Monday 18 June 2018 by Leigh Winton Week in review

From the trading desk

Fed raises rates as expected, surprise US Genworth approval. Modest demand for Sprint, HCA continues as a US investment grade favourite, Virgin AUD bond popular in the Asian markets and RMBS offering attractive yields. Active trades across FIIG originated bonds as investors switch into the new Next Generation senior secured bond issued last week

What’s trading

AUD

  • FIIG originated a new bond last week for Next Generation Health and Lifestyle Clubs. The company issued a five year senior secured bond, paying a coupon of 7.90%pa. There were active trades across an array of FIIG originated bonds all switching into this new issue, including Cash Converters, IMF Bentham, Impact Homes, Lucas Total Contract Solutions and Elanor Investors,  to name a few. Prices were off a touch on all those names, as supply far outweighed demand. Investors are able to purchase these bonds at the following yields to worst:
    • CCV-7.95%-19Sep18 at an indicative YTW of 8.33%pa
    • ELANOR-7.10%-17Oct22 at an indicative YTW of 6.28%pa
    • IMFBENTHAM-7.40%-30Jun20 at an indicative YTW of 4.04%pa
    • IMPACT-8.50%-12Feb21 at an indicative YTW of 6.96%pa
    • LUCAS-8.00%-29Sep22 at an indicative YTW of 6.84%pa
  • The new Virgin Australia AUD high yield bond continues to be popular particularly with Asian markets, pushing the price higher as we had expected. We still see great value in the name, with investors able to purchase the bond at an indicative yield to worst of 7.69%pa.
  • Residential Mortgage Backed Securities continues to be a popular option for investors and we were able to secure some attractive parcels including an E tranche rated ‘BB’, 5.2 years weighted average life (WAL) with a forecasted yield of 7.78%pa. For the more conservative investors, we secured a C tranche rated ’A’, 6.5 year WAL with a forecasted yield of 4.86%pa

Non AUD

  • Activity in the USD space was muted given the shorter working week due to Queen’s birthday public holiday on Monday. The majority of activity was in Genworth Holdings following the approval of a USD2.7bn buyout from China Oceanwide Holding Group Co. The deal was given the green light by the Committee on Foreign Investment in the US (CFIUS) after it found “no unresolved national security concerns” with the proposed deal. The news surprised the market, causing the price of Genworth’s 2021 fixed senior bond to jump in price by USD4.50. Many clients chose to capitalise on the increase by selling Genworth and moving elsewhere into the USD and AUD high yield spaces. The price of the 2021s has since peeled back slightly, but is still trading significantly higher than where it was just one week ago. Clients looking to exit their position in Genworth can expect to do so at an indicative yield of 6.92%pa
  • Telecommunications provider Sprint Corp experienced modest demand last week. The price of the company’s 2025 fixed rate senior bond has been incrementally climbing for the last week on speculation a deal to merge with competitor T-Mobile will go though (subject to regulatory approval). 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. Clients can expect to add the Sprint 2025 to portfolios at an indicative yield of 6.15%pa

Economic wrap

As expected, the Fed raised rates 25 basis points last week to a target range of 1.75%-2.00%, with all eight voting members in favour. The accompanying commentary and dotplot chart forecast one to two possible further rate hikes this year in a generally hawkish statement, which assigns a greater likelihood to two rate rises than markets had expected.

US bond yields struggled to regain the 3% level in 10 year treasuries, as concerns and comments about trade tariffs between the US and China increased.

Locally, last week’s headline unemployment number looked positive at a 5.4% rate, but any optimism was outweighed by the increase in jobs being all part time, and the fact that the decreased participation rate had aided a lower unemployment figure.

Other news – AUD and USD high yield available

Next Generation Health and Lifestyle Clubs (Next Gen) issued a five year amortising AUD45m senior secured bond with quarterly coupons of 7.90%. The amortising nature of the bond reduces the risk over time for the company whose clubs differentiate themselves as higher end multi service facilities, more akin to country clubs.

Continuing on from our midyear update from FIIG Research, we enclose updated recommendations from our research team. As a reminder, the recommendations of outperform, market perform or underperform are relative to the sector in which the company operates, whereas the credit outlooks of positive, stable or negative are specifically related to the credit fundamentals of the organisation . Click here to view the updated recommendations (client login required).

The week saw  switches into the Next Generation deal and some reallocation towards more investment grade securities within client portfolios. These trades led to supply in some FIIG deals where we have outperform recommendations with a stable or positive outlook, including the two Axsesstoday bonds, Moneytech and ZipMoney Trust that are in our preferred financials sector, and NRW and SCT logistics that are in the Transport/Mining Services sector.

Ask your FIIG relationship manager for current pricing and information on the above names, or if you want to understand the FIIG Research reason for inclusion. Typically this opportunity with availability of stock in quality names does not last long.

HCA continues to be the investment grade USD bond choice. The company is the largest for profit acute care hospital operator in the US measured by revenue, issuing a 5.25%pa coupon ‘BBB’ rated bond, with yield to maturity just above 4.50%pa.

Sprint has been on a bit of a run of late with the company on CreditWatch positive, given the merger agreement with T-Mobile. S&P has stated a  Sprint upgrade could be as high as three notches. There is still potential upside for these bonds assuming the deal proceeds. However, any setbacks would be disappointing and  lead to price declines. S&P expects a transaction close within first half 2019.


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