Fixed Income

So far in 2019, credit markets have been buoyed by the US Federal Reserve’s (Fed) announcement of a pause in its Quantitative Tightening (QT) program and the shift in the Fed’s language away from being hawkish. In recent months, the Reserve Bank of Australia (RBA) has also signalled that the monetary policy outlook is more balanced. This has resulted in the market now pricing in a reduction in the official cash rate over the coming year. The macro backdrop has seen the Australian credit market rally, with strong demand for the bonds issued by the financial sector at the start of the year and now more recently, demand for bonds issued by non-financials.

Financials dominate, but investors craving diversity

To date, over $20bn in bonds have been issued in the Australian market by companies in the financial sector, which is up almost 10% on 2018 levels. By comparison, non-financials at the same point have only issued $3.6bn into the Australian market, leaving investors desperate for opportunities to diversify their portfolios. Investor wishes were granted with some recent non-financial corporate issuance where demand by the investor base was particularly pronounced.

Retail issues met with strong demand despite sector pressure

Despite recent reports of the retail sector being under pressure amid lower revenue growth and margin compression, there were two retail-related bonds issued in the Australian bond market that were met with strong demand. 

This provided a chance for investors to add diversity to portfolios and gave an insight into whether concerns about the retail sector outlook extended to the corporate bond market.

BWP, the owner of the properties tenanted primarily by Bunnings stores, recently issued $100m of seven year bonds into the market. As the company advised that they were only seeking to raise $100m, this meant there was a real risk that investor allocations would be relatively low, resulting from surplus demand from investors. This proved to be case, with total bids being approximately five times the amount issued. The initial price for this bond was set at a credit spread of 160 basis points (bps), but strong demand saw it revised to 150bps. While BWP is a landlord, its tenant profile is retail and this marks a positive development for both the company and the broader market.

Iconic Australian retailer Woolworths Limited had a bond mature in March 2019 which resulted in them not having any debt outstanding in the Australian corporate bond market. This situation didn’t last long as in early April after management engaged with investors they then promptly launched a five year bond deal. This bond deal was particularly significant because it was the first ‘green bond’ issued by the company and was also the world’s first ‘green bond’ issued by a supermarket. The proceeds of this green bond targets specific initiatives by the company around renewable energy, energy efficiency, and green buildings. Demand for this historic bond was significant and reached over $2bn, which was well over the $400m issued. Having initially launched at a range of 130bps-135bps, it was then priced at a credit spread of 120bps. This was a significant tightening in credit spread, reflecting strong investor demand by both traditional corporate bond investors as well as investors with mandates targeting green bonds.

Why are we seeing demand for non-financials?

Demand for high quality, non-financial corporate bonds has generally always existed in the Australian market and despite the concerns about weakening metrics for retailers these two bond deals show that demand is particularly significant now. It was a combination of scarcity of issuance, favourable market conditions and interest in an inaugural green bond (in Woolworths’ case) that drove both books being approximately five times oversubscribed.

It would be reasonable to conclude that because these deals were significantly oversubscribed that there is a meaningful amount of unsatisfied demand for corporate bonds. While to a large extent this is true, we believe that investors will continue to favour high quality companies that offer relatively stable cash flows and provide diversification benefits against the large amount of financial company bonds available in the market.

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