Tuesday 12 June 2018 by FIIG Securities spectrum Trade opportunities

Reduce risk in your portfolio Part 2 – Move up the credit rating spectrum

One of our recurring themes is to reduce risk in your portfolio. We make some suggestions from BB rated credits right through to AAA rated securities for both wholesale and retail investors and in AUD and USD

Credit ratings matter in bond markets. A high credit rating means lower risk that translates to a lower cost to borrow, and therefore a lower yield for investors.

See the guide below describing the different credit rating meanings. Note that the ‘AA’ range is deemed ‘Highest quality’ while the lowest rated investment grade ‘BBB’ range is described as ‘Lower medium grade, adequate but weakened payment capacity’.

Move down into sub investment grade or high yield and the ‘BB’ range is described as ‘Speculative, elevated vulnerability, substantial risk but likely to fulfil obligations.

Source: FIIG Securities, S&P Global Credit Ratings, Moody’s and Fitch

Historically, some corporations have bought insurance to improve credit ratings and lower the cost to issue. These days those particular bonds that are ‘credit wrapped’ are often overlooked or not given credit for the ‘wrapper’ even though it is still in place and does provide additional security to the bondholders.

One such bond that I’ve liked for many years is an inflation linked bond by Australian Gas Networks (AGN), previously known as Envestra. The infrastructure company owns 22,000 kilometres of mains pipeline servicing one million customers across five states and territories. The bond has a credit wrap from Assured Guaranty that improved its credit rating at first issue, lowering its cost of funding. The AGN bond is deemed very low risk. Unfortunately as the bond is available to retail investors we cannot disclose its credit rating.

However, here is a list of bonds available to retail and wholesale clients, moving from lowest risk at the top of the table to highest risk at the end.

Australian dollar bonds available to retail and wholesale clients

Source: FIIG Securities
Note: Prices and credit ratings accurate as at 11 June 2018, but subject to change

- All bonds are senior unsecured, except the ANZ bond which is subordinated
- Inflation linked bonds assume inflation at the RBA target mid point of 2.5%pa
- Credit ratings cannot be disclosed to retail clients, however this list runs from lowest risk issuer by credit rating then for similarly rated credits
- Assumes early maturity dates equates to lower risk, although this is not necessarily the case

This is the first of three tables, showing a range of bonds to give you an idea of what’s possible but the bonds listed are in no way recommendations. You’ll still need to do your research to determine if they suit your risk/ return and cashflow goals.

In the next table we show a range of Australian dollar denominated bonds that are available to wholesale investors only. We can therefore disclose the credit ratings.

Australian dollar bonds available to qualified wholesale clients only

Source: FIIG Securities
Note: Prices and credit ratings accurate as at 11 June 2018, subject to change

Scanning the list above, just goes to reiterate the very low interest rate environment and as a consequence, the low yields available on many investment grade bonds.

However, you can see that typically, the shorter the term, the lower the yield. So one way to try and increase yield is to invest for longer. The Aroundtown SA bond is a good example with a longer May 2025 maturity date delivering a yield to worst of 4.34%pa.

We don’t list any AUD sub investment grade bonds given our theme is to reduce risk by moving up the credit rating spectrum.

The final list shown below is of US dollar bonds. We do have some sub investment grade bonds here, with the lowest rating we show being BB-. We do not make any CCC bonds available under FIIG policy with single ‘B’ range bonds,  the lowest on our available list. Below we chose to just show ‘BB’ range and above, for this week’s theme of moving up the credit rating spectrum.

USD bonds available to qualified wholesale clients only 

Source: FIIG Securities
Note: Prices and credit ratings accurate as at 11 June 2018, subject to change
All bonds are fixed rate

Two classes of securities are that are worth considering but not mentioned in this note are indexed annuity bonds which are available to both retail and wholesale clients as well as residential mortgage backed securities (RMBS) available for wholesale qualified clients only.

For more information please call your local relationship manager.

Click here to find out if you qualify as a wholesale client.