ANZ CPS3 options for holders

18 August 2017

As part of the announcement regarding a new capital note (ANZ Capital Notes 5), ANZ has outlined the options available to holders of ANZ CPS3 hybrids (ASX code: ANZPC).

Under the (revised) terms of the CPS3 securities, holders who were registered on 11 August may

  • reinvest the face value of their holdings into the new capital notes
  • sell into a buy-back offer
  • do nothing and continue to hold their securities.

In order to be able to offer the buy-back and re-investment options to CPS3 holders, ANZ had to amend the CPS3 terms so as to allow a pro rata dividend payment to all CPS3 holders, including eligible CPS3 holders who participate in the buy-back facility. The pro rata dividend will be paid for the period from 1 September 2017 to the buy-back settlement date which is expected to be 28 September 2017. To be eligible for the pro rata dividend, holders will need to be registered on the expected record date on 20 September 2017.

 Holders who wish to keep their CPS 3 securities may do so until they are sold on the ASX or ANZ exchanges them under the CPS 3 rules. ANZ has stated it has “not made any decision how it will deal with the CPS3 which are not bought-back under the Buy-Back Facility” but it points out the factors which it would take into account if it were to do so. These factors include APRA approval and replacement with “tier 1 capital of the same or better quality” unless APRA deems otherwise.

These CPS3 holders who are still holding their CPS3 in March 2018 will receive a dividend calculated from 28 September 2017 (or the buy-back settlement date if it differs) instead of 1 September 2017. Other holders who become registered after 11 August 2017 will be in the same position as holders who decide not to reinvest into the new capital notes or sell into the buy-back offer.

More jobs (but less full-time ones)

17 August 2017

The Australian economy has just recorded its tenth month of employment gains. The ABS has released employment estimates which indicated the total number of people employed in Australia in either full-time or part-time work increased by 27,900 during the month, more than the generally-expected figure of 20,000. Consequently, the unemployment rate fell from a revised June figure of 5.7% to 5.6% at the end of July (although in a technical sense the difference arose from rounding and it was basically unchanged at 5.65%).

The total number of work hours across the whole economy fell by 0.8% when compared to June as 48,200 more part-time jobs were created and 20,300 full-time jobs disappeared. However, on a 12 month basis the figures were more encouraging; aggregate hours worked grew by 1.9% as 155,800 full-time and 113,000 part-time positions were created.

On the surface of things, the unemployment rate has been stuck around 5.6% since October 2016. However, in this period, more people have been encouraged to return to the workforce and the participation rate has increased from 64.4% at the end of October 2016 to its current figure of 65.1%.

On the day bond yields fell and the local currency was weaker against the U.S. dollar. Three year bond yields slipped from 1.98% to 1.97% and 10 year bond yields dropped 2bps to 2.64%.

Australian economy recorded recent employment gains

Here’s what a few economists thought of the figures:

Felicity Emmett, ANZ

Some of the detail was a bit softer than the headline: full-time jobs fell, hours worked were down and the jobs gains were narrowly based. But we wouldn’t overplay these details. The labour market is clearly improving and additional job gains look likely in the near term. Further out, we continue to think that ongoing inroads into the unemployment rate will be more difficult to achieve, in part because the strong pace of public sector employment gains is unlikely to be sustainable.

Josh Williamson, Citi

Coming on the back of the soft 0.4% private sector wages growth data for Q2, the July labour force data do not suggest that wages growth will pick-up in Q3 outside some influence from the stronger-than-expected regulated increase in minimum wages. Furthermore, the strong employment gains in recent months have been unable to lower the unemployment rate from an average of 5.6% and annual growth in both employment and the labour force look like they have peaked.

Retail figures imply U.S. “above trend”

16 August 2017

US households have surprised economists with the size of retail spending in July. According to the latest advance U.S. retail sales numbers released by the U.S. Census Bureau, figures indicated retail sales increased by 0.6% during July, well in front of the 0.3% expected and up on June’s revised figure of 0.3%. On a yearly basis, the increase was 4.2%, up from June’s comparable figure of 3.4% (after revisions).

In dollar terms the increase was driven predominantly by vehicle/parts sales as well as sales of building material and gardening equipment. However, the largest percentage increase came from the “non-store” category which increased by 1.3% for the month and 11.5% for the year. Non-store sales currently account for around 11% of total retail sales.

According to ANZ’s Daniel Gradwell, the figures were “were much stronger than expected” and the numbers “point to strong consumption at the start of Q3 and possible upward revisions to the Q2 GDP figures.” He thinks the U.S. economy is at “above-trend” levels that is why FOMC member William Dudley and other support “another rate rise later this year.”

US bond yields moved higher by the end of the day. Both 2 year and 10 year Treasury yields increased by 2bps on the day to 1.35% and 2.27% respectively.

Below-trend growth in 2018: Westpac

16 August 2017

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of economic activity relative to trend in Australia. The index combines certain economic variables which are thought to lead changes in economic growth into a single measure which is claimed to be a reliable cyclical indicator for the Australian economy and a “critical” indicator of swings in Australia’s overall economic activity.

For the last couple of months, the Leading Index has returned values which imply below-trend growth. July’s reading returned -0.10% and while it was a negative result it was an improvement over June’s revised reading of -0.54% (revised up from -0.76%).

Westpac chief economist Bill Evans contrasted recent readings with those at the start of the year. “Despite the improvement in the growth rate it remains negative for a second consecutive month pointing to below-trend growth momentum and a sharp turnaround from strong positive, above trend reads at the start of the year.” He thinks the Index suggests a 2018 growth rate which was more consistent with Westpac’s forecast than the RBA’s recent forecast of 3.25% growth contained in its August Statement on Monetary Policy. “Westpac is currently forecasting growth of 2.50% in 2018. Trend growth is generally assessed as 2.75%.”

Private sector pay rate barely keeping up with inflation

16 August 2017

Each quarter the Australian Bureau of Statistics (ABS) surveys around 3000 enterprises regarding a sample of jobs in each workplace to measure changes in the price of labour across around 18000 jobs.

According to the latest wage price index figures published by the ABS, hourly wages grew by 0.5% in the June quarter, down from the revised March figure of 0.6% but in line with market expectations. Year-on-year growth was steady at 1.9% (after revisions) which means it is still at the lowest growth rate since the beginning of the series in 1999.

ANZ economist Felicity Emmett said the figures were “broadly in line” with the RBA’s expectations “although the tick down in private wage growth would be disappointing.” However, she expects the figures to “pop higher” in the September quarter as a result of the larger-than-usual” increase in the minimum wage rate handed down by the Fair Work Commission in June.

 Public sector hourly wages growth continued to grow faster than private sector hourly pay. Public sector hourly pay grew by 0.6% for the quarter and 2.4% for the year to June while the comparable figures for the private sector were 0.4% and 1.8%.

The hourly wages growth report produced another figure at the bottom of readings since the series began in 1999 and hourly pay growth in the private sector has now slipped below the annual rate of headline consumer inflation. However, some economists have been speculating the downward trend of slower and slower rates of growth may have come to an end. UBS economist George Tharenou said, “it now seems likely the WPI has finally troughed, amid clearly stronger jobs and business conditions and more importantly the surprising 3.3% minimum wage increase…”

RBA: household debt now the focus

15 August 2017

The publication of the minutes of the RBA’s August meeting was a fairly innocuous affair and they did not cause the same ruckus as the publication of the July minutes. Unlike a month ago, bond yields moved just a little higher while the local currency was a little lower. That is not to say these minutes did not contain any important hints about RBA thinking but at least they did not provoke such a strong reaction as in July.

There were the standard areas of RBA interest; global economic conditions, which had continued to improve, especially in China and the local outlook, which was little changed from a month before. Local GDP growth was expected to be around 3% and inflation was expected to increase “gradually”. There was also the obligatory reference to the effect of a stronger local currency which would “result in a slower pick-up in inflation and economic activity than currently forecast.” All fairly usual stuff.

Then there were the changes from the previous minutes. These are what most economists and observers are interested in. ANZ senior economist David Plank thought there were two issues which were worthy of comment. The first was the concern the RBA regarding the level of household debt. The reference to “the risks associated with high household debt in a low-inflation environment” in the last paragraph is a measure of its importance in the RBA’s thinking. The second was its concern regarding “relatively strong” housing price growth in Melbourne and Sydney and a lack of progress in slowing price growth in these two markets.

Caltex to redeem Notes next month

11 August 2017

Caltex Notes were issued in September 2012. They paid a floating rate of interest equivalent to 3 month BBSW + 425bps, had a first call date of 15 September 2017 and a final maturity date in 15 September 2037.

In a notice to the ASX, Caltex said it intends redeem all of the Caltex Subordinated Notes on 15 September, 2017. The redemption will be funded out of existing bank debt facilities. Holders who are on the register on 7 September will receive $100 plus $1.5678 interest per note.

This announcement was expected and it had little effect on the notes’ yield. At the closing price of $101.19, the internal rate of return (IRR) was just under 4.0%.

New yield-focused Magellan IPO to list on ASX

10 August 2017

Magellan Financial Group is set to float a new ASX-listed investment trust, the Magellan Global Trust (MGT). The Trust will invest in a focused portfolio of high quality global companies and it intends to target a 4% cash distribution yield.

MGT will be a closed-end investment trust listed on the ASX which will invest in a portfolio of between 15 and 35 companies of “high quality” global companies. The investment mandate will be flexible to enable the Magellan Global Trust to hold up to 50% of the portfolio in cash. Magellan also intends to manage the currency exposure. Magellan’s Chief Executive Mr. Hamish Douglass and Mr. Stefan Marcionetti will be acting as the portfolio managers.

MGT plans to pay its cash distribution semi-annually. The first distribution of 3.0 cents per unit is expected to be paid in January 2018 and the second distribution of 3.0 cents per unit is expected to be paid in July 2018.

Mr Douglas commented saying: “We believe that the Magellan Global Trust will be an attractive vehicle for investors making an investment in global equities. We believe that many retail investors value regular cash distributions and this has been missing in many global equity products. We consider that the target 4% cash distribution yield differentiates this offering from many other global equity products.”

The initial public offering (IPO) will comprise a Priority Offer for Magellan shareholders and a broker firm/general public offer. Commonwealth Securities, National Australia Bank, Ord Minnett and Taylor Collison will act as lead brokers, while the co-managers include Bell Potter, JBWere, Morgans Financial, and Macquarie Equities. The record date for determining eligibility for the Priority Offer was 1 August 2017.

This IPO is another example of diversified income strategy products coming to market for investors looking for alternative ways of generating yield from their portfolio.

MCP Master Income Trust offer opens

10 August 2017

The ASX will soon have another income-focused fund available for investors to trade when Metric Credit Partners (MCP) lists its MCP Master Income Trust (ASX code: MXT). MXT is targeting a minimum yield equal to the RBA cash rate plus 3.25% per annum which is currently around 4.75%, net of fees and costs. Distributions will be paid monthly.

The initial public offering (IPO) opens on 10 August 2017 and it is seeking to raise up to $500 million from investors in Australia and New Zealand at a unit price of $2.00. The offer is expected to close on 19 September 2017 and the units are scheduled to list on the ASX on 9 October 2017.

The Trust will be the first ASX-listed investment trust offering exposure to corporate lending. It will provide investors with exposure to a portfolio which reflects activity in the Australian corporate loan market, diversified by borrower, industry and credit quality. The trust initially will have exposure to over 50 individual investments with a near-term target of 75-100 individual investments.

MXT initially will be a “fund of funds”. It will obtain its exposure via a series of wholesale funds managed by the Metric Credit Partners team. The funds and their initial exposures will be as follows:

  • MCP Diversified Australian Senior Loans Fund  60-70%
  • MCP Secured Private Debt Fund II  20-30%
  • MCP Real Estate Debt Fund  10-20%

Household confidence slips again

09 August 2017

NAB’s latest business survey indicated the business sector continued to experience buoyant conditions, with confidence levels to match. This rosy picture has not extended to Australian households, a divergence some economists attribute to low rates of growth in wages and salaries. According to the latest Westpac-Melbourne Institute Consumer Sentiment Index, households were slightly more pessimistic than a month ago as the Index slipped from 96.6 in July to 95.5 in August. Any reading below 100 indicates the number of consumers who are pessimistic is greater than the number of consumers who are optimistic.

The survey was held in the first week of August and households at the time were just about as pessimistic as they had been just prior to the RBA’s first of two rate cuts in 2016. However, at the moment there is virtually no thought of further rate cuts as other economic indicators are not as they were in 2016. The global environment has also changed and the global rate of growth is now higher. Consequently, central banks around the world either have entered the rate rising part of the cycle (the U.S., Canada, Mexico) or are contemplating it (the ECB). Despite the RBA stating recently it is not in lockstep with other central banks, it will soon face the same pressures to normalise rates as every other central bank.

Westpac chief economist Bill Evans said, “The consumer mood has deteriorated over the last year with August marking the ninth consecutive month where pessimists are outnumbering optimists. We have not seen such a succession of weak reads since 2008. The survey detail suggests increased pressures on family finances, concerns around interest rates and housing affordability in NSW and Victoria are more than outweighing increased confidence around jobs.”

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