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With the official cash rate having dropped from 4.75 per cent in late 2010 to 3.5 per cent at present, what constitutes both ‘sleep-at-night’ money and ‘high yield’ has also come down. And that means a change in investor thinking on what is high-yield territory – a place where investors can pick up higher yields, but with added risk.

“At the end of 2010, when bank bill rates were at 5 per cent, you could get term deposits at 6-6.5 per cent, government guaranteed. That was sleep-at-night money. Now, with bank bills at 3.6 per cent, you would struggle to get 5 per cent in a term deposit,” says Steven Wright, director of fixed interest at RBS Morgans.

“People who want to lock in that figure 6.5 per cent now have to take on more risk.”

Mike Saba, head of fixed-interest at Evans & Partners, says the listed interest-bearing securities market on the Australian Securities Exchange (ASX) is “picking up a lot of activity” from income-oriented investors.

“The sector has matured a lot this year. Go back 12 months ago, it was 90 per cent hybrids. Now there are corporate bonds and hybrids. There has been a lot of issuance up the capital structure. Just above hybrids there are subordinated bonds; there are eight or nine of those, from banks or corporates; then there are senior bonds, five or six of them.

“Investors are now not only looking at a good mix of companies and credit ratings, they also can diversify across the capital structure. You can get a good mix of senior bonds, subordinated bonds and preference shares. The great thing about that is that you can invest any amount of money.”

Saba says the capitalisation of the ASX-listed interest-bearing securities sector has expanded from $22 billion 12 months ago to $30 billion. “We’ve had issuance from ten companies in the last 12 months. Volumes are up accordingly: turnover is up 40% in this time. This shows that there is more activity in the sector: that is, the same volume is not being spread across the market, but more investors.

“The buying demand is coming from right across the board: we see self-managed super funds (SMSFs) and retail investors wary of the sharemarket volatility, and needing income; there’s also a lot of credit fund managers, institutions coming back into the market because there’s a lot of bonds being issued; there’s demand across the whole buying curve. Fixed interest as an asset class continues to attract investors for surety of yield – albeit with some credit risk being taken on,” says Saba.

It is a good time to be buying interest-bearing securities, he says, because the spreads are quite wide. “With so much issuance, the margins have to be higher to get the deals done. Corporates are staying away from bank funding, which is getting increasingly expensive – the banks are paying more to source funds, the Basel III requirements mean they have to put more capital aside to back loans, so companies are increasingly looking at the public markets, which are a lot less covenant-heavy. Floating-rate securities (with a margin set over bank bills) make a lot of sense in this environment,” he says.

If 6.5 per cent remains your target yield, you will have to take more risk, and come down the capital structure a bit, to get that same level of income, says Wright. “But at that level you’re still talking about securities issued by AA-rated domestic banks, very well-capitalised, and really, giving very little reason for concern. I think you can still sleep at night.

“If you want high yield, you’re looking at something in the 7-7.5 per cent range, from corporate subordinated debt: AGL, Origin, Tabcorp. We’re seeing some high-quality companies issuing into this market, offering relatively high yield: the likes of Woolworths, Caltex, Colonial.”

The trick to seeking high yield is to think in terms of a portfolio yield to maturity, says Saba.

“Don’t think of it in terms of the running yield, which is just the cashflow yield. Think of it in terms of the yield to maturity, which takes in the time value of money, the timing of coupon payments and whether the maturity value varies from the purchase price.

“With so many preference shares in the market, there is quite often the possibility of a capital ‘kick’ on a re-rating for some particular reason to do with the structure of the security, or a step-up announcement.”

A ‘step-up’ security has an automatic interest rate increase if the issuer does not redeem the security on a certain date. “The step-up is a great example, where over the next few months we expect that the Australian Prudential regulation Authority (APRA) will push the banks to buy back the step-ups at the first possible date: there is a big anti-step-up mood coming out of Basel III, and flowing through into APRA.”

For example, says Saba, two major bank step-ups in the market, one from Westpac and one from CBA, have a premium built-in to their prices because of the step-up. “When APRA pushes them to announce that they will be buying-back at the step-up date we expect there will be a bit of a re-rating on that. There are always stories like that floating around, and that can boost the yield to maturity a bit,” he says.

Both Wright and Saba have nominated two portfolios of ASX-listed interest-bearing securities, one conservative, one higher-yield. “We reckon a conservative portfolio can yield 6.5 per cent, which is substantially higher than term deposits, and something a bit more aggressive can go as high as 8.5 per cent. But it’s like any form of investment, you have to take a portfolio approach,” says Wright.

Steven Wright, director of fixed interest at RBS Morgans – Conservative Portfolio

ASX CodeIssue Details Rating YieldMaturity Yield to Maturity
 WBCPA Westpac SPS BBB 4.14% 23 September 2013 6.13%
 IANG IAG RES A- 5.26% 15 December 2019 7.93%
 WCTPA Westpac TPS BBB 3.16% 30 June 2016 8.12%
 BENHA Bendigo Bonds N/A 4.92% 15 March 2014 5.25%
 CBAHA CBABonds I N/A 4.57% 24 December 2015 4.84%
 ANZPC ANZ CPS 3 N/A 4.63% 1 September 2019 7.05%
 CNGHA Colonial Sub Notes N/A 6.77% 31 March 2017 6.81%
 ANZHA ANZ Sub Notes N/A 6.27% 14 June 2017 6.13%
 CBAPA CBA PERLS V BBB 4.84% 31 October 2014 6.99%
 NABHB NAB Sub Notes N/A 6.27% 18 June 2017 6.10%

 

Steven Wright, director of fixed interest at RBS Morgans – High-Yield Portfolio

ASX CodeIssue Details Rating YieldMaturity Yield to Maturity
RHCPARamsay CARESN/A5.86%Perpetual8.71%
SVWPASeven Group TELYS4N/A5.79%Perpetual9.88%
MQCPAMacquarie Bank CPSBB11.10%30 June 20139.46%
ORGHAOrigin Subordinated NotesN/A7.52%22 December 20167.29%
MXUPAMultiplex SITESN/A7.42%Perpetual9.93%
NFNGNufarm SPSBB7.42%Perpetual10.46%
TPAPATranspacific SPSN/A6.66%Perpetual7.00%
AYUHAAust. Unity NotesN/A7.07%14 August 20166.66%
LEPHCAle Notes 2N/A7.52%20 August 20147.31%

 

Mike Saba, head of fixed-interest at Evans & Partners – Conservative Portfolio

CodeIssue detailsRatingYieldMaturityYield to Maturity
ANZHAANZ Banking GroupA-­?6.27%14/06/176.24%
NABHBNat Aust BankA-­?6.25%18/06/176.16%
HBSHBHeritage BSBBB+6.96%20/06/176.28%
CNGHAColonialBBB+6.77%31/03/176.72%
TAHHATabcorpBBB-­?7.48%1/05/145.99%
TTSHATattsBBB-­?6.61%5/07/196.58%
WOWHCWoolworthsBBB6.52%24/11/165.90%
IANGIAG RESA-­?7.62%16/12/197.84%
SBKPBSuncorp MetwayA-­?6.81%14/06/138.30%
LEPHCALE GroupBBB-­?7.43%20/08/147.28%
AYUHAAustralian UnityBBB7.04%14/04/166.83%
CBAHACBA BondA+4.71%24/12/155.16%
PCAPACBA Perls 3BBB5.19%6/04/168.06%
WCTPAWestpacBBB5.15%30/06/167.97%

 

Mike Saba, head of fixed-interest at Evans & Partners – High Yield Portfolio

CodeIssue DetailsRatingYieldMaturityYield to Maturity
HBSHBHeritage BSBBB+6.96%20/06/176.28%
CNGHAColonialBBB+6.77%31/03/176.72%
TTSHATattsBBB-­?6.61%5/07/196.58%
IANGIAG RESA-­?7.62%16/12/197.84%
SBKPBSuncorp MetwayA-­?6.81%14/06/138.30%
AYUHAAustralian UnityBBB7.04%14/04/166.83%
PRYHAPrimary Health CareUnR7.84%28/09/159.01%
LEPHCALE GroupBBB-­?7.43%20/08/147.28%
PCAPACBA PERLS 3BBB5.19%6/04/168.06%
ANZHAANZ Banking GroupA-­?6.27%14/06/176.24%
NABHBNat Aust BankA-­?6.25%18/06/176.16%
TAHHATabcorpBBB-­?7.48%1/05/145.99%
WOWHCWoolworthsBBB6.52%24/11/165.90%
ANZPCANZ Banking GroupBBB6.56%28/09/196.97%
WCTPAWestpacBBB5.15%30/06/167.97%
MQCPAMacquarieBBB11.04%30/06/1311.66%
AAZPBAustraland ASSETSUnR9.16%Perpetual9.25%
MXUPAMultiplex SITESUnR10.11%Perpetual10.31%
MBLHBMacquarie BankBBB8.02%Perpetual8.35%
IAGPCIAGUnR7.59%1/05/198.09%

 

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