Investing

The long and short of credit market opportunities

  • 05.May.2020
  • Michael Rockliff,  XTB

XTBs available for both short duration and longer maturities with yields up to 4.88%

COVID-19 has sent shock waves through the market with no asset class spared.

The ASX200 fell 39% from its highs of 7,197 on 20 February to a low of 4,402 on 23 March. Meanwhile the iTraxx which measures the credit spreads of corporates over government bond rates blew out from 46.6 bps to 243.2 bps over that same period. In the equity markets, there has been opportunity to buy quality stocks at considerably discounted prices, this same opportunity also exists in the bond market.

Raising Cash

In recent weeks, we have seen companies coming to market to raise cash via equity placements and/or cutting dividend programs. While this may dilute shareholders at sometimes very low prices, it helps bondholders as there is more cash on the balance sheet to pay out their liabilities. On a stand-alone basis that should tighten the credit spread of that particular corporate.

As a reminder:

A corporate is required to pay its bond coupon payments and matured bonds out otherwise it is in default – so the company would raise more cash to ensure that it was still viable. For example, cutting dividends is usually seen as a positive from a bondholder’s perspective.

 

Recently we have seen:

  • Qantas establish a $1.05bn 10 year loan at 2.75%,
  • Downer set up a debt facility for $500m and move their debt maturities so they only have $200m maturing in the 2nd half of 2021, and
  • NAB recently announced a $3.5bn equity raising and a cut to its dividend of 64% down to 30c.
  • ANZ has deferred its dividend
  • And just yesterday, Westpac also announced its suspending its dividend. These are just a few of many similar examples.

 

XTB Opportunities

We see there is opportunity in our credit markets for investment grade XTBs. I have highlighted a few XTBs which I have been discussing with clients. There are options for more short term duration and longer term maturities – depending on individual circumstances.

XTB Maturity Yield to Maturity*
YTMQF2 – Qantas Jun-21 4.79%
YTMDO1- Downer Mar-22 3.26%
YTMQF3 – Qantas May-22 4.02%
YTMMG2 – Mirvac Sep-23 2.41%
YTMDX1 – Dexus Nov-25 3.02%
YTMGP1 – GPT Aug-26 2.93%
YTMVC1 – Vicinity Apr-27 3.28%
YTMDX2 – Dexus May-27 3.07%
YTMQF4 – Qantas Nov-29 4.88%
* As at 05 MAY 2020. Source Australian Corporate Bond Company

For more information

Give us a call on 1800 995 993 to create a portfolio, or download our recommended portfolios.

Disclaimer
The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should read the PDS that relates to that Class of XTB prior to making an investment decision and consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.

Events

  • 16Aug 2020

    YTMF14: Bank of Queensland BBSW + 1.02% 16 NOV 2021

    This is the coupon date

  • 16Aug 2020

    YTMAS2: Ausnet 4.40% 16 AUG 2027

    This is the coupon date

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