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Crown: Credit Update

Crown Return

Holders of Crown hybrids now need to establish what to do with their capital given the listed corporate hybrid market remains very small comparable to the OTC corporate bond market.

In our view, one name in the listed corporate space which offers good value is the Nufarm (NFNG) Perps. If investors prefer listed financial exposure, then the Australian Unity (AYUPA) Perps would be the best bet. Both of these lines offer above 8% on a yield to maturity (YTM) basis. We currently believe the listed financial hybrid space (mainly comprised of the major banks) is pricing tight versus their OTC equivalents. This was evidenced with the new Westpac (WBCPL) margin guided at 3.4-3.6% above 3m BBSW, which was very tight in our opinion.

Please speak to an IAM representative for further detail on the credit and structural dynamics of these securities.

USD AT1 indics:

  • MQGAU 6 ⅛ PERP – 91.375 8.39%
  • QBEAU 5 ¼ PERP – 93.75 7.72%
  • INTNED 3 ⅞ PERP – 93.50 11.06%
  • WSTP 5 PERP – 88.125 7.816%

We have provided indicative pricing to the client on our key USD OTC AT1 financials above (as at 1/07/2022).

Approximately 26% Annualised from August 2021 Recommendation

  • Face value of AUD100 per note
  • Deferred (but accrued) interest per note being:
    • AUD1.03 per note for interest not paid on 15 March 2022
    • AUD1.04 per note for interest not paid on 14 June 2022
  • AUD0.68 per note for accrued interest (not paid) from 14 June 2022 till redemption date.

The redemption of the AUD630m outstanding will occur on 28 July 2022 as a result of the change of control (CoC) occurring. Those who acted on the buy recommendation in August 2021 (almost one year ago) would have achieved a sizeable return of roughly 26% annualised, including the two coupons that were paid in September 2021 and December 2021.

At that stage, the Crown Hybrids had dropped below AUD90 as there was risk Crown would lose its ability to operate the Melbourne Casino and that an acquisition from Blackstone may not take place given the impending regulatory risk.

To put some context around this return figure, the Ausbond floating rate index has achieved a flat return over that same period. The trade was only sensible for those clients with larger risk budgets, and that was caveated in our trade idea. We had expected an equity raising as the credit was in a stretched position, but the issues around the Victorian Royal Commission were resolved swiftly, providing the positive catalyst the credit needed.

Since then, Crown has renewed its Melbourne license, regained authority to open its Sydney Barangaroo Casino, had a favourable domestic reopening thematic, and Blackstone has received all necessary approvals to take over the company.

The annualised return of roughly 26% reflects the current market price of AUD102.08, which is trading close to the redemption price and largely factors in the deferred (but accrued) interest over 2022 – the March 2022 and June 2022 coupons.

Chart 1. Comparative Returns

Source: Bloomberg

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