Monday 23 July 2018 by Leigh Winton Week in review

From the trading desk

Investors capitalise on weak prices of Aussie USD issuers, supply remains across a number of high yield issues, US spread between two and 10 year Treasuries forecast to invert, Impact and Sunland fixed rate, senior bonds now available to all investors, NCIG’s new investment grade senior secured bond added to FIIG’s DirectBond menu as its junior subordinated debt active with callable yield over 8.00%pa, NRW announces new contract with BHP

What’s trading

AUD

  • Trade activity among AUD securities was broad based last week. Property bonds experienced a modest spike in turnover as some cheap supply of Sunland Capital became available, prompting opportunistic investors to buy at a reduced price. Impact Group was another name in the property sector to become available. Fixed rate, senior lines in Impact and Sunland are currently available to both retail and wholesale investors in minimum parcel sizes of $10,000. Indicative offer yields are shown below:

    • IMPACT-8.50%-12Feb21 – 6.98%pa

    • SUNLAND-7.55%-25Nov20 – 6.35%pa

  • Conversely, supply has started to dry up for some portfolio staples such as the Virgin Australia 2023 fixed rate senior bond, and the Sydney Airport 2030 inflation linked senior bond. A combination of sustained demand and a relatively small issue size of $150m has seen supply of Virgin drop markedly since issue. Similarly, the Sydney Airport bonds are traditionally tightly held securities and trade infrequently in the institutional market. One could expect prices to nudge higher if the current lack of supply remains, however we expect to eventually have access to both bonds. Current indicative offer yields are below

    • SYDAIR-ILB-3.12%-20Nov30 – 5.16%pa (nominal yield using +2.50% inflation assumption)

    • VIRGIN-8.25%-30May23 – 7.33%pa, rated B-

Non AUD

  • Australian issuers of USD were the major focus last week as investors sought to capitalise on weakening prices. Lack of demand from trading desks in Asia, spurred by negative sentiment around high yield securities, saw prices of some of our favourite USD issuers decline. Prices have now stabilised as buyers return to the market, however supply remains across a number of high yield issues. Clients wishing to add to their portfolios can expect the below indicative yields:

    • BARMINCO-6.625%-15May22-USD – 7.64%pa, Rated B

    • NCIG-12.5%-31Mar27c – USD – 8.14%pa, Rated B+

    • QBE-5.875%-17Jun26c-USD – 5.97%pa, rated BBB

    • VIRGIN-7.875%-15Oct21-USD – 7.60%pa, rated B-

  • In September 2017, Newcastle Coal Infrastructure Group (NCIG) issued an investment grade, senior secured, fixed rate bond with a legal final maturity of 2027. This has been added to FIIG’s USD DirectBond menu, complementing the high yield, senior unsecured 2027 issue already available, issued by NCIG’s holding company in 2011. The new addition gives clients the option to invest in either end of the HY/IG spectrum. NCIG pays a fixed rate semi-annual coupon of 4.40% and is available to wholesale clients in minimum parcels of $10,000 at an indicative yield of 5.10%pa. It is rated four notches higher than the unsecured USD issue at BBB.

Economic wrap

The US yield curve, (2’s-10’s)steepened on Friday with 10 year yields of 2.89% rising more than two year yields of 2.59%. Many forecasters expect the spread between two and 10 year Treasuries to invert as Federal Open Market Committee (FOMC) rate rises impact the shorter end of the curve more than the longer end. However, any pick up in US inflation is likely to see 10 year yields rise again above 3.00%, so we aren’t convinced the curve will invert.

Credit spreads scarcely changed, with the North American investment grade index up one basis point to 61.5 and the high yield index up six basis points to 339.5.

Oil stabilised with West Texas Intermediate (WTI) closing last week at USD$68.25, having fallen heavily the previous week. A rebound occurred with Saudi Arabia noting it won’t oversupply the market. US data remains largely strong with the Philadelphia Fed Manufacturing Index and the Conference Board’s Leading Index beating expectations.

Locally, the Australian Consumer Price Index (CPI) with major data released this Wednesday, forecast 2.2%pa for the headline number and 1.9%pa for the less volatile trimmed mean and weighted median measures, according to Bloomberg.

US 2Q Gross Domestic Product (GDP) released later this week is expected to reach at least 3.5%, compared to 2% in 1Q. This follows trends in recent years where 1Q numbers have been weakest due to seasonal factors.

The Trump criticism of the Fed continued, with little thought about how this will impact the timing of rate rises, but the political intentions of the President are clear. US Treasury secretary Mnuchin said at a G20 meeting in Argentina ‘that Trump’s intention was not to pressure the Fed’.

Other news – AUD and USD high yield available

The new NextDC, ASX listed data centre provider, bonds started trading last week and have been incredibly scarce. There is still some supply in the existing 6.25% June 2021 bond at a yield to worst (YTW) of 4.350%pa if called at $101.50 in June 2019 or a yield to maturity (YTM) of 5.10%pa to June 2021.

The NCIG junior subordinated debt, senior debt but to a holding company, has been active this week. We really like the March 2027 callable bond at a yield above 8.00%, and our clients like the 12.5% coupons, although the minimum parcel size is USD100,000.

NRW Holdings has announced another contract win, the South Flank Precinct Bulk Earthworks & Concrete contract by BHP Billiton. It’s a credit positive for the company and its amortising 7.50% Dec 2020 bond.

This week we published three sample portfolios:

1) AUD 100% IG yielding 4.25%pa

2) Mixed AUD IG and sub IG yielding 5.25%pa

3) Higher yield portfolio with foreign currency bonds, yielding 6.25%pa.

Click here to view the article and the portfolios.

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