Roy Keenan, Head of Australian Fixed Income and Portfolio Manager of the Yarra Enhanced Income Fund, details the backdrop to one of the Fund’s key securities.
One of 2019’s (i.e. pre COVID!) more notable credit market deals was the over the counter (OTC) subordinated deal completed by the ASX-listed employment and education market leader SEEK Ltd. (SEK).
SEK issued $150mn of 6nc3 sub notes – in part to repay the company’s more expensive bank debt – at an attractive initial credit margin of BBSW+370bps.
Key terms of the deal included:
- Step-ups of +200bps and +700bps in credit margin if not redeemed at the 3-year call date and on a change of control (CoC) respectively; and
- A shareholder dividend stopper should cumulative distributions on the notes not be paid in any particular period and any amounts owing to noteholders remain outstanding.
At the time of issue, our internal senior unsecured credit rating for SEK was investment grade, with a two notch downgrade applied for the issue’s subordination. Based on key terms which financially penalise the deal’s extension beyond three years and the strength of SEK’s underlying business, we valued the issue as a shorter dated 3-year deal, which at +370bps were attractively priced compared to what was available in the publicly traded BB universe (refer Chart 1).
As with many corporates, the onset of the pandemic proved a challenging period for SEK. Pleasingly, the strength of our analysis was validated through the course of CY20: the company did not raise equity as many expected, choosing instead to increase the size of its sub notes by a further $75m (to $225m outstanding) to provide additional capital.
Moreover, with the share price recently hitting record highs, this $10bn market cap leader is as well placed as any Australian company to raise equity for deleveraging purposes in the event the need arises.
These sub notes from a global leader in online recruitment with significant financial resources are currently pricing at ~+340bps credit margin, contributing significant yield to our portfolios in a market where income remains increasingly difficult to find.
The Yarra Enhanced Income Fund offers stable, regular income, and currently provides unitholders with a yield of 3.23%[1]. Since its inception in 2003, the Fund has established a long track record of achieving its performance objectives, significantly outperforming the RBA Cash Rate and delivering annual distributions (incl. franking) of 6.22% p.a. For further information on the Yarra Enhanced Income Fund, please click here or contact a member of the firm’s Distribution Team.
Roy Keenan
Portfolio Manager, Yarra Enhanced Income Fund
[1] Running yield as at 28 February 2021.