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Millionaire Investors Catch Australia’s high-Yield Express

via flickr/MickiTakesPictures via flickr/MickiTakesPictures
via flickr/MickiTakesPictures via flickr/MickiTakesPictures

High-yield bond business is piping hot in Australia, based largely upon high demand from wealthy individuals. Two major factors have triggered the high-yield effect. Higher capital costs have caused banks to take on less risk than usual in lending to unrated and otherwise unproven companies. Additionally, low interest rates globally have forced investors to take on more risk for decent returns.

Within the past year-and-a-half, seven firms sold $1.39B in local high-yield debt, up from zero from before that span of time. Outstanding Australian high-yield debt has multiplied in dollar amount 10 times to $20B. High-yield debt was only $2B in 2010.

A high-yield bond, by definition, carries a lower credit rating that investment-level corporate bonds, treasury bonds and municipal bonds. These bonds pay a higher yield because they carry a higher risk of default than other forms of bonds.

According to Augusto Medeiros, a credit analyst at Deutsche Bank, said,

“This is the biggest development in the Australian fixed-income market and should broaden funding alternatives to borrowers.”

Mark Paton, CEO of FIIG Securities, said Australia has a sub-investment grade market valued at around $1B. FIIG has completed nine unrated transactions in the last two years, with yields from 6.5% to 9.5%. Paton added that FIIG has a (Australian) $60M payment-in-kind (PIK) issue with an all-up return of 18%.

PIK loans are loans that usually don’t provide any cash flow from borrower to lender between the drawdown date and the maturity or refinancing date, which makes it an expensive, high-risk loan. PIK notes aren’t popular in Australia but were prevalent in the U.S. and Europe before the global financial crisis. They’ve come full circle and are re-emerging globally.



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