Published in The Australian 21 November 2015
Diversified Victorian based mutual, Australian Unity has launched Australia’s first bond under the new “simple bond legislation”, designed to make it easier for companies to access the retail corporate bond market
Under the simple bond regime, the bonds must be “vanilla” senior unsecured debt with no conversions, deferral of interest and no write-off or loss absorption qualities. The scheme allows for a simpler prospectus, making the bonds cheaper to issue and thus increasing the appeal for companies to issue into the retail market.
The bond was launched on 10 November with the aim of raising $200 million. Funds will be used to repay Australian Unity’s existing bond due to mature in April 2016, to help finance the $114 million acquisition of NSW Home Care and for general corporate use. The bond is senior unsecured, floating rate with interest payable quarterly based on 3 month BBSW plus a margin of 2.8 per cent, equating to an annual rate of approximately 5 per cent for the first quarter.
Demand for the new bond was good with final issuance of $230 million with $100 million of new money.
Reasons to invest
Australian Unity is an attractive business diversified across three complimentary sectors: healthcare, retirement living and financial services. Net profit after tax has been rising steadily in recent years and to 30 June 2015 was $34.6 million up from $29.6 million the previous year. At year end, total assets were $4,331.6 million and net assets $542.9 million.
Healthcare contributes 57 per cent to profit with retirement living 24 per cent, financial services 16 percent and WA based Big Sky Credit Union 3 per cent.
I like the three complimentary businesses that should offer cross selling opportunities. Strategies seem well-considered and reasonably conservative.
The bond has some covenants restricting gearing and ranking of extra debt.
For additional comfort, Australian Unity has been rated by Australia Ratings as BBB+. This seems slightly high given the companies’ size and mutual status, but the company would likely be rated investment grade by international agencies given the quite stable nature and cash generating capacity of its businesses.
Is it good value for money?
Over the last week, there have been eight new debt issues in the wholesale over the counter market worth $1,755 million. The issue most closely resembling the Australian Unity bond is a subordinated bond issued by Suncorp. The terms of the bonds are different and the Suncorp bond can be used to help absorb losses if needed, but assuming the Australia Ratings credit rating is right, then risk is similar.
Suncorp’s bond was also floating rate and the size was close at $225 million but interest offered was higher at 3 month BBSW plus 3.3 per cent, or 0.5 per cent over the Australian Unity bond. However this bond isn’t available to retail investors and we do think the pricing is attractive.
In summary, the Australian Unity bond is good for retail investors looking to diversify away from shares and the banks. I think the bond is priced fairly priced and it was good to see the issue upsized from the $200 million originally sought.