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This Week's Best Bond: Australian Dollar-Based Corporate Bonds

With the many uncertainties surrounding the value of US dollar, we have a simple approach to protect against the devaluing of the dollar while providing income. This week we are highlighting Australian dollar denominated corporate bonds to inform the investor about ways to diversify fixed income portfolios.

Diversifying one’s portfolio with foreign denominated instruments should assist with protecting the overall purchasing power. We have highlighted three issues, but there are numerous other offerings denominated in Australian dollars.

We believe there is a possibility of a triple win opportunity here:

  1. Foreign issues offer a way to diversify out of US dollar denominated debt.
  2. These instruments have higher yields for notes maturing in less than four years.
  3. Australian dollars could potentially appreciate against the US dollar, allowing investors principal appreciation and/or losses.

The US investor has been worried about the future purchasing power of the greenback. Washington continues to spend at record levels ($1.3 trillion fiscal year ended 09/30/2010) as tax revenues continue to decline. The rate at which the US is growing its debt, in an effort fund itself, is becoming possibly self destructive. Our self inflicted pain seems to be creating significant downward pressures on the value of the US dollar thus improving foreign currency valuations against it. We like the Australian dollar and wrote an article focusing on the Australia economy’s strengths and weakness.

The Federal Reserve has hinted that it will continue to purchase treasuries on the secondary market. The idea behind this is that lowering the cost of borrowing will allow business cheaper capital to expand business practices leading to reduce the overall unemployment levels and increase tax revenues. This places pressures on the price and yields that fixed income investors receive. The “real” value of the US dollar in the international markets is absorbing this pressure because there is so much supply.

There are many different theories of what will happen to the US dollar next. One way to protect your portfolio from a weak US dollar is to diversify the holdings to non US dollar denominated assets. This week we are highlighting a couple of larger investment grade corporate bonds that offer issues denominated in Australian dollars.

Issuer Yield Rating Maturity
National Australia Bank 5.1% Aa1/AA 2011
Netlsle AG 5.395% Aa1/AA 2013
GE Capital 6.6% Aa2/AA+ 2014

National Australia Bank (OTCPK:NABZY)

National Australia Bank is based in Melbourne and is the leading financial institution of Australia. Its roots can be traced back to the 19th century. Currently, National Australia Bank has operations in 10 countries with just under 10 million customers offering financial services ranging from retail banking to international institutional financial services.

We have found some very attractive yields at shorter maturities. This National Australia Bank offers debt issued in Australian dollars with a yield to maturity of 5.97% that matures in 2013. They are currently rated Aa1 by Moody's and AA by S&P.

Like all banks, the economic environment has effected the operating results of the National Australian Bank however not to the extreme as was and still is seen in other geographic regions of the banking industry. Profits were down on an annual basis in 2009 but they were still profitable. For the first half of their fiscal 2010 year, ending March 2010, they profited A$.96 (A$=Australian dollars per share). Although annual levels of income are expected to be slightly lower than pre-crisis levels, management has described.

Nestle AG (OTCPK:NSRGY)

Nestle is a true global conglomerate. It is best known for its powdered drink line, but also has business operations that include pharmaceuticals, pet care, dairy products and prepared foods including the recently acquired Kraft Frozen Pizza unit in North America. Based in Switzerland, the company has operating units in 86 countries and employs over a quarter million people and has an Aa1/AA rating.

The issue we are highlighting is part of a 450 million Australian dollar offering. This issue matures in 2014 and has a yield to maturity of 5.398% with a coupon of 5.75%. This is an excellent way to participate in a global conglomerate debt and have foreign currency exposure.

Nestle AG reported sales of 52.267 billion Swiss francs (about $51 billion US dollars) for the first six months of 2010. Net income was 7.7 billion Swiss francs, which was a 12 percent increase from the same time frame of the previous year.

One frequently asked question we get about foreign corporate bonds is “Why do firms issue debt in foreign currency?” It is often in a corporations best interest to issue debt in a currency that expenses are paid in. This reduces some of the foreign currency risk for the issuers. Nestle AG is developing a nutritional foods division and they are developing/expanding there operations near Victoria, Australia.

GE Capital Australia Funding Note (NYSE:GE)

General Electric is another large multinational conglomerate. One of there wholly owned subsidiaries of GE is GE Capital. They are based in the United States and has operations thought the world. Based on Forbes yearly ranking, GE is the second largest company in the world in 2010.

GE has had their share of troubles over the latest economic swing but has remained profitable. GE Capital suffered significantly from the financial/credit crisis. GE ability to continue, albeit lower compared to 2007, to pay a dividend and the planned 2011 reinstating of the stock repurchase plan showcases it’s ability to generate cash flow.

Third quarter earnings were announced on Friday, October 15, 2010 and management was up beat about the GE Capital division. Chief Executive Jeff Immelt said

GE Capital has strengthened its franchise into an advantaged specialty-finance player that is creating value for GE shareholders. GE Capital is well positioned with respect to Basel III capital requirements and we expect earnings growth in our financial services business to continue.

Profits for the division grew to $871 million in the third quarter compared to last year's third quarter results of $141 million.

For comparative purposes, we have found a similar US dollar denominated GE Capital bonds.

Issuer GE Capital GE Capital
Currency US Dollar Australian Dollar
Maturity 07/15/2014 09/01/2014
Rating Aa2/AA+ Aa2/AA+
Coupon 5.125% 7.5%
Payment Quarterly Annual
Yield to Maturity 1.912% 6.6%

Allotments

Many foreign currencies like Australian corporate bonds often require a larger single bond purchases. To alleviate this constraint, we are combining many bond clients into a single larger unit purchases. In our previous syndicates, we were able to facilitate $10,000 US dollars purchases and many of these high yielding Australian corporate bonds listed above appear similar. If you want to receive updates about our next high income world syndicate please contact us at Durig Capital.

Many of the clients that like Australian debt also like reviewing comparable New Zealand yields. Most our world based income clients, have also indicated significant interests in both Brazil government bonds and selective Brazil corporates bonds.

Conclusion

There are many benefits to owning foreign denominated debt. We believe that foreign denominated bonds could increase both the value and income of portfolios. We are advising our clients that a properly diversified portfolio could take advantage of the weak US dollar. In the case of the Australian dollar, one could also enjoy significantly higher income and better overall returns.

Disclosure: Durig Capital’s clients currently have several Australian debt positions along with other world bonds.

Source: High Yield Down Under: Australian Dollar-Based Corporate Bonds