Before market-open on 22 September 2016, ACBC made an announcement to the ASX regarding the coupon step-up. In accordance with ASX procedures, there was a 20 minute delay to the start of the trading for YTMAWC. Prior to the announcement of the downgrade, YTMAWC was trading at a mid-price (mid-price of the bid-offer spread on ASX), of $104.85. This price reflected a yield to maturity (YTM) of 4.48% pa1.
On the morning of the 22nd the market maker was making markets for YMTAWC with a mid-price of $106.14. This price equates to a YTM of 5.68% pa.1 The XTB’s price had increased by an absolute amount of $1.29 ($106.14 – $104.85). The XTB’s yield also increased from 4.48% pa1 to 5.68% pa1, or an increase of 1.20% pa1.
Two things are of note here:
- An increase in YTM is normally associated with a fall in price. However, the coupon has also increased, 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 increased by 1.75%, the YTM has only increased by 1.20%. It can be inferred that investors are demanding approximately 0.55% pa1 as compensation for holding YTMAWC as result of this rating change. This is only an approximation, because the US Central Bank also made policy statements during this time, so government bonds also had price changes.
What does the future hold?
- The rating agency has given its rating an “Outlook: Stable” description, so we do not expect any medium-term change in status.
- In the event of further rating downgrades, there are no further coupon changes, as per the terms of the bond.
- If the rating was to increase from BB to BB+ then the coupon would decrease by 0.50% to 6.75%.
- A rating improvement of 2 notches to BBB- 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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