Listed Debt Securities Indices Performance Review
Some price weakness seen in CBA hybrid securities
The Westpac Subordinated Notes II (WBCHB) left the Australia Ratings Listed Debt Securities Indices during August. Under the rules for construction of the indices, securities with less than 12 months to go before the scheduled call or maturity date will be excluded from the indices.
Under these rules the ANZ CPS3 (ANZPC) notes left the indices in September last year, in anticipation of the notes being called this month. However, this is not to be with ANZ having recently decided to leave the notes outstanding.
While the notes face mandatory conversion into ordinary equity in September 2019, and therefore are likely to be called or redeemed sometime before then, the actual timing is uncertain. The notes will therefore not be returned to the indices.
The exclusion of WBCHB notes leaves a $925 million hole in the indices, which with a closing price of $102.40 and a yield to call of 2.53% per annum at the end of July, should in isolation cause the weighted average price of the indices to fall and the weighted average yield to rise. However, this event did not occur in isolation and prices generally continued to rise across the market.
The weighted average price of the Combined index increased to $102.96 as at the end of August, up from $102.77. This occurred despite AGLHA, ANZPD, CGFPA, CGFPB, NABPB, SUNPD and WBCPD going ex-distribution during the month.
The new PEET Limited simple FRNs (PPCHB) entered the Combined and Green indices at a price of $103.50 and a yield to maturity of 6.52% per annum. The FRNs were rated ‘BB+/GREEN’ by Australia Ratings during August.
August Performance Table
The net result of each of these changes and movements is that the Combined index increased by 0.41% over the month, while the Green index declined by 0.93%. The Peet FRNs had a slightly dilutionary impact on the Green index, entering with no accumulated distributions, but the price performance of the other constituents was mixed too. However, entering with a yield to maturity of 6.52% per annum, the PEET notes pushed the weighted average yield of the index up sharply to 4.18%, from 3.75% at the end of July.
The Blue index fell in-line with the price of the Qube subordinated notes to $107.20 from $107.40 and the yield rose slightly by 15bps to 5.29%.
The Yellow index increased by 0.89% as Crown Resorts resumed its buyback of the CWNHA notes and the price of CWNHB notes inched ever closer to par value. The weighted average yield of the Yellow index fell 6.16%, reversing the rise to 6.32% the month before.
The Orange index put in the strongest performance, rising by 0.92%. Most constituents enjoyed price increases bringing down the weighted average yield by 8bps to 3.33% per annum.
The performance of the Red index was more subdued, increasing by just 0.38% over the month.
Many of the securities that went ex-distribution during August are constituents of this index and some price weakness was evident in the CBA hybrid securities CBAPC, CBAPE and CBAPF. As a result, the weighted average yield of the Red index increased to 5.59% up by 11bps from the end of July.
Source: ADCM Services, Ord Minnett
Debt Securities’ Level of Complexity (PCI):
Green - simple; Blue – relatively simple; Yellow – complex; Orange – more complex; Red – very complex; Black - Combined