April continued the fallout from the Credit Suisse and Silicon Valley Bank situations, with a further large (14th largest in the US) bank, First Republic, failing towards the end of the month and being bought from the government regulator by JP Morgan.
Worryingly, other large bank executives are proclaiming the “banking crisis” is now over, which reminds me of 2008/9. The ‘boring’ banks that we like are far larger and more diversified than those that have failed, and far less
(if at all) reliant on investment banking activities like Credit Suisse, and we feel comfortable in their ability to weather this latest storm.
Market bond yields are largely unchanged during the month, although the shorter end of the yield curve has gone up with more hikes than last month being priced in.
Given the uncertainty, the primary market has remained quiet, with only about half of the expected issuance coming to market. However, as we exit from US reporting season, we expect that to quicken once more and hopefully throw up opportunities.
Conservative portfolio
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.13% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.
Given the few primary deals in the month to drive opportunities we didn’t make any substantive changes to the portfolio.
We are aware that half the exposure is to the financial services sector but given the strong balance sheets run by APRA regulated businesses, and the conservative stance of said regulator, we remain comfortable with this weighting.
We did look at the new Worley bond issued in April as a replacement for the relatively high capital price Rabobank 7.074% 2027c bond, but on balance given the higher rating and running yield we kept it in the portfolio.
The only change to the securities was to update the RMBS component of the portfolio from a 2022 vintage to a current 2023 pool, replacing the Triton with a newly issued Pepper note. Given house prices have fallen around 15% nationally in the last 12 months,
we are more comfortable with RMBS now than when prices were peaking. However, to remain conservative, we stay in the well supported A rated C tranche of this transaction, which still pays a healthy forecast yield of over 7%.
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have between 15-20 positions, with the high yielding bonds in smaller parcel sizes (comprising 38% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 7.48% and is an approximate $590k spend.
Similar to the Conservative portfolio, we made no changes this month other than to roll forward the RMBS exposure from the previous Olympus 2022 note to the Peppers 2023 note. This improved the credit quality from a BBB rating to an A rating and also
improved the yield by about 0.30%. As both are floating on the 1-month Bank Bill Swap (BBSW) rate, there was no change to the duration risk of the portfolio.
There was one new AUD high yield bond in the month but on a relative value basis we preferred to stick with the allocations we have, as we already have an exposure to property-based private credit in Zagga.
High Yield portfolio:
The High Yield portfolio looks to generate a high yield while still looking to have a bias towards as low risk positions as possible.
This is achieved by good diversification and attempting to identify fundamentally mispriced bonds.
The current portfolio has 16 bonds, yields 9.63% and is an approximate $502k spend, demonstrating the concept of greater diversity in higher risk positions.
Nickel Industries extended their maturity profile during the month, exchanging the 2024 line for new 2028 maturity bonds. We saw this as an opportunity to exit the holding at a price of 102, well above where it had been trading previously. However, not
all the existing bonds were taken into the exchange and so a significant amount remain outstanding.
Given the volatility in markets since the bank failures/takeovers, we are looking to move up in quality generally, while recognising that this is a high yield portfolio and so inherently carries credit risk.
With Nickel being rated B+, we felt we would rather own more conservative risk than this low rating, and so have removed it from the portfolio. Ideally, we would have added more AT1 risk from our preferred ‘boring’ banks, but we already hold
these in the portfolio and so are unwilling to overweight these exposures.
By removing the Nickel exposure, we bring the portfolio value back down close to $500,000.
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