Week in Review
- Australian retail sales data beat analyst expectations, rising 0.9% for the month of May versus the consensus estimate of 0.4%. The rise was the fifth consecutive monthly rise in retail turnover, suggesting households have coped well after the first two interest rate hikes.
- The US economy contracted an annualised 1.6% QoQ in Q1 2022, the first contraction since the 2020 pandemic-induced recession.
- Australian Pacific Mortgage Fund raised AUD5.4m via a nine-month secured property transaction. The bond pays a quarterly fixed coupon of 7% and matures in March 2023.
Chart of the Week: RBA is raising interest rates at a slower pace than counterparts
Central banks in the US, UK, Canada, and NZ have all moved much faster to curb inflation, while also alarming investors who fear that aggressive hikes may trigger a recession.
Credit Opinion: Seek (SEKAU) Hybrids
We believe there is value in the Seek hybrids, which are leveraged to favourable employment markets set to provide a tailwind over 2022 and 2023. This should support job ad volumes and yield – which alongside the theme of the ‘Great Resignation’ playing out in many job sectors, will support revenue and EBITDA growth. The company has high cash flow generation which provides the ability to reinvest into the business, as well as pay an appropriate return to debt and equity holders.
Seek has been able to diversify its business away from Australian & NZ (ANZ) successfully over the last five years. Its investments in China, South-east Asia, Brazil, and Mexico have contributed a significant amount of group sales and EBITDA (to date). The geographical diversification not only lessens Seek’s dependence on the Australian economy, but also creates further growth potential.
Trade Idea: European Bank USD AT1 Securities
The recent sell-off/volatility has provided us with an opportunity to source some European bank USD AT1 securities at very attractive levels. These AT1 securities are loss absorbing with write down (temporary) and/or equity conversion and include interest deferral (non-cumulative). The securities are structured as perpetual instruments with a first call after five (or ten) years which can then be called on various dates. AT1 securities which have a write down (temporary) feature can be written back, reducing any loss incurred to an investor.
The first important consideration is to be comfortable with the underlying credit risk. IAM has reviewed the following banks and has no credit issues at a headline level. The second important consideration is to assess call risk and ability for securities to be written down (temporarily) and/or converted to equity as well as payment of interest under certain regulatory conditions (this is called the Maximum Distributable Amount (MDA) cushion). Bank CET1 ratios falling into the MDA buffer zone raises red flags with investors.
The table below outlines our most frequently traded issues over the past week.
|Issuer||Coupon||Rating (S&P, Fitch, Moody’s)||Call Date||Yield|
|Au Pacific Mortgage Fund||7.000%||NR||19-Jul-22||7.000%|
|Heartland Au Grp Pty Ltd||BBSW3M+2.000%||BBB-||09-Jul-24||6.465%|
|Westpac Banking Corp NZ||5.000%||BBB||21-Sep-27||7.560%|
|QBE Insurance Group||5.250%||BBB-||16-May-25||7.000%|
|QBE Insurance Group||BBSW3M+2.750%||BBB||25-Aug-26||6.570%|
|Macquarie Bank London||6.125%||BB+||08-Mar-27||8.143%|
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