Opinion: Why companies are set to launch a bond rush at Mums and Dads

By Roger J Kerr There is nothing like good healthy competition to keep prices stable to falling. Debt borrowing margins or credit spreads continue to decrease after the market ructions of the last two and a half years. Our local banks with corporate customers are finally realising that many of these borrowers are seriously looking at the corporate bond markets for five and seven year issues as a debt funding substitute for traditional bank debt. There are numerous corporate names in the pipeline for bond issues over coming months, with BBB or equivalent borrowers eyeing 200 to 250 basis point over swap as being somewhat cheaper than their three-year bank facilities. If the local banks want to replace loans being repaid they will need to do some new lending at some stage, but they will need to lower their pricing to get the business. It seems that local "mum and dad" retail investors have not learnt too many lessons from the property market related finance company failures in respect to what is an appropriate return for the risk being taken on. Late last year Kiwi Income Property Trust (not-rated) did extraordinarily well to have a $100m Mandatory Convertible Note (i.e. equity) priced at 350 basis points over swap and be comfortably over-subscribed. Very cheap equity for the borrower and the 8.95% yield return to investors being well below what property-related subordinated debt issues go at outside NZ. I hear that these notes are trading inside 350 points on the secondary market. This tells me that there is a lot of money looking for a fixed interest home and investors are already moving out on the risk spectrum. You will do much with better quality names than this coming to the market with straight senior debt bond issues over coming months. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com