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.
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.
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%|
|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
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