The Changing Face of Fixed Interest

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If you’re looking for investments that may generate higher income returns on your cash than a traditional Term Deposit, bonds may be the answer.

With competition by the banks for term deposit funding beginning to subside and the deposit guarantee reducing to $250,000, it’s time to consider alternative income investments. Whilst term deposits are still essential in any income portfolio it’s worth investigating the range of income investments in the Australian market (both ASX listed and unlisted). To date, the bulk of issuance of ASX listed interest rate securities has been in hybrids (preference shares) dominated by the banks but there are corporate bonds available as well.

So where do bonds rank?

  • Bond investments rank ahead of all ordinary and preference shares for payment of interest and must be repaid at the maturity date; if not, the company is in default and investors can take action to recover their investment. This contrasts to the repayment of hybrids which can be deferred (potentially indefinitely) and there is no obligation to ever repay equity.
  • Senior bonds rank ahead of all subordinated borrowings and before anyone else is paid interest or repaid their money, senior bond holders must be paid first. This means that investors who want certainty of income and lower risk should consider including corporate bonds as a core portfolio holding.
  • Investors in senior unsecured bonds rank along side (pari pasu) unsecured bank facilities and will generally have the same claim on the assets of a company should it default. Only secured creditors rank ahead.

This is represented in the diagram below:

RBS

In recent times ASIC has made changes to the disclosure requirements making it easier for ASX listed companies to issue ASX listed bonds without increasing the risk to investors. In summary, issuers can now use a short-form or a two-part prospectus. ASIC’s view is that this will make it faster and less expensive (lower legal fees) for companies to issue bonds to retail investors.
New Corporate Bond issues under these rules must be:

  • over $50 million in size.
  • ASX listed.
  • Senior in ranking i.e. not subordinated to other borrowings.
  • vanilla – i.e. not have complex or unusual terms.
  • no longer than 10 years to maturity.
    2 examples of senior corporate bonds include:
    1. Commonwealth Bank (CBAHA) which earns the 90 day bank bill rate + 1.05%* and redeems at $100 face value at maturity on 24th December 2015.
    2. Bendigo Adelaide Bank (BENHA) which earns the 90 day bank bill rate + 1.40%* and redeems at $100 face value at maturity on 15th March 2014.
    90 day bank bill rate as at 20th Oct = 4.72%
    To find out more contact RBS Morgans on 02 6686 4144.

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