Tuesday 04 September 2018 by Week in review

From the trading desk

Cash Converters maturity draws near and investors sell early, while Qantas and Virgin bonds do battle, investors sell USD Ensco while Westpac hiked its variable mortgage rates

What’s trading


  •  The FIIG Research team prefers the Virgin 2021 USD bond in the airline sector as it offers better relative value compared to Qantas AUD.  Qantas has a higher credit rating but Virgin offers an attractive increase in yield and USD exposure.  Investors have been switching from the shorter dated 2019 USD Virgin bond and extending maturity, moving to the 2021 USD bond.  The Virgin 2021 bond is available to wholesale investors at an indicative yield to maturity of 7.41%pa.
  • As the Cash Converter’s (CCV) maturity nears, investors have been selling ahead of the pack and reinvesting funds now to avoid reinvestment risk.  Wholesale clients have been reinvesting in NextGen 2023, while retail clients have been investing in the DBCT 2021 floating rate note (FRN).  There remains a limited amount of DBCT 2021 FRN available at an indicative margin of +411bps.    
  • Investors have been selling Ensco, the drilling services provider post the credit rating downgrade.  Some investors have chosen to maintain a USD exposure and have switched in to Virgin 2021 USD, and also the Barminco 2022 USD bond.  Investors are sacrificing yield moving to the Virgin and Barminco bonds but are reducing the tenor by 3-4 years.  Barminco supply remains accessible at an indicative yield to maturity of 5.98%pa.

 Economic wrap

  • Westpac hiked its variable mortgage rate by 14bps last week triggering strong reactions from Canberra but none (yet) from the other three majors. If they move, the RBA stance might need to change.
  • The infrastructure sector in Australia shows no sign of cooling down, with a Transurban led consortium buying a majority interest in Westconnex, valuing the business at about AUD18bn. We continue to have an Overweight recommendation on the sector.
  • Global trade tensions eased marginally, as the US and Mexico reached a preliminary agreement on NAFTA’s replacement. Still a long way until this translates into a treaty, and still no progress on the US / EU treaty negotiations.