Income Report / Income Report: A look at 3 new deals (MXT, NBI)

By Market Matters 13 March 19

Income Report: A look at 3 new deals (MXT, NBI)

Market Matters Income Report 13th March 2019

The market is trading lower just after the open with the selling that started from 3pm yesterday afternoon continuing. As we touched on this morning, we’ve started to see a number of companies tap the market for fresh equity – Zip Co (Z1P) the latest this morning with an institutional placement. The cynic in me suggests this is a sign that markets have run too hard, too fast and company boards (rightly so) are using that strength to issue new stock .

All sectors are in the red this morning with the ASX 200 trading down at 6144, off from its 6270 recent high. MM remains neutral the ASX200 after its strong rally from late December lows but we are not afraid to buy selective stocks.

Sectors this morning

We were planning a ‘Part 2’ on franking credits today and how it could impact stocks (particularly banks) ahead of a new Labor Government, however there are a number of income focussed deals recently out that need coverage. We’ll aim to revisit franking next week.  

ASX 200 Chart

The past week saw the Income Portfolio up by 0.3%. The only big contributor was Perpetual which paid a $1.25 fully franked dividend while only falling 19c. In the current financial year, the portfolio has added 4.37% vs the benchmark (RBA + 4%) which is tracking at 3.83%. Since inception (5/7/2017) the portfolio is up +11.24%, outperforming its benchmark (RBA Cash plus 4%) at +9.27%. On a per annum basis, the portfolio is outperforming its benchmark by 103bps.

MCP Income Opportunities Trust: MOT

Last week we mentioned the new listed investment trust (LIT) launched by Metrics and only yesterday we have the chance to meet with the company and get more detail on the offer. Unfortunately, given demand for this one the bookbuild process is being wrapped up early, by 3pm this afternoon meaning that those who wish to bid into the deal would need to do so through a broker by then. Our desk at Shaw can place bids for those with an account, or those who wish to open one.  

Email [email protected] or call (02) 9238 1561

We currently have the MCP Master Income Trust (MXT)  in the MM  Income Portfolio having added it during the IPO around 12 months ago. This LIT invests in the Australian corporate loan market aiming to provide investors (us) with a return of the RBA cash rate +3.25% - which currently equates to 4.75%, They’ve done well and delivered what they have set out to do  in the first 12 months.

MCP Master Income (MXT) Chart

In terms of the new offer from Metrics – (MOT) -  Harry described it as MXT’s riskier cousin and that seems a fitting description.

Key points

The MCP Income Opportunities Trust (ASX Code MOT) is set to raise $300m, and from what we’re told, they’ve raised that and then some and the deal will close (today) oversubscribed.  The trust will invest in a number of different sub trusts with the underlying investments being higher risk credit described as sub investment grade. They pay higher yield but come with a higher level of risk.  

The manager has more discretion in MOT than they do in MXT to take advantage of opportunities as they arise, however less structure means returns rely more heavily on the Portfolio Manager getting it right. They will initially target investment across around 30 individual names however they have no cap on size per each individual position, whereas MXT has a 5% cap on any investment, although in realty, their biggest investment is currently running at 2%.

MXT has at least 60% of their holdings in investment grade loans with a few loans higher up the curve whereas MOT won’t. As suggested above, they are targeting the higher bang for buck sort of exposures that can obviously yield better returns but with a greater chance that those returns may not be achieved.

When talking risk we must anchor it to return, or potential return and MOT is targeting an aggressive number, with a total return target of 8-10% per annum, which is high in terms of credit funds.

Distributions to be paid quarterly and the target here is 7% p.a. income (plus a few % capital growth to get the 8-10% total return target). Capital growth will be generated by equity upside. For instance, many loans Metrics deal with allow them to negotiate an equity component whether through attaching options or a free equity. Think restructure or recapitalising credit which gives the creditor leverage into the business.  

One interesting aspect, and I think this is sensible is that distributions will not be topped up by capital if there is a shortfall in income from loans.

They charge an annual management fee of 1.45% and a  pretty aggressive +15.38% performance fee over RBA + 6% benchmark. Worth noting that if RBA drop rates below 1%,  the performance fee will be paid before the income target of 7% is hit and distributed. If the RBA raise rates this becomes a more challenging task and given the broad structure of the Trust and discretion of the Manager it could push them to take more risk to achieve performance targets).  

They raising a maximum of $300m to start with, and that’s largely been done.

While this looks an interesting offer we won’t be taking it up in the MM Income Portfolio. We prefer to have lower risk credit exposures mixed with direct equities for the equity style upside rather than focussing on higher risk credit that has a more opaque equity component to it.

The PDS is available by clicking here

Perpetual launches new Income Trust

Another raising in the Income space with Perpetual launching the Perpetual Credit Income Trust that is to be listed on the ASX (subject to approval) under code PCI on the 14th May. While I  haven’t met with the managers (I will) , the deal is lower risk than the MOT outlined above and a more traditional credit offering. As a consequence, the return targets / fee structure is aligned with that risk / return profile. The deal looks attractive.  Our desk at Shaw can place bids for those with an account, or who wish to open one.

The trust will focus on investment grade assets in the high yield Australian corporate loan market  and the global high yield bond market – it’s sort of a cross between MXT and NBI that we own in the MM Income Portfolio. MXT invests in corporate loans in Australia targeting a return of 4.75% while NBI is a global bond manager targeting a 5.25% return. PCI combines both sub asset classes into the one $400m listed investment vehicle.

The trust targets a return of the RBA cash rate plus 3.25%, which is the same target held by MXT, equating to 4.75% net of fees.

Distributions to be paid monthly  and the fund should be a good diversifier for those looking for income that is not heavily aligned to equity markets.  

They charge an annual management fee of 0.88% and no performance fee.

NB Global Corporate Income Trust

We own this in the MM Income Portfolio and last week they made an announcement around the possibility of issuing new units in the Trust, essentially raising more money to manage. The announcement said….In light of the macroeconomic tailwinds for the asset class, coupled with NBI's consistent performance and ongoing market demand, Neuberger Berman is considering a new capital raise for NBI in the coming months.

It looks like they’ll raise money and we will send details when that occurs. They’ve previously said that an offer of new units will comprise both an entitlement offer for existing unitholders and a public offer for new investors.

The last time we wrote about NBI (click here) we posed the question whether or not corporate bonds were becoming too risky. The chart below highlights two things. The volatility in corporate bonds through the NTA Figure (Blue Line), which is the value of their underlying portfolio and the market price of the Trust (White Line).

NBI has generally traded at a premium to the value of their assets (although less so than MXT which is covered below) – currently priced at $2.03 (as at the 8th) versus NTA of $2.00. If they raise money, which I expect they will, they will likely do so at NTA – therefore paying above NTA on market doesn’t make a lot of sense (other than providing firm access to any raise).

NBI – NTA versus Share price (to 8th March)

Now looking at MXT, we can see 2 main things:  

1. Volatility is lower, particularly evident during December when we had some extreme equity / bonds market volatility 

2. They trade at a bigger premium to their last assets

MXT have clearly been consistent performers, we own them in the Income Portfolio however we would not buy them here given the premium they now trade to NTA and the increasing number of new entrants in the sector. 

MXT – NTA versus Share price (to 8th March)

Conclusion (s)

MOT is an interesting fund, but not for us. We prefer more vanilla debt funds combined with straight equity exposure

The new Perpetual Income Trust is appealing, and should do well

NBI is likely to raise new money  – more details to come

Have a great day!

James / Harry & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 13/03/2019

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers. 

If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.