Tuesday 17 July 2018 by Guest Contributor At FIIG

BondCast - Two relative value picks

Cut your reading time and listen to a podcast instead. This week's BondCast looks at two relative value picks from our panel

This week, we are joined by our senior relationship managers to learn more about which bonds are on the move. Both Sunland and QBE bonds have high yields around 6%pa. See the transcript below on the page.

Stay tuned for our weekly podcast to learn more about bonds and trade opportunities brought to your by our experts.

We would welcome any feedback or questions, if you could please email clientservices@fiig.com.au.


Jake Koundjakin-spaceJake Koundakjian 
Director, Fixed Income Sales

Jake grew up in Ottawa, Canada, where he rose from a teenage bank teller to a portfolio manager overseeing more than $600 million in assets for the Bank of Nova Scotia. With over twenty years in asset management he moved to Australia seven years ago with his family.

Liz Moran- space
Elizabeth Moran
Director – Education and Research

Elizabeth has been with FIIG for ten years and for much of that time has been a corporate and bank analyst. In recent years her passion for education has seen her role shift, to author/ edit FIIG’s “The Australian Guide to Fixed Income” and an online fixed income course for Financial Advisers. She continues to edit FIIG’s weekly newsletter, “The WIRE”.

In her role as Director of Education, Elizabeth has delivered presentations at conferences across Australia. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings, writing daily press releases for Bloomberg. Elizabeth spent five years in London, three working as a credit rating analyst for NatWest Markets.

Stephen Mackie - spaceStephen Mackie
Director – Fixed Income

Stephen Mackie is based in the firm's Brisbane office, managing investments for clients, ranging from individuals to institutions.

Stephen has over 25 years' experience in global markets, including his most recent role at QIC where he was a Director - Investment Specialist in the Global Multi-Asset team. Prior to this, he has held a variety of senior roles as a trader and portfolio manager with RBC Capital Markets, Citi, Kapstream Capital and the Commonwealth Bank.


Elizabeth Moran: [00:00:00] Hello. Welcome to another edition of BondCast. My name is Elizabeth Moran, director of education and research here at FIIG. Today, I have with me Stephen Mackie and Jack Koundakjian. Today we are going to talk about Sunland and QBE and what they have in common. We all like the relative value of both these bonds. Let's kick off with Sunland which is a high yield bond available to all investors. Steve, do you want to talk a little bit about it?

Stephen Mackie: [00:00:33] Yeah, Liz. Sunland - it's a Queensland company originally started on the Gold Coast, and has been around for 35 years. One of the reasons I like the company is they have a diversified development portfolio. They concentrate on multistory residential, urban redevelopment, single occupancy houses. And they're also diversifying their portfolio. So whilst they started on the Gold Coast and have their roots very much there, they've done developments in Brisbane, the Northern Beaches of Sydney and as far afield as Melbourne. So, really a national brand. And if we think about some of their major developments that have gone through - Palazzo Versace, we've got Q1 on the Gold Coast, Abian here in Brisbane which is a lovely development. So really you could almost call them an iconic developer.

[00:01:30] So the bond that's on offer at the moment is a 2020 November maturity bond and will yield investors just below 6.4 per cent per annum. So, you know if you think of the context of property that's a pretty good yield on bonds. It's a piece of paper that we've got available that we're getting our investors into. What do you think Jake?

Jake Koundakjian: [00:01:52] Yeah, we certainly do like it quite a bit. It's actually my wife's second biggest position from a bond perspective. We certainly do like it quite a bit - it's Marines came in well, strong free cash flows and the equity is very good as well. Also just watching the company over the years, they seem to zig while others are sagging. Just don't think they pull stumps on Melbourne and Sydney. The good really good timing a few years back when they put their efforts into the southeast Queensland market which seems to be also been a very astute move on their part. So yeah I like the company, it's ASX listed, almost a few hundred million market cap now, it's a senior unsecured position. Offered at 6.4 per cent yield, they do have the right to call it back in November of this year at 103 dollars, which would be a great win because it's higher than the current offering price. Hopefully they do that, but who knows. But it's also being called in November 2019 as well at 101.50. Both would be wins if they occurred for investors if they're buying now.

Elizabeth Moran: [00:02:57] Okay great!

Jake Koundakjian: [00:02:57] If we come back to relative value and look at all the comparable bonds on offer for retail investors, which my wife is, this one really sticks out. There is one that's higher - Impact but I do prefer the ASX listed Sunland - just that flow of information is better and it's really, really good value.

Elizabeth Moran: [00:03:16] I mean for me having a 30 year experience in that market, they've seen some ups and downs in that time so they know how to cover for them. I would expect.

Stephen Mackie: [00:03:31] And a company like Sunland, the founders are still involved in the company, so they're committed to the business going forward. They've had strong revenue growth and cash flow continues to grow. I think you know just in terms of their debt to equity ratios, they're very stable. If we also look at their earnings before interest and tax depreciation, again they are very stable. So the metrics just add up for me, I think it's one of those companies that sit on the FIIG platform that offer good relative value. If we look at what the Sunland equity has done, it's had a pretty solid return this year and the debt's just presenting an opportunity for investors to pick it up at cheaper levels.

Elizabeth Moran: [00:04:14] Excellent, that's a big tick from all of us, let's move on to QBE which is the US dollar line we're going to talk about. Although I know they do have a UK line and a number of bonds that they've issued. But, top 25 global insurer and reinsurer, very big group market cap of $13.4 billion, Jake you really love this one?

Jake Koundakjian: [00:04:36] Yeah look it's a really great name. QBE, in my experience in Australia the last seven years is so well respected when they come to the marketplace place, the bond market place. And also implies that only equity investors haven't been as happy, but from a bond perspective I'm quite comfortable. It's an investment grade offering. In this case it's wholesale investors only and it unfortunately has a big minimum of USD 200,000.

[00:05:01] So we're able to secure the bond for investors now at a little bit under that hundred dollar price which is when the bond was first issued a few years ago and from memory, it was eight times oversubscribed. So there was a lot of interest in its first issue. So we are able to get it cheaper now than it was when it first IPO'd. So yeah 14,000 employees around 37 countries. These guys are big, big players in the field.

Elizabeth Moran: [00:05:26] And what's the yield and the credit rating?

Jake Koundakjian: [00:05:27] The relative value is really good, just under 6 percent for a BBB- bond. Looking at comparable investment grade bonds - they're all mid 4s, high 3s as far as the yield is concerned. So, QBE is really sticking out. It looks quite attractive with comparatively - strong capital base, liquidity is good for the company, it's investment grade, it's global presence. It certainly speaks to my interest.

Elizabeth Moran: [00:05:53] So it's a little bit on the nose, why do you think that is?

Jake Koundakjian: [00:05:56] Tough one.

Stephen Mackie: [00:05:56] I think, talking to investors generally, I think it's maybe swept up in a little bit of the negative sentiment that came out of the Banking Royal Commission. Just generally the finance sector has been beaten up a little, some of the banks have recovered some haven't. But I think large Aussie players generally probably didn't fare well out of the whole banking sector review in the Royal Commission.

[00:06:25] We also think QBE's Latin American operations, which they have sold, were struggling so that probably marked the bond down a little. But again, going back to the stock, the stock has bounced over the past month and a half. Bond investors may be reacting a little bit slower coming into the end of financial year. Banks maybe have this bond in their portfolio as well. So they’re probably marking it down. But like Jake was saying, it's a good company. It's the 800 pound gorilla in the insurance market. When you think about it they've got a massive investment portfolio that underwrites all their assets. The $26 billion invested is predominantly in corporate bonds I might add. So they themselves are well entrenched in the market.

[00:07:10] But again, like Sunland it is a company that is diversified so you get a good spread of revenue. They're diversified geographically. Again they've gotten out of Latin America. But they're also diversified in what they do, so motor vehicle, commercial, accident insurance and also more importantly reinsurance. So they're also quite big in the reinsurance sector. So, there's a risk with any bond you buy but when you buy the QBE bond you're really buying a bond in a company that looks after risk. And also if we have a look at their risk weightings as well, based on the AFMA measures, they're about 1.6 times their solvency levels, and then targeting to get that up to about 1.8 times insolvency on the AFMA scales, so it's pretty good.

Elizabeth Moran: [00:08:05] It's certainly not a company that you can imagine that's going to go bust any time soon, so you've got to think it's going to be around for a number of years as it has been already.

Jake Koundakjian: [00:08:15] Since the 1880s, I believe.

Elizabeth Moran: [00:08:17] Well, a really long time. It is a longer dated bond, its first call is in 2026, is that right Jake?

Jake Koundakjian: [00:08:23] Yeah that's right, so eight years out. That might be part of the price weakness we've seen. There's been generally concerns starting in May 2013, but it's picked up pace in the last two years as rates rise.

Elizabeth Moran: [00:08:35] And it's a floater isn't it?

Jake Koundakjian: [00:08:39] It's a fixed.

Elizabeth Moran: [00:08:39] So that might be something to do with it as well.

Stephen Mackie: [00:08:39] So it's coupon is five and seven eighths for those people that know how to do fractions or 5.875 per cent. But more importantly it's just kind of getting marked back towards good entry level. So it also has a step up on it. So if we get to the call date, then potentially QBE will have to pay higher borrowing costs so it goes up to about 4.4 per cent over the swap rate. So, based on today's market that means that this bond would step up to about 7.1 per cent. So, more than likely it will be called.

Jake Koundakjian: [00:09:20] I really struggle to see why QBE, barring the unknown of course, but you know investment grade, quality company; they seem to be getting themselves in order and things are properly in the background such as selling off divisions that aren't working for them. So they're quite attractive. And again, you know you buy low and sell high. I learned that decades back - still practicing making it happen - and this looks attractively valued, cheaper than when it first IPO'd.

[00:09:46] It's going to be eight more years of me not having to worry too much about the cash that's coming out of it. And it looks very very attractive.

Elizabeth Moran: [00:09:54] And at 6 percent, an investment grade at 6 percent - that's a cracking bond.

Jake Koundakjian: [00:10:00] That's not an equation that exists normally.

Stephen Mackie: [00:10:01] And they do have a heavy exposure to the North American market. And if we think about what's happening just generally - tariffs and Trump's policies - businesses that do have good exposure in that market I think going forward will do better. So particularly an insurer, you know if you're looking to diversify your financials away from the Aussie banks perhaps, then QBE is one to have a look.

Elizabeth Moran: [00:10:23] There, you have two relative value picks for today's bond cast - Sunland and QBE - that does it for us. Thanks very much.