This week WA state manager, Darryl Bruce and NSW senior relationship manager, Ben Taylor share three investment ideas
1. Sell BILLITON 2020c and buy QBE 2026c
Sell BILLITON-6.25%-19Oct20c-USD and buy QBE-5.875%-17Jun26c-USD.
QBE bonds are now available very close to par. We believe the QBE bond offers standout value versus USD BHP 20s while maintaining investment grade and increasing yield by 173 basis points(bps) with a yield to maturity of 5.97%pa.
The following table shows the figures for both bonds:
The following graph shows QBE offer levels since inception:Prices accurate as at 31 July 2018 but subject to change
Source: FIIG Securities
The following graph shows comparable investment grade USD offers:
Source: FIIG Securities
Why has the QBE bond sold off?
There are a few broad reasons for the price move, including company credit (both sector and company specific) and overall moves in interest rates.
- Australian financial institutions are out of favour at present. The Royal Commission into Banking has not inspired a lot of buying interest in these names.
- Recent poor results, while in line with initial guidance, were not well received by the market as they show profitability remains under pressure.
- Finally, interest rates in the US have moved higher recently which has put downward pressure on bond prices.
Credit and security type: QBE’s December year end result was a loss of USD1.25bn – mainly due to natural disaster related losses. The company has since announced a number of changes, including the sale of the loss making Latin American business as well as several changes in senior management, including a new CEO (Pat Regan).
Despite the recent poor result, we do not have any major concerns regarding the viability of this company. You will notice in the price chart there was similar weakness toward the end of 2016, which was also in response to weak results. QBE is focusing on several initiatives which if successful should see improvement in the credit metrics of the company, including simplifying the company. The recent moves off the back of these latest results represent another opportunity in our view to take advantage of a better entry point.
Interest Rates: Broadly, we feel that current interest rate expectations in the US are aggressive, hence we’re comfortable in taking on investment grade exposure of this duration. The recent weakness in inflation data has further added to this view.
View the QBE Factsheet here.
Contact Darryl Bruce, State Manager WA – Fixed Income on 08 9421 8502
2. Add Adani USD 2022
One idea you may like to consider which is trading at a nice discount is the senior secured, investment grade, Adani Abbot Point Terminal (AAPT) 2022 US dollar bond.
AAPT exports a mix of both thermal and metallurgical coal from the Port of Abbot Point which lies approximately 25km north of Bowen in Queensland. The bonds are now trading at lows and offered at USD93.75 on the back of negative publicity around the Adani name and the US trade war with China where we are seeing many Aussie issue credits in US dollars being sold off indiscriminately.
The reason we believe this idea should be considered is due to the fact that the Port facility is essential infrastructure with nine long term take or pay agreements servicing coal mines in the Newlands, Collinsville, Sonoma, Goonyella, Bowen Basin and Galilee Basin areas. The Terminal has a history of stable operating performance and is ring fenced from any expansion efforts Adani has in the Galilee Basin. Therefore, while these issues are topical, we view the proposed development as having no impact on this bond in the near term.
Our Research team assigned an ‘Outperform’ recommendation on the bonds. While the research has flagged the remaining refinancing task required for 2018, this was subsequently completed a few weeks ago and AAPT has no maturing debt until late 2020.
The Adani bonds trade in USD200,000 face value parcels at a large discount and offer an investment grade opportunity with a yield of 6.10%pa in USD. One parcel costs USD188,612 or circa AUD253,579 assuming an exchange rate of 0.7438.
Prices accurate as at 31 July 2018 but subject to change.
View the Adani 2022 Factsheet here.
Note this bond is available to wholesale clients only.
3. Add new NCIG 2027 USD DirectBond
Another idea is to add an allocation to Newcastle Coal Infrastructure Group’s structurally subordinated US dollar bonds at 8.21%pa. The offer was keenly taken up by our client base.
We have DirectBonded its new investment grade, senior secured 2027 USD bonds which are BBB rated and can be purchased in USD10,000 face value increments. These bonds are rated five notches above the unsecured bond and provide a 5.02%pa yield in a high quality essential infrastructure asset.
NCIG holds the long term lease on the NCIG coal export terminal at the Port of Newcastle and is owned by coal companies who mine in the area, including BHP.
Newcastle coal is highly sought after for its high heat generation ability, particularly by the Japanese and Korean power utilities, which have underpinned demand for export coal from this region. NCIG shipper mines and projects generally rank as some of the most cost competitive mines globally, with many in the first and second cost quartiles of the global thermal coal cost curve.
NCIG's cash flows are relatively stable, reflecting the take or pay agreements in place with shippers, which cover the full capacity of the terminal.
The relatively low ratios reflect the fact that NCIG’s revenue is based on a cost recovery model, with no distribution to shareholders.