Teachers Mutual has announced it has priced $100 million October 2019 FRNs. While it is not the largest or most interesting transaction YieldReport has seen this week, or month for that matter, the pricing is considerably different from its last transaction in November 2014. In that $70 million transaction, which was also for a 3 year FRN, the margin over 3 month BBSW was 100bps. In its latest transaction the margin has been set at 140bps – a considerable blowout in financing costs.
In the global scramble for yield, there has been a tendency for investors to go outside their traditional sectors in an attempt to maintain the income component of their overall return. One would think in that investment environment spreads over bonds would contract. This latest bond issue from Teachers Mutual is an indication this is not necessarily the case.
There is an upside as the overall interest cost will be less. In November 2014, 3 month BBSW was around 2.74% and a year later it was 2.26%. Now it is 1.75% and if BBSW were to stay where it is Teachers Mutual will pay around 3.15% annually, whereas in November 2014 it was paying around 3.74%. Historically low rates make even detrimental things appear better.