JCB find the YieldReport to be an invaluable summary of all debt market activity. Whilst we are focussed on the highest grade bonds it is important to see what is..Angus Coote, Executive Director, JCB Active Bond Fund
Nissan Financial Services Australia will commence another sort of roadshow from the one we would normally expect from the car company when it embarks on a series of investor meetings in late August/early September. Typically these meetings are a prelude to some sort of capital raising. Nissan Australia is rated A- by S&P and has debt issued in yen and US dollars but not in Australian dollars as yet. The announcement of the roadshow comes shortly after Apple said it was considering a debt issue in Australia and not long after SABMiller sold $700 5y bonds at the end of July via its FBG Treasury subsidiary.
The UK’s Office of National Statistics released July CPI and PPI figures which suggest the UK’s period of deflation may be coming to an end. The CPI grew by a meagre 0.1% for the year to July, up from June’s figure of 0.0%. In the year to July 2015, food prices fell by 2.7% and prices of motor fuels fell by 11.4%. These two groups have provided some of the largest downward contributions the CPI and reduced the headline rate by approximately 0.7 percentage points. Lower fuel prices also helped lower producers’ input prices as the overall price of materials and fuels bought by UK manufacturers fell 12.4% in the twelve months to July.
The less-volatile core measure fell 4.9% for the year, a slightly larger fall than the 4.7% in June. Core factory gate prices rose 0.3% in the 12 months to July 2015, higher than the comparable June figure of 0.1%. The net result should be a rise in profitability for UK firms as costs rose at a lower rate than revenues.
Earlier this year the BoE governor Mark Carney had said deflation during 2015 was “more likely than not” but it was expected to be temporary. The pound rose on the figures and economists believe official rates will rise in the first quarter of 2016.
RBA August minutes: slightly positive but no great change
18 August 2015
With the release of the RBA minutes coming so soon after the Statement on Monetary Policy (SOMP) and recent speeches by two deputy governors, commentators and analysts did not expect anything new to be revealed. Instead they were focused on changes in tone and any variations from the July minutes.
As with the July minutes, the RBA’s forward view would be data-dependent. But differences emerged in the comments on the exchange rate where the currency’s depreciation was now assisting the economy’s transition, thus ceasing the need for the RBA to talk the currency down. Business conditions were also seen in a more positive light: “business conditions were clearly above average”. The unemployment rate was assessed as likely to have stabilised, which the SoMP had explained was the result of lower net immigration and low wages inflation.
Westpac said the August minutes reveal an unchanged stance on policy, an RBA which finds the current level of the dollar acceptable and a generally more positive view on the economic outlook. A subdued level of growth (2.5%) for 2015/2016 is offset by the Bank’s forecast for robust growth in 2016/2017 this year. “Accordingly we maintain our call that rates will remain on hold over the course of 2015 and 2016.” ANZ was more circumspect in its reading of the minutes. It agreed the minutes were more positive but it thought the RBA still has an easing bias.
Commonwealth Bank announced it will be arranging a series of investor meetings on its own behalf as the issuers of new residential mortgage-backed securities. The new issue is expected to be priced in the last week of August and is part of the bank’s Medallion programme which issues into both the domestic and offshore markets.
In the AOFM’s third RMBS auction, $122.85m of securities held by the AOFM were sold representing just over 17% of the amortised face value of bonds on offer. The amount sold was higher than the $96m disposed in the second auction held in July but still seen as being somewhat on the light side. Westpac commented, “Either the reserve levels of the AOFM are set too high, investor bids are too low or opportunistic, or a combination of these [factors].” The chief of the AOFM, Rob Nicholls gave a speech last month in which he discussed the aims of the sales process and he sought to dismiss theories the AOFM was under pressure. However, perhaps as a result of the three auctions, the AOFM announced it would decrease the amount of RMBS on offer “until further notice”. The AOFM bought large swathes of RMBSs from investment banks in the aftermath of the GFC in order to provide immediate liquidity. The sales process has been orderly but slow with the AOFM being categorised by some as a ‘fussy seller’. There is conjecture as to whether markets are trying to game the AOFM in order to buy the bonds cheaper, whether the market genuinely believe the value of the RMBSs is lower than being offered or whether the AOFM is playing a long game and trying to maximise the value for Treasury.
Apple is the most or one of the most profitable companies in the world. It has a hoard of cash around the globe, which when totalled up exceeds US$200bn. In a teleconference held for Australian bond fund managers, that is seen as a prelude to Apple issuing $AUD domestic bonds, Apple reiterated that the major reason for keeping its cash outside the US is that any cash repatriated will incur tax at a corporate rate of 35%. Apple’s totally legal solution to this is to keep the money offshore and to borrow money (via the bond market) that it then uses to fund share buy-backs and dividend payments. The interest it pays on the debt is tax deductable to Apple and shareholders are kept happy. Apple has accumulated more cash than any company in history and an amount that is larger than the GDP of many nations.
Originally Apple’s borrowings occurred in the US but increasingly it has sought to diversify its debt investor base to Europe, Japan and now possibly Australia. A domestic Apple bond would be a huge fillip for Australian fixed interest investors that have a difficult time finding similarly rated investments that are not banks. Apple is currently rated AA+ by S&P.
One side benefit of borrowing in the country where a company has a lot of cash is the loan acts as a natural currency hedge. When the value of the asset rises or falls so does the value of the liability. The asset in this case is the cash while a new Apple bond issued in Australian dollars would be the liability.
Cash rate futures markets are priced for a rate cut in early to mid-2016 and Westpac is wondering why. The prices of cash rate futures imply a “90% chance of rate cut by mid-2016 and a 50% chance of one by November.” Westpac sees the Federal Reserve raising rates in September, a 3% growth rate in Australia in 2016 and a Reserve Bank which views the Australian unemployment rates as having peaked. Westpac chief economist, Bill Evans, says “Markets may be expecting that, in the event of the labour market faltering in such an environment the Bank may see the need to restore more stimulus across the economy. We are not convinced about such prospects but we are also surprised about current market pricing.” He sees very little chance of a 1 September rate cut and expects rates to remain on hold for the rest of 2015 and through 2016.
ABS data released indicates a fall in new vehicle sales of 1.3% for July, seasonally adjusted, which is a reversal of June’s rise of 3.8% and slightly less than the expected fall of 1.5%. Year-on-year results were brighter with the July figure of 3.7% not much less than the June figure of 4.0%. WA declined the most in year-on-year terms as the fallout from the end of the mining boom continues to wash through its economy.
The world’s largest technology company, Apple Inc, is believed to be considering a debt issue in the Australian market. The company will be making a series of investor calls to update them on a potential bond issue. Deutsche, Goldman Sachs and Commonwealth Bank are said to have been appointed to arrange a potential issue.
Apple has a huge amount of cash – in excess of US$200bn – sitting offshore. If it repatriates this money into the US it must pay US taxes at a rate of 35%. By leaving the money offshore, it can take its time to decide how best to use the cash and ultimately minimise its corporate taxes.
Previously the company has issued bonds to fund dividends and share buy-backs. The interest on the bonds is tax deductable making the process extremely tax-efficient. Bonds have previously been issued in yen, swiss francs and euro. An Australian dollar bond issue would be a strong endorsement of the local bond market that also recently saw SAB Miller issue $700m worth of bonds to fund its Foster’s operation in Australia.
Readers may recall our insight article in June on how green bonds work and how they are used to fund green projects. Now, Teachers Mutual Bank has been certified by the Responsible Investment Association of Australia to recognise the bank’s policy exclusion in lending to, or investing in, large scale greenhouse gas polluting activities. It will mean the bonds issued by the bank will be deemed to be green. Teachers Mutual Bank said it wanted to demonstrate profitability and sustainability were not mutually exclusive.
