Tuesday 03 July 2018 by Leigh Winton Week in review

From the trading desk

Fed restrictions on major investment banks, active trades in the USD investment grade space while high yield sells off, RMBS supply available, and FIIG originated bonds active as StockCo and Axsesstoday become available to retail investors. With the Aussie dollar below 74 cents, we make suggestions for new USD bonds to buy

What’s trading

AUD

  • The new Virgin Australia AUD high yield bond remains popular and as expected the price trended higher throughout the week. Supply from the institutional market is becoming scarce, however we are still able to source the bond at an indicative yield to worst (YTW) of 7.44%pa
  • Residential Mortgage Backed Securities (RMBS) continue to be popular and we were able to secure a small parcel of some D notes rated ‘Baa2’ by Moody’s with a weighted average life (WAL) of 5.9 years and a forecasted yield of 5.58%pa. While supply no longer remains in this line we will continue to try and source similar RMBS tranches. We have also seen active trading in some C notes, rated ’A’ by S&P with a WAL of 6.5 years and a forecasted yield of 4.71%pa, a small parcel remains.
  • FIIG originated bonds were heavily traded throughout the week, with Stockco and Axsesstoday becoming available to retail investors. We saw supply being offered up in these with many investors looking to switch into names such as:
    • Sunland-7.55%-25Nov20 at an indicative YTW of 6.44%pa
    • AdaniAbbot-7.10%-29May20 at an indicative YTW of 5.14%pa
    • Plenary-6.50%-17May24 at an indicative YTW of 6.098%pa
    • Merredin-7.50%-15Nov22 at an indicative YTW of 6.79%pa

Non AUD

  • The reduction of high yield USD exposure continued as a key theme last week. The recent downward slide in the AUD has made shifting funds back into domestic investments an attractive trade for many clients. Selling has varied among industries with aviation services provider Bristow Group, pharmaceuticals manufacturer Mallinckrodt and electricity provider Talen Energy all experiencing decent turnover across senior debt lines. These securities are currently trading in decent volume and good liquidity is available for each at the indicative yields provided:
    • Bristow-8.75%-01Mar23-USD – 9.47%pa
    • Mallinckordt-5.75%-01Aug22-USD – 9.11%pa
    • Talen-6.50%-01Jun25-USD – 12.11%pa
  • The investment grade space was the clear standout for clients looking to stay in the USD space. US based hospital provider HCA Inc. and Australian insurer QBE Insurance Group both proved popular for investors seeking diversification away from the high yield sector. Our senior debt option from HCA and our lower Tier 2 options from QBE are both in good supply and available to wholesale clients at the below indicative yields:
    • HCA-5.25%-15Apr25-USD – 4.64%pa
    • QBE-5.875%-17Jun26c-USD – 5.88%pa

Economic wrap

Mixed US data last week with some weakness seen in consumer sentiment; no doubt affected by the uncertainty of potential tariffs. The US final estimate for Q1 GDP was also weaker at 2.0%, although the PCE deflator (Fed’s preferred inflation measure) met expectations at 2.3%.

China PMI was released over the weekend with a softer reading of 51.5 versus an expectation of 51.6. There was however, a small increase in the non manufacturing number to 55.0.

This week the US releases jobs data with expectations of an unchanged 3.8% unemployment rate, a 195,000 gain in non farm payrolls and a 2.8% annualised increase in average hourly earnings.

The Fed released results of its annual ‘stress tests’ of US banks. Deutsche Bank’s US unit failed a component of the test, and the Fed put some restrictions on Goldman Sachs, Morgan Stanley and State Street.

Other news – AUD and USD high yield available

There is a new investment grade Bendigo and Adelaide Bank Tier 2 security available for retail investors. The bond (callable in December 2021 and with a final maturity of 2026) pays coupons of 3 month BBSW+2.80%. At a price of $105.00, the margin over BBSW yields 1.25%pa with an expected fixed rate of 3.515%pa based on the current interest rate swap curve. Click this link to see the Factsheet for the bond and to understand what the non viability trigger (PONV) means.

Axsesstoday Group announced its intention to raise a minimum of AUD50 million in unsecured notes, issued at the holding company level and ranking behind all other debt issued by the group. Given the subordinated, unsecured nature of this new offering, our preference is for investors to consider the other two Axsesstoday offerings - a fixed rate 7.50% June 2021 bond and a floating rate 3 month BBSW+6.50% October 2021 note. Both these latter bonds rated Outperform by FIIG Research. Click this link to see our latest piece from Research.

The AGN 2025 inflation linked bond traded actively last week. However, we feel there are other inflation linked bonds offering better value with the AGN bond trading above $142.00, yet the coupon is based on $136.59. Although the yield over CPI adjusts for these premiums via the real yield, we are not sure the premium is justified with inflation in Australia expected to stay low for at least another couple of years.

With the Australian dollar below 0.7400, we continued to see some opportunistic unwinding of USD bonds. However, for those looking for new USD bonds to buy, the two Virgin bonds (2019 and 2021s), the Adani Abbot December 2022s and the NCIG junior security (which requires a minimum $100 000 face value, but pays 12.50% coupons) all have an Outperform recommendation from FIIG Research.


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.