There are very few corporate floating rate notes in the Australian bond market with most corporates opting to fix their cost of funds for an extended duration (typically 10yrs) to provide funding certainty. The issuer preference for fixed rate structures means there are limited options in the corporate space for investors who are concerned with duration (interest rate sensitivity) or would like exposure to floating rate structures but are seeking to diversify away from financials.
One senior floating rate note issue from Pacific National in our opinion represents value with an expected yield to maturity of 7.00%. The issue pays a floating rate coupon of 3mBBSW + 2.60% with the most recent coupon set at 7.0186%, its highest quarterly coupon since inception (issued in 2017). With inflation remaining stubborn and the RBA continuing to inch rates higher, we are likely to see the quarterly coupons remain in the ~7.00% region for some time.
About the issuer:
Pacific National (PN) is a key player in Australia’s infrastructure transportation sector. PN’s strategy is to transform the rail freight industry across Australia, with a role in mitigating emissions and having a positive environmental and social impact. The company’s shareholders have been willing to forego dividends to protect the BBB-/Baa3 rating. These shareholders are experienced infrastructure investors with over USD1.7trn assets under management. Coal haulage contracts are largely on a take or pay (ToP) basis, which protects the issuer from counterparty risk. The weighted average coal contract is 5.8 years, while a freight contract is 2-4 years respectively. A common misconception with PN is that it supports coal transportation only. This is inherently wrong, and the company is slowly diversifying out of coal and into rail freight. In fact, revenue from coal is expected to drop from 42% (of rail revenue as at FY21) to 30% by 2025-2030 as rail freight increases as a portion of revenue. Over time, the development of the 1,700km Inland Rail Network will increase the competitiveness of rail against road transportation and help this diversification take place.
