Post GFC, the Australian banks pulled back on commercial lending as concerns of difficult economic times ahead forced them to reassess their exposures. Caught in the crossfire were good businesses, which suddenly found funding either cut off, or much more expensive than before. A recent issue by G8 Education Limited shows SMSF investors are prepared to step into the market to fill the breach, and get a strong yield in return.
While the big four banks have been fighting hard in the home loan market, out in the corporate lending world, things haven’t been so rosy. With a number of market participants pulling out of Australia post GFC, the big four banks have had the corporate lending market to themselves. For borrowers, this has generally meant tighter terms and higher margins, or no lending at all.
This pull-back in bank funding has created a supply/demand shortfall in the lending market, which, almost inevitably, had to be filled by someone. With virtually no market for unrated bond issues from institutions, borrowers (like many potential investors) were to a large extent locked out of the bond market.
However, a number of forces have converged to help meet this gap – the continued expansion of the SMSF market, the low cash rate, and the realisation by many investors, as a result of losses through the GFC, that capital protection and risk allocation needed to be more closely monitored – and have brought together the sophisticated individual investor market with companies looking for funding on reasonable terms.
Corporate bond offerings
Last week, listed childcare and education provider, G8 Education Limited (GEM:AX) successfully raised $70 million in senior unsecured bonds through FIIG Securities. This issue was the third bond raising by an unrated company in the last 12 months, showing that an appetite for high-yielding fixed income products, exists in the Australian market.
The GEM deal, following similar issues by listed catering finance company Silver Chef Limited (SIV:AX) and unlisted Mackay Sugar, had a number of attractive attributes.
Firstly, with cash rates low, and likely to remain low in the short to medium term, the yield on offer from the GEM notes (at 7.65% for six years) proved very attractive for investors looking to protect their level of income. Secondly, with many investors still hesitant to fully commit to the equity market, having taken losses through the GFC, a bond investment in a company offers an increased level of security over an equity exposure. This is due to the legal obligations of bond issues; the regular payment of a pre-set level of distribution and the repayment of capital at maturity. The issue gave investors the chance to improve their allocation to fixed income, without losing out on income.
With three similar senior unsecured bonds going to the market inside 12 months and more deals likely around the corner, the demand for these high-yielding investments, and the supply from high quality companies, looks to have changed the fixed income landscape in Australia. While these issues have seen some institutional interest, the vast majority of the funding has been provided by the SMSF market.
This shouldn’t come as a surprise to anyone. In Europe, the US and Asia, investing in bonds similar to these is commonplace and easy, and this is reflected in the investment allocations in these markets, where corporate bonds form a significant portion of investors’ portfolios.
The issue from G8 (and Silver Chef and Mackay Sugar before them), is another step in the maturing Australian financial market, as SMSF investors become increasingly aware of what they were missing out on, and demand a better deal.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: CBA – all class [1]
- Roger Montgomery: Why I don’t like mining services [2]
- Andrea Slattery: My SMSF [3]
- Penny pryor: Buy, Sell, Hold – what the brokers say [4]
- Tony Negline: Deferred lifetime annuities – expensive waste of time? [5]
- Question of the Week: What’s the real cash rate? [6]