Coolabah Capital Investments

From Kieran Davies: The latest data on cash flows show that Australian households continue to marginally dissave, which means that they are running down their financial assets and/or incurring more debt.(1) Using the figures to estimate what has happened to the excess savings built up during COVID, they continue to decline, falling to 7% of annual GDP in Q2 (or 5% of GDP assuming households do not run down the higher offset/redraw balances built up early in the pandemic). Read full analysis below… https://lnkd.in/gW3eWakd

AFR: Bank investors face $1b franking credit hit Hundreds of thousands of bank investors stand to lose about $1 billion in annual franking credits under the banking regulator’s plan to phase out hybrid securities. The surprise proposal by the Australian Prudential Regulation Authority this month to wind down the $43 billion local bank hybrid market could force retail investors into riskier investments such as shares, bond fund managers say... Wilson Asset Management chairman Geoff Wilson, who campaigned against Labor’s proposed curtailing of franking credit refunds at the 2019 election, said it was not APRA’s job to eliminate risk for investors. “It is disappointing behaviour by APRA and another attack on franking,” he said... Seed Funds Management portfolio manager Nicholas Chaplin said he believed APRA would be making an error that would weaken Australian banks’ capital versus foreign peers. “The move will make depositors less safe, as it will also do for subordinated and senior bondholders. “It will deprive investors, especially self-managed super funds, of the opportunity to benefit from franking credits associated with investments in hybrid securities.”

AFR: Private equity manager and former Macquarie phenom Ben Brazil has warned that a wave of highly indebted unlisted companies will be unable to refinance their loans, unleashing a barrage of distressed assets and a buyers’ market for investors looking to turn a profit... “The choices of the past echo for a much longer period of time [in private markets],” Mr Brazil told The Australian Financial Review. ”Those investments were predicated on loose credit and when that tide goes out and the credit retracts, those investments will really get caught out.” “There is a bifurcation between those borrowers that are eminently healthy, versus those where there is a genuine question mark as to whether their debt levels are sustainable,” he said. “They really can’t access credit, and certainly not on the terms that justify historic purchase prices,” Mr Brazil said. “What we’ve seen is that the difficulties can seem to come out of nowhere and can be fairly severe,” Mr Brazil said. “Opacity is a defining feature of these privately owned companies.” See more below...

Arguably the most surprising yet, if I can say so, impressive feature of the Great Debate on Public Credit vs Private Credit between the formidable Andrew Lockhart (Metrics) and myself is the footage of me heli-skiing a month ago, which the Pinnacle guys managed to sneakily insert into the clip as I walked into the ring. You can see it at about 2mins 55 secs...This footage was subsequently used in three different online New Zealand skiing advertisements. Enjoy! https://lnkd.in/gussHMUq Warwick Boys Ying Yi Ann C. Kyle Macintyre Andrew Reidy Darcy Graham Callum Evans Megan Jenner, CFA Nina Redfern Andrew Chambers John Phokos Gary Walsh

In this new flash episode of the Complexity Premia podcast, Chris and Ying Yi discuss a range of important developments, including the great private vs public credit debate between Chris and Andrew Lockhart of Metrics (watch the video here so you can judge who won) and APRA’s controversial proposal to kill off the Aussie bank hybrid market, amongst other things. https://lnkd.in/gd5K-KjH

Why is APRA trying to blow up the hybrid market? Under a plan that was never publicly canvassed, Australia’s banking regulator is trying to shut down the $40 billion listed hybrid market; substantially raise bank leverage and risks for depositors (and taxpayers); and make all smaller banks non-compliant with global best-practice regulations. This bureaucratic overreach will destroy a huge franked income sector beloved by self-managed super fund investors and retirees. The Australian Prudential Regulation Authority claims the proposal was motivated by the collapse of Credit Suisse, but this makes zero sense because its hybrids worked with speed and efficacy, just as they were intended to. Bankers say the scheme is motivated by the fact that APRA has lost the stomach to oversee a banking crisis that involves automatically converting listed hybrids into bank shares. In my meeting with APRA last year, that was the key anxiety. Regulators worry they will cop the blame for any retail losses. APRA is now putting its interests ahead of the depositors and taxpayers it is legislated to protect. Read more below... https://lnkd.in/gKuVhQ8u

APRA's globally unprecedented proposal to shut-down the $40 billion bank hybrid market would make enormous sense if it also required banks to replace this lost equity with new equity in the form of ordinary shares. APRA is instead proposing to replace the Tier 1 equity capital that hybrids provide with debt. This dramatically increases bank leverage and the risks both depositors and taxpayers face. Westpac's leverage jumps from 18.6x to 21.9x while BoQ's leverage goes from 18.7x to 23.1x. The bizarre thing is that APRA has spent the last 10 years getting banks to reduce their leverage to protect depositors and taxpayers, as I have argued they should do since the GFC. Chart below. Go figure...

The ASX hybrid market faces a range of threats right now. On Friday, 5-year major bank hybrid spreads closed at just 2.1% above the quarterly bank bill swap rate (BBSW), which translates into an all-in running yield of circa 6.5%. That is around the historical tights for ASX hybrid spreads since 2007, making the sector unattractive on a spread basis. Since the introduction of Basel 3 hybrids in 2013, the average major bank spread for a 5-year security has been around 3.3% above BBSW. To be sure, the all-in yield, grossed up for franking, of 6.5% will be appealing to some punters, although there are arguably better opportunities up the capital structure, particularly in AA- rated senior-ranking and A- rated Tier 2 bonds issued by the same Big 4 banks. Whereas hybrids are trading about 1.2% below their average spreads, the major banks' senior bonds are pricing in-line with historical heuristics. And while well-bid Tier 2 spreads are slightly inside their long-run range, they have benefited from a recent rating upgrade from BBB+ to A-, and on a rating-adjusted basis look normal. (We predicted this rating upgrade in late 2023, which materialised in April 2024.) The first threat for ASX bank hybrids is the return of competing "corporate hybrids". Last week, Scentre Group attracted $3.4 billion of demand for a BBB+ rated hybrid that paid a superior 2.3% spread above BBSW. It would not be surprising to see more of these corporate deals come to market, and for investors to switch out of lower-yielding bank hybrids. A second threat is the incoming APRA report on hybrids, which will create a new class of securities that are much easier for the regulator to convert into equities. They will also likely be offered more frequently into the wholesale unlisted, as opposed to ASX listed, market where investors have more demanding return expectations. These riskier new hybrids will carry chunkier credit spreads and hence offer superior yields. Once again, it would not be surprising to see investors switch from the older, lower-yielding bank hybrids into the new securities, which could drag the former’s spreads wider. There are also innovative listed investment trusts coming to market, such as the Metrics Real Estate Multi-Strategy Fund (ASX: MRE). This is interesting because it is also a hybrid product: 50:50 allocated to real estate debt and equity funds run by Metrics, targeting overall net returns of 10-12% pa. The real estate debt fund targets 5% over BBSW while the equity strategy seeks returns of 15-20% pa. If these objectives are delivered, they will likely outperform ASX hybrids. And whereas hybrid spreads look historically expensive, the commercial property market is obviously in a cyclically much more stressed state that should, in theory, afford superior relative value. Consequently, there may, as a result, be switching from hybrids into this strategy. Finally, overlay volatile equity markets that can hurt hybrids: the S&P500 lost 1.7% on Friday...

From our chief macro strategist Kieran Davies: US labour market data were broadly in line with market forecasts in August, still painting a picture of a market having broadly returned to balance and on the cusp of supply exceeding demand. The results are probably not as definitive as policy-makers would have hope for, such that they will likely be left choosing between cutting by either 25bp or 50bp at the 17-18 September policy meeting. Normally the Fed prefers to cut by 25bp unless there is a crisis and it can signal further action through updated dot plots of policy-maker forecasts for the funds rate, but some policy-makers might still make the case for a larger move given the cooling trend in the labour market and given the FOMC is likely to mark down its forecast for inflation over the next twelve months. For his part, Fed Chair Powell recently avoided providing guidance on the likely size of the first rate cut, but his comment that “we do not seek or welcome further cooling [in the labour market]” suggests he will be open to a large initial move. The unemployment rate rounded down to 4.2% after rounding up to 4.3% in July, with the average rate still matching the 0.5pp Sahm rule threshold that has signalled all modern recessions. At this point, the unemployment rate is close to most measures of the NAIRU and will soon exceed them if unemployment continues to edge higher. The FOMC had previously forecast hardly any change in the unemployment rate over the next few years and could factor in unemployment increasing to about 4½% by the end of this year when it revises its outlook. The number of payroll jobs rose by 0.1% for the third month in a row given downward revisions to history, with annualised monthly trend growth estimated to have slowed to 0.8%, which, excluding the steep contractions during the COVID recession, is the weakest growth since the economy was slowly emerging from the global financial crisis (note that the large downward benchmark revision to the level of payroll jobs in March will be incorporated into the history of the series next year). Employment, which is volatile, grew by 0.1% in August after holding steady in July. Employment has fluctuated since late last year around a broadly flat trend, positing a mix of small falls and small rises. The level of employment will likely be eventually revised higher when population benchmarks better reflect the recent surge in migration, but those revisions are likely a long time away and recent growth is likely to still be weak given the employment-population ratio has edged lower.