June 2024
Matthew Macreadie
Novacare AUD April 2033 Senior Secured CPI Indexed Annuity Bonds ~ Real yield 4.312%
The Novacare AUD April 2033 senior secured CPI indexed annuity bonds suit an investor seeking inflation protection with exposure to a quality infrastructure asset (despite being downgraded to high yield) and comfortable with a longer maturity investment.
The indicative nominal yield to maturity, assuming inflation averages 3% over the life of the bond (being the top of RBA’s target mid-point of 2-3%) is 7.829%. A return of close to 8% compares very well versus the BB/BBB opportunity set.
A CPI indexed annuity bond is unlike other bonds. It pays principal and interest (adjusted for inflation) over the life of the bond. Come the maturity date of 2033 all principal will have been returned. We have a schedule that we can provide to show the Novacare AUD April 2033 senior secured CPI indexed annuity bond cash flows if investors would like to see.
About Novacare
Novacare is a Public-Private-Partnership (PPP) and the financing vehicle of the Novacare Consortium which was contracted by the NSW Department of Health for the financing, design, construction, and refurbishment of various facilities at the Mater Hospital in Newcastle and the provision of specific non-clinical ancillary services. The project construction has been completed and the project is now in the lower risk operational phase. Novacare’s revenues are not linked to the number of patients that use the hospital’s services; rather they are related to the quality and availability of the Mater Hospital to the level specified in the contract.
Re Moody’s downgrade from Baa2 to Ba2.
Recently, Moody’s downgraded Novacare to Ba2. This reflects Moody’s assessment that Novacare’s operating risk profile has weakened following the State (NSW) seeking to levy further material abatements on Novacare in March and April 2024. Honeywell (subcontractor) is contesting the majority of these claimed abatements and consequently they have not crystallised.
In our view, Moody’s have been overly conservative in this instance and the downgrade gives investors an opportunity to get set in the credit.
- The current amount of the State’s (NSW) claimed abatements is currently below the level of Honeywell’s guarantee, which mitigates the risk of Novacare experiencing a liquidity shortfall. Honeywell is rated A2/positive and an experienced company that should be able to deal with a guarantee payable on demand.
- Furthermore, even if a scenario was to play out whereby the State (NSW) enforced an early termination the termination payment regime protects bondholders through a very high recovery rate. Investors are likely to receive 100% back given the senior secured nature of the bond and favourable termination payment regime.
- We believe these abatement issues will be handled in a coordinated fashion and the operating performance will improve over the next 12 to 24 months.
