Monday 25 June 2018 by Leigh Winton Week in review

From the trading desk

Rising oil price follows plans to increase production, switch from JEM Southbank to alternatives, Virgin AUD bond still offers attractive yield, and investors sell off USD high yield while others add exposure at cheaper levels. StockCo goes retail and is callable in 2019, read our research and strategy update

What’s trading

AUD

  • The new Virgin Australia AUD high yield bond continues to be popular and as expected, the price has been trending higher throughout the week. Supply is becoming harder to source from the institutional market, however we have a parcel available at an indicative yield to worst (YTW) of 7.50%pa
  • FIIG originated bonds were active throughout the week, with many clients looking to rebalance their portfolio. Popular trades have been;
    • Minimising refinancing risk by selling the Cash Converters 7.95% September 2018 bond at 8.22%pa and purchasing the Virgin 8.25% May 2023 bond at 7.50%pa
    • Minimising exposure to the financial services sector by selling the CML BBSW+5.40% May 2020 callable bond at 5.42%pa and moving into the energy sector by purchasing the Merredin 7.50% November 2022 bond at 6.72%pa.
    • Selling into a strong institutional bid on the IMF Bentham- 7.40% June 2020 bond at 5.66%pa and purchasing the newly issued Next Generation 7.90% June 2023 bond at 7.66%pa
  • The StockCo 8.75% October 2021 callable bond became available to retail investors during the week, with strong demand coming from retail investors. Holders of the bond can currently exit at an indicative of YTW 7.09%pa

Non AUD

  • Reducing exposure to high yield USD investments was a key theme last week as a lower AUD made diverting funds back to domestic investments attractive. Selling was varied among industries with telecommunications provider Frontier Communications, rental company Hertz Corp., and pharmaceuticals manufacturer Mallinckrodt all experiencing decent flow in across their senior debt. Below is a selection of securities in these credits that are currently trading in decent volume. Good liquidity is available for each during US trade at the indicative yields provided:
    • FRONTIER-11.00%-15Jun25c-USD – 15.27%pa
    • HERTZ-7.625%-01Jun22-USD – 8.34%pa
    • MALLINCKRODT-5.75%-01Aug22-USD – 9.07%pa
  • A number of other USD high yield bonds experienced good two way flow last week. Clients electing to stay in USD were able to add exposure to a number of lines at cheaper levels given the recent wave of selling. Food and beverage company Dean Foods, data centre provider Rackspace Hosting and telecommunications provider Sprint Corp. all experienced decent demand. Clients looking to add these bonds to their portfolios can expect to do so at the below indicative yields:
    • DEANFOODS-6.50%-15Mar23-USD – 6.95%pa
    • RackSpace-8.625%-15Nov24-USD – 7.87%pa
    • SPRINT-7.625%-15Feb25-USD – 6.30%pa

Economic wrap

Oil production is set to increase from 1 July with major producers agreeing to lift production by around one million barrels per day. Nevertheless, oil rose to $68.50 per barrel (WTI) as the production increase was expected.

China will cut its reserve asset ratio for some lenders by 0.50% from July, in what is seen as a move to support lending to small to medium enterprises (SMEs) and to accelerate the debt-for-equity swap program.

This week the US Treasury will auction another $100bn of securities in 2 year, 5 year and 7 year maturities.

The PCE deflator (US) is released Thursday night which is the Fed’s preferred inflation measure. Expectations are for a 2.2% headline annualised rate and a 1.9% core number according to Bloomberg.

Other news – AUD high yield available

The JEM Southbank 28 June 2018 callable bond was actively traded last week, upon news that repayment of the bond may not occur at the end of June. Although we believe the refinancing leading to the note repayment will occur in July, the coupon after 28 June will be BBSW+1.5%. This will represent around a 3% fall in coupon, so clients are exiting now at or close to the par ($100.00) redemption price and locking in alternatives.

StockCo has gone retail this week, widening the pool of buyers for the security. The 2022 maturing bond is callable in October 2019 at a price of $103.00, and offering a yield of circa 6.00% off current purchase price to the call date. The company has expressed its intention to call the bond at the first available opportunity in October 2019, although this is not a certainty. Please click on this link for our research and strategy piece on StockCo.

Cash Converters (CCV) has been trading close to par ($100.00) subsequent to the closing of the equity rights issue that will help with repayment of the  bond maturing in September. Please click on this link for our Strategy piece on CCV.

Supply in the new Virgin 8.25% May 2023 bond seems to be drying up. Since first issue, the sub investment grade bond has consistently traded higher in price with buyers now having to pay above $103.00. However even at this price, demand is still evident with the yield around 7.50%pa. By comparison, the Virgin USD bonds have a yield of 6.42%pa for the November 2019 bond, and a yield of 7.18%pa for the October 2021 bond. Based on the USD bond yields, the AUD bond still looks attractive.


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