Qube Bond: Qubha

Product Description:
This is a new note from Qube Holdings (ABN 14 149 723 053) to be issued on 5th October 2016. It is an unsecured note which will have an application to trade on the ASX under the code QUBHA (so not strictly unlisted). The note will mature on 5th October 2023 and will be a floating rate note with a coupon rate 390 basis points above the 90 day bank bill rate. FIIG suggests the note will have an indicative yield of 5.65%.

As the coupon is a floating rate, there is a risk that if the interest rate drops further, the yield on the notes will also fall. As an indication, the chart below shows the overnight and 90-day interbank cash rates from 1990. Clearly, the rates are at a historic low and have been consistently trending downwards for some time. However, the flip side of the coin is that sooner or later rates will rise. As always, if anyone knew when or in what direction the changes would happen, the market would have priced it out already. Be aware either is a possibility and over a 7 year term, both seem probable at one point or another.

qube-bond-chart-1

Data: Reserve Bank of Australia. Chart: The Constant Investor.

The note ranks below most of the company’s debts. The company’s offer indicates it holds $592 million in bank debt and finance leases, which rank ahead of the $300 million in standard notes issued in this offer (p. 7 of the offer document, see here). However, FIIG suggests that the level of debt which ranks ahead of the notes in this issue is at a level of $690 million with a net asset position over the 2016 year of $2.04 billion, operating profit of $93 million and a 24% gearing rate. Unlike the Adani bond, the Qube issue is unsecured and therefore subject to more credit risk in the event of a wind up of the company.

Payments will be made quarterly, in arrears and are compulsory (p. 8 offer document). Unpaid interest payments are cumulative and compounding. The notes are subject to call at any time under certain events listed in the prospectus. There are no specific call dates. Minimum application size for the offer is 50 notes ($5000) and larger applications must be made in multiples of 10 notes (multiples of $1000). The offer is being made to broker firm applicants and eligible shareholders.

Company Description:
Qube is one of Australia’s largest import and export logistics providers. It has a market capitalization on the ASX of around $3.8billion (late August 2016, p. 9 prospectus). It has assets in logistics, ports and a large intermodal terminal development in southwest Sydney. It acquired a 50% interest in the Patrick Terminals business from Asciano in mid 2016.

It has operations near ports, rail facilities and customer sites across the country and provides services in logistics (container cargo), ports and bulk (non-containerised cargo), strategic assets (such as the Moorebank terminal and Minto holdings) and the new Patricks acquisition (stevedoring and port services). The company is dependent on import/export sectors and may be affected by changes in the exchange rate. A major part of the business strategy for Qube is the Moorebank intermodal development and the Patricks’ acquisition, both of which are still in early stages.

The pro forma financial statements included in the prospectus indicate a gearing ratio of 26.4%, adjusted EBIDTA with total net debt of 2.5 and an interest cover ratio of 6.9 (p. 44).

The company has a debt gearing strategy targeting 30-40% gearing in the long term. After the issue in October, the debt maturity profile (p. 45 prospectus) indicates there is around 250 million maturing in financial year 2019, around 800 million in 2020 and 300 million in notes maturing in 2014 (numbers are approximate, read off the chart). This may change if Qube issues further debt and this is one of the risks of the investment.