by
Alen Golubovic | Jul 15, 2014
Key Points
- Port of Brisbane issued a new AUD $200m seven-year tranche in the domestic bond market at the end of June at 145 basis points (bps) over the base swap rate
- The credit spread is the margin over a base rate (typically the AUD swap rate of equivalent years to maturity or ‘tenor’ of the bond) and represents the credit risk premium which is priced into the returns on the instrument for the credit risk being assumed
- The last 12-15 months has seen a significant tightening in credit spreads of new BBB-rated corporate bond issues in the AUD corporate bond market, from around 250bps in early 2013 to now be around 150bps. With a low base rate environment and low credit margins, we expect to see further issuance
- Despite the low new issue margins there still exist some strong value in the BBB space from issuers such as Adani Abbot Point Terminal Pty Ltd with the May 2020 6.10% fixed rate bond currently offered at an indicative yield to maturity of 5.84%, which equates to an indicative credit margin of 253bps. Alternatively there are a large number of sub-investment grade or unrated senior unsecured issues as well as a number of subordinated and Tier 1 callable securities that are offering high returns
Port of Brisbane issued a new AUD $200m seven-year tranche in the domestic bond market at the end of June. The transaction was launched at 150bps over the base swap rate, and through significant oversubscription was able to double its minimum launch volume and also achieve a further 5bps tightening on its issue credit spread, closing the deal at a very tight 145bps.
As the chart of issue margin plotted by issue date (below) demonstrates, over the last 12-15 months credit spreads on new BBB issuances in the AUD corporate bond market have experienced a tightening trend, with spreads contracting in the order of 100bps points over base swap rates. In light of these tightening spreads, as well as a low base rate environment, we should expect to see more new issues coming into the AUD corporate bond market while investor demand continues to remain unsatisfied by supply.
Source: Kanganews, FIIG Securities
Noting the recent Port of Brisbane issuance, we have seen spreads tighten from early 2013 levels by about 100bps, broadly suggesting that BBB-rated issuers can raise debt in the AUD corporate market today at levels of about 1% per annum lower than they could a year ago by virtue of the reduction in credit spreads (not taking account movements in the underlying base rates).
The Port of Brisbane issue highlights that, despite record low levels of spreads, there is still an excess of investor demand relative to supply in the AUD corporate bond market. With spreads at record tight levels and yields close to historic lows, the AUD market remains globally competitive from a pricing perspective for bond issuers.
Despite the low new issue margins there still exist some strong value in the BBB space from issuers such as Adani Abbot Point Terminal Pty Ltd with the May 2020 6.10% fixed rate bond currently offered at an indicative yield to maturity of 5.84%, which equates to an indicative credit margin of 253bps. Alternatively there are a large number of sub-investment grade or unrated senior unsecured issues as well as a number of subordinated and Tier 1 callable securities that are offering high returns.
Please speak to your FIIG representative if you are interested in any of these bonds.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.
Key terms:
Credit spread is the margin over a base rate (typically the A$ swap rate of equivalent duration to the tenor of the bond) and represents the credit risk premium which is priced into the returns on the instrument for the credit risk being assumed.
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