Friday, March 26, 2010

Fixed Income Investment Ideas

During March, the risk premium in the bond markets has continued to decline hence giving the bond prices a push upwards. Most bonds have risen quite well in the last couple of weeks, especially since first week of January. Three things have occured in the last few days. One was that the S&P rating of Greece was reaffirmed assuring the help of Greece by the wider European Union whch was confirmed today. This reduced the global risk so bond yields came down and prices rose. Secondly, the US Fed during the course of its meeting on 16 March announced that it shall keep USD interest rates at a low level for an extended period of time giving more certainty to the markets and hence once again reducing the yields, especially across high yield bonds. Thirdly, Dubai also announced that it will give fair treatment to its debtors and reduced speculation while announcing on Thursday - as usual - its plan for the debt restructuring of DP World and Nakheel. At the minimum, this brings a plan on the table, it remains to be seen whether this plan is beneficial to all stakeholders and the future credibility of Dubai. All these factors combined have reduced global risk premiums and caused bond prices to surge.

My FX bond ideas of last year have taken a beating unless GBP / EUR bonds were sold when both currencies started their decline sometime Jan onwards when the US market started rising and Greece and others started coming out with their troubles. For some investors, who hold GBP and EUR, there are various investment ideas if they continue to hold the currencies.

Meanwhile, some of the bond ideas that I have been toying with in the last few days are as follows:

1. Noble Group 2020 maturity bond 6.75% coopun bond - This bond was issued in Oct 2009 at USD 99.10 and has since then risen to USD 104 levels today but still yields 6.2% which is a good yield on a 10 year BBB- rated bond. The total issue size is USD 1.25bn including an additional placement of USD 400m in Feb at a price of UD 103.40 yielding around 6.3%. With the company doing a commendable job in their commodity trading/shipping sector, it is a matter of time before the yield compresses to below 6%, probably 5.5%, over the next 6-12 months, leading the bond price to rise to USD 106-108 levels. When reviewed in late Oct 09, at the time of issue, the bond was yielding approx 6.75% and today yields 6.2%.

2. ANZ Bank 5.1% Jan 2020 is another bond of a solid bank with AA rating yielding approx 5% and hovers just over par at USD 100.25 levels. One of the rare banks which during the crisis currently is in acquisition and expansion mode globally but mostly in Asia. It has received a new banking licence in India last month and acquired assets sold by RBS in parts of Asia. It also is hiring aggressively in 2010. This USD bond offers a yield of 5% on a USD 1.25bn bond and hopes to rise in price and lower its yield by later this year.

3.Nomura Holdings 6.7% Mar 2020 bond is a BBB+ rated Japanese Investment bank with a USD 1.5bn 10 year bond and a 5% USD 1.5bn 5 year bond, both issued in Mar 2010. This is the company that pickedup the bankrupt Lehman Brothers assets outside of USA and is quickly becoming a very large investment bank worldwide and will be in Top 5 or Top 10 investment banks in the world in 2010 and onwards. The 10 year bond at a price of USD 103.40 offers a yield of 6.2% and the 5 year bond at a price of USD 102 offers a yield of 4.5%.

4. Credit Suisse 5.3% Aug 2019 bond issued in Aug 2009 offers a yield of 4.85% at a price of USD 103. Credit Suisse has not had any major issues in the current crisis and continues to rise despite its competitor UBS having serious issues, both from Switzerland. This USD 2bn issue is rated A+ and in my view should offer a yield of 4% in about a year causing its price to rise to USD 108 levels approx.

5. Temasek Holdings 4.3% Oct 2019 is a 10 year bond issued by Govt of Singapore, rated AAA, one of the strongest in the world. The yield neither goes up much nor down and hence offers an extremely stable return from one of the strongest countries in the world and Asia.

All above are current ideas offering stellar returns from extremely strong rated issuers with the capability to withstand any double dip recession or a severe financial event happening in the next 12 months, should it arise, though I personally doubt it very much. The companies above have performed well in the crisis during 2008/9 and ongoing recession and should come out of it ahead of various other corporates.

6. Various other interesting ideas in USD / GBP / AUD space include names such as

a) BUMI Resources 2016 bond. Largest coal mining company from Indonesia with coal extraction rising from 45m tonnes to 65m tonnes in 2009. Chinese Govt as a debtor of USD 1.9bn and one of the hottest coomodity sectors (coal) in the world, this company is doing so well that its share price has risen from Indonesia Rupiah 500 levels last year (in the depths of the crisis to IDR 2350 today). The stock price has languished in the last 6 months but could be expected to rise again in the next 6 months after some tax issues are resolved and continue its journey to IDR 3,500 - IDR 4,000 levels in the coming 12 months. The USD 300m bond issued in Nov 2009 at 12% coupon has risen to USD 109 levels and continues to yield 9.5% and with some more yield compression will yield probably 8.5% at a price of USD 113-114 level in the coming 6 months.

b) Evergrande Real Estate and Country Garden Holdings, both Chinese real estate developers have USD bonds and both rated BB-. Evergrande's bonds ar USD 750m in size and issued in Jan 2010 at coupon of 13% for 5 year term maturing in 2015 while Country Garden Holdings issued a 5 year term bond of USD 375m size in Sep 2009 at 11.75% coupon. Evergrande has risen to USD 103 level yielding just below 12% while Countray Garden has risen to USD 107 levels yielding approx 9.5%. Country Garden also provided an additional USD 1.50 in cash payment to bond holders on Feb 24 2010 to dilute the technicals of the bond where company is now allowed to have a higher leverage and reduce fixed cost coverage ratio from 3.5x to 3x. This payment is in addition to the current bond price. Both companies are investing in second and third tier cities of China, from coast to coast and should not have any major problems that are more likley in larger cities such as Shanghai & Beijing. The Govt control and assistance to the real estate sector from banks and various rules, the fact that any investor needs to place 40% downpayment to buy any property besides their first residence are strong indicators of rising Chinese local demand unlike other countries where foreigners or higher leverage provides 'hot' money to circulate in the real estate sectors. Country Garden also purchasd the most expensive land in the world in Dec 2009 along with three other companies with a 33% stake being USD 3.5b land for the Asian Games site in Guanghzhou. All in all, I favour Chinese real estate companis despite various media hype in the recent past.

c) Vietnam has sovereign bonds which have been under pressure lately but the recenly issued USD 1bn bond in Jan 2010 trading at 102.50 levels offers a yield of 6.4% on the sovereign risk in a country which is doing well partly due to the Asian region that it is situated in. With a BB rating and a coupon of 6.75% and a yield of 6.4%, the 10 year bond offers a good opportunity to invest in USD. While an older bond issued in 2005 at 6.875% coupon trades at USD 108 levels and provides a current yield of 5.4% which has a size of USD 750m.

d) GBP bonds in Citi offer a yield of 4.8% for 2015 maturity and 5.7% on a 2018 maturity. Morgan Stanely provides yield of 4.8% on a 2017 GBP bond. Both are A rated issuers. While A+, JP Morgan has a yield of 4.4% on a 2016 maturity bond. UBS, A+, offers yield of 4.6% on a 2016 bond as well. London Stock Exchange is an excellent buy at USD 104 levels with yield of 5.1% in GBP.

e) AUD bonds from Commonwealth bank of Australia, AA- rating, gives a yield of 6.85 on a callable bond in 2012, final maturity 2017. BNP, a very strong company with AA- rating in AUD bond gives yield of 6.7% at price of approx USD 100 on a 2015 bond. While ANZ, AAA bond maturing 2014 gives yield of 5.6% at USD 99 levels. Rabo bank, another AAA bond, offers yield of 5.8% in AUD maturing 2014.

All in all, a dynamic portfolio can be customised based on above issuers that may include both highly rated issuers and high yielding bonds to meet anyone's needs and objectives while keeping an eye on when to invest and when to get out, to realize all or most of the capital gains.

Stay tuned for more..