Earlier this year we published a series of articles outlining the benefits of being a Wholesale investor.
With the exciting development of our new Small Parcel Trading service available to wholesale investors, we have had a number of queries from clients about how to become certified as wholesale.
Considering the number of queries received, we decided it would be a good idea to recap the various benefits clients gain when they are classified as wholesale.
Costs and minimum denominations are the same for Retail investors as they are for Wholesale investors, however as a Wholesale investor you have a significantly wider range of bonds to choose from, and credit rating information to help you make your investment decision.
How to qualify
To qualify as a wholesale investor, there are certain financial tests that must be met and certified by a Qualified Accountant.
Essentially, an investor must either have, or control, greater than $2.5m in net assets, or have a gross taxable income of >$250,000 in each of the last two years.
Relevant details can be found by clicking on this link to the Factsheet and Certificate.
So what are the benefits?
Access to credit ratings
Credit ratings are a useful starting point to understand how risky the investment is compared to other similar bonds.
The two largest and well-known ratings agencies are Standard & Poors (S&P) and Moody’s, with both using an alphanumeric system from AAA/Aaa at the top of the scale to C/C at the bottom. More letters are better than fewer, and an A rating is better than a B rating and so forth.
Investment grade, the highest quality of bond, is defined by a rating of BBB-/Baa3 or better, while Non-Investment grade (also known as sub-investment grade, high yield or even ‘junk’) is a rating of BB+/Ba1 or lower. Investment grade ratings denote a low probability of default (i.e. not making payments or interest or principal when due).
FIIG-originated unrated primary issues
Post-GFC, as yields had taken a shift lower due to the central bank response to the crisis, investors were concerned about the erosion of their income. We also had potential borrowers looking for capital outside the Investment grade space asking us if we could offer them capital.
As a result of the demand for capital, we arranged the issuance of our first unrated issue for ASX-listed finance company Silver Chef in 2012. This began a journey that has since seen more than $2.5B in unrated debt capital raised for more than 50 issuers.
The total return since inception for a passive investment in each bond at issue is 6.89% p.a., with the most recent being a $30M increase to an existing bond from WA Stockwell, at a yield of 7.25%.
Institutional market primary issues
Primary issuance also occurs in the wider institutional market. Typically conservative, Investment grade rated new issues are arranged by the major banks, sometimes in collaboration with a more specialist Joint Lead Manager.
The process is run by building a book or orders around an initial pricing guide for the tenor sought by the issuer and comparing that to the demand in terms of volume and at what particular price will be paid by the market participants. Where these two intersect is where the bond will be issued.
Typically the new bond has to offer an incentive to draw new orders from the market, to entice investors away from staying invested in current issues. This is known as the new issue premium, and allows investors in new issues the opportunity, all other things being equal, to pick up extra return versus what is available in the secondary market.
This new issue premium is usually available for approximately a month post issue, and then is eroded by secondary market pricing reflecting the relative value of the bond by rising slightly.
Access to foreign currency denominated bonds
The bond market is a truly global market, with a panoply of issuers in a wide range of currencies. As the largest, deepest and most liquid, we usually focus on the US market with the huge range of issuers allowing a choice of risk and return unmatched by any other market.
This is especially true in the high yield market – for example, the US high yield market size is approximately equivalent to Australia’s entire bond market, including government issuance.
There are opportunities in Australian companies that issue in USD as diversifiers given they have no domestic bonds, as well as US-based and global companies issuing in USD.
Clearly an exposure to non-AUD denominated bonds brings with it foreign exchange risk, but we believe the benefits outweigh the risks.
Access to Structured Credit
One other category of bonds that are reserved for wholesale clients are those issued as structured notes.
Structured credit is more complex, and typically involves a pooled group of assets backing the issuance of a tranched series of bonds from a Special Purpose Vehicle (“SPV” – usually a trust), with a strictly defined structure (hence the term ‘structured’ credit) describing the mechanism of payment of the returns from the bond, either principal or interest, and also incorporating potential losses.
The most common are bonds issued from pools of residential mortgages – known as Residential Mortgage-Backed Securities (“RMBS”) – but any asset type that is securitised in this way is generically known as an Asset Backed Security (“ABS”).
Investor preference for risk/return balance can be satisfied by investing in a particular tranche in any individual transaction.
Managed Income Portfolio Service (“MIPS”)
If you would prefer a specialist manage your bond portfolio for whatever reason – it may be lack of time, experience or simply you prefer not to manage individual securities, then we also offer our Managed Income Portfolio Service (“MIPS”) to Wholesale investors.
MIPS is run by a professional management team and is separate from the broader FIIG business, allowing it access to all that FIIG has to offer but also the independence to trade directly with the broader market on an arms-length basis.
For a minimum investment of $500,000, there are three separate programs to choose from, each with differing risk parameters and desired returns.
For amounts >$5m, it is possible to customise a program to match a unique investment profile.
Small Parcel trading
The latest benefit of being a Wholesale investor is the ability to participate in our newly announced Small Parcel Trading service.
Allowing clients to participate in bonds with large minimum parcel sizes, this extension of our well-established Direct Bond service has improved access to bonds previously out of reach to the majority of clients due to the large minimum investment required, typically upwards of $100,000 USD.
These bonds are now available in the usual minimum parcels of $10,000, and has further broadened the available universe of bonds that clients can invest in.
Essentially, becoming Wholesale qualified significantly increases the available investment opportunities to you as a direct bond investor because, in addition to the features you already enjoy as a Retail investor, it provides access to all of the above features and services.
The long form articles which cover the benefits mentioned above more comprehensively, can be found by clicking on the following links:
FIIG-originated unrated primary issues
Public market primary deals
USD denominated bonds