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Glencore or Abbot Point? We pick the better value bond

by Alen Golubovic | Sep 16, 2014

The Glencore bond was issued at 140bps over the 5 year swap rate, and is already trading 3–5bps tighter in the secondary bond market.  The AAPT 2020 bond is currently offered at an indicative yield to maturity of 5.96%pa, which equates to a margin of 242 bps over the swap rate.

At the current pricing on the AAPT 2020 bond, an investor can earn an additional 105bps over the Glencore bond making it more than worthy of consideration in a diversified bond portfolio. Both bonds are investment grade, with the AAPT bond rated one notch lower than Glencore.

Glencore is a large, diversified multinational commodity trading and mining company, with a $52.8bn market capitalisation and $US38bn of long term debt obligations. The company has several major assets in Australia, and is the nation’s largest coal producer through its Australian subsidiary Glencore Xstrata which also has the largest take-or-pay contract with Adani Abbot Point Terminal (AAPT). Further, the port operator is Abbot Point Bulkcoal Pty Ltd, a wholly owned subsidiary of Glencore Xstrata.

AAPT is a single infrastructure asset tied to a natural resource (thermal and metallurgical coal). The creditworthiness and long term viability of AAPT is tied largely to the viability of the Queensland coal export market, so it represents a very different exposure to a diversified commodity business such as Glencore. However, whilst AAPT does assume commodity risk exposure to thermal and metallurgical coal, it does not represent a ‘naked’ coal exposure in itself.

The take-or-pay contracts that are the primary source of revenue for AAPT, over the duration of the contract periods (11.5 year weighted average contract periods), largely remove the volume and price risk associated with direct investment into a coal business.

Compared to having exposure to a business with direct coal mining operations:

  • AAPT does not take ‘naked’ coal price or coal volume risk – these are largely mitigated by the take-or-pay contracts, which require the coal exporters through AAPT to pay the contracted rate for shipping coal per total contracted throughput. The users of the coal terminal, rather than AAPT itself, assume the risk that actual exported volumes are less than those contracted under the take-or-pay arrangements
  • The take-or-pay payment to AAPT is an essential requirement for a coal miner to make any money from its Queensland export coal business – pointing to the robustness of the revenues of AAPT

For further information on the AAPT bond or to obtain a copy of the detailed research report, please contact your FIIG representative.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. The AAPT 6.10% fixed rate bond (maturing 29 May 2020) is available to wholesale investors only in minimum (face value) parcel sizes of $10,000 with a minimum upfront spend of $50,000.

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