Monday 28 May 2018 by Asmita Kulkarni Week in review

From the trading desk

Positive US data continues despite some missed expectations, active trades in Hertz 2022s after sustained price weakness, Sprint 2025s see further demand, and investors redirect Plenary redemption funds to the Praeco 2020s. Sell off in Qantas 2020s while QBE USD 2026s an attractive investment grade option. Both Merredin and JCP USD yielding above 7%

What’s trading

AUD

  • Investors continue to move into investment grade names. The Praeco 7.132% 28 July 2020 bond has been popular, issued to fund the building and maintenance of the Department of Defence located just outside Canberra. These bonds are available at an indicative yield to worst (YTW) of 4.04%pa. Many clients have reinvested their Plenary redemption funds to purchase the Praeco bonds, as well as switching out of the Qantas 6.5% 2020 at an indicative YTW of 3.40%pa, picking up 60bps and a one notch upgrade in rating for a similar term
  • We have good supply of AUD high yield supply at the moment as clients heed our suggestion to increase investment grade holdings, including the following:
    • CCV-7.95%-19Sep18 at an indicative YTW of 7.11%pa
    • Merredin-7.50%-15Nov22 at an indicative YTW of 6.45%pa
    • StockCo-8.75%-6Oct21c at an indicative YTW of 6.63%pa
    • ZipMoney Trust 2017-1 B at an indicative YTW of 6.65%pa
  • We had access to a reasonable sized parcel of RMBS Aa3 rated C notes with a weighted average life of 3.1 years and a forecasted yield of 4.69%pa throughout the week. These were well bid and we quickly exhausted supply

Non AUD

  • Rental car company Hertz Corporation experienced a spike in demand last week following roughly a fortnight of sustained gradual price weakness in the company’s 2022 senior debt. The fall was preceded by a 15% drop in the equity as rising costs for marketing and new fleet systems outstripped improvements in revenue. The bonds are now trading circa USD2 lower than at the start of May, prompting some investors looking for high yield exposure to jump in. Supply in the fixed rate June 2022 is currently available at an indicative yield to worst of 7.26%pa
  • Telecommunications provider Sprint Corp also experienced renewed demand as investors added positions in the 2025 fixed rate senior issue. Sprint is currently in negotiations to merge with T-Mobile, subject to regulatory approval and recently sought consent from note holders to remove the change of control risk on notes maturing in 2023 and 2025. If approved, the merger should create greater competition for rivals AT&T and Verizon, and ensure the US leads the world in 5G wireless technology. Supply of the 2025s remains available in minimum parcels of USD10,000 to wholesale clients only at an indicative yield to worst of 6.69%pa

Economic wrap

Broadly positive US data continues, although Friday’s Sentiment Index and Durable Goods Orders both missed expectations. Focus this week will be on the PCE deflator (the Fed’s preferred inflation measure) with expectations of an annual 2.00% number, and US unemployment and average earnings numbers, with an annual 2.6% average hourly earnings expectation, according to Bloomberg.

The Fed Funds futures market is fully pricing a rise of 25 basis points in June, which will take the range up to 1.75% - 2.00%.

Australian government bond yields topped out again with the 10 years bond yield index unable to breach 3.00%. Although there is a strong correlation with the US 10 year, Australian treasury yields will find it hard to break above 3.00% with no cash rate increases expected for the remainder of 2018.

Other news – AUD high yield available

The QBE callable Tier 2 2026 USD security has significantly eased in price since Christmas in line with many other USD Tier 1 and Tier 2 securities. We continue to believe they offer value as an investment grade option in US dollars yielding above 5.50%pa.

Virgin’s Australian dollar bond starts trading later this week. The 8.25% 5 year bond will be available to wholesale investors, but scarcity will likely see the issue available at or around 102.00, or a yield of between 7.70%-7.75%. Nevertheless, it will likely see initial demand due to its brand recognition and a view that with airlines, debt is a safer place to be than equity.

An alternative to the Virgin AUD bond are their two US securities, where FIIG Research have an Outperform recommendation. The 8.50% November 2019 bond yields around 5.91%pa and a 7.875% October 2021 bond yields around 7.11%pa.

Merredin Energy is a WA based peaking power station receiving revenue for the provision of power capacity. We have some supply in its 2022 7.50% amortising bond at a yield to maturity of circa 6.5%pa. The bond is callable from November 2019 with a yield above 7.00% if called before November 2021. FIIG Research has assigned the security with a Market Perform recommendation.

JC Penney (JCP) was downgraded by S&P to B from B+ after the resignation of its CEO, Marvin Ellison. The agency cited his exit will make it harder for JCP to successfully improve operating performance. The USD 5.875% July 2023 bonds have a first lien meaning it is senior secured, and yield above 7.25% to maturity.