With the reopening of the FIIG originated High Yield market in 2019 last week by the Armour Energy transaction, it is timely to take a look at the history of this part of the fixed income asset class which, before FIIG pioneered it in 2012, had been sorely lacking in direct investors’ portfolios.
The first transaction was for ASX-listed equipment finance company Silver Chef, who borrowed $30m in September 2012 at a rate of 8.5%, and they called the bond early in September 2015 at a price of 103. Investors in the primary issue at a price of 100 (“par”), received a return to the call of 9.7% (all returns are per annum).
This is a good example of the kind of capital we provide to these smaller businesses. They are typically looking for longer maturity, or tenor, growth capital that they could not or cannot get from their banks.
This can be because the amounts they are looking to borrow are too small or they are simply a bit too early in their growth journey for the very conservative banks to consider lending to.
Often, this capital results in the company accelerating their growth agenda and repaying the capital early at a premium to the issue price, which enhances results.
FIIG has originated 52 transactions and raised over $2.2bn for over 40 separate issuers. This places FIIG firmly as the leading high yield debt originator in Australia over the past seven years.
Returns:
Selected AUD HY bond prices
The simplest way to invest in FIIG’s high yield originations is to buy them at the primary issue and hold them to maturity or early redemption.
If this strategy had been followed for each of the deals, the total return to the end of Feb 2019 is 8.0%.
The highest return achieved due to an early call was for the Payce 9.5% 2018 bond, which was issued in December 2013 and called early in March 2016 at 107.70, giving investors a return of 13.2%.
The lowest return is currently for the Eric 10% 04/08/2021c bond, which has a current price of 70.5 and a return of -1.7%. This shows the value of the high coupons, which can to a large extent cushion capital underperformance.
Risk:
S&P, the ratings agency, compiles a report each year (between 1981-2017) showing the default1 statistics of every bond in in its coverage globally. For the BB/B ratings band, on average in any given 5 year period (the average tenor of the bonds issued), they have seen defaults of 7.11/17.88%.
This means we could reasonably expect, of the 52 bonds issued, for between 4 and 9 to have defaulted. We have only had 1 technical default where an extension of maturity was sought, although in this instance coupons have continued to be paid to investors exactly when expected.
Conclusion:
It is evident that the experience of investing in FIIG originated high yield bonds at the primary issue has resulted in returns significantly in excess of those offered in similar instruments, and with a historical risk profile demonstrably superior to the global experience.
1 A ‘default’ is defined as the missing of a payment when due, either of coupon (interest) or principal.