News

The Bank of England’s Monetary Policy Committee kept the UK’s official rate steady at 0.50%, having last changed it in 2009. An improving labour market was adding fuel to argument for a higher rate but, as with the US Federal Reserve, there seems to be some debate as to when to start the process.

Recent falls in LNG and oil prices may mean Origin may have to cut debt levels in order for it to keep its BBB investment grade status. Origin’s APLNG project has been a major consumer of capital in recent years and a sell-down of its stake may be required to bolster Origin’s balance sheet in light of weaker revenues. Macquarie noted Origin’s past reluctance to issue equity which leaves asset sales of part of the APLNG project or its stake in Contact Energy as possible moves.

Last week AGL announced write-downs of an additional $600m across various upstream energy assets. The announcement had little effect on its ASX listed subordinated notes which closed the previous Friday at $105.00. During the course of the week the notes ranged between $104.11 and $105.48 before finishing the week at $105.12

Last week Fortescue’s 9.75% March 2022 notes went under their issue price for the first time since their placement in April. Concerns about China’s economy, the flow-on effect to iron ore prices and a general flight to safety appear to have spooked holders and potential buyers.

St Barbara recently repurchased US$54m of the 8.875% April 2018 notes it issued in March 2013. The purchases took place in two tranches and resulted Moody’s placing the company credit watch “positive”. Similarly, S&P recently revised St Barbara’s outlook from negative to stable on the back of the company’s “improving operating performance” and the debt buy-back.

Westpac and Commonwealth were active in the covered-bond market last week with WBC issuing US$800m of 3y bonds at Libor + 30 bps while CBA issued $US1bn of 5 y bonds at 45bps over mid-swap for an Australian equivalent of mid-swaps + 72bps. These yields are up on similar issues last year where “big four” banks issued covered bonds offshore at rates close to Libor.

The IMF expects global GDP growth to be 3.3% in 2015 down from the April estimate of 3.5%. Much of the reduction is the result of cuts to US GDP growth forecasts but the organisation saw the US issues as temporary and the “underlying drivers for acceleration in consumption and investment in the United States——wage growth, labor market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market—remain intact.”

The financial system inquiry chaired by David Murray called for Australian banks to be “unquestionably strong” with capital ratios in the top quartile of internationally active banks. Australia’s banking regulator, ASIC, has said that this would require banks to hold a further 200bps of common equity tier 1 capital in order to achieve this benchmark, according to its study released on 13 June. However, APRA said that the results of its study “will inform, but will not ultimately determine, APRA’s approach for setting ‘unquestionably strong’ capital adequacy requirements” and that APRA “regards the top quartile positioning as a useful ‘sense check’ of the strength of the Australian framework, but does not intend to tightly tie Australian requirements to a benchmark based on the capital adequacy ratios of international banks”. APRA’s view is likely to be well received by Australia’s banks that have been worried that APRA would enforce a rigid formula for capital requirements that were set by international standards and failed to take into account the strength of the local banking system.

In a recent interview, bond fund manager, Bill Gross, warned investors of a looming liquidity crunch. With many investors seeking to exit bond markets ahead of the Fed raising interest rates Gross warned that markets may not be able to handle such volume of orders during times of stress. With many of the world’s largest investment banks unable to act as market makers and thus provide liquidity, exiting a portfolio may become much more difficult than has been the case in the past. In particular, investors and markets have not been tested during a stretch of time when prices go down and policymakers’ hands are tied to perform their historical function of buyer of last resort. It’s then that liquidity will be tested.

Perhaps as a result of Greece only accounting for 0.25% of global GDP, several asset managers have recently informed members of their almost total lack of exposure to the troubled country.

Brad Holzberger, chief investment officer of QSuper, said “In QSuper’s ready-made options, namely balanced, moderate, aggressive, QSuper Lifetime and international shares, we have chosen not to invest in Greek shares or bonds.” First State Super said something similar: “Our pre-mixed options such as the Diversified and Balanced options have no direct exposure to Greek assets” while Magellan’s CIO confirmed as much again.