News

The UK’s famous boys’ school, Eton College, has for the first time in its illustrious 575 year history decided to borrow some money. Despite having a reported £345m of assets, a £297m endowment fund and an extensive £70m property portfolio across the UK, the world-famous school is to issue £45m of debt maturing in 45 years at a fixed rate of 3.63%. The funds are to be used on building programmes and assisting boys from poorer backgrounds with tuition fees. The school has an annual income of £44m but funds scholarships from its investment income.

Elders announced an on-market buyback for it ASX-listed subordinated notes (ASX code: ELDPA) issued at $100 in 2006. Elders chief Mark Allison said the offer “provides an opportunity for holders who wish to sell to do so on a first-come, first-served basis.” Elders would have preferred to acquire the hybrids through an off-market offer but was prohibited from doing so under the Corporations Act. The distributions on the unsecured notes were set at BBSW + 2.20% but Futuris, as it was known then, ran into trouble with it vehicle division and distributions ceased in 2009 and have not been paid since. At one stage in July 2013 the notes traded briefly down to $8. Steve Anagnos from Shaw & Partners said, “Utilize this liquidity event, particularly as the hybrids are currently not paying any distributions and are a perpetual security with no maturity date.” Philip Bayley from Australian Debt Capital Markets has suggested an alternative view might be worthwhile. As it stands, Elders cannot pay a dividend on ordinary shares until a full annual distribution is made on the ELDPA’s. The recent interim results announced by Elders create the suggestion that dividends might be reinstated in fiscal 2017. This might see the notes trade back to, or above $100 from the $80 buy-back price – a further 20% return.

Investors wishing to take advantage of the buyback need to decide quickly as Elders will be standing in the ASX market as a buyer at $80.00 until $30m worth are purchased.

The People’s Bank of China (PBOC) surprised currency markets last week when it devalued the renminbi by 1.9%. The PBOC indicated the devaluation would be a one-off but in the offshore currency markets, where the renminbi is floating, the currency slid. Markets feared the devaluation was an indication the Chinese government thought the economy was might be doing worse than what was currently expected. Global equity markets reacted by falling and bond market measures of risk spiked higher. iTraxx, which measures the cost of credit default swap contracts, rose by 1.5% on the day of the announcement and another 3% the next day, while safe-haven bond yields dropped by unusually large daily amounts.

Prior to a string of weaker economic indicators results, China’s policy was to move the composition of economic growth away from investment and towards consumption. China’s move created uncertainty with regards to the continuation of the policy and some market participants saw the devaluation as a possible reversal of this policy, at least in the short term.

Calm returned but only after a sustained campaign by Chinese officials who said a further fall in the exchange rate was unnecessary. The PBOC said China’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided “strong support” for the exchange rate.

The sales of cars, sporting goods and building materials in the US have lifted retail sales figures for July. The US Commerce Department released retail sales figures showing a 0.6% increase for the month, slightly more than the 0.5% expected and higher than the June figures which were revised up from -0.3% to 0.0%. On top of other positive reports from factory inventories and constructions, it is expected second quarter US GDP figures will be adjusted up from 2.3% to 3.0% or higher. This adds to the market view that rates will rise when the Fed next meets in September.

Short term loan company Money3 is said to be looking at issuing debt securities in order to plug the funding gap left by the withdrawal of Westpac as its primary lender. Readers will recall that Westpac made a corporate decision to cease funding ‘pay day’ lenders such as cash Converters and Money3 and while the bank has not said as much, it is believed to be the result of the increased reputational risk such lending might generate. Westpac is the last major bank to cease funding such providers.

Pay day lenders often charge very high interest rates, sometimes to vulnerable people. In June 2015 Cash Converters reached an in-principle agreement to pay $23m to settle a class action with 37,000 customers who claimed they were charged excessive interest rates on short-term loans.

Money lenders are having to secure lines of credit beyond banks and it is believed that Money3 has secured a $30m corporate bond facility that will allow it to raise funds and grow its business with certainty. It is also believed to be reducing its reliance on the more controversial pay day loans and increasing its lending focus onto other parts of its business such as auto loans.

In September 2013 Cash Converters raised around $60m for 5 years at a rate of 7.95% through FIIG Securities. This was around Swap + 400bps at the time.

Deputy governor of the RBA, Philip Lowe, gave the annual Shann Memorial Lecture where he expressed the bank’s thoughts on the limitations of monetary policy except in the short term. “Monetary policy is ultimately not a driver of medium-term economic growth,” he said. Infrastructure, innovation, regulation and competition were more important. In a hint RBA officials are keeping an eye on house prices and the effects of low interest rates on them, he noted the risks in an economy increase with rapidly rising house prices.

The Westpac-Melbourne Institute consumer confidence index rose in August, by an amount which has surprised its creators. The index jumped from 92.2 in July to record 99.5 in August. Moves of this magnitude are usually associated with significant events such as Federal Budgets and interest rate changes. Westpac’s explanation is the move simply reverses the downwards moves in June and July which came about because of the short term effects coming from offshore i.e. Greece budget / banking crisis and Chinese share market volatility. A recording of 100 means optimists are in balance with pessimists and August’s result is a move back to a neutral setting.

Homeowners are more positive than renters although the majority expect interest rate rises in the next 12 months and thus the thought of lower rates is not responsible for higher levels of confidence. Survey respondents reported a higher levels of confidence in the labour market and Westpac sees this feeling as driving the less pessimistic result.

Bill Evans, Westpac chief economist, expects the current improvement in sentiment to be “unsustainable particularly given a resurgence of concerns around China and the evidence last week that the unemployment rate lifted to 6.3%.” However he does not think this will lead to a cut in rates. He said, “Westpac expects that rates will remain on hold over the course of the remainder of this year and in 2016. If, however, it became clear through the course of 2016 that the 3.75% growth outlook was likely to be achieved, and even exceeded, then rate increases would quickly move onto the radar screen.”

Commonwealth Bank announced a $5bn capital raising via rights issue and in the process announced a change to the maximum conversion ratio of its PERLS III hybrid security. These Commonwealth hybrids were issued in April 2006 and are somewhat different from the standard mandatory converting securities in that they have a reset clause which will be activated in 2016. The change to the conversion ratio will be fairly minor. Currently, the maximum conversion ratio is 100 shares and after the adjustment and in the absence of major moves in the prices between the day of the announcement and the “ex-rights” date, the conversion number will be a few percent higher. Commonwealth said it had sought approval from APRA to adjust its other listed hybrids in a similar way but APRA had not provided approval and the bank was seeking to “discuss this further” with the regulator.

Private sector wages grew at the lowest rate since the data series began in September 1998. Seasonally adjusted private sector wages growth for the year to the June quarter 2015 was 2.2%, smaller than the public sector rise of 2.5%. Through the year, all sectors rose 2.3%. WA has the lowest growth of all states due to weakness in the resources sector. The numbers overall would suggest there is little impact from rising wages on the level of inflation.

Heritage Bank, Australia’s largest customer-owned bank, announced full year results for 2014/2015 this week. The results were mixed with pre-tax profit and net profit declining by 4% and 6% respectively while total consolidated assets grew 0.4% to $8.557 billion. Heritage’s capital adequacy ratio was 13.37% and its liquidity ratio was 19.39%, above regulatory requirements. CEO John Minz said the 2014/15 year was one in which Heritage accelerated its transformation journey to respond to technological changes in banking. The BBB+/A3 rated Heritage has one hybrid security listed on the share market in the form of a 7.25% March 2016 note and the yield to maturity jumped from 3.71% to 4.12% on the day.