US CPI is due, NZ First Party to form coalition, FIIG originated Lucas TCS success on the secondary market along with a new issue from Elanor Investors, risks rising for QBE 2026 sub debt, NCIG and Frontier holders lock in profits and active trades in Avon Products and AAPT. Our latest sample portfolios are now available
What’s trading
AUD
- Adani Abbot Point Terminal 7.10% 2020 experienced some heavy flow last week following a recent news story that startled some investors; there was strong institutional support for this bond with the price staying stable. We expect this support for Adani to continue over the coming week, which is currently trading at an indicative yield of 7.095%pa. There is also strong institutional support for IMF Bentham 7.40% 2020 bond and Capitol Health 8.25% 2020
- Clients have been looking at selling out of their subordinated debt over the past week as yields have tightened to historically tight levels. Many investors have seen impressive capital gains – the main trades being out of Bendigo and Adelaide Bank 2024 & 2026 bonds with yields of 3.66%pa and 4.37%pa, respectively, as well as AAI 2040 & 2042 bonds with yields of 3.89%pa and 4.46%pa, respectively
Non AUD
- Newcastle Coal Infrastructure Group’s (NCIG) March 2027 senior unsecured bond experienced heavy flow last week as recent price appreciation made it an attractive switch target. NCIG launched a new senior secured bond in September which priced significantly tighter than guidance. This put upward pressure on the unsecured line which hit a new high on Friday. The major focus for reinvestment was telecommunications provider Frontier Communications April 2020 senior bond. At an indicative yield to maturity of 8.39%, Frontier allows clients to retain high yield exposure while significantly reducing duration
- Global beauty manufacturer Avon Products traded heavily late in the week following an attractive offer from the institutional sector. The semi annual fixed rate August 2022 senior bond is still in good supply available to clients at an indicative yield to worst of 6.27%
Economic wrap
- US employment data was mixed with non farm payroll declining by 33,000 jobs. Job losses in leisure and hospitality, which was likely impacted by recent hurricanes, largely contributed to this decline. Wage growth however, was a positive and the headline unemployment rate fell to 4.2%
- NZ final election results show two coalitions are possible with 61 seats needed for a majority. The NZ First Party will be a contender in either case – jointly with the Nationals they would make up 65 seats, or 63 seats together with the Labour and Greens. NZ First’s Winston Peters is already being wooed but the longevity of any coalition is unlikely
- US CPI is released this week with expectations of a 0.2% monthly core rise. The FOMC September minutes are released which will make reference to whether current economic data is on track to justify a December rate hike
Other news
USD denominated QBE 2026 sub debt looks expensive. The bond has traditionally attracted buyers as one of the higher yielding investment grade securities. However, we believe there is some risk to the investment grade rating with the high degree of uncertainty surrounding 2017 catastrophe claims, coupled with the decision by QBE to continue buying back its own equity, which is not usually a positive for debt investors.
Lucas Total Contract Solutions (Holdings) has made an impressive start in the secondary market. Investors who wish to scale back on their allocations can realise immediate gains.
Holders of the NCIG sub debt continue to lock in profits, especially where they hold more than the minimum parcel of AUD100,000. NCIG is currently trading between 124.50 and 127.50 and traded as low as 103.00 in August 2016. Frontier 2020’s have been the latest beneficiary with investors continuing to seek returns via credit rather than duration. These shorter dated high yield securities offer a return above 8.00%.
Elanor Investors Group (ASX: ENN) issued a five year fixed rate bond last week via FIIG. Elanor is an Australian real estate funds management group with $841m of retail, office and hotel, tourism & leisure investment properties under management or on balance sheet as at 30 June 2017. The notes pay coupons of 7.1% and settle on 17 October.
Our latest sample portfolios are now available. The main changes are the withdrawal of AGN in the investment grade portfolio; the withdrawal of Rackspace, Seek, Dicker Data and Axsess; and the inclusion of Lucas, Vale and JC Penney in the higher yielding portfolio.