Australian investors, whether privately or via their self managed super funds, are able to buy the shares of any Australian company listed on the ASX but have usually struggled to buy the debt issued by these same companies. That’s meant that large swathes of investments are locked up in bank term deposits when investors would happily take a little more yield, through higher interest rates, and a little more risk than deposits at the bank offer.
All of that is changing however with the recent launch of exchange-traded bond units (XTBs) on the ASX. Launched by the Australian Corporate Bond Company (ACBC) XTBs give investors the ability to purchase units – as small as $100 but likely limited to higher amounts by brokers – which provide access to Australian corporate bond debt.
Barry Ziegler from Bell Potter told Business Insider:
Finally, retail investors have the opportunity to invest in senior debt of some of Australia’s largest ASX listed corporations. Until XTBs retail investors have been able to buy equity in these companies but not debt which is a bizarre situation as debt issues carry significantly less risk than equities.
XTBs offer investors regular income from the debt of leading Australian corporations and can be easily accessed through a liquid and transparent market being the ASX.
That’s the key. XTBs are not large scale bond purchases, nor are they a bond fund of the type you’d get from a fund manager.
Rather each XTB gives the buyer direct access to the underlying risk and interest rates on a specific company-issued bond.
Take the ASX listed ‘YTMBHP’ for example. Buyers who buy this on the ASX are buying a unit which gives them exposure to the BHP Billiton Finance Limited bond, maturing on the 18th of October 2017. It carries a coupon of 3.75% and a yield to maturity of 2.48%. That means it costs $1.0359 for every dollar of exposure to the bond.
If BHP isn’t to your liking there are currently 16 other XTBs including a Wesfarmers 8.25% coupon 28th of March 2019 bond which carries a yield to maturity of 2.76%, or a Woolworth’s 6% coupon 21st of March 2019 trading with a yield to maturity of 2.907%. The Lend Lease 2020 has a relatively healthy 3.84% yield to maturity.
There are also bonds from Aurizon, Crown, Dexus, GPT, Incitec, Mirvac, Novion, Westfield, Stockland and Telstra.
As Potter’s Zeigler said, what’s revolutionary about XTBs is that through the unit trust structure small investors can break down the barriers that usually exist in the Australian corporate bond markets where a usual “parcel” would be at least $1 million and sometimes $5 million.
But corporate bonds also have issues of liquidity. That means, it is often easy to buy a bond but sometimes difficult to then sell that bond back either to the bank/broker you bought it from or to the wider market – not without some big swings in pricing anyway.
XTBs appear to have solved this issue because Deutsche Bank Australia acts as a market maker for each of the 17 XTBs on the ASX at present. That means that they will create a buy and sell price for each bond on the market.
Business Insider asked Richard Murphy, the CEO of ACBC, how XTBss can have better liquidity than the underlying bond. He said they can’t, but what Deutsche Bank’s market making does is provide investors with the confidence that they can buy, and sell if necessary, the units in the bond they hold back to Deutsche.
That begs the question if Deutsche is then the crucial element in the future of XTBs. Murphy said that ACBC was talking to two other interested parties about becoming back-up liquidity providers to give further confidence to investors and strength to this emerging market.
The key point is that ACBC through the unique trust structure it has established for XTBs which follow an REIT type arrangement with a responsible manager overseen by ASIC, Australian Executor Trustees as the custodian of the assets of the trust and wholesale market makers giving liquidity to this retail product means that ACBC is in fact only providing the infrastructure for this product to grow.
Indeed, Murphy said more XTBs on new bond issues are already in the pipeline.
In the end XTBs won’t be for everyone. Many investors will be happy to take the lower risk and lower return that bank TD’s offer. Indeed many people may see the yield on BHP as too low given the current environement.
But what XTBs do is offer retail investors choice. That’s a good thing.
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