News

Tasmania’s MyState Bank priced a $25m Tier 2 subordinated bond issue last week at a mouth-watering BBSW + 500bps. MyState Bank is the renamed MyState Financial, perhaps best known in mainland states for its takeover of Queensland’s The Rock Building Society in 2011. It is listed on the ASX.

The bonds have a maturity of 10 years with a non-call period of 5 years and are Basel III compliant, meaning they satisfy APRA’s rules for capital eligibility. The bonds will convert into equity in the event that APRA deems the bank non-viable or if the level of bank capital falls below a certain threshold. S&P is understood to have rated the bonds as BB+.

Moody’s announced the upgrade of Qantas’ senior unsecured debt to Ba1 from the previous Ba2 on the back of an improving financial profile. The ratings agency expects “the company to continue to make solid progress on its transformation program” and for the company’s earnings and balance sheet to benefit from lower fuel prices and a weaker Australian dollar.

Origin Energy has been downgraded to BBB from BBB+ by Fitch not long after Moody’s announced it will downgrade the company to Baa3. Both agencies’ announcements were made after the sale of Origin’s 53% stake in Contact Energy. Although the sale will reduce debt levels, the reduction in earnings diversity and weaker energy prices in general led to the agency’s change. Origin Energy said the sale reduces the company’s financial risk as debt will be repaid and Contact Energy’s debt will no longer be consolidated in Origin’s balance sheet. Deutche Bank calculated Origin’s net debt would fall about $2.8bn or about 20%. Prices of Origin’s subordinated notes were largely unchanged on the news.

The Australian Office of Financial Management announced its bond tenders for the week beginning 10 August 2015 and it is a sizeable one with the addition of a new $1.25bn 2040 index linked bond. Other bonds to be tendered include $900m of the July 2022 and $900m of the April 2026. There will also be a tender for $500m of treasury notes. New indexed linked bonds are not that common and while the natural buyers for these bonds are largely comprised of insurance companies and life offices, investors will be looking for clues about the market view on inflation. Index bonds adjust the capital amount of the bond by the inflation rate each quarter thus protecting the investor capital from being eroded by inflation. In April 2015 the AOFM saw the first ever inflation linked bond tender sold at a yield below the inflation level. In that tender, investors were prepared to lock in a return of 7.6bps below the official level of inflation. The outlook for inflation looks considerably different from that time and Initial price guidance for the index bond issue is a spread of 14 to 18 basis points to the yield on the 21 August 2035 Treasury Indexed Bond.

The Bank of England will not raise rates in 2015, despite a recovering economy, according to markets after the latest BoE monthly meeting. The BoE last cut cash rates to 0.5% in 2009 after the GFC and it has left them steady since. Only 1 of its 9 policymakers voted for an increase at last week’s meeting, surprising markets that had tipped at least 2 or 3 to opt for a rate rise. A rate specialist from Societe Generale, Jason Simpson, said “The message is clear: rates need to rise. Not yet, but they need to go up and every inflation report is one step closer to that.” The governor of the BoE, Mark Carney, said the Bank was getting closer to taking the first step to undo its stimulus for the UK economy. “The likely timing of the first Bank Rate increase is drawing closer,” he told reporters. “However the exact timing of the first move cannot be predicted in advance … in short, it will be data-dependent.”

Westpac announced the results of its book-build process and in doing so increased the offer size to $1.25bn from the previously indicated amount of $750m. The margin above BBSW to be paid to holders came in at the bottom of the 4.00% to 4.20% indicative range. This is not surprising given the strong demand for the offer and the increased issue size. The offer is scheduled to close on 1 September but may well be closed early. The initial yield will be around 6.14%pa (approx. 2.14% for BBSW and plus the 400bps margin). The yield is pre-tax and includes franking credits. The actual yield will be reset each quarter as the BBSW rate rises and falls but the margin will remain 400bps above BBSW.

The Labour Force data was released showing a headline unemployment rate of 6.3% (s.a) compared to June’s rate of 6.1% and May’s rate of 5.9%. The increase in the unemployment rate was despite a large 38.5k jobs created in the month – nearly four times the number the market was expecting and the highest July print on record. The rise raised questions yet again about the accuracy of the ABS’s numbers but it does appear in part to be caused by a rise in the number of people looking for work – the participation rate – which increased 64.8% to 65.1%. That said, the ranks of the unemployed are said to have grown by 40,000 which confused most observers. The market didn’t know what to make of the numbers with the AUD rocketing higher, then falling and finally settling around 20bps lower than before the announcement. Many commentators are of the view that the RBA will not cut rates again.

Ivan Colhoun from the NAB said “We’d discount the sharp rise in unemployment as the start of a new trend and instead conclude that the unemployment rate has been broadly stable at around the 6.1-6.2% mark”. Ben Jarman from JP Morgan called the result a “messy one” and Barclay’s Keiran Davies said the “growth in employment is somewhat overstated because the Bureau of Statistics hasn’t updated its population benchmarks… The RBA seems likely to lower its forecast peak in unemployment.”

ANZ announced it will issue $3bn of ordinary shares, which qualify as common equity tier 1 (CET1) capital, in two tranches, $500m for retail investor via a share purchase plan scheme and $2.5bn to institutions via a share placement. The shares will be issued at a price of $30.95. ANZ’s CFO Shayne Elliott said APRA’s decision to raise the risk weighting on residential mortgages had influenced the decision, especially in regards to the timing and amount of capital required. Readers may recall Yield Report’s July articles reporting APRA’s directive for banks to increase the amount of CET1 capital by 1 July 2016. A capital raising of $3b will go a long way towards meeting ANZ’s commitments.

APRA’s motivation behind requiring banks to raise CET1 capital has been partly driven by the Basel III committee recommendations and partly by David Murray’s Financial System Inquiry call for Australian banks to be “unquestionably strong”. The increased capital levels will offer greater protection to depositors, maintain confidence in the banking system and protect it against future shocks. One good side effect for bank debt holders is that the addition of ordinary share capital to banks’ balance sheets reduces the overall risk in holding debt securities – including hybrid securities.

Some analysts have suggested ANZ rushed to raise equity before the Commonwealth Bank reports its annual profit next week. It is widely expected that the Commonwealth will announce how it intends to deal with the new APRA risk weighting requirements with a number thinking it could seek to underwrite the Dividend Reinvestment Plan in order to raise capital in a smoother and perhaps fairer, way.

PIMCO, the former firm of Bill Gross, said it had received a “Wells notice” from the SEC relating to the Total Return Active Exchange Traded Fund. A Wells Notice is a letter that the SEC sends when it is planning to bring an enforcement action while giving the recipient a chance to rebut the allegations. The notice is focussing on how PIMCO valued mortgage backed securities in a four month period in 2012 and whether the valuations led to inflation of the fund’s performance. Bill Gross left PIMCO to join Janus Capital Partners in September 2014 but he was in charge of the ETF at the time the allegation refers to. PIMCO have not publicly responded to the allegations so far.

As expected, the RBA held the cash rate steady at 2.00% at its 4 August meeting. However, some of the comments arising from Glenn Stevens’ statement pushed the currency higher on the basis that future rate cuts are less likely. The statement accompanying the announcement removed the previously used reference about the AUD that “further depreciation seems both likely and necessary”, suggesting the RBA is comfortable with the level of the dollar and implying further rate cuts to get the dollar lower are not necessary. HSBC’s economist, Paul Bloxham said, “The RBA typically does not cut rates once the unemployment rate has peaked.”

Westpac’s Bill Evans thought the change in the governor’s statement to be a signal the bank is no longer concerned about adding to upward pressure on the currency by having a wide gap between US and Australian interest rates. “A key motivation behind cutting rates would be to further lower the AUD. That motivation now seems to have dissipated,” he said. Cash rate futures adjusted for the decline in the likelihood of future cuts but the markets are still betting rates will fall any time from late this year. Futures markets indicate a 68% chance of a December rate cut and an 86% chance of a rate cut by April.