Wednesday 14 November 2018 by FIIG Securities FIIG Securities Sales commentary

Bondcast – Lendlease, proposed APRA new capital requirements, AMP Tier 2, CBA and Westpac Tier 1

Learn more about which bonds are on the move with the weekly podcast with Elizabeth Moran, Stephen Mackie  and Jake Koundakjian. 

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


[00:00:00]Elizabeth - Welcome to another edition of BondCast. My name is Elizabeth Moran. I'm director of education research here at FIIG Securities. With me today I have with me Jake Koundakjian and Stephen Mackie. Today, we’ll kick off with Lendlease. I think that was quite a bit of a shock to the market late last week.

Jake - Yeah looked like a good deal. I was definitely interested in the ten year but they cancelled the deal which is something that's very very very rare in the marketplace.

But I think was the right thing for them to do given that they had a shock surprise announcement of was it a $350m loss?

Steve- In the engineering division, that's right. There was an unannounced write down of $350 mil. Now obviously they roadshowed the bond so the bond investors didn't get to look at that write down before they committed to taking the bond on board.

Price was reflecting the equities. So obviously I think the only right thing to do was to cancel the deal and look at coming back to the market.

Jake - Which they will probably do in six month’s time or so I'd imagine. Obviously a good company. But I think they did the right thing by canceling it.

Elizabeth - We never know if there’s going to be further write downs and I mean certainly in my time here in Australia I haven't ever seen another investment grade company cancel a bond that close.

[00:01:40] Jake During the GFC perhaps?

Elizabeth – They just didn’t issue, there wasn't the market.

Jake -  But quite rare.

Elizabeth - It was rare and quite obviously disappointing to a lot of investors that had got in on the primary or had made switches to enable them to invest. Nonetheless we keep going.

The other news last week was from APRA who said they want to increase the capital that the banks are required to hold by four to five percentage points which means there's more issuance coming doesn't it?

Jake - APRA and many many banking regulators around the world, want their financial firms to have bucket loads of money in the bank. This is what I have as much money as possible stuffed away just in case. And you know when I look back to 25 years in markets and if I think of any industry that's ready for another GFC it's the financial industry. But they have to be unquestionably strong. So this is another attempt to continue that, with up to $80bn more in the next four years for the banks.

Steve - Yeah pretty much so that they're lifting the total capital requirement by four to five. Now overseas they've got similar capital buffers but APRA has specifically targeted subordinated debt. So in terms of the market, that was very good for senior debt so holders of bank senior notes were pretty happy about it. Again you know if you're a subordinated debt buyer it just means that there's more paper coming on board at better rates.

[00:03:08] So I think you know we've got to look through the negatives of this and that you know longer term it means we've got a stronger banking sector and I think for the economy as a whole that's a good thing and going back to the GFC, I mean taxpayers didn't technically have to bail out any of the banks unlike in the US and the UK and Europe, whilst the government did guarantee some of the debt issuance by the banks and by the state governments as well. There wasn't any cheques written to bail our banks out. So, I think this is just trying to give some comfort to taxpayers that their hard earned dollars aren’t going to be recycled into the banks in the next crisis.

Elizabeth – They did actually step in to support the RMBS market as well didn’t they? So where there wasn't liquidity in that market they bought up quite a few of those tranches which they have now all sold and it’s been fine.

Steve- Again is just part and parcel of operating monetary and fiscal policy, the government and the Reserve Bank at arm's length you know interact in the markets you know when markets are at extremes be it currency, bond markets etc. You will find governments will react if they think it's going to filter through to sentiment in the economy.

Elizabeth - Absolutely. Those subordinated bonds actually have a non viability cause which I'm not sure everyone's aware of. But in essence if APRA declare the financial institution non-viable the subordinated debt converts to shares and is meant to be loss absorbing to help protect the higher ranked investors in the structure.

Steve- That's correct. And the entity has to be a non-going concern so the doors have to be boarded up at that point in time for APRA to make that declaration.

[00:04:53] Steve - Now as we all know if that happens if we see a bank doors closed I think that you know share markets are probably the last thing people are worrying about at that point.

Elizabeth – This is true.

Jake - But hard to know how it would trigger, I mean you'd imagine the equities would've been already trashed pretty hard which of course.

Steve- Equities would have gone, hybrids would have gone.

Yeah. And then you know we're heading up the capital structure to the subordinated notes and you know there's obviously a lot of pain has been taken by that stage. So you know it could be that at that point that is the best point to get converted as well.

Elizabeth - Good point. Certainly a great unknown and if you think back to the GFC I think there's an argument for when the RBA stepped in to guarantee bank funding that at that point some of the banks were non-viable. We haven't heard the whole story there. I doubt that we ever will. But I think that might have been an instance deemed non viability for future reference, so just something to think about.

You are getting paid for taking on a bit more risk but certainly that market's going to look attractive going forward. If you get all the big four banks issuing into it.

Jake - This is this is why they're asking for another 80 billion to be stuffed to the coffers so that if anything nasty ever occurs again similar to what has occurred the banks will be unquestionably strong.

[00:06:21] So this is protection just in case of extreme, extreme, extreme circumstances.

Elizabeth - So the top four had fallen behind in international standards they had been unquestionably strong and in the top quartile. So I think this is helping push them back into it.

Steve - And it also lifting up the subordinated debt levels to where there were four or five years ago. So you know there has been a bit of a roll down in terms of the make up of the capital structure. So we are just going back to where they were in terms of that makeup of the total capital requirement

Jake – I’m definitely open to seeing more big four names subordinated bonds.

Steve - At better rates.

Elizabeth - Yes of course. So we had one last point with AMP.

Jake -  A bit of a controversial name, to put in the same vein as the big four banks. Certainly they've all been hauled in front of the royal commission.

Steve - The new AMP bond, what do you think about that Jake?

Jake - Look I think they got us at two point seventy five to 3 percent over the bank go swap rate and I was really hoping would be at the higher end of that range and it didn't price quote the higher end of that range and I was really open when I really want to get really involved name it. You know when a company the size and stature of AMP is going through some dramas which I believe are survivable events, it's a good time to be investing in companies when nobody likes them. And certainly there's a lot of hatred towards AMP now.

[00:07:47] So I really wanted to really get involved and the motivator for that would have been paying me 3 percent over the bank bill swap rate. Unfortunately because of the conditions in the marketplace, everyone wanted the credit or still wants the credit and that lowered the rate.

So I did buy some for investors, but I was not as aggressively as I would have wanted to be.

Elizabeth – It probably isn’t one of my favoured names I have to admit, I probably wouldn’t be there. But you know each to their own and I think the bonds are going to be a lot more secure than the equity and you know is AMP going to survive? Probably.

So you know it has got a hard journey in front of it. I think it'll be a bumpy ride as well. I'm not sure I'd be up for it.

Jake - I think every quarter leading into every quarter results you will be gritting their teeth getting ready for what's going to come out and that's why I wanted to be paid the higher end of the range.

I do believe that they'll survive because they're quite well capitalised but I think every quarter for the next two years potentially could be gritting your teeth getting ready for what's going to come out now. So that's why I wanted to be paid more and that's why I didn't get too excited. I understand it's trading well it hasn’t started trading yet but I think it's trading in line with where priced.

Elizabeth - What did you think Steve? You haven't really talked again.

Steve - You know I think the market's probably voting that they've got confidence. Dave Murray is at the helm there. Having worked under Dave Murray for many years at the Commonwealth Bank he's pretty stable pair of hands.

So there'll be a lot of changes at AMP. So the company you are buying now isn't necessarily what it was over the last five years. I think it'll be structurally different going forward. The industry is going to be structurally different going forward, financial planning is changing, insurance is changing after the banking royal commission.

The repercussions can be felt for many years going forward. For me personally, if I'm putting money into finance I prefer the banks. I will keep my eyes peeled for these juicy subordinated bank debts coming up.

Elizabeth - Fantastic. One last thing. There's been quite a lot of Tier 1 issuance in the last few weeks with CBA and Westpac just coming to the market and I thought I saw this morning ME Bank was looking to raise as well. Any thoughts that there?

Jake – Everyone has their hands up.  

Elizabeth - They have, pre- Christmas

Steve - And they're flying off the shelves you know the Westpac deal was a pretty jumbo sized issuance and that'll do them for their funding for the rest of the year. And I just think as well Asian investors with the Aussie dollar at these levels snapping them up as well from all reports most of the RMBS has gone recently. Now our friends up in Asia have taken a large chunk of the top trenches in the RMBS segment of the bank paper that tends to fly out the doors as well.

Elizabeth - That’s another edition of BondCast signing off, thank you.