Tuesday 14 August 2018 by Leigh Winton Week in review

From the trading desk

This week, US sanctions on Turkey impacts global markets, New DirectBond from Nufarm, IAMGOLD 2025 remains popular, Frontier and Talen lines downgraded by S&P, FIIG originated bonds traded heavily throughout the week 

What’s trading

AUD

  • FIIG’s new issue for Zenith Energy started trading in the secondary market on Friday. The issue proved popular on primary issue, and clients who wish to add the notes to their portfolio have already put their orders in. Zenith Energy is a leading domestic offgrid power producer, predominantly servicing clients in the mining sector. The amortising notes pay a 7.55% fixed coupon with a first call date on 22October 2022, and a final maturity on 10 October 2025.
  • Investors found sizable liquidity for their IMF Bentham 2020 supply, as the notes were heavily bid by institutional investors toward the end of the week. Clients are able to exit their position in the notes at an indicative yield to worst of 5.10%pa.
  • FIIG was able to acquire supply in the Aroundtown 4.50% notes with a maturity on 14 May 2025. Aroundtown manages and invests in commercial and residential real estate assets, primarily serving customers in Europe. The notes are currently offered at an indicative yield to worst of 4.11%pa.
  • FIIG originated bonds have traded heavily throughout the week, and we are seeing supply in the following names:
    • AAT-7.50%-13Nov20 at an indicative yield to worst of 4.592%pa
    • Axsess-7.50%-22Jun20c at an indicative yield to worst of 3.722%pa
    • Moneytech-BBSW+4.65%-17Apr20c at an indicative margin of +3.117%pa
    • StockCo-8.75%-6Oct21c at an indicative yield to worst of 5.550%pa

Non AUD

  • Bonds from gold producers proved popular last week as investors sought exposure to the defensive asset class. Canadian producer IAMGOLD Corp experienced the most turnover as the highest yielding gold option available. Supply from the institutional market remains good for IAMGOLD, as well as for investment grade options Kinross Gold and Newcrest Mining. A selection of available bonds at indicative offer yields is listed below:
    • IAMGOLD-7.00%-15Apr25-USD- 5.76%pa rated B+ by S& P and B2 by Moody’s
    • KCN-5.95%-15Mar2024-USD – 4.67%pa rated BBB- by S&P and Ba1 by Moody’s
    • NEWCREST-4.2%-1Oct22 – USD – 3.86%pa rated BBB- by S&P and Baa3 by Moody’s
  • In the USD space, attention turned to exiting underperforming positions as the weaker AUD helped to pare capital losses. Talen Energy was a particular focus as S&P revised its outlook to Negative from Stable, citing expectations that the company’s financial metrics will weaken over the next two years. Similarly, S&P lowered the issuer credit rating and senior unsecured debt rating for telecommunications provider Frontier Communications to CCC+ from B-. It’s expected Frontier will stabilise EBITDA and reduce leverage over the longer term without meaningful top line improvement. Indicative bid yields for both Talen lines, and Frontier’s senior unsecured 2025 line are provided below:
    • FRONTIER-11.00%-15Jun25c-USD – 15.99%pa rated CCC+ by S&P and Caa1 by Moody’s
    • Talen-6.50%-01Jun25-USD – 12.63%pa rated B+ by S&P and B2 by Moody’s
    • Talen-9.50%-15July22-USD – 11.15%pa rated B+ by S&P and B2 by Moody’s

Economic wrap

The RBA meeting last week almost went unnoticed, with no change to the cash rate.The release of the RBA’s Statement of Monetary Policy followed on Friday. Of particular interest was some minor downward revision to forecast inflation and GDP until mid 2020 with inflation expected to remain at the lower end of the 2%-3% target range.

The US Treasury successfully auctioned USD78bn of government bonds as part of its quarterly debt funding. There was strong demand from pension funds especially for the USD18bn of 30 year bonds and USD26bn of 10 year notes.

US Consumer Price Index was 2.9% annualised, headline, and 2.4%,ex food and energy. The Core, ex food and energy, number was the highest in almost 10 years and follows on from the Chicago Fed president, Evans’ statement that US rates may rise more than expected, with policy becoming ‘somewhat restrictive’, if inflation continues to hold above 2%.

Markets were largely subdued until Friday when the US announced further sanctions on Turkey. The Turkish Lira fell by as much as 17% during the day against the USD and nervousness spread to other markets, including Australia. The AUD finished the day at its lowest level since January 2017. Given high reliance on USD debt of Turkish corporates and a current lack of confidence that the Turkish government is willing to act decisively, critics start to wonder if a bailout is needed.. Are we looking at the new Greece? Time will tell.

The coming weeks could present some volatility, with the end of summer in the Northern hemisphere and the likely decision by the US to impose tariffs on an additional USD200bn of Chinese goods. One apparent certainty, is that the US Federal Reserve will raise its rates again at its September meeting.

Release this week of employment and 2Q wage data in Australia will likely provide further guidance on the future direction of unemployment and the inflation trajectory. In all cases, the current RBA forecast points to a rate hike being unlikely until the end of 2019 to early 2020 at the earliest.

Any deterioration in the US - China trade tensions with the potential of a flow on effect on the global and Australian economy would push out even further any potential Australian rate hikes. Pessimists could even argue that the next rate movement will be a lower cash rate.

Other news – AUD and USD high yield available

Our ‘lower for longer theme’ prevails with clients extending duration in AUD investment grade, exiting Glencore 2019s, Downer 2018s and Alumina,callable May, 2019s , and buying Aroundtown 2025s and Asciano 2027s. We expect this trend to continue.

Nufarm is one of the world’s leading crop protection and specialist seeds companies. We have recently DirectBonded its new USD fixed rate bond, maturing in 2026 with 5.75% coupons. The BB- rated, senior unsecured, stapled security is trading below par  at $100.00. This likely reflects Australian drought, but we still believe the debt of the company is better than the equity. View the Factsheet.

IMF Bentham traded actively between $103.00 and $103.30 as investors took profit on the bond callable in June 2019 at $101.00, with a respective yield to call below 5.00%pa.

The Sydney Airport 2030 inflation linked bond continues to be in demand despite higher prices. The attraction of the issuer’s infrastructure monopoly business and a shortage of longer dated inflation product continues to drive the price up.

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