Tuesday 21 November 2017 by Guest Contributor Trade opportunities

What the sales team are trading

This week two ideas from senior relationship managers, Ben Taylor in Sydney and Jake Koundakjian in Brisbane


Add JC Penney - Ben Taylor, Director (02) 9697 8731 bentaylor

One of the bonds that we added to our offering in the middle of the year was the 2023, 5.875%, USD fixed rate bond from JC Penney (JCP). Given recent price action, I believe it is worthwhile taking another look at this bond.

JCP is an icon in the US retail sector and traces its roots back to 1902. As at July 2017, it had grown to operate 1,011 stores in 49 states across the US.

The 2023 bond is the only secured bond in the JC Penny stack and rates higher than all the other bonds issued by the company.

After issuing a warning for their 3Q17 results in late October, JC Penney actually reported a surprise result, beating its poor forecast. Management struck a positive tone on its earnings and indicated that they would consider a proactive refinancing of near term debt utilising free cash flow.

Following the release of the profit warning, both the equity and bonds were heavily sold off.

We believe this now presents a buying opportunity given the better than expected results making the sell off look like an overreaction. The bonds are rated BB-/Ba2 (S&P/Moody's) and with a yield to worst a very attractive 6.74%.

As a refresher, the business is a merchandiser primarily selling through department stores, as well as the company’s website. Unusually, it uses its stores to fill online orders, reducing the costs associated with a centralised warehouse model.

Our external credit researcher currently has an Outperform rating assigned to JCP citing that “we continue to believe that the company is showing signs of adaptation to the changing consumer dynamic in department store retailing…” with current fashion trends driving the store to offer a more trend centric mix that  includes casual/athleisure wear.

Note this bond is available to wholesale clients only. 

Barminco, worth reassessing - Jake Koundakjian (07) 3231 6629 jakek

As a keen market watcher, I’m casting my eye over a broad range of securities and since mid year, the USD denominated Barminco 6.625% May 2022 bond has been on my radar. The bond sold off at the cheapest level we have seen since first issue and was available under par in August (see Figure 1). Since then, economic data and market speculation indicate better times could be ahead for the company, see below. 

Who is Barminco?

Barminco is the market leader in underground hard rock development and production contract mining in Australia by number of contracts. It operates in Western Australia, Queensland and Tasmania in contract mining and diamond drilling projects. Half of the company’s revenue is linked to gold with its balance also linked to copper, zinc, lead and tin. Over the last three years, it has successfully decreased financial leverage and has shown a good track record of contract renewals and extensions.

Recently, Barminco was awarded a three year extension to two existing contracts worth $236m at Western Areas. These extended contracts represent 15 years of service at Flying Fox and five years at Spotted Quoll. As at 31 December 2016, the two mines contributed in aggregate 11.5% to Barminco’s total revenue.

Importantly Moody’s has recently concluded their review on Barminco and affirmed the B1 corporate family rating with the senior secured notes also affirmed B1. The bond is potentially callable in May 2019 at just over $103.0 clean price. If called, yield lifts to 8.695%pa. This bond (Factsheet here) would be a welcome addition to a diversified high yielding portfolio. 

Barminco May 2022 clean (without interest) price

Source: FIIG Securities, Bloomberg
Figure 1

Market trends that have us looking at Barminco

1.   Gold is on the rise.
Is it the current North Korean madman or a few other fears such as the debt ceiling, stock valuations, Trump, etc.? I’m unsure why but traditionally, the shiny stuff gets love when investors are scared. Barminco has a 63% exposure to the booming gold sector, which according to The Australian, “is experiencing some of its best conditions on record”

Source: FIIG Securities, Bloomberg
Figure 2

2.   Australian Capex came out stronger than expected. 
Capital expenditure (capex) is a business’ investment in its own future growth. According to the ABS, Australian total new capital expenditure was $28.2bn, up 0.6% for the quarter ending 30 June 2017 over the previous quarter, although down 4% compared to a year ago. This is part of a bigger trend stemming out of the US and the stronger than expected Australian capex results was a good sign, with RBC Capital Markets senior economist observing that the mining capex downturn is drawing to a close in Australia. Barminco makes up 89% of their revenue from Australia

3.   ASX listed companies’ 52 week high
– some mining companies – Ausdrill, NRW, WorleyParsons and more – are hitting 52 week highs on the Australian share market

4.   Possibility that Barminco will relist shares. 
Recent news suggests that the company could be valued at $400 million which is very positive for its bonds

5.  Rising employment opportunities. Employment website SEEK reported that ads in mining, resources and energy grew 60% in September compared to the same time last year – this is a huge leap! One could infer that Barminco is busy with recruitment as 89% of its revenue comes from Australia as of December 2016

Moody’s upgrade of Ausdrill

The Moody’s upgrade of Ausdrill, a West Australian based mining services company that has many parallels to Barminco is another positive sign.  Both companies have a joint venture in Africa with Moody’s recently stating that Ausdrill’s credit performance is increasingly driven by that business.

Moody’s cites further points in its Ausdrill upgrade similar to the trends discussed above that can be correlated to Barminco – that exposure to gold has been a positive with growth opportunities starting to emerge in the sector as capex expands, as well as developments of new mines over the next 24 months. 

Possible acquisition by Ausdrill

There is increasing speculation that Ausdrill is working on a deal to revive prior attempts to embark on a merger with Barminco. This is good news for Barminco (owned by Wesfarmers advisory firm, Gresham) and BIS industries as its owners search for an exit.

If the acquisition by Ausdrill falls through, it is likely that Barminco will list next year having tested the market earlier this year for a possible float.

Ausdrill is timing an increase in its share price so that a merger with Barminco will be perceived to make sense. Ausdrill’s market value has grown to $780 million with shares traded at 21 cents in 2015, but closing at $2.54 yesterday – a price that would render a Barminco merger as reasonable.

To add more fuel to my interest in the Barminco bonds, there is a change of control clause on the bonds where we would have the rights (but not obligation) to sell at USD101.0, a nice pick up for a bond trading below that level.

Note this bond is available to wholesale clients only.

Issuer Capital structure Rating Maturity date Coupon Yield to maturity  Running yield  Mkt price/$100 Minimum face value 
Barminco Finance Ltd Senior secured debt B 15 May 2022 6.625% 6.53% 6.60% USD100.375 USD10,000