In our recent outlook we mentioned that demand for credit products was exceptionally strong and the lack of issuance would create an illiquidity or ‘scarcity yield’ premium. A month down the track, issuance in the listed hybrid market has picked up but markets still remain starved for new product as negative net issuance (i.e maturing bonds greater than new issues) continues to discourage selling. As a result, secondary market liquidity has declined and trading margins have tightened. So whilst fundamental and technical factors are all currently supportive of credit markets, it is very difficult to get hold of stock.
Reporting season continued last week with several large corporates leading the way. From a credit perspective, results were in line with expectations with cost cutting, shareholder initiatives and acquisitions continuing to dominate corporate strategy.
In corporate news, Crown Resorts (ASX: CWN) surprised the market once again by announcing it would not to proceed with the proposed REIT IPO. However, the company announced a new dividend policy, a special dividend, and a $500 million share buy-back. Most importantly, the group also announced the potential on-market buyback of Crown Subordinated Notes I (ASX: CWNHA). Under the CWNHA prospectus, management are not allowed to conduct on-market purchasing until September 2017 (see our research for updated recommendations).
Seven Group (ASX: SVW) revealed that the previously announced on-market purchase of up 10% of TELYS4 has not yet commenced. This would suggest some price upside, given the program remains open until August 2017 (see our research for updated recommendations).
CBA announced a new additional tier 1 (AT1) hybrid that will be known as PERLS IX (Prospective ASX Code: CBAPF). CBA have guided the margin to be in the range of [3.90 – 4.10%] set through a bookbuild. Eligible holders of Colonial Subordinated Notes (ASX Code: CNGNHA) will receive priority allocation to the new deal if they apply through the priority securityholder offer.
Finally, URF Notes III (ASX: URFHC) commenced trading last Thursday. The US Masters Residential Property Fund (ASX: URF) closed the offer oversubscribed, raising $175 million (above the initially proposed $150 million). This demand extended into secondary markets with the notes finishing the week with a price of $100.56 (YTM – 7.625%).
2017 has been a relatively quiet period for interest rate news as everyone awaits new direction. Fresh remarks by RBA Governor (Philip Lowe) last week may help alleviate some uncertainty.
Since Lowe was placed in charge (September 2016), the cash rate has been unchanged at 1.50% and the RBA has resisted calls for further easing in fear of dangerously high household debt. As a result, Lowe has suggested a ‘Period of Stability’ in domestic interest rates which is consistent with our outlook released in January 2017. Addtional rate cuts would be in pursuit of higher inflation and/or lower unemployment in the economy. However, Lowe’s testimony made it clear that further cuts would not be considered unless the economy deteriorated materially