This week we examine a floating rate bond denominated in Australian dollars, from one of Europe's most reputable insurance companies, AXA. This high yielding investment grade (BBB/BAA1/A) debt has a first call date in 2016, at which time it will either be called by the company, or it will increase its coupon rate from 1.4% to 2.4% above the 90 day Australian benchmark BBSW rate (which is currently 3.28%.) We have targeted acquiring this bond at a price significantly enough below par value to return its holders a running yield of about 5.7% without adding in any of the capital gains appreciation that might be realized should the issue be called. We believe that the current environment of easy monetary policy and very low interest rates may provide the best opportunities to add floating rate bonds, which can offer significant advantages over fixed rate bonds if or when interest rates began to rise. This quality rated AXA floating rate perpetual bond offers an excellent current yield rate and good potential for capital gains appreciation should Australian Bank Swap rates rise, and it is why we have chosen it for addition to our Foreign and World Fixed Income holdings.
Wealth Preservation Concerns
Without congressional action, up to $600 billion worth of expiring tax cuts, new taxes and automatic spending cuts are set to take effect starting into 2013. Financial pundits are predicting that, if these new taxes and automatic cuts are enacted, the U.S. could fall back into a recession next year and likely take much of the equity market's gains with it. As news of this "fiscal cliff" intensifies, the fears of uncertainty continue to weigh heavily on the markets. While the Fed continues to battle the deflationary undertow of a weak economy with its easy monetary policy and the printing of more and more and more money, the immediate and inevitable effects of a great amount of "more money" appear to become less and less and less observable, effectual, predictable, or sensational. While addressing an interviewer's question of whether inflation was of any concern going forward, one financial pundit's entire retort was to simply say that it was certainly no concern of the Fed! Given the astonishing pace at which the Fed can be seen actively pumping up the money supply, it's not hard to concur with this sentiment. But even if inflation is not yet much of a concern to some, the debasement and devaluation of the dollar has an equally debilitating erosion of wealth
Here at Durig Capital, we have undertaken the effort to protect our client's assets against the persistent destruction associated with an ever increasing supply of federal dollars, by scouring the globe in search of sound investments in the strongest global economies, and it is why we have chosen this high yield, floating (re-adjusts quarterly) rate, perpetual Australian dollar bonds as This Week's Best Bond.
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Australia's abundant and diverse natural resources include extensive reserves of coal, iron ore, copper, gold, natural gas, uranium, and renewable energy sources. It also has a large services sector and is a significant exporter of natural resources, energy, and food. Key tenets of Australia's trade policy include support for open trade and the successful culmination of the Doha Round of multilateral trade negotiations, particularly for agriculture and services.
While many large advanced economies have been struggling with growing debt burdens that result from years of heavy government spending, Australia's gross public debt is closer to 27% of GDP. Unemployment, originally expected to reach 8-10% after the financial crisis in 2008, peaked at 5.7% in late 2009, fell to below 5.0% in 2011, and currently remains subdued at 5.45%. Budget deficits have been under control owing to prudent public finance management that recognizes limits on government. As a result of an improved economy (growing 2.7% in 2010, 3% in 2011, and pacing about 3.75% for 2012), the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015. The Reserve Bank of Australia (RBA) has recently trimmed the economy's growth forecast to 3 percent in 2013, and between 2.25% and 3.25% for 2014, stating that "the Australian government's fiscal consolidation appears to be weighing on growth over the second half of the year." The annual rate of inflation in Australian is now expected to reach 3.25% by June 2013, above the RBA's target range for annual inflation of two to three percent.
China's slowdown in demand, as well as industrial production and retail sales data continues to generate uncertainty about the near-term outlook for Australian resource stocks, but offshore investors continue to see Australia as a safe haven with a stable growth outlook.
Public debt to GDP
|Australia (in A$)|| 27.0%|
A$ 4.2 billion
A$ 309 Billion
A$ 314 Billion
| 107.2%||$1.313 Trillion||$ 2.182 Trillion||$ 2.739 Trillion|
Stanford University has rated the Australian economy number #1 on its global Sovereign Fiscal Responsibility Index. This recognition helped highlight how much stronger Australia's financial condition is compared to #28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.
Australian dollars (AUD) per US dollar -
About AXA Group
The AXA Group was created through the merger of several insurance companies, the oldest of which dates back to 1817. Founded in 1852 and headquartered in Paris, France, AXA became the Group's new corporate name in 1985, and after several strategic insurance acquisitions and mergers, the Group expanded its operations to include the asset management business in 1994. AXA has continued with additional acquisitions and mergers to become one of the world's top global insurance brands, with a presence in 61 countries and more than 214,000 employees and distributors serving about 95 million clients. The company operates primarily in Europe, North America, and the Asia-Pacific region, and its three major business lines are property and casualty insurance, life insurance and savings, and asset management.
Trading primarily on the Euronext Paris exchange, AXA Group carries an enterprise value of about $40 billion. Its currently cash position is indicated to be about $31 billion and its debt is about $43 billion. While the company's principal subsidiaries are rated at AA-, Aa3, and AA- respectively by Standard and Poor's, Moody's, and Fitch, the subordinated bond issue being reviewed here is rated by these same agencies as BBB, Baa1, and A. Total revenues for 2011 were about $104.9 billion, while earnings (EBITDA) were $5.31 billion. The first half of 2012 appeared to confirm AXA's sustainable earnings and a robust balance sheet.
The default risk is AXA's ability to perform. While the higher yield of this debt issue reflects a higher degree of risk typically associated with hybrid/perpetual issues, given its sound business fundamentals, its quality investment grade rating, and its relatively good 1.4% spread (adjusting to 2.4% in 2016) above the Australian BBSW rate, it is our opinion that the default risks for these rate adjusting bonds is quite low relative to the excellent yields that they offer.
The currency risk of the Australian dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Australia's economy and the policies of the Reserve Bank of Australia.
Accessibility and Liquidity
Aside from owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail, the question arises as to how a retail investor might own or acquire individual, maturity definite Australian dollar denominated bonds. Many times broker/dealers require an institutional sized single bond purchase. However, with a broker and advisor's assistance, it is possible for a number of retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as US $10,000.
We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant devaluation of the US dollar. We acknowledge that a stronger US dollar would directly reduce the total returns of this Australian dollar bonds. Conversely, if the US dollar continues on the longer term path of relative weakness to the Australian dollar that it has been on, this alone would add significantly to the already positively accruing returns of this bond.
The combination of offering a superior yield that would increase should inflation force central bank rates higher, some protection against a further loss of wealth with a continuation of the US dollar's weakness against the Australian dollar,, and a diversification away from heavily overweight US dollar based assets into one of the world's top tier fiscally conservative countries is why we are adding these investment grade AXA SA floating rate bonds at this time to our Foreign and World Fixed Income holdings.
Issuer: AXA Group
Current Coupon: 4.91 (adjusts quarterly)
First Call: 10/26/2016
Price: 86 (target)
Current Yield: ~5.7%
Disclosure: Durig Capital and certain clients may have a position in these AXA bonds.
Contact our Fixed Income Specialist for questions about the AXA bond at 971-327-8847.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.