Tuesday 17 May 2016 by FIIG Securities jumping Trade opportunities

Two short dated fixed rate bonds with attractive returns

Fixed income investors are traditionally looking for higher yields than what they can earn on cash and deposits, without the volatility displayed by equities

Bonds offer these characteristics, but excitingly, we have two short term opportunities which offer a 50% higher yield than what is available on deposits.

The bonds are higher risk than deposits and do not have any government guarantee. You need to decide if the higher returns compensate for the higher risk.


  • Royal Women’s Hospital (RWH) March 2017 bond with a yield to maturity of 5.00%
  • Swiss Re May callable in 2017 with yield to maturity of 4.40%

Royal Women’s Hospital

RWH Finance Pty Ltd is the financing vehicle for Royal Women’s Health Partnership (RWHP) which entered into a public private partnership (PPP) with the Victorian government for the design, construction and long term maintenance of the Royal Women’s Hospital in Melbourne. The physical building was completed in 2008.

RWH is one of the more mature PPPs in Australia, which started in 2008. Operational performance has been solid and this is expected to continue for the remainder of the concession which expires in 2033. For investors, RWH represents attractive, long term exposure to a mature operating Australian PPP which is difficult to replicate.

RWH is owned by Bilfinger Berger Group Investments (BBGI), which is a closed end infrastructure investment company listed on the London Stock Exchange with a geographically diversified portfolio of 39 high quality availability based PPP/PFI infrastructure assets. Net asset value was GBP470m as at 30 June 2015 and further acquisitions have been made since then. The company has only two assets in Australia (RWH and Northern Territory Prisons) and so RWH represents an important exposure for the fund to the relatively high quality Australian PPP market.

We expect the RWH bonds to be repaid at first call in 2017. The company will need to refinance in order for investors to be repaid. If RWH fail to meet the first call the final maturity becomes 2021. However the bond documents refer to the 2017 date as a ‘scheduled maturity date’ not a ‘call date’. This is very different to the optional redemption (call) provisions we see on a number of other bonds, and there are direct penalties associated if RWH does not refinance the bonds in 2017, the following occurs:

  • Dividends are locked up.  These become unavailable to the owner and so are used to pay down debt; and,
  • The owner’s ability to control the refinancing task effectively diminishes. If they decide not to call in 2017, it could lead to a full erosion of its equity investment

Our analysts have concluded there needs to be an injection of new equity from BBGI to achieve a successful refinancing. Nevertheless, we believe the fund has sufficient resources to fund a capital injection and announced improved liquidity during the last few months.

Additionally, there are reputational issues for BBGI if they walk away from the asset – it would make participation in future deals in the Australian market very challenging because these transactions are ‘partnerships’ with government parties. It is important to governments that these assets appear stable and don’t default.

Swiss Re

The Swiss Re Group is a leading wholesale provider of reinsurance, insurance and other insurance based forms of risk transfer. Dealing directly and working through brokers, its global client base consists of insurance companies, mid to large sized corporations and public sector clients.

They offer automobile, liability, accident, engineering, marine, aviation, life, and health insurance. Swiss Re also manages fixed income and equity investments for itself and other companies.

Swiss Re has a market cap of about CHF35bn, with current share price CHF 93.75. This is equivalent to AUD46 billion at the current exchange rate. The shares had a low in 2009 of CHF 18.64.

Credit ratings

Both of these securities are considered investment grade (IG) by ratings agencies. On a pure ratings basis, Swiss Re is a stronger credit, although the Swiss Re is an old style hybrid and lower down in the capital structure. The term to maturity can be extended beyond what we expect, which is an additional risk.

Capital structure

This refers to the ranking of the security in the (unlikely) event of receivership and a wind up whereby assets are disposed of, and the security structure shows the priority of payments – from the top down.  The diagram below shows a simplified bank capital structure, although not all organisations have all segments. For example only banks have term deposits.

Security Ranking

The RWH is a piece of senior unsecured debt, so that it ranks higher in the capital structure than subordinated debt or hybrids.

The Swiss Re is an ‘old style’ Tier 1 hybrid security meaning it is lower in the capital structure than the RWH bond. The May 2017 maturity date is a call date but nevertheless the rules pertaining to ‘newer style’ hybrids are not applicable to it.  


We expect both securities to mature in 2017. There are callable features attached to the bonds which many of our investors are familiar with due to the high familiarity with bank hybrids. Although this mean the maturity cannot be 100% guaranteed, in the absence of a GFC style event we expect both bonds to redeemed during 2017.

Which security to buy

The Swiss Re is lower yielding, a slightly longer maturity, and has a stronger credit rating. The bond is available in a minimum of 100k securities and in multiples of 100k thereafter.

The RWH is a local Australian piece of arguably essential social infrastructure. It has a higher yield and a shorter maturity. The bond is available in a smaller minimum of only $10,000 parcels.

Bonds for wholesale investors and how to qualify

Some companies have documentary restrictions or selling restrictions on to whom their corporate debt can be sold to. The companies may have restricted their bonds for ease of documentation, ease of process or due to some product complexity. Both of these bonds have some complexity as they have call dates attached to them.


FIIG believes both these securities can be used as part of a balanced portfolio to boost the lower returns currently available on deposits.

If you would like to know more about the cashflows on the securities, please email Leigh Winton: leigh.winton@fiig.com.auExternal link - opens in a new window

If you would like to know more about the organisations involved, please use the below link to the issuers area of the FIIG website http://thewire.fiig.com.au/issuersExternal link - opens in a new window