Tuesday 18 November 2014 by Lincoln Tragardh Legacy

From the Trading Desk (18/11/14)

Economic wrap

With limited economic data released last week, all attention was on the APEC summit in Beijing and the G20 meeting in Brisbane.  Leaders of the G20 nations have committed to boost global economic growth by more than $2 trillion by 2018, in an effort to create jobs and encourage more free trade. Most significantly for Australia, the Free Trade Agreement signed with China will liberate more than 90% of Australian exports from tariffs over the next four years. Of the limited data released, US retail sales rose by 0.3% in October, which is above the forecast 0.2% gain for the month.  In further positive news, US consumer sentiment was at a 7-year high of 89.4 in November. This was up from 86.9 in October.

Six banks were fined a total of $4.3 billion after a 13-month probe into the rigging of foreign-exchange benchmarks last year. Citigroup and JPMorgan were the most hit with the penalty, followed by UBS AG, Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Bank of America Corp. It’s alleged the banks colluded with counterparts at other firms to determine what they pay for foreign currency.

Yields were relatively flat over the week in response to the lack of news flow, with the 5 and 10 year benchmark swap rate moving 1-4 basis points (bps) lower to close at 3.20% and 3.68% respectively.  The 5 and 10 year Commonwealth government yields were 3-6 bps higher over the week, closing at 2.84% and 3.34%.

This week the RBA minutes from the November meeting are due, with the focus on the tone of the statement.

Pricing and trading situation


A Free Trade Agreement between the Australia and China is positive news for Adani Abbot Point, specifically:

  • The removal of the 3% coking coal tariff from the start of the FTA
  • Removing the 6% thermal coal tariff in two years
  • The State Bank of India has provided Adani with a US$1bn credit line to help underwrite its Carmichael coal mine
  • The Queensland Government will take an equity stake in the rail link for the Galilee Basin (including Adani’s Carmichael mine). The funding is conditional on the Galilee projects starting next year

Adani continues to trade well as the highest yielding investment grade security currently available. FIIG is well positioned to fill client purchase orders at a current indicative yield of 5.98%

Sydney Airport

An opportunity has arisen relevant to investors who hold the Sydney Airport 2020 capital indexed bond.  Recently the spread between this bond and the 2030 bond from the same issuer has been widening and has now breached the widest spread we have seen since we have been tracking the prices on these bonds (see chart below).  Now over 50bps difference between the two, this is now a compelling opportunity to switch to the longer dated bond and increase yield on the investment.


The Genworth June 16 LT2 experienced a decline in price last week after news regarding the US parent’s downgrade, prompting some clients to capitalise on the limited stock that became available.  Genworth is offered at an indicative margin of +165bps to call. S&P downgraded the Genworth Group’s credit ratings by one notch across the group, citing a less favourable assessment of the company's capital and earnings volatility and overall risk position after third quarter earnings volatility. The Australian mortgage insurance business is now rated A+, down from AA-, with a stable outlook.

G8 Education

G8 Education’s August 2018 fixed rate issue traded actively last week as institutional support pushed turnover to $12m across 68 trades, making it easily our most traded security.  Supply is available in both the fixed rate bond, and the March 2018 FRN, and are indicatively offered at 6.28% and +285bps respectively.

Mackay Sugar Limited FY14 results

Mackay Sugar’s FY14 results reflected a challenging environment for sugar, with lower production and falling sugar prices being the key contributor to a reduction in earnings. This has resulted in a weakening in Mackay Sugar’s credit metrics in FY14. Financial leverage, expressed as net debt / EBITDA has increased from 4.0x in FY13 to 5.0x in FY14. EBITDA interest cover fell from 4.4x in FY13 to 2.7x in FY14.

Mackay Sugar expects to see an improvement in profitability in FY15. The company is expecting an improved crop for the 2014 season. In addition, a higher US dollar is expected to contribute to AUD revenues given the commodity is priced in US dollars.

Mackay Sugar bonds were active this week after decent volume became available and then was promptly spoken for by strong bid interest from the retail client sector. This spurred $3.5m in turnover making MSL our second most traded security. Demand among retail clients for the MSL has not abated, leaving FIIG very well positioned to execute client sell orders.

Company updates
Ausdrill - full research report available

Ausdrill is facing challenges given the downturn in the mining sector, and we have seen yields increase recently reflecting a change in the risk/reward equation for the sector.

We have prepared a full research report for Ausdrill which can be accessed here (note: bonds are only available to wholesale clients).

Next DC trading update

With NEXTDC’s AGM last Friday, management gave an update on the circa four months since YE14 and modestly upgraded their full FY15 earnings guidance. The first four months of FY15 have shown good results. Contracted utilisation increased 1.2MW to 13.1MW with an average price of $5.4m per MW, with annualised contracted recurring revenue increasing $6.5m to $48.2m. Positive EBITDA is expected for both the first half of FY15 and FY15 overall (an improvement on previous expectations for EBITDA break-even in the first half). Overall, the EBITDA guidance upgrade into positive territory is the standout news.