Tuesday 17 July 2018 by Leigh Winton Week in review

From the trading desk

The US Treasury yield curve continues to flatten, investors switch out of Transocean and into Sprint, FIIG favourite names in good supply with downward pressure on USD bonds issued by Australian companies. Demand for the Virgin 2023s continues, Sydney Airport 2030s attractive amid inflation expectations and new NextDC 2021 to start trading. RMBS supply still available.

What’s trading

AUD

  • Demand continues for investment grade floating rate bonds, particularly Residential Backed Mortgage Securities (RMBS), with supply available.  Clients switched from their existing Tier 2 financial institution bonds into the Apollo 2018-1 Class C notes and Light Trust 2018-1 Class C notes, with a pick up in margin.  The Apollo C notes are offered at a margin of 1 month BBSW + 2.13bps and the Light Trust C notes are available at a margin of 1 month BBSW + 2.46bps.  Australian RMBS transactions remain in high demand and margin compression is expected to continue.  Supply of RMBS securities is limited

  • The Virgin 2023 AUD bond’s popularity continues with clients adding the household name to their portfolios as an outright position.   It offers a high indicative yield of 7.40%pa and a 2023 maturity.  The bond price moved 25 cents higher over the week and is expected to increase with strong demand as institutional sellers run out of bonds

  • The Sydney Airport 2030 bond is attracting strong bids being investment grade and with domestic inflation expectations pushed out mid to long term. These tightly-held bonds are scarce, with few institutional sellers of corporate linkers.  Current holders are able to sell these at an indicative yield of 5.39%pa with a 2.50% inflation assumption

Non AUD

  • Trading in the USD trading space improved last week with US traders back on deck following the 4 July holiday. The volume mostly comprises clients selling exposure to oil driller Transocean in favour of telecommunications company Sprint Corp. Although Transocean’s 2023 fixed rate senior debt has ridden the coattails of a higher oil price recently, there is limited upside on capital price with an early call in July 2020. Many investors are exiting at current levels. Sprint’s pending merger with telecom provider T-Mobile could significantly improve both companies’ advantage against competitors like AT&T and Verizon. Approval of the merger by US regulators should positively impact Sprint debt. As the switch is live, investors can expect to move from Transocean to Sprint at the indicative yields below:
    • TRANSOCEAN-9.00%-15Jul23-USD – 7.17%pa
    • SPRINT-7.625%-15Feb25-USD – 6.63%pa

       

  • Credit spreads in Asian high yield debt has blown out with increased default risk negativity. There is downward price pressure on a number of USD bonds issued by Australian companies, as Asian trading desks turn hungry for yield prefer more distressed names. There are a number of investment options available to clients seeking to capitalise on the downturn, including FIIG favourite names. Good supply is available at the indicative yields below:
    • BARMINCO-6.625%-15May22-USD – 8.03%pa
    • NCIG-12.5%-31Mar27c-USD – 8.18%pa
    • QBE-5.875%-17Jun26c-USD – 5.93%pa
    • VIRGIN-7.875%-15Oct21-USD – 7.60%pa

Economic wrap

Fridays’ US Michigan consumer sentiment fell this month due to concerns about the impact of tariffs.

The euro area Industrial Production (IP) beat expectations, following stronger German factory orders numbers last week. Lithuania registered the largest increase.

Oil had its worst week in two months with concerns the US may try stabilising US fuel and gasoline prices by tapping into its reserves to boost supplies.

The yield curve continues to flatten with the spread between two and 10 year US treasuries breaching 0.25%. Credit indices had a good week with both North American benchmark investment grade and high yield indices narrowing.

Other news – AUD and USD high yield available

The new NextDC (ASX listed data centre provider) bonds are likely to start trading this week and at a premium, with a lower yield in the secondary market. This has created some supply in the existing 6.25% June 2021 bond at a yield to worst (YTW) of 4.50% if called at $101.50 in June 2019 or a yield to maturity (YTM) of 5.13% in June 2021.

We prefer the shorter 2021 maturity with the NextDC bond as the industry is changing rapidly. We also prefer more predictable cashflow over a shorter period, as the refinancing risk is dealt with earlier (being during or before 2021 for the AUD 300m issue maturing in June 2021).

In RMBS, the Light Trust 2018-1 Class C and Apollo 2018-1 Class C Notes have been trading this week, enabling investors to gain yield pick up on the floating rate portion of their portfolio. Both notes are rated A or equivalent. Ask your relationship manager (RM) for the differences between the two pools and their relative pricing.

Due to popular demand we are republishing the Beginner’s Guide to RMBS for those unfamiliar with the sector or needing a refresher. Click here to view the article.

In USD, clients have been moving out of Transocean and into Sprint. The Transocean 9% July 2023 bond has attractive coupons. However, the bond is saleable around $106.25, and sellers have found this acceptable as the bond is callable by the issuer in 2020 at $104.50.Many clients have chosen to take profits given recent bouts of oil price volatility. In comparison, clients feel a successful Sprint merger with T-Mobile could further improve the price of the 7.625% Feb 2025 bond, yielding at 6.75%pa at $105.10.

The success of the Virgin AUD bond has spilled into their two USD bonds with an 8.50% November 2019 bond yielding above 6.50%pa and a 7.875% October 2021 bond yielding above 7.50%pa. We believe the key risk for the company is the oil price, not competition. The airline has some oil hedging into 2019 but the hedge book drops quickly by 2021. If you have concerns about rising oil prices, the short dated 2019 bond would be the best investment option in Virgin’s capital stack.

 

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