After market close on 7 April 2017, we made an announcement to the ASX regarding the coupon step-down. Prior to the announcement of the upgrade, YTMAWC was trading at an offer price of $109.64. This price reflected a yield to maturity (YTM) of 4.47% pa.
On the morning of 10 April the Market Maker was making markets for YTMAWC with an offer price of $109.33. This price equates to a YTM of 4.13% pa.
- The XTB’s price had decreased by an absolute amount of $0.31 ($109.64 – $109.33).
- The XTB’s YTM also decreased from 4.47% to 4.12% pa, or a decrease of 0.35% pa.
Two things are of note here:
- A decrease in YTM is normally associated with a rise in price. However, the coupon has also decreased, representing the change in the bond’s economics. So we have a rare situation where both price and yield have moved in the same direction.
- Although the coupon decreased by 0.50%, the YTM has only decreased by 0.35%. It can be inferred that investors are demanding approximately 0.15% pa1 less as compensation for holding YTMAWC as result of this rating change. This is only an approximation, because important economic data was released during this time, so government bonds also had price changes.
What does the future hold?
- AWC has been given an “Outlook: Stable” description, so we do not expect any medium-term change in status.
- In the event of rating downgrades, this will result in a coupon increase of 0.50% (6.75% to 7.25%).
- A rating improvement causes the bond to become investment grade again, leading the coupon to revert to 5.50%.
- The company has the right, but not the obligation to call the bond at par ($100) around 6 months before the scheduled maturity (19 November 2019).
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