Wednesday 24 October 2018 by FIIG Securities FIIG Securities Sales commentary

Bondcast - Wentworth by-election, franking credits, Centuria and Next Generation Clubs

Learn more about which bonds are on the move with this weekly podcast. This week Elizabeth Moran and Jake Koundakjian discuss the recent by-election, franking credits and new issues from last week.

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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.

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.

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.


Elizabeth Moran - Hello welcome to another edition of podcast. My name is Elizabeth Moran. I'm director of education and research here at FIIG. And I have with me today Jake Koundakjian and Steve Mackie.  Let’s start with the Wentworth by-election at the weekend. Quite an interesting result.

 Jake Koundakjian  - Very interesting.

Elizabeth - Just goes to show you know it's not such a safe Liberal seat even though they’ve held it a long time. People are really disgruntled with the Liberal Party. The Labor Party is looking like a strong strong candidate for the next election.

Steve Mackie -You know I’d agree, as a former Wentworth resident myself I think you pretty much couldn't get a more blue blooded seat. So I think as a benchmark and a bellwether I think ScoMo probably has his work cut out for the next election. What do you think Jake?

Jake - Well as always I’m thinking, how do you make money off it and how could that be positive or negative for fixed income?

It could be extremely positive for fixed income given potential tax effects and franking credit area.

Elizabeth [00:01:08] Yeah well all of a sudden most hybrids aren’t looking that good if you can’t claim the franking credits. Rates of return on them are equal to the subordinated bonds which are a far superior investment. So I think certainly it could be a positive for the bond market.

Steve - I don't disagree and I think the way the deficit's been running, ScoMo has been doing a good job as a treasurer. I think the next government whoever may be leading that will want to keep things going the way they are. I think you know with the Aussie dollar as well down where it is, our bonds are still pretty attractive to overseas investors so it's good news all round for bond investors at the moment.

[00:01:48] You know I've heard people say there's no way losing franking credits could ever happen but it did in Canada in October 2006. They removed the tax benefits of an investment called Trust units. So you woke up on Halloween morning and they called it the trust unit massacre and all of a sudden your trust units are down 15, 16, or 20% because of a change in taxes. Certainly it has happened in other jurisdictions similar to Australia and could quite possibly occur here.

Elizabeth - We'll keep an eye on that one.  So a couple of things today we will talk about some new issues, Centuria first which was a week or so ago.

Jake - Hard to keep track, there's been a few good deals across the desk and yeah they wanted to raise up to a $100m I think but they ended up just printing $80m. They went for a fixed and floating with a 2023 maturity. For those fixed, it was it 6.5% and for the floating, BBSW + 4.25%, so both around  the 6.5% and a good company in my opinion.

Elizabeth - I know we had some clients in at first issue, was that in the fixed or the floating or was it a bit of both?

Steve -Definitely a lot of investors were looking at the fixed line. You know like Jake was saying it was a good quality issue. You're getting prime commercial real estate backing these notes you know Centuria is a pretty well respected ASX listed REITS operator so to get a yield you know in the sixes, I think given this environment given what the stock market's doing it's not bad. I think it was a pretty easy sell for the two.

Jake - Yeah well the way I see it they are an investment manager. Centuria is a listed investment manager, they have a number of listed and unlisted funds that they manage for you and happens to be very high quality real estate with tenants like Woolies and IAG and General Electric, BlueScope so they go they've got very good tenants and a really good deal and it was well received.

Elizabeth - So how long have they been in the business just out of curiosity? Do you happen to recall?

Jake - Not off the top of my head.

Steve - Definitely pre GFC you know the portfolio is sort of circa $5bn I think in property. So you know that they're growing assets under management which is that is a key barometer in funds management that you are doing well, particularly in the institutional space if they're getting sponsorship to sell their trust then they're doing quite well I think.

[00:04:25] Okay great let's move on to Next Gen they had a tap to their original issue. You want to talk about?

Jake - Sure a lot of my client base had never heard of a tap before. A tap means you're adding to an existing position. So they issued the bond through us $45m, 7.9% quarterly pay in June of this year and at that point they were indicating they would probably raise another $15m which is what they did.  Just this week, pardon me Friday last week. The tap was for $15m. It’s a fungible issue some more jargon for you, fungible means it melts into the other one, so it's the same bond.

Elizabeth - And are the funds are they being used to purchase the Doncaster site?  

Steve [00:05:41] - That's correct. So they sold down a property in Perth and the proceeds as well as this tap are being used to fund the Doncaster site. It's a multi use site. You have a Mirvac apartment development on that site obviously Doncaster, prime Melbourne real estate. So you know the switch from a real estate point of view I think is quite good positioning for the company. Again you know this is senior secured debt.

So we've got a claim over the assets and Next Generation Clubs switches which is quite a good position to be in as a bondholder.

Elizabeth - Certainly that Doncaster real estate is prime now and people that have held their houses there for a long period would have done very well over the last X number of years.  

Jake [00:06:03] And me as a bondholder I am doing well in the bond itself. So that's a 7.9% on a quarterly basis and it’s pretty attractive.

Liz [00:06:08] Yeah I don't have too much else today do either of you guys have anything you want to add?

Steve [00:06:14] I think you know just generally a lot of investors are a bit worried about how the market's been trading you know. A lot of them probably have equal allocation of equities and bonds and I think you probably will take some time to sit back as an investor and re-evaluate what your overall objectives are. But you know I think the one thing that we can say is that your bond portfolio shouldn't be keeping you up at night.  If it is get on the phone. Talk to me and Jake. I think you know it's about reducing that volatility in your portfolio by that I mean the sleepless nights. Jake.

Jake [00:06:48] They're certainly looking back to a couple of years ago versus now. Certainly there's a few more risks on the horizon, the trade wars and rising interest rates these should slowdown growth overall, so if you don't want to discuss adding more investment grade or higher quality to your overall portfolio, shifting from riskier assets from equities and property towards more defensive fixed income arena. So we are the experts here. Come on by and give us a call.

Steve [00:07:14] Lets formulate a view for where we think markets are going and then just make sure we're positioned accordingly.

[00:07:21] And on that note there is a note in the WIRE this week as well on rebalancing your portfolio. So probably one to have a read of. Thanks very much for joining us.

You're welcome Liz.