Tuesday 05 June 2018 by FIIG Research Company updates

Company updates – ANZ, CBA, Deutsche Bank, HCA, Petrobras, RSEA, TransAlta, Virgin

This week, new DirectBonds from HCA and Virgin Australia, Deutsche Bank downgraded by S&P, Petrobras’ shares plummet as CEO exits, RSEA plans aggressive expansion, and TransAlta receives rating action. CBA pays huge fine for breaches of anti money laundering

CBA to pay AUD700m for anti money laundering

On 4 June 2018, it was reported that the Commonwealth Bank of Australia (CBA) has agreed to pay the largest civil penalty fine in Australian corporate history for breaches of anti money laundering and counter terrorism. CBA’s offence has led to millions of dollars flowing through to drug importers.

As part of the settlement, CBA admitted to the late filing of 53,506 reports of transactions of AUD10,000 or more through its "intelligent deposit machines" (IDMs). Banks are required to report these large transactions within 10 business days, so that AUSTRAC can monitor them to see if the money might be going to crime gangs or terrorist networks. For a period of three years, the bank also failed to properly monitor transactions on 778,370 accounts to check for money laundering red flags.

In other news, it was reported that senior bankers from ANZ, Deutsche Bank AG and Citigroup Global Markets Australia expect to be served with criminal cartel charges over an AUD2.5bn capital raising by ANZ. JP Morgan, who self reported the issue to the Australian Competition and Consumer Commission (ACCC), is believed to have been granted immunity in the case. The charges are expected as early as Monday next week.

Deutsche Bank downgraded by S&P

On 24 May 2018, Deutsche Bank (DB) announced further details of its planned multi year restructuring, focusing notably on its US equities sales and trading business.

The rating agency expects to see significant execution risks in the delivery of the updated strategy amid a continued unhelpful market backdrop, and believe that relative to peers, DB will remain a negative outlier for some time.

As a result, S&P lowered DB’s long term issuer credit rating from ‘A-‘ to ‘BBB+’, also effective on DB’s core operating subsidiaries. The rating agency affirmed its ratings on DB’s subordinated debt issues, including the ‘BBB’ rating on its senior subordinated instruments.

The stable outlook reflects S&P’s view that management will execute its strategy in earnest and, over time, will show progress against its 2019 financial objectives. In doing so, it is expected for DB to achieve its longer term objective of a more stable and better functioning business model. S&P’s central scenario assumes that cost cutting measures will be tailored and targeted enough to preserve the bank's capital markets franchise, in particular in Europe, and avoid substantial revenue loss.

The following DB bonds all rated BBB- are available to trade:

  • Deutsche AUD 3.75% January 2023 bond available at YTW – 3.75%pa
  • Deutsche AUD BBSW+1.40% January 2023 bond available at YTW – 4.22%pa

New DirectBonds and updated filter lists

The following have been added to the DirectBonds list:

  • HCA USD 5.25% April 2025; rated BBB- available at YTW – 4.97%pa View Factsheet
  • Virgin Australia AUD 8.25% May 2023; rated B- available at YTW – 8.16%pa View Factsheet

The full list of DirectBonds for May is available on the FIIG website to wholesale clients.

Petrobras countered by Brazilian government plans and replaces CEO

On 1 June 2018, CNBC reported that Petrobras Brasileiro SA’s (Petrobras) shares had plunged 20 per cent after CEO Pedro Parente resigns amid strikes against the company’s fuel pricing policies.

Parente’s exit saw USD11bn wiped off the company’s market value, marking the highest profile casualty of a trucker’s strike that had paralysed Brazil for two weeks. His replacement is former CFO, Ivan Monteiro who was formerly a top executive at state controlled bank, Banco do Brasil. Monteira will be under pressure to further cut company debt and push investor friendly policies.

Two days before Parente’s exit, Brazil’s Federal Government enacted a plan to cut road diesel prices by $R0.46/litre for a period of 60 days and thereafter move to a monthly price adjustment system for diesel. The move by the government runs counter to Petrobras's plans announced few days prior to move back to a daily price adjustment system after a 15 day period during which it would voluntarily cut diesel prices at its refineries by 10%.

Petrobras management held another conference call on 29 May to reassure the market but with negotiations ongoing in Brazil, the meeting was unable to provide any clear details.

The following Petrobras bonds all rated BB- are available to wholesale clients:

  • Petrobras USD USLIBOR+2.14% January 2019 bond available at YTW – 4.07%pa
  • Petrobras GBP 6.25% December 2026 bond; rated BB- available at YTW – 5.42%pa
  • Petrobras USD 7.375% January 2027 bond available at YTW – 7.53%pa

RSEA plans aggressive expansion

On 4 June 2018, the Financial Review reported that Australia’s largest workwear and safety products retailer, RSEA Safety (RSEA) is planning to open a further 30 big box stores in the next two years. This follows after an AUD145m buyout by the founders and top management backed by London listed debt funder Intermediate Capital Group.

It is expected that “RSEA will generate close to AUD200m in annual sales in 2018-19 as demand from tradespeople and blue collar workers accelerates in an infrastructure boom which is expected to last another 10 years”. On 1 June 2018, private equity firm CHAMP Ventures sold its 70 per cent stake in RSEA after owning it for six years.

Earlier this year, RSEA became a big sponsor of St Kilda in the Australian Football League, and is using the big box model to increase its market share. It has been at the forefront of a shift where young trades people on big incomes are becoming much more fashion conscious.

TransAlta receives rating action; outlook to positive

On 1 June 2018, Moody’s Investor’s Service (Moody’s) affirmed TransAlta Corporation’s (TransAlta) following ratings:

  • Corporate family rating
  • Senior unsecured rating of Ba1
  • Probability of default rating of Ba1-PD

The rating agency also revised is rating outlook to positive from stable, and leaving TransAlta’s speculative grade liquidity rating unchanged at SGL-2.

The rating action is due to a combination of economic and regulatory changes. The Alberta market is undergoing a major transformation where coal capacity will experience a steep decline in the next few years, while new contracted renewables, a carbon credit regime and a capacity market are being introduced.

TransAlta is implementing a debt reduction plan to operate in this new environment and Moody’s expects the net result to be credit positive. The company's business outside of Alberta is comprised mainly of contracted generation and owned by its yieldco subsidiary TransAlta Renewables Inc. (not rated).

The following TransAlta bonds all rated BBB- are available to wholesale clients:

  • TransAlta USD 4.50% November 2022 bond available at YTW – 4.56%pa
  • TransAlta CAD 7.30% October 2029 bond available at YTW – 6.38%pa
  • TransAlta USD 6.50% March 2040 bond available at YTW – 6.61%pa

Please note yield to worst are accurate as of 5 June 2018, subject to change. S&P ratings are shown.