Tuesday 08 August 2017 by FIIG Research Trade opportunities

Three ways to reinvest your RWH and G8 money

Last Friday Royal Womens Hospital, repaid nominal bondholders and the G8 fixed rate issue was bought back on Monday, so there is quite a bit of cash looking for a home


1. Peppers Residential Mortgage Backed Securities (RMBS) or other investment grade rated RMBS tranches (wholesale investors only)

Note: This trade was suggested by Mornington Peninsula relationship manager, Paul Gray

In a nutshell – this RMBS Note is “AA” rated with an expected weighted average life of 3.6 years.

It pays MONTHLY floating rate coupons based on the 30 day bank bill rate plus 2.75%pa. Remember that the RWH bond was only paying bills plus 1.20% pa for the last few months  and had a much lower credit rating. The G8 bond of course was unrated.

So your return right now is circa 4.36% pa and this of course will increase if and when rates increase over time – this is an outstanding return when compared with bonds that have a similar credit rating. The major bank FRNs are at less than 3.0% pa.

This bond provides you with a wonderful opportunity to add a very high investment grade asset to your bond portfolio and one which provides strong, reliable cash flow on a monthly basis.

The RMBS is expected to begin to return capital to you from April 2019.

The Offer

Originator overview:

  • Pepper is an ASX listed financial services business with operations in Australasia, Asia, and Europe with AUM of more than $50bn
  • The business is currently being pursued by KKR and will likely be privatised, should the offer be approved by shareholders. The merits of the takeover notwithstanding, the security has a closed pool of assets and would not be affected by (for example) a deterioration in underwriting standards 
  • Pepper is rated a STRONG servicer (Stable outlook) by S&P 


Transaction overview

  • $900m issue size
  • 12 tranches in total
  • Two tranches denominated in USD, rated Aaa by Moody’s and AAA by S&P
  • 10 tranches denominated in AUD, rated Aaa to B1 by Moody’s and two tranches unrated
  • First mortgages to prime and nonconforming borrowers secured over Australian residential property and payable in Australian dollars

Class B Noteholders benefit from several layers of protection from losses:

  • Borrower equity in their home, reflected in the loan to value ratios of the underlying mortgages
  • Excess spread generated by the transaction
  • A cash reserve that traps excess spread currently funded at $860,000 of a $2.5m maximum
  • A retention ledger that offsets early principal repayments to more junior Notes
  • More junior ranking Notes
  • C, D, E, and F Notes totalling $58.5m that amortise on a pro rata basis with Notes A-B when certain conditions are met
  • G Notes totalling $14.4m that do not amortise while other notes remain outstanding

Pool commentary

  • Underlying mortgages are well diversified geographically with a relatively small share of interest only and investment loans
  • A meaningful proportion of the pool have experienced a prior credit event (default, judgement, or bankruptcy)
  • The seasoning of the pool is relatively low. Older loans have a lower likelihood of default, as well as benefiting from appreciated property prices
  • More detail is available in the attached ‘Investor Report’. A pool cut containing complete line by line detail is available on request. Investors should note that all of these factors (and others) are taken into account by the credit ratings agencies when assigning ratings
  • The transaction benefits from reserves and liquidity features to meet shortfalls of interest and principal

These Notes offer a long term, floating rate exposure to a diversifying asset class with an attractive risk / return profile. As the transaction pays down, investors benefit from building credit enhancement as a buffer against loss. Over time, the underlying assets should improve naturally as borrowers pay down their mortgages.

Please see the links at the end of the note to educational RMBS WIRE articles and the link to a webinar, available to FIIG wholesale clients only

Please call your local dealer for the S&P pre sale report and cashflows.

2. FIIG originated high yield bonds (retail and wholesale investors)

Since 2012, we have issued over 35 bonds totalling more than $1.5bn on behalf of mid sized corporations.

Now that G8 Education has redeemed its fixed rate bond, you may like to consider another FIIG originated issue. Please contact your dealer to discuss availability as supply is thin at the moment. There is a mix of fixed and floating rate bonds available to retail and wholesale investors.

3. US high yield (wholesale investors only)

More and more wholesale investors are turning to the US high yield market, which has a much greater range of issuers, range of bonds available and liquidity. The higher Australian dollar is making this a more attractive option to local investors keen to have some exposure in a foreign currency.

If you are interested we suggest investing small amounts across many issuers, and your relationship manager can make suggestions about constructing a portfolio.