The stability of markets continues to amaze post Brexit which in hindsight was a buying opportunity. However, political and economic risks remain high in Europe and we doubt credit markets will continue to tighten (prices going up) consistently over the next financial year. Currently trading margins are at (or close to) their lows for the past 12 months and it is hard to see why they will materially tighten from here. However, the Bank of England has now joined the European Central Bank in buying corporate bonds for their asset purchase programs (buying corporate bonds as well as sovereign bonds) and hence the bid for this asset class is strong and it may be a catalyst for further tightening. The Australian bank hybrid (Tier 1) market remains strong with ANZ upsizing its ANZ Capital Notes 4 transaction from $1 billion to $1.3 billion and pricing at the low end of guidance. While this pricing trend is not new we continue to believe the hybrid market will remain stable for calendar 2016 as APRA tightens its grip and net new supply is constrained. We are now in the final week of reporting season and results have been broadly stable from a credit perspective. Many large investment grade issuers (not all) have suffered from economic weakness and as a result revenue is down but cost cutting has helped the bottom line and dividends as a whole are stable (or slightly up). Earnings leverage is creeping up but unfortunately this is not a function of investment. Positive results were well received by both debt and equity investors. For example Woolworths result was pleasing (albeit underlying profit declined 38% to $1.6 billion and net operating cashflow decreasing 30% to $2.4 billion) as they stated their intention to redeem the Woolworths Notes II and suggested it “may be refinanced by a hybrid containing similar characteristics or a combination of debt and equity in equal proportions“. APA Group started realising the value of recent acquisitions and investments with revenue and EBITDA growth of 48% and 62%, respectively. Qantas posted record results for the 2016 financial year with underlying EBITDAR increasing 22% to $3.4 billion despite only a 2.4% increase in revenue. Please check our research library (click here) for other updates.
