Tuesday 12 June 2018 by Leigh Winton Week in review

From the trading desk

Fed minutes due Thursday with a hike anticipated, HCA the standout USD trade, Kindred calls its 2023 bond, Virgin’s AUD bond flies out the door, and Cash Converters popularity continues after equity raising announcement. Sell off in AUD investment grade with investors switching to floating rate notes

What’s trading

AUD

  • AUD investment grade corporates have been a popular sell this week, with many now trading well above par. Investors look to take profits and switch into more recently issued investment grade names. Popular sales included the Qantas 7.75% 2022 bond trading at circa $114, AAI BBSW+3.2% 2022c at around $105.25 and Alumina, having had a coupon stepdown after it was upgraded to ‘BBB-‘. Switches were into the following names:
    • BOQ-BBSW+1.85%-01May23c at an indicative YTW of 4.03%pa
    • Challenger-BBSW+2.10%-24Nov22c at an indicative YTW of 4.03%pa
    • IAG-BBSW+2.10%-15Jun24c at an indicative YTW of 4.27%pa
  • Virgin Australia’s new 8.25% 2023 bond continues to be a popular name, offering a yield to worst of 7.80%pa. Many investors switched out of high yield AUD names such as Cash Converters, Merredin and Impact, offering supply to the market.
    • Cash Converters is trading down slightly but still offered an extremely attractive yield to maturity of 7.55%pa for a three month bond. A small supply still remains
    • Merredin’s price remained stable throughout the week, with many investors choosing to purchase this bond for sector diversification and relatively attractive yield to worst of 6.55%pa
  • We were able to secure some supply in some ’BBB’ rated D notes with a weighted average life (WAL) of 3.7 years and a forecasted yield of 5.65%pa. These notes were extremely popular and none remains. We were also able to secure a parcel of  ’'A’ rated C notes with a WAL of 3.7 years and a forecasted yield of 4.62%pa, supply in this line remains. Switches were made from seasoned subordinated Tier 2 bonds such as AAI 2020 and 2022 and Bendigo and Adelaide Bank 2019 and 2021

Non AUD

  • Healthcare facilities and services company HCA Inc. was the standout in the USD space last week following its recent addition to the DirectBonds list. The 5.25% fixed rate senior bonds maturing in 2025 proved popular among clients searching for safer USD options, moving from high yield securities into the investment grade HCA. Supply in HCA remains good with stock available at an indicative yield of 4.52%pa
  • The above mentioned move to more conservative investment grade securities has generated supply in a number of USD high yield bonds at lower than normal levels. The securities below are currently available at indicative yield to worsts, all to wholesale clients only:
    • AVON-7.875%-15Aug22-USD – 7.56%pa
    • HERTZ-7.625%-01Jun22-USD – 8.04%pa
    • NCIG-12.5%-31Mar27c – USD – 8.17%pa


Economic wrap
 

The Fed (FOMC) minutes are released Thursday morning with markets fully pricing in a 25 basis points increase to a Fed Funds range of 1.75% to 2.00%.

The Fed commentary and dotplot chart should give us some guidance as to whether we should only expect one more rate hike this year from the FOMC.

US CPI is released tonight with expectations of a 2.8% yearly number according to Bloomberg, although only 2.2% excluding food and energy.

In Australia, unemployment is the main focus with forecasts of a 5.5% rate and circa 20,000 jobs added. The rate is consistent with the forecasts from the RBA’s latest statement of monetary policy.

Other news – AUD and USD high yield available

The JEM Southbank nominal bond is expected to be called on or before the 28 June 2018. The equity sponsor, AMP is believed to have negotiated a bank debt solution to enable an orderly repayment of the notional outstanding of just less than AUD128m.

Virgin Australia’s ‘B’ rated Australian dollar bond continues to fly out the door, despite clients having to pay up to circa $102.00 to obtain bonds. The yield to maturity of 7.80%pa and coupon of 8.25% have attracted clients looking to reinvest proceeds from matured or soon to be maturing bonds.

Cash Converters has traded heavily since the company 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 this will likely eliminate the refinancing risk associated with the bond.

Many clients have looked to switch from these shorter dated bonds into the new Virgin security to avoid reinvestment risk and to get set while Virgin bonds are still available.

Kindred is calling its 8.75% January 2023 USD bonds at a price just above 106.50 at the beginning of July. Talk to your relationship manager to discuss the pros and cons of selling before the call and potential reinvestment options. HCA is in a similar sector and is continuing to find demand with investors looking for an investment grade US dollar bond.

HCA is the largest (for profit) acute care hospital operator in the US measured by revenue. Healthcare is usually considered a defensive sector where we recommend clients with US exposures to consider this company for more stable performance in their portfolios.


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