Hybrids Daily. Commentary on yesterday s market FIG.1: UP FIG.2: DOWN FIG.3: BEST SWITCH FIG.4: UPCOMING DISTRIBUTIONS FIG.5: THE SWAP CURVE 2.

Transcription

1 Interest Rate BAILLIEU HOLST RESEARCH 13 April 2016 INTERNAL ONLY Hybrids Daily Commentary on yesterday s market Business conditions have soared to the highest level in eight years, according to NAB, with overall business conditions rising from +8 to +12 points in March, above the long-run average of +5. While banks drove equities higher it was not nearly as buoyant in hybrids with CBAPC, ANZPD and NABPC generating most of the interest. There has been speculation that Wesfarmers owned Target had arranged cheaper prices with 31 overseas suppliers for the first half of fiscal 2016 on the promise it would pay more in the second half. FIG.1: UP MQGPB $99.00 $1.15 BENPF $94.55 $1.05 TAHHB $ $0.72 ANZPF $92.00 $0.51 AMPPA $ $0.50 FIG.2: DOWN AMPHA $ $0.68 CWNHA $ $0.35 CTXHA $ $0.24 NABHA $ $0.21 AGLHA $ $0.20 FIG.3: BEST SWITCH Security NABPB AYUHB Switch BUY SELL FIG.4: UPCOMING DISTRIBUTIONS Security Date Amount IAGPC 21-Apr % NABHA 28-Apr % SVWPA 11-May % WBCHA 12-May % WBCHB 12-May % SUNPD 13-May % SBKHB 13-May % FIG.5: THE SWAP CURVE 2.75% 2.25% 2.42% 2.34% 2.26% 2.14% 2.09% 2.10% 2.00% 1.75% Duration 2.61% Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 1

2 FIG.6: THE PREFERRED LOWER RISK SIX-PACK Security Commentary ANZPD ANZ Capital Notes Low An attractively priced Basel III compliant CPS style security CBAPD CBA Perls VII Low CBA's latest Basel III high quality security that is trading a little under fair value NABPC NAB Capital Notes Low NAB's latest Capital Note with a strong yield NABPB NAB CPS II Low NAB's second CPS with a strong yield WBCPF Westpac Capital Note III Low Good quality fairly priced debt instrument ANZPE ANZ Capital Notes II Low ANZ's second longest dated and reasonably priced Basel III compliant CPS style security FIG.7: MOST EXPENSIVE Security Commentary ANZHA ANZ subordinated debt Low Good quality fairly priced debt instrument NABHB NAB Subordinated Debt Low A reasonably priced high quality security WBCHA Westpac Subordinated Debt FRN Low A good quality hybrid that is slightly expensive at these levels WOWHC Woolworths Converting Preference Low Liquid and slightly expensive hybrid TTSHA Tatts Group Subordinated Debt Low Tatts first listed and unsecured debt trading around fair value Why you should include hybrids in your portfolio Diversification and yield is the key Hybrid securities are the Janus of the share market world they are so named because they have two distinct features and are a mix of debt and equity. They are issued by companies to raise capital, and they offer investors a predictable rate of return or dividend for a set period, usually until a maturity or conversion date. The return may be fixed or floating, determined by a margin over a market rate, usually the bank-bill rate (BBSW). Hybrids rank behind traditional debt obligations but ahead of equity. At maturity, a hybrid may convert to ordinary shares, cash, or a mixture of both, or may be reset for another term. But the terms of conversion are up to the issuer. Typically hybrids are higher risk investments than other fixed income securities due to their subordination in the capital structure, but lower risk than shares (equities). Other characteristics of hybrids include the following: - Hybrids pay a predetermined (fixed or floating) rate of return or dividend until a certain date. At that date the holder may have a number of options including converting the securities into the underlying ordinary share of the issuer. - Therefore, unlike a share the holder has a known cash flow and, unlike a fixed interest security, there is an option held by the issuer to convert to the underlying equity. - Hybrid securities have a wide variety of maturities, structures and liquidity as well as issuers across the credit rating spectrum. Since every hybrid is structured differently this allows more flexibility, but analysis and comparison are more difficult. - Hybrids usually offer higher returns than those offered by more senior assets in the capital structure, such as senior and subordinated debt. What are some of the key risks to investors? Credit risk: This is the risk that an issuer may be unable to meet the interest or capital repayments on the hybrid when they fall due. Generally, the higher the credit risk of the issuer, the higher the interest rate that investors will expect in order to risk lending funds to the issuer. Hybrids are riskier than bonds (both senior and subordinated debt) in a liquidation scenario. However, in most cases they are less risky than equity (shares). Interest rate risk: This is the risk associated with an interest-bearing asset, such as a hybrid, due to variability of interest rates. s of hybrids will vary for many reasons, one of which is a change in interest rates. In general, as rates fall the price of a hybrid will rise, and vice versa. This creates the likelihood of a capital gain or loss in the event the holder needs to sell the hybrid prior to maturity. Similarly with floating rate notes, if market sentiment towards the issuer changes, the premium paid by the issuer over the benchmark known as the spread will change from the issuing premium. The bottom line Hybrids are attractive to many retail investors because they offer a yield premium for their credit rating, augmented in many cases by franking benefits. Being unable to easily access the wholesale corporate bond market, many retail investors will find them the best yields on offer. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 2

3 Our current universe of hybrids FIG.8: STEP-UP PREFERENCE SHARES & VARIABLE DURATION SECURITIES / BENPD Bendigo Bank Preference share IV with CET $ Dec-17 $2.62 Semi Yes 26-May % 7.25% 6.89% 4.89% $ Medium BENPE Bendigo Bank CPS II $ Nov-20 $1.94 Semi Yes 17-May % 6.07% 8.44% 6.44% $95.42 Medium Cheap BENPF Bendigo Bank CPS III $ Jun-21 $2.27 Semi Yes 01-Jun % 6.90% 8.44% 6.44% $96.13 Medium Cheap BOQPD Bank of Queensland Perp. Pref. Share $ Apr-18 $2.58 Semi Yes 26-Sep % 7.27% 6.76% 4.76% $ Medium CBAPC CBA Perls VI $ Dec-18 $1.09 Quarterly Yes 03-Jun % 6.14% 6.07% 4.07% $99.99 Low CBAPD CBA Perls VI I $ Dec-22 $0.90 Quarterly Yes 03-Jun-16 Nil 5.86% 7.79% 5.79% $87.29 Low CBAPE CBA Perls VI II $ Oct-21 $2.62 Quarterly Yes 01-Jun % 7.32% 7.24% 5.24% $ Low CGFPA Challenger Capital Note $ May-20 $0.98 Quarterly Yes 16-May-16 Nil 6.06% 8.16% 6.16% $94.39 Low Cheap ELDPA Elders Hybrids $ Jul-69 $0.00 Quarterly Yes 17-Jun % 0.00% 8.41% 6.41% $74.14 Spec/High GMPPA Goodman Group Step-Up Units $ Sep-22 $1.56 Quarterly No 20-Jun % 6.29% 6.66% 4.66% $98.65 Medium IANG IAG Perp. Exch. Note $ Dec-19 $1.11 Quarterly Yes 03-Jun % 6.40% 6.69% 4.69% $ Low IAGPC IAG Mandatory CPS $ May-17 $2.15 Semi Yes 21-Apr % 5.93% 6.19% 4.19% $ Low MQGPA Macquarie Capital Notes $ Jun-18 $2.65 Semi Yes 26-May % 6.21% 7.44% 5.44% $ Medium MQGPB Macquarie Capital Notes II $ Mar-21 $1.58 Semi No 08-Sep-16 Nil 3.21% 7.59% 5.59% $98.73 Medium MBLPA Macquarie Capital Notes I $ Mar-20 $2.37 Semi Yes 15-Sep-16 nil 6.07% 8.21% 6.21% $96.58 Medium Cheap MXUPA Multiplex Group $ Jul-66 $1.55 Quarterly No 26-Jun % 8.66% 9.49% 7.49% $79.42 High Cheap NABPA NAB preference shares $ Mar-20 $0.97 Quarterly Yes 01-Jun % 5.76% 6.76% 4.76% $96.72 Low NABPB NAB CPS II $ Dec-20 $0.98 Quarterly Yes 31-May % 5.99% 7.45% 5.45% $95.41 Low NABPC NAB Capital Notes $ Mar-20 $1.02 Quarterly Yes 11-Jun-16 Nil 6.15% 7.30% 5.30% $96.92 Low NFNG Nufarm 6.94% Perp. 24-Nov-11 $ Oct-66 $3.07 Semi No 06-Oct % 7.62% 8.38% 6.38% $78.97 High PXUPA PaperlinX Step-Up Perp. Pref. $ Jun-66 $0.00 Semi No 03-Jun % 0.00% 79.05% 77.05% $34.64 Spec/High RHCPA Ramsay Health Care $ Oct-66 $2.47 Semi Yes 30-Sep % 6.92% 7.44% 5.44% $ Medium SUNPD Suncorp Sub Debt Notes $ Nov-18 $1.28 Quarterly No 13-May % 5.07% 4.87% 2.87% $ Low SUNPE Suncorp CPS 3 $ Jun-20 $1.00 Quarterly Yes 01-Jun-16 Nil 6.00% 7.20% 5.20% $97.17 Low Cheap SVWPA Seven Group Cnv. Red. Pref. $ May-20 $2.45 Semi Yes 11-May % 11.76% 25.35% 23.35% $74.60 Medium $ - WCTPA Westpac Float. Rate. Cnv. Pref. $ Jun-16 $0.58 Quarterly Yes 10-Jun % 3.33% 5.83% 3.83% $ Low WBCPC Westpac Pref. II $ Mar-18 $2.00 Semi Yes 21-Sep % 5.71% 5.62% 3.62% $ Low WBCPD Westpac Capital Notes $ Mar-19 $0.98 Quarterly Yes 30-May % 5.76% 6.95% 4.95% $97.68 Low WBCPE Westpac Capital Notes II $ Sep-22 $0.95 Quarterly Yes 11-Jun-16 Nil 6.01% 7.63% 5.63% $89.84 Low WBCPF Westpac Capital Notes III $ Mar-21 $1.11 Quarterly Yes 10-Jun-16 Nil 6.56% 7.29% 5.29% $96.88 Low WOWHC Woolworths Cnv. Pref. $ Nov-16 $1.36 Quarterly No 13-May % 5.36% 3.88% 1.88% $ Low FIG.9: MANDATORY CONVERTIBLES Fixed / AFIG Australian Foundation Investment Notes $ Feb-17 $3.10 Semi No 17-Aug % 5.64% 9.27% 7.27% $ Low Floating ANZPA ANZ Pref. Share $ Dec-16 $0.96 Quarterly Yes 27-May % 5.45% 5.22% 3.22% $ Low ANZPC ANZ Cnv. Pref. Share CPS3 $ Sep-17 $1.85 Semi Yes 15-Aug % 5.24% 5.12% 3.12% $ Low ANZPD ANZ Capital Notes $ Sep-21 $1.95 Semi Yes 20-May % 5.96% 7.81% 5.81% $95.50 Low Cheap ANZPE ANZ Capital Notes II $ Mar-22 $1.93 Semi Yes 15-Sep % 6.01% 7.51% 5.51% $91.27 Low ANZPF ANZ Capital Notes III $ Mar-23 $2.05 Semi Yes 15-Sep % 6.38% 7.69% 5.69% $91.30 Low SUNPC Suncorp Pref. Shares Iii with CET $ Dec-17 $1.22 Quarterly Yes 09-Jun % 6.88% 6.35% 4.35% $ Low Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 3

4 FIG.10: PREVIOUSLY RESET PREFERENCE SHARES / FIG.11: ASX-LISTED DEBT AGLHA AGL Subordinated Notes $ Jun-19 $1.54 Quarterly No 27-May % 6.03% 5.49% 3.49% $ Medium ANZHA ANZ Subordinated Debt $ Jun-17 $1.26 Quarterly No 10-Jun-16 Nil 4.97% 3.98% 1.98% $ Low AMPHA AMP FRN 18-Dec-18 $ Dec-18 $1.28 Quarterly No 09-Jun-16 Nil 5.07% 4.55% 2.55% $ Low AQHHA APA Subordinated Debt $ Mar-18 $1.69 Quarterly No 18-Jun-16 Nil 6.57% 6.10% 4.10% $ Medium AYUHB Au. Unity Float. Rate Unsec. Note II Mat $ Dec-20 $1.71 Quarterly No 04-Jul-16 Nil 5.02% 4.51% 2.51% $99.97 Medium Expensive CNGHA Colonial Subordinated Debt $ Mar-17 $1.39 Quarterly No 21-Jun-16 Nil 5.45% 3.87% 1.87% $ Low CTXHA Caltex Subordinated Debt 15-Sep-17 $ Sep-17 $1.71 Quarterly No 06-Jun-16 Nil 6.65% 4.93% 2.93% $ Medium CWNHA Crown Subordinated Debt 14-Sep-18 $ Sep-18 $1.84 Quarterly No 03-Jun-16 Nil 8.60% 15.46% 13.46% $ Medium Cheap CWNHB Crown Subordinated Debt II $ Mar-21 $1.58 Quarterly No 03-Jun-16 Nil 8.54% 14.42% 12.42% $93.29 Medium Cheap HBSHB Heritage Bldg 7.25% Fix. Coup. Unsec. 20-Jun-17 $ Jun-17 $1.81 Quarterly No 10-Jun-16 Nil 6.94% 4.10% 2.10% $ Medium NABHB NAB Subordinated Debt $ Jun-17 $1.31 Quarterly No 09-Jun-16 Nil 5.15% 3.80% 1.80% $ Low ORGHA Origin Energy Subordinated Frn. $ Dec-16 $1.59 Quarterly No 11-Jun % 6.41% 8.10% 6.10% $ Medium TAHHB Tabcorp Bond Series II $ Mar-17 $1.58 Quarterly No 10-Jun-16 Nil 6.23% 5.12% 3.12% $ Low TTSHA Tatts Group Subordinated Debt $ Jul-19 $1.34 Quarterly No 22-Jun-16 Nil 5.12% 3.64% 1.64% $ Low Expensive WBCHA Westpac Subordinated Debt $ Aug-17 $1.24 Quarterly No 12-May-16 Nil 4.87% 3.98% 1.98% $ Low WBCHB Westpac Subordinated Debt II $ Aug-18 $1.13 Quarterly No 12-May-16 Nil 4.52% 4.72% 2.72% $ Low FIG.12: PERPETUALS BENHB Bendigo Bank Perp. Float. Cap. Note $68.95 Perp $0.81 Quarterly No 13-May-16 Nil 4.70% 5.72% 3.72% $67.92 Low $ - MBLHB Macquarie Bank Stapled Perp. Frn. $64.32 Perp $1.00 Quarterly No 26-Jun-16 Nil 6.22% 7.15% 5.15% $70.29 Low $ - NABHA National Bank Inc. Sec. Stapled $64.55 Perp $0.87 Quarterly No 28-Apr-16 Nil 5.38% 6.49% 4.49% $69.29 Low $ - FIG.13: DEFINITIONS or Step-Up Valuation / / The YTM is the rate of return if a bond is held until maturity. It takes into account the current market price, par value, coupon interest rate and time to maturity The length of time until the principal amount of a bond must be repaid or until the security is extended with an increased distribution amount The investor receiving the distribution will also receive a quantity of franking credits in proportion to the overall tax rate of the company per dollar in profits The number of times a company distributes per year The last date that a holder must own a security to receive their distribution The percentage of extra yield that a hybrid will pay when it extends beyond a reset date Our group's evaluation of the financial and structural risk inherent in the security The value we ascribe to the security using our bespoke pricing models Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 4

5 This document has been prepared and issued by: Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Baillieu Holst Ltd ABN AFSL No Participant of ASX Group Participant of NSX Ltd Participant of Chi-X Australia Analysts stock ratings are defined as follows: Buy: The stock s total return is expected to increase by at least percent from the current share price over the next 12 months. Hold: The stock s total return is expected to trade within a range of ±10-15 percent from the current share price over the next 12 months. Sell: The stock s total return is expected to decrease by at least percent from the current share price over the next 12 months. Disclosure of potential interest and disclaimer: Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice. When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and financial circumstances. If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your information held with us. Please be assured that we keep your information strictly confidential. No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd. Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given. Melbourne (Head Office) Address Level 26, 360 Collins Street Melbourne, VIC 3000 Australia Postal PO Box 48, Collins Street West Melbourne, VIC 8007 Australia Phone Facsimile melbourne@baillieuholst.com.au Adelaide Office Address 1, 341 Payneham Road Marden, SA 5070 Australia Phone Facsimile adelaide@baillieuholst.com.au Bendigo Office Address Cnr Bridge & Baxter Streets Bendigo, VIC 3550 Australia Postal PO Box 40 North Bendigo VIC 3550 Australia Phone Facsimile bendigo@baillieuholst.com.au Brisbane Office Address Level 18, 333 Ann Street Brisbane, QLD 4000 Australia Phone brisbane@baillieuholst.com.au Geelong Office Address 16 Aberdeen Street Geelong West Vic 3218 Postal PO Box 364 Geelong Vic 3220 Australia Phone Facsimile geelong@baillieuholst.com.au Newcastle Office Address Level 1, 120 Darby Street Cooks Hill, NSW 2300 Australia Postal PO Box 111 The Junction, NSW 2291 Australia Phone Facsimile newcastle@baillieuholst.com.au Perth Office Address Level 10, 191 St Georges Terrace Perth WA 6000 Australia Postal PO Box 7662, Cloisters Square Perth, WA 6850 Australia Phone Facsimile perth@baillieuholst.com.au Sydney Office Address Level 18, 1 Alfred Street Sydney, NSW 2000 Australia Postal PO Box R1797 Royal Exchange, NSW 1225 Australia Phone Facsimile sydney@baillieuholst.com.au Baillieu Holst Ltd ABN Page 5