Investor frenzy marks February's trading period as BA Financial Capital Income Fund reports

By Newsdesk

March 11 2024
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The BA Financial Capital Income Fund (BA FCIF) has experienced a vibrant February with hybrid activity witnessing a notable surge.

Investor frenzy marks February's trading period as BA Financial Capital Income Fund reports

This period saw prominent market moves including Bendigo & Adelaide Bank and insurer IAG following ANZ’s Tier 1 issue, alongside multiple tightly-priced Tier 2 issues. The fund disclosed that the capital markets are currently harboring a significant amount of money seeking investment opportunities, with all recent issues receiving strong demand. Of particular interest was the swift closure of IAG's offer, mere hours after its launch.

The unit price of the fund stood at $1.0537 as of 29 February 2024, after six distributions, with the weekly update on unit price available on the fund's website. As of the same date, the fund's weighted average yield to call was 7.37%, a projection based on each security's purchase price. Additionally, the running yield was reported at 6.01%.

Franking credits, which offer an additional 0.94% to returns over the previous year, were highlighted as a value-add for investors, with 32% of the portfolio benefitting from full franking value. The fund emphasized its ongoing efforts to actively adjust its weightings based on the relative value of the prime asset classes it holds. The allocation included 43.3% in Tier 1 instruments, 46.9% in Tier 2 instruments, 7.2% in senior bonds, and 2.6% in cash.

The new hybrid issues in February were flagged as attractively priced and beneficial to the portfolio. These included ANZ's issue with a margin of 90-Day BBSW+290 and tightened offerings from BEN and IAG at +320. Notably, the fund capitalized on the ANZ offer by displacing its remaining exposure to AN3PJ, gaining both a yield advantage and capital gains. A mention was made of the CGFPD issue, which showed good relative value, leading to increased holdings by the fund. Macquarie Bank’s Tier 2 issue, involving both fixed and floating tranches, was also in the limelight due to overwhelming demand leading to a margin tightening from +215 basis points to +195 at pricing.

With the 90-day BBSW rate aligning closely with the RBA cash rate, the fund anticipates an eventual downward trend as inflation is gradually controlled. The imminent call date of the $1.59 billion CBAPH issue on 26 April was also addressed, noting CBA's healthy Additional Tier 1 capital levels and APRA's increasing requirements for loss-absorbing capital. This scenario indicates a preference for Tier 1 capital issuance over Tier 2 from a cost perspective, although no replacement decision was noted for the CBAPH issue.

The report further explored the economic outlook, citing Apollo’s Chief Economist regarding the persistence of higher interest rates. Observations on the US economy’s resilience, coupled with similarities in the Australian economic environment, suggest a consensus leaning towards "higher for longer" interest rates. Factors such as small business pricing strategies, rental market trends, and public sector wage increases contribute to this perspective, alluding to a potential delay in rate reductions until at least 2025.

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