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Weekly Highlights

While domestic markets were broadly stable last week terrorist activity in Orlando and new polls over the long weekend indicating a greater risk that the UK will leave the European Union (“Brexit” referendum is held on 23 June) have caused equity markets to open sharply lower. As a result the flight to quality has meant the Australian Government 10Y Bond Yields reached a new record low this morning (2.06%). While the Brexit event has no direct effect on Australian markets a “yes” vote will send European financial markets into a spin and this will inevitably have a knock on effect to our markets.

 

In the financial sector credit spreads were noticeably wider with institutional credit indices breaking through the top-end of recent trading ranges. The weakness in financials is primarily driven by the UK banks but this has impacted the peer group including Australian Banks. At the same time trading margins of ASX listed hybrids have widened off recent lows. Whilst some of this sell off may be due to the increase in supply due to recent primary issuance by the four major banks domestically as well as in the US & New Zealand, the re-emergence of risk off tone is more likely to be the real reason.

 

In the corporate sector Credit Rating Agency Moody’s has downgraded senior secured rating on the privately owned Newcastle Coal Infrastructure Group to junk and kept its outlook on negative. While the reasoning is not new the agency acted primarily because the proposed refinancing and capital simplification transaction was deferred. This in itself was primarily because they expect cash flow volatility due to a weakening position of its coal mining counterparties. Yancoal and Peabody account for ~35% of capacity. While this is not a company we specifically cover counterparty risk is a key theme within the mining, mining services, engineering and logistic sectors which we are watching.

 

Rio Tinto has been the stand out issuer for activity in the debt sector as it actively seeks ways to shore up its balance sheet. The company has already completed the buyback of $1.5 billion worth of debt securities through two rounds of tender offers (for $141 million and $1.359 billion worth of debt securities) earlier this year. Last week, the company announced another cash tender offer for the purchase of $3 billion worth of notes maturing in the time period 2018-2022. Assuming that the tender offer is fully subscribed, the company should be able to reduce its outstanding debt by around $4.5 billion for the year. This should improve Rio Tinto’s credit metrics and enhance its financial flexibility.

 

In primary markets Bloomberg has reported that ME Bank is updating wholesale debt investors with a potential subordinated debt issue this week.

 

Click below for Interactive Charts

Chart 1: Bloomberg AUSBond Composite Index (Monthly)

Chart 2: Bonds vs Equities 2015/2016 (Monthly)