Yield direction and volatility
The US Federal Reserve ended its bond purchasing program after it met last week, releasing a more upbeat statement compared to the previous month’s commentary. Last month’s statement noted a ‘significant underutilisation of labour resources’, whereas the latest commentary said this underutilisation was ‘diminishing’. Markets were risk-on in response to the more hawkish tone, sending bond yields higher over the week.
The 10 year benchmark swap rate crept up 6 basis points (bps) to end the week at a yield of 3.72%. In response to the Fed decision the 5 year Commonwealth government yield increased 2 bps to 2.87%.
It’s been a busy week for economic data in Australia, with the Retail Sales figures released, Employment data and the RBA rate decision (see below).
RBA rate decision
As expected, the RBA kept cash rates on hold at 2.5% yesterday. The official cash rate has remained at 2.5% since the last 25bp cut in August 2013.
Bloomberg commented that “Volatility in some financial markets has picked up over the past couple of months. Overall, however, financial conditions remain very accommodative. Long-term interest rates and risk spreads remain very low. Markets still appear to be attaching a low probability to any rise in global interest rates or other adverse event over the period ahead”.
New DirectBonds
FIIG has added another of the Fortescue Metals Group Resources Pty Ltd (FMG) USD bonds to the DirectBonds list, this time the FMG November 2019 bond which pays a fixed coupon of 8.25% semi-annually and is available to wholesale clients only. It can be purchased in minimum parcel sizes of USD$10,000. The FMG USD April 2022 maturity bond was added to the direct bonds list previously. FMG is a wholly owned subsidiary of Fortescue Metals Group Ltd. Fortescue Metals Group Ltd is an ASX listed iron ore production and exploration company based in Perth.
The FMG Resources November 2019 bond is indicatively offered at a yield to maturity of 6.70% and a first yield to call in 2015 of 5.50%.
For an update following our meeting with management last week, please see below.
Fortescue Metals Group trading and notes from our meeting with management
The above mentioned USD denominated FMG November 2019 fixed rate bond traded actively last week having transacted almost $2.5m following its addition to FIIG’s DirectBonds list. FIIG currently has decent access to the FMG is at an indicative YTM of 6.70%.
Last week our research team had a call with Stephen Pearce (CFO), Ian Wells (General Manager of Funding and Treasury) and Stuart Gale (General Manager Finance and IR) from Fortescue, confirming our previous views and also highlighting the following additional points:
- FMG owns 100% of its port and rail infrastructure. There were previous talks about selling a stake in the infrastructure to generate cash (in 2012, with a 30%-40% non-operating stake valued at US$2billion), but this was put on hold with the uptick in earnings over the course of FY14. While we prefer that Fortescue retains full control of the infrastructure, a partial sale provides a solid ‘Plan B’ for the business should iron ore prices stay flat resulting in additional cashflow being needed to fund sustaining capital expenditure.
- FMG ‘as good as’ identified the 8.25% 2019s as the most expensive bond in their debt profile, and therefore a prime candidate for early call once positive cash flow permits it. In our opinion, a persisting US$80/t iron ore price won’t permit an early call on the bond. We will need to see prices at US$90/t and above for FMG to generate the free cashflow needed to permit an early call.
We therefore reiterate that the 8.25% 2019s represent good value on a yield to maturity and early call basis. The possible early call also provides investors with exposure to a potential high spread, short duration play, should free cash flows permit. Please click here
to view the latest factsheet on this bond.
Qantas
Qantas’ gamut of AUD fixed coupon bonds dominated secondary trading last week on the news that preliminary 1Q15 figures suggest a return to profit. The news prompted a flurry of demand across all three Qantas AUD issues, pushing offer yields steadily lower as the week progressed. The May 2022 issue, the highest yielding of the three, was by far the standout with $15.5m in turnover for the week; triple that of the next most traded security. Each of the AUD denominated Qantas issues are still in excellent supply. Current indicative offer yields are listed below:
- Qantas April 2020: 6.37%
- Qantas June 2021: 6.80%
- Qantas May 2022: 6.89%
G8 Education
The G8 Education August 2019 fixed rate bond experienced significant two-way flow following a $100m capital raising undertaken by the company a few weeks back. Recording $5m of turnover against 52 trades, G8 became FIIG’s second most traded security for the week. FIIG currently has excellent supply in the bond and can fill client purchase orders at an indicative yield to maturity of 6.31%.
PMP
Since becoming eligible for investment by retail clients in late October, the PMP Oct 2017 fixed rate bond has consistently been one of our most traded issues with last week being no exception. The strong retail bid provided wholesale holders with a deep market to sell into. Investors took the opportunity to realise profits and switch into higher yielding wholesale securities (such the above mentioned Qan 22s). PMP remains in modest supply at an indicative offer YTM of 6.53%.
PAYCE Update
PAYCE released a further update on the East Village project to the ASX on 29 October 2014 and has also confirmed the guarantee has now been provided from the owner of the East Village retail and commercial space (Joynton North Pty Ltd ATF Joynton North Property Trust) for the benefit of bondholders which significantly improves the security position and de-risks the bond.
For further detail on the announcement and credit implications see “Good news on two FIIG-originated deals”.
Compared to other FIIG-originated deals, PAYCE continues to exhibit strong value given the security position and general outlook for the Group. The bonds are currently offered at 7.11% to maturity (or 6.07% to first call date in December 2016).
360 Capital Update
360 Capital announced to the ASX on 30 October 2014 that an unconditional sale contract for the Hurstville Property had been executed, for $47m (before costs).
The sale removes one of the key risks to the business.
For further detail on the announcement and credit implications see “Good news on two FIIG-originated deals”.
With the bonds indicatively offered at 6.63% (a trading margin of circa 350bps) they are considered very good value given the low risk profile of the underlying business and now the removal of one of the key risks.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.