Listed Debt Securities Indices Performance Review

March - 2017 First Quarter Review

New supply puts a lid on prices

Following on from a strong 2016, when the Australia Ratings listed debt securities Combined index increased by more than 8%, the first quarter of 2017 has seen a more subdued increase in the index of 0.76%.

The search for yield, as interest rates continued to fall, and a lack of supply as redemptions exceeded new issues, particularly towards the end of last year, drove up prices among listed debt securities in 2016. These forces have moderated over the first quarter of 2017.

See 2017 March Quarter Returns and Weighted Average

While $1.25 billion of securities were redeemed over the quarter (Colonial Group Subordinated Notes (CNGHA) - $1.0 billion and Tabcorp Subordinated Notes (TAHHB) - $250 million) new issues amounted to almost $2.6 billion, thereby keeping a lid on security prices. National Australia Bank issued $943 million of Subordinated Notes 2 (NABPE) and Commonwealth Bank issued $1.64 billion of PERLS IX (CBAPE) notes on the last day of March.

More supply is also in the pipeline. Indeed, Challenger Limited’s, $450 million of Capital Notes 2 (CGFPB) will be issued on Friday, and Suncorp has $300 million of Capital Notes (SUNPF) coming at the end of April.

Nevertheless, price increases among listed securities have been sufficient to see the weighted average yield of the Combined index contract to 5.51% per annum at the end of March, from 5.57% at the end of 2016. And while security price increases have been modest, distribution payments have contributed to the increase in the Combined index.

The Combined Index is an accumulation index, as are all of the Australia Ratings listed debt securities indices, reflecting both the movement in the price of securities and the accumulation of distributions made over time. The gross value of distributions is used to reflect the value of the franking credits attached to franked distributions.

Red index enjoyed the largest increase

Looking at the performance of the other indices over the first quarter of 2017, the Red index enjoyed the largest increase of 0.95%, while the weighted average yield fell by 8bps to 5.76% per annum. The Red index comprises the higher risk Additional Tier 1 securities issued by financial institutions.

At the other end of the risk spectrum is the senior ranking securities issued by the financial and non-financial issuers that make up the Green index. The colours of the indices reflect the Product Complexity Indicator colours assigned to each of the listed debt securities that have been rated by Australia Ratings under its contract with the ASX.

The Green index increased by 0.54% over the quarter, which is entirely due to distributions made over the period. Price weakness among index constituents resulted in the weighted average yield of the index actually increasing to 3.74% per annum, from 3.57% at year end.

The Yellow and Orange indices were impacted by the removal of one constituent in each, as the remaining term to the securities’ call dates fell below one year. Under the rules for the compilation of the indices constituents must have a remaining term to call/maturity of more than one year.

The APA Group Subordinated Notes (AQHHA) were removed from the Yellow index, and the Westpac Convertible Preference Shares (WBCPC) were removed from the Orange index.

These changes caused the Yellow index to decline by 0.12% over the quarter but the Orange index managed to return 0.83% over the quarter, coming second after the Red index. Conversely, the weighted average yield of the Yellow index increased to 6.94% per annum, from 6.39%, while the weighted average yield of the Orange index fell to 3.75% per annum from 3.88%.

Chart 1:Performance of the Australia Ratings indices

Source: ADCM Services, Ord Minnett

Debt Securities’ Level of Complexity (PCI):
Green - simple; Blue – relatively simple; Yellow – complex; Orange – more complex; Red – very complex
Dotted dark grey - Unfranked; Dotted light grey - Franked; Black - Combined

Following the recent rating of the Qube Subordinated Notes by Australia Ratings, at ‘BB+/Blue’, the notes entered the Blue index. The Blue index has been suspended since the last of the old Basel II bank subordinated notes were excluded from the index due to impending call dates.

The Franked index reflects the stronger performance of the Orange and Red indices. The Franked index increased by 0.91% over the quarter while the Unfranked index increased by a more modest 0.56%.

The riskier debt securities listed on the ASX usually pay franked distributions.

Chart 2: 

Movements in Weighted Average Yields by Index from December 2014

Source: ADCM Services, Ord Minnett


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