Tuesday 05 June 2018 by Leigh Winton Week in review

From the trading desk

New DirectBond from HCA, QBE upgrade, switches from several AUD high yield names into Virgin’s new AUD bond. Cash Converters equity raising to repay September 2018 bond and USD high yield available in Hertz 2022 and Sprint 2025 bonds 

What’s trading

AUD 

  • Virgin Australia’s recently issued AUD high yield bond pays a coupon of 8.25% and matures in May 2023. As expected the bond was heavily traded with the price appreciating throughout the week. Current indicative yield to worst (YTW) of 7.75%pa. and supply is expected to dry up soon as the yield continues to tighten
  • We were able to secure a few parcels of residential mortgage backed securities (RMBS) last week. A popular tranche was an E note rated 'BB' by S&P, with weighted average life (WAL) of 5.2 years, and trading margin of BBSW+5.17% equating to a forecasted yield of 7.87%pa. Investors looking for investment grade rated RMBS were also able to purchase some “BBB” rated D notes paying a margin of BBSW+2.98%, a WAL of 6.5 years and a forecasted yield of 5.63%pa
  • The AUD high yield space was active last week, with many investors looking to switch out of their current high yield positions and move into the new Virgin AUD bond. As supply came through, we saw the prices come off a touch. The following AUD high yield bonds are available:
    • Axsess-7.50%-22Jun20c at an indicative YTW of 6.29%pa
    • IMFBENTHAM-7.40%-30Jun20 at an indicative YTW 5.02%pa
    • LUCAS-8.00%-29Sep22 at an indicative YTW of 6.70%pa
    • StockCo-8.75%-6Oct21c at an indicative YTW of 6.73%pa

Non AUD

  • Last week saw the addition of a new USD security to the DirectBond list. HCA Inc is the largest for-profit acute care hospital operation in the US as measured by revenue. Headquartered in Tennessee, HCA operates psychiatric facilities, a rehabilitation hospital, as well as ambulatory surgery centres and cancer treatment and outpatient rehab centres across 20 US states and England. The addition of HCA expands the range of investment grade options offered by FIIG and provides the opportunity for diversification into an industry that was previously underrepresented in the USD space. HCA’s senior secured 2025 note is rated ‘BBB-‘ by S&P and pays a fixed 5.25% semi annual coupon available to wholesale clients in minimum parcels of USD10,000. Clients looking to add this security to their portfolios can expect to do so at an indicative yield of 4.63%pa
  • QBE Insurance Group traded actively last week following a ratings upgrade of the holding company by Moody’s to 'A3' from 'Baa1'. Despite the upgrade, QBE’s 5.875% fixed rate subordinated notes traded lower, dragged down by an underperforming USD hybrid sector. This represented a buying opportunity to many investors. The 2026 notes are still in good supply at an indicative yield of 5.83%. The notes have a minimum parcel size of USD200,000 for wholesale clients only

Economic wrap

Sentiment improved greatly on Friday boosted by positive US unemployment data and news that the Trump meeting with the North Korean leader is back on.

All parts of Friday’s US data were strong with an improvement in the unemployment rate to 3.8%, and an increase in non farm payrolls with 223,000 jobs added.

Most impressive was a higher 2.7%pa average hourly earnings rate, as this has been the laggard with little or no growth. The 10 year US bond yields were back up to 2.90%.

The RBA meets tomorrow with no change in the cash rate forecast.

Other news – AUD and USD high yield available

Virgin Australia was the largest traded name locally last week, with a huge demand for its 2023 AUD bond. This reflects investors’  appetite for sub investment grade product in the local market, coupled with a well known issuer. We believe the bond will continue to tighten in yield (through price appreciation) with some stock still available at a yield of circa 7.75%pa to maturity.

Cash Converters announced an equity raising to assist in the repayment of its AUD bond maturing in September. The issue is underwritten by Hartleys Limited, and upon completion, will largely eliminate the refinancing risk associated with this bond maturing in September 2018.

QBE was upgraded by Moody’s last week to an A-equivalent rating ('A3' in Moody’s terminology) from a 'BBB+' equivalent (Baa1 Moody’s). The upgrade follows the rating agency citing a new cross sector methodology for assigning instrument ratings to insurers.

We continue to like the QBE 5.875% USD bond callable in 2026 (final legal maturity 2046) at a yield to call of circa 5.75%pa. This security requires an AUD200,000 minimum holding, and is subordinated meaning its rating is weaker than the senior debt at 'BBB-', yet it is still investment grade.

We encourage clients to consider the risk in high yield bonds and ordinarily invest in bonds where sufficient protection (such as covenants, security or seniority in the capital stack) is provided to offset risk.

The Hertz June 2022 USD bond fits this theme nicely, with a yield close to 8% for the BB- bond which has a second ranking claim on assets. This is known as a junior lien, and although there are more senior creditors, there is a high recovery estimate of at least 70% in the event of default.

Separately, the Sprint 7.625% February 2025 bond is seen to offer value at current levels around USD106.25. Sprint and T-Mobile have recently agreed on a merger with Moody’s placing Sprint ratings on review for upgrade.

The major obstacles to the merger are regulatory hurdles which have led to consent solicitation being organised by Sprint. This would give it more flexibility with regard to the change of control clauses within its bond documentation.


Get your free copy of The Benefits of Corporate Bonds eBook

Get a copy of The Benefits of Corporate Bonds eBook

Subscribe to The WIRE newsletter

Sign up to a free weekly newsletter to get the latest investment news.