Adani Abbot Point Terminal Bond: AU3CB0221422
As a change in pace, we are also profiling the Adani Abbot Point Terminal Bond AU3CB0221422 this week. Adani has another bond issued that is available to wholesale investors, but this one is available to retail investors as well.
We should note at the outset that a single bond is a very different investment to a bond fund like Henderson or Pimco. The investor may receive a higher coupon rate and/or yield, but the investor is also subject to the risk attached to that firm. The Adani bond is no exception.
If you have a large portfolio of bonds and equities covering many companies and industries, this may be no problem for you. But if you have a limited amount to invest, be aware that you may not be adequately diversified by investing in individual bonds. A financial advisor can discuss these issues with you.
This bond is a fixed-rate bond issued by Adani Abbot Point Terminal Pty Ltd. The bonds were issued on 30/05/14 and mature on 29/05/20. The redemption date is quite close, so this is a relatively short term investment (<4 years).
The bond is senior secured debt and is subject to call at any time on a “make whole payment” clause. As at 20/09/16 on the FIIG bond rate sheet, the running yield is 7.33%, yield to maturity 8.09% and market clean price is at 96.87. You can find the current FIIG bond rate sheet here.
The bond was downgraded by Moody’s to Ba2 earlier this year and as a result the coupon rate increased to 7.1% from the issue rate of 6.1%. The downgrade decision cited concerns about the company’s cash flow and the pressure on the coal industry generally. This places the bond in the speculative category (not investment grade) and indicates that the product is subject to substantial credit risk.
Whilst the yield to maturity of the bond is higher than the bond funds we have profiled, it is also an investment subject to more risk.
The ratings downgrade is only one driver of the relatively high yield on this bond compared to other corporate bonds on the Australian market. The other is the considerable price collapse the bond experienced earlier this year after the downgrade and its impact on yield to maturity. Prices are rising steadily, but unlike many bonds in the market at this point it is still trading below face value, see the graph below. This is a bond that has been subject to significant price volatility in recent times and even in the middle of a substantial bond rally, the market lost a lot of confidence in the product and has been slow to regain it.
Source: Borse-Berlin, see here accessed 15/09/16.
The Adani Abbot Point Terminal is facing a number of challenges. These include both the cash flow and industry issues described by Moody’s as well as issues of debt restructure and utilization specific to the port itself. The export of coal and related materials from Australia has decreased substantially in dollar terms since 2008 (see below) and this has a direct impact on the profitability of a business like the Abbot Point Terminal.
Data Source: Australian Bureau of Statistics, Series A1827829F. Chart: The Constant Investor.
The Abbot Port terminal is currently facing relatively low utilization rates and has major user Glencore due to make a decision on renewal in 2018. The Byerwen mine is still in construction and that is also effecting utilization. The port is an essential piece of infrastructure, but the company has some risks attached to it. The FIIG analysis here gives a good overview of the issues facing the port and the company.
This bond is trading below coupon and while the price is trending upwards, it’s a long road back after the various challenges earlier in the year. These challenges have not disappeared and many will be ongoing. The relatively good yields compared to other corporate bonds are because the bond is one of the few trading less than face value and has a relatively high coupon rate, as it is currently rated below investment status. We can expect that should the product be upgraded to investment status by Moody’s in the future, the coupon will drop back to the issue rate of 6.1%.
Like any other higher risk investment, it should be treated with caution. It may be a suitable investment in your portfolio strategy, but it’s not in the same risk class as either a bond fund or government bonds. If you have any doubt, consulting a financial advisor who can discuss your specific circumstances can be money well spent.