Investors in retirement need an income. There is a lack of supply in Australian dollar denominated high yield bonds, but greater liquidity in the US means we have access to a number of bonds
Last week we highlighted that now is a good time to sell your bonds if you can use the funds elsewhere, or are perhaps thinking about preparing to invest in the next FIIG originated deal.
It’s no surprise that Australian dollar bonds are hard to source at the moment, with most investors content to maintain their positions. Still, cash continues to build as coupons – interest payments on bonds – are made and maturities and redemptions such as 360 Capital continue.
That leaves many with the quandary of “where to invest?”
USD high yield is a favoured trade at the moment and we’re doing our best to find bonds with good stories to tell and attractive rates on offer. Over the last few weeks, we’ve DirectBonded three new bonds. Two are from telecom company, Frontier Communications and another from integrated engineering company, McDermott International.
The Frontier fixed rate bond maturing in June 2025 paying a yield to worst (YTW)* of over 10% per annum has been a favoured trade. It’s worth noting that this is a big issue of US$3.6bn, providing good trading liquidity. McDermott is smaller, but still meets the minimum US benchmark amount of US$500m – a good size compared to many Australian dollar issues.
Other positive points regarding the companies listed include:
- The companies are typically listed
- Have visible market capitalisation figures
- Good news flow
Please click on the company name in the table to view its factsheet. Please note we do not have a factsheet for Geo Group.
US high yield bonds
| Company | Credit rating | Maturity date | Yield to worst* | Running yield | Minimum face value parcel |
CenturyLink Inc
| BB | 01/04/2025 | 5.98% | 5.75% | $10,000
|
CenturyLink Inc
| BB | 15/09/2039 | 8.31% | 8.19% | $10,000
|
Dell Inc
| BB- | 15/04/2028 | 6.08% | 6.56% | $10,000
|
Frontier Communications Corporation
| BB- | 15/06/2025 | 10.34% | 10.61% | $10,000
|
Frontier Communications Corporation
| BB- | 15/01/2023 | 8.71% | 7.68% | $10,000
|
| Geo Group Inc | BB- | 01/04/2023 | 5.27% | 5.16% | $10,000
|
Hertz Corporation
| B | 15/10/2024 | 7.23% | 6.12% | $10,000
|
IAMGOLD Corporation
| B+ | 01/10/2020 | 5.54% | 6.62% | $10,000
|
McDermott International
| BB | 01/05/2021 | 4.81% | 7.64% | $10,000
|
Navient Corporation
| BB- | 01/08/2033 | 7.22% | 6.64% | $10,000
|
Virgin Australia
| B- | 15/11/2019 | 6.57% | 8.11% | $10,000
|
Source: FIIG Securities
Prices accurate as of 24 January 2017 but subject to change
All bonds listed are fixed rate and senior debt
Note: All bonds listed, excluding IAMGOLD Corporation and Virgin Australia, require a W-8BEN form
Bonds available to wholesale investors only
What is the cashflow if I purchase all 11 bonds?
Over the next 12 months the expected cashflow is $8,277 or an income of just over 7%.
A few more points to note
All of the high yield bonds listed are fixed rate and some are long dated. The very long dated bonds will show greater price fluctuations should interest rates move up or down and you may not want to subject your portfolio to that volatility. But you are getting paid well to go long.
All bonds are available from US$10,000 face value per bond and only available to wholesale investors. We recommend investors take small stakes in many high yield bonds, diversifying exposure and helping protect the overall portfolio should any of the companies default.
The list is just high yield US bonds. There are others that are investment grade with lower returns, but these bonds will show greater price sensitivity to changes in interest rates. In essence the amount you are paid for taking credit risk is less – typically, the higher the credit rating, the higher the correlation to interest rates.
*
The yield to worst (YTW) is the lowest yield an investor can expect when investing in a callable bond.