Tuesday 12 November 2013 by FIIG Securities FIIG Securities Legacy

A bumper issuance week – AMP looks like good relative value

Over the last week there has been a raft of new bonds come to the market. This article discusses the relative value of the new AMP floating rate note compared to an existing bond

Key points:

  1. There has been a lot of new bond issues come to the market over the last week.
  2. Domestic and international banks issued approximately $6bn, state governments $3.34bn and corporates (Coke-a-Cola, Aurizon and Australia Post) made the most of low rates.
  3. The new AMP floating rate note is paying 95 basis points over an existing issue to compensate for a higher risk “non-viability” clause and other terms and conditions variations, which looks high.

Over the last week there has been a raft of new bonds come to the market. A combination of low interest rates, a more stable political outlook and a pre-Christmas rush have seen a wide range of issuers come to the market.

The bond I’d like to focus on is the AMP floating rate note. The bond is a subordinated bond with a 10NC5 structure (10 years until final maturity, although the company can “call” or “repay” the bond after five years or each subsequent interest payment date). The structure is typical for a subordinated issue where investors are paid a premium as compensation for a possible longer term to maturity compared to a senior bond which has a hard maturity date.

The AMP bond is interesting in that the company issued a similar floating rate note late last year at a margin of 310 basis points (100 basis points = 1 per cent) over the benchmark bank bill swap rate (BBSW). This bond rallied with the spread or margin contracting to 170 basis points and the price of the bond rising to its current $105.15, providing a capital gain to the issuers that bought the bonds at first issue.

The interest rate range for the new AMP bond has been set at 265 basis points over 3 month BBSW, a premium of 95 basis points over the previously-mentioned bond.

The terms and conditions of the new bond are slightly different to the older AMP bond as it includes a non-viability clause where the Australian Prudential Regulation Authority (APRA) has the capacity convert these bonds to shares to support the company should it deem AMP “non-viable”. The pricing range implies this additional risk to be worth 95 basis points. Given the very low rate environment we think the margin on the new AMP bond is high and the spread should contract.

Issuance by other domestic and international institutions was wide-spread. Australian banks were big issuers and ANZ was the largest with a $2 billion issue, including $1.7 billion of senior floating rate notes priced at 3 month BBSW plus 88 basis points and $300 million of fixed rate bonds with a 4.5 per cent interest rate, both due to mature in 2018. Bank of Queensland and NAB also issued fixed rate bonds; BOQ was for three years at a rate of 3.72 per cent and NAB, like ANZ, issued a floating rate note for a five year term at 3 month BBSW plus 88 basis points. Bendigo and Adelaide Bank announced a $600m five year floating rate note at 3 month BBSW plus 120bps.

Last Thursday, NAB announced its intention to launch a Tier 1 hybrid this week.

Six international banks including Bank of China, Royal Bank of Canada (Sydney) and Sumitomo Mitsui Banking Corporation Sydney Branch collectively issued over $2bn.

State governments issued $3.34 billion with maturities between four to twelve years and rates between 3.5% for the Treasury Corporation Victoria’s bonds due in four years to Western Australian Treasury Corporation’s longer dated July 2025 maturity paying a higher 5% interest.

Coke-a-Cola, Aurizon and Australia Post made the most of low interest rates.

The Asian private banks are expected to be large buyers of AMP and other corporate bonds.