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Glencore issue highlights virtues of non-bank bonds

by Elizabeth Moran | Oct 13, 2014

ANGLO-SWISS miner Glencore has been in the news recently courting Rio Tinto but it made bond market headlines last month for different reasons.

The behemoth producer and marketer of more than 90 commodities launched its first Australian dollar bond, a five-year, fixed-rate bond with an issue yield of 4.75 per cent.

The BBB-rated corporate sought $500 million, although there was demand for $700m.

Financial institutions are the main issuers of bonds so when non-financial corporations come to the market and the terms are right, demand is high.

One reason is that corporate bonds, particularly those of inter- national corporations not listed on the ASX, provide fantastic diversification.

The bond was issued in the over-the-counter market, unfortunately not giving SMSFs an opportunity to invest.

Interestingly there were only around 90 investors in the final book, meaning they invested an average of $5.55m each.

According to a report by KangaNews, the banks that managed the trans-action said demand was 67 per cent domestic with the rest split between European and Asian ac- counts.

The oversubscription and the high domestic interest shows how willing institutions are to invest in investment grade fixed rate bonds, despite the relatively low returns.

It highlights the view that larger investors also think interest rates will be lower longer.

Not all investors will hold the bonds to maturity but if they had serious concerns of imminent and steep rises in interest rates, they would have demanded a higher fixed rate of return to investor declined to invest in the issue. Even if Glencore wasn’t accessible to many, there are other bonds with similar credit quality worth considering.

There are three senior, fixed rate bonds on the market that have shorter terms. Theoretically, they should offer lower returns than the Glencore bond.

The Dalrymple Bay Coal Terminal bond is perhaps the most comparable, and not ASX listed, so good for the diversity of your portfolio. But, with less than two years to run it is substantially shorter dated. The bond offers a relatively good 4.3 per cent until maturity.

The Downer Finance bond is closest in terms of return but with only three years to run I think it is a better proposition.

The 4.49 per cent return on the Incitec Pivot bond, with over four years to run, is a good option if you can invest $500,000 in a single asset.

If you are seeking to diversify your investments, bonds offers a range of risk and return options — many not listed on the ASX.

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