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IAM is sitting pretty, as the commodities boom drives a surge in debt capital markets activity
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Special Report: IAM has assisted its clients to be involved in a number of mining bond issues already, with more expected in the pipeline.
As a leading player in Australia’s corporate debt market, Income Asset Management (ASX:IAM) has had a front-row seat to some big changes in global bonds lately.
With higher inflation, benchmark government bonds for developed economies such as Australia and the US have climbed to multi-year highs.
The changes have given rise to an extended bout of volatility in equity markets, as capital flows adjust to the higher yield returns now on offer in bond markets.
In turn, the IAM team has been busy fielding client requests as investors look to adjust their strategies, said Matthew Macreadie, the group’s director of Credit Strategy.
Risk management
How can fixed income investors profit from these changes?
Macreadie highlighted a couple of new strategies, starting with a higher allocation to floating rate bonds, rather than fixed-rate investments.
“Floating rate bonds benefit from a rise in rates because it means they have a higher future coupon rate,” Macreadie said.
A good recent example came from banking heavyweight CBA last week, which issued a floating rate Tier 2 subordinated note.
“For us, that kind of issuance offers a good way for investors to manage their interest rate risk in the current environment,” Macreadie said.
The other kind of structure IAM has focused on with clients concerns the current macro environment of higher rates and inflation.
“If that turns into an environment where you also have lower economic growth, it results in stagflation,” Macreadie says.
“So you really need to pick the right credit issuers which have a good buffer in their credit ratings and balance sheets, can absorb an increase in funding costs and have solid growth profiles.”
Before it was acquired by Block Inc, BNPL leader Afterpay was an issuer in Australia’s corporate debt markets.
But Macreadie says that’s a sector which could struggle for demand these days.
“Some of those high-growth sectors like BNPL don’t really look sustainable at this point in the cycle,” Macreadie said.
“You’re looking for business models that can absorb these rate rises. So we’re guiding our clients to in invest in debt instruments across that ASX50 to ASX100 landscape, and steer clear of borrowers in ASX300 that might be more susceptible to liquidity funding issues.”
Commodity boom
Turning from risk to opportunity, and along with the rising outlook for yields and inflation, global capital has also pivoted into what looks like a sustained commodity boom.
From bulk commodities to battery metals and rare earths, prices across the board remain elevated at multi-year highs.
And as more investment flows into the sector, it’s creating an opportunity for mining companies to use debt capital markets as an effective way to fund their next stage of growth.
“That’s been another real focus area for us, helping to push clients into bond issues that are linked to the mining sector,” Macreadie said.
Among ASX mining players active in debt capital markets, Macreadie flagged a recent issue by Strandline Resources (ASX:STA), which operates mineral sands exploration projects in Tanzania and WA.
The bond gives investors the opportunity to earn a strong 12.5% coupon rate, for a company operating in sectors with major macro tailwinds.
Another corporate debt issue was from Jervois Mining (ASX:JRV), which successfully launched a 12% bond issue and has a pipeline of projects in Australia, East Africa and the US as it looks to build out an integrated cobalt and nickel supply chain.
“If you look at the strength of that space over the last 12 months, mining is a good place to be.
“We’ve got our clients involved in a number of deals so far and we’d expect to see more in that space over the coming 12-18 months as well,” Macreadie said.
Income Asset Management (ASX:INY) delivers unparalleled access to a complete income investment service. We aim to provide investors and portfolio managers with the most trustworthy and capable platform to research, execute, and manage their income investments. Our businesses across deposits, bonds, treasury management and asset management are all there to enable investors to compare, choose, and execute, in the most efficient, transparent, and cost-effective way.
