Investment Strategy

IAMGOLD (IMG) remains our pick in the USD High Yield (HY) mining sector. The current bond price, offering a yield in excess of 6.50%, is a good entry level for new investors or those looking to add to their holdings. Further bolstering this investment thesis are the recent Moody’s upgrade, a rebound in gold price and positive 2Q18 company results.

Our independent credit research provider, CreditSights, has revised its sector recommendations for Car Rental to ‘Selective Risk Taking’. There is no change to the credit and indicatively yielding over 7.90%pa, the Hertz 2022 is an appealing short dated US dollar offering.

Centuria Capital No. 2 Fund (Centuria) is launching a new transaction, seeking to raise up to AUD100m of senior secured notes maturing in April 2023. The transaction will include one floating rate tranche and one fixed rate tranche, both offering a yield in the region of 6.50%.

Port of Melbourne's inaugural AUD issuance is expected to be in demand due to its investment grade rating as well as the stability and predictability of its cash flows. However, we do not believe it offers value at the indicative pricing of below 4.00%.

The French Bank, BNP Paribas, is to issue an Australian dollar Tier 2 style bond. The investment grade 15 year bond callable after 10 years is expected to price around 5.00$ yield which equates to a margin of BBSW +2.20%.

Nufarm's April 2026 bond is the recent inclusion to the DirectBond list and available to wholesale investors. The US dollar bond trades at a discount to its issue price, providing an appealing entry point for investors who are comfortable with the investment grade risk.

Heathrow Airport's inaugural AUD issuance is expected to receive strong investor demand due to its investment grade rating and stable and predictable cash flow.s The bond offers reasonable value with trading margin of circa BBSW+1.40% and fits our theme of extending duration in Australian dollar denominated investment grade bonds. Nevertheless, we see better relative value elsewhere with these bonds also carrying additional interest rate risk.

Harvey 2018-1 is Credit Union Australia’s (CUA) first transaction for 2018. It is a prime RMBS supported by a good quality pool of collateral

Adani Abbot Point Terminal (AAPT) is the financing subsidiary for the companies holding the lease on the Abbot Point Coal Terminal. AAPT’s 4.45% Dec 2022 USD bond looks attractive as a 4 year investment with an indicative yield above 7.25%.

Inflation linked securities should be in every fixed income portfolio. These securities protect investors against inflationary pressures while maintaining a steadily growing income flow.

Australian corporate predominantly issue fixed rate bonds leading to a limited offering in floating rate notes (FRN) particularly in investment grade.

This transaction is CBA's first public RMBS term out deal for 2018 and the biggest RMBS transaction fo the year.

Dean Foods is a medium term US dollar bond for wholesale investors that are comfortable with sub investment grade credit risk in return for yield circa 7.375%.

The price of the Qantas 2022 bond has peaked and is gradually moving towards par as the bond moves closer to maturity. This price movement is eroding the total return of the bond as lower price offsets running yield (yield from coupons). Investors should consider exiting this bond at the current premium and investing in longer dated bonds with higher overall yields.

Harland Clarke is an attractive short dated US dollar bond for wholesale investors looking to park funds and earn what we consider to be a good risk adjusted return.

The new AT&T AUD issuance across various maturity buckets is expected to be well received by the market. The 4.60% (based on indicative price talk) 10 year maturity bond offers standout value when compared to the AUD telecom yield curve.

Despite the recent bond price rally, the Barminco 6.625% 2022 bond, which offers an indicative yield above 6%pa is an attractive investment at current levels. The credit quality of the issuer is expected to significantly improve assuming the merger with Ausdrill completes, with ratings expected to be upgraded by up to three notches.

This document has been prepared by FIIG Investment Strategy Group. Opinions expressed may differ from those expressed by FIIG Credit Research.

Inflation linked securities should be in every fixed income portfolio. These securities protect investors against inflationary pressures while maintaining a steadily growing income flow. Below is an explanation of how these bonds work and the investment options available to FIIG clients.

Within the airline sector we believe the Virgin 2021 bonds in USD offer the stand out value compared to the Qantas curve. The Qantas 2020, 2021 and 2022 bonds have rallied significantly and now look expensive with less likelihood of any further upside.