In Australia, the market for corporate debt continues to grow rapidly. Just like IPO’s in the equity market, the trading of new issues of corporate bonds is becoming a more popular investment strategy for traders. In this article, we discuss a plan for trading new issues that often yields excellent returns with limited exposure.

Companies can raise capital from different options, such as borrowing, finding additional private investors, or being acquired by another company. However, the IPO option by far raises the largest sums of money for most companies, especially public companies who can usually enjoy lower interest rates when they issue debt. Initial Public Offering can also increase the company’s exposure, prestige and public image, which helps to improve the company’s sales and profit.

 

The diagram of RBA 2017 figures on issued bonds, continue to support the popularity of this market. The value of non-government bonds issued in Australia has increased to a record level to $520 billion.

Bonds remain as a central part of any investment portfolio diversification because bonds have shown the ability to weather both political and economic volatility as such they make an excellent contribution to any self-managed super fund. Investors seeking a stable or defensive portfolio with recurring income and low risk should consider corporate bonds. However, those looking for quick returns can also invest in Bonds or notes. The strategy is similar to the IPO market in equities. When a new listing comes on that is well sort after the share tends to float at a premium. Investors grab this premium for a quick profit. Likewise in the bond markets, a well sort after bond can float at a premium. Initial investors can take advantage of this for a quick return.

 

As an Example

 

Macquarie Group has reported stellar profit results delivering the net profit of $2.56 billion. It has superior earnings from each of the five core divisions, including the asset management, corporate and asset finance, banking and financial services, commodities and global market and Macquarie Capital. The asset management contains the highest proportion - 33% of the total net profit contribution.

 

Even Macquarie Group has some earnings exposure to volatile capital markets conditions. However, the group has sustainable profit from the latest financial year, which is a positive signal to the potential bond investors. The group intends to raise capital by issuing a Convertible Note. Due to the running yield, the group’s credit rating, the success of the previous note the issue will be well sorted after by investors. Thus it is expected to float at a premium. It is this premium that short-term investors are looking into. For example, the note will be issued at face value of $100. As anticipated once it hit the market it may trade to $102, it is this $2 that is the premium, which investors may roll out off once it is floated in the secondary market. This is an easy gain to any bond portfolio of 2%.

 

Macquarie Capital Notes 3

• First call in December 2024
• Expected Margin of 400-420bps over three months BBSW
• “Rollover“ issue from the existing MQGPAs Capital notes which called on 7th of June 2018
• Based on an approximate 90-day BBSW of 2.02%, this equates to an indicative initial distribution rate of between 6.02% to 6.22% inclusive of franking.