Australia Ratings also confirmed its product complexity indicator of ‘GREEN’ on the AUNs indicating that Australia Ratings considers the AUNs to be a debt investment with simple and straight forward terms and conditions.

“The ‘BBB+’ rating on the AUNs primarily reflects the assessed credit quality of both their issuer, Australian Unity Limited and the wider Australian Unity Group” said Australia Ratings’ credit analyst, Chris Cudsi. Mr Cudsi added, “In 2014, we expect Australian Unity to maintain the level of profitability achieved in 2013”.

AU’s earnings rose in 2013, as improved investment returns attributable to stronger asset markets offset significantly higher claims costs in AU’s health insurer. Net profit after tax (NPAT) for 2013 was A$29.4 million, compared with A$22.3 million for the previous corresponding period.

The Australian Unity Group is a diversified mutual specialising in the provision of healthcare (mainly, health insurance), financial services and retirement living.

The credit rating reflects the following key strengths of AUL’s business:

• Robust and competitive healthcare arm that generates over 60% of adjusted EBITDA
• Prudent and moderately conservative risk appetite with regard to gearing levels and maintenance of buffers above regulatory capital requirements
• Increasing diversification benefits of continued expansion into Retirement Living, Financial Services and Big Sky Building Society businesses

The credit rating also reflects the following key risks to AUL’s business:

• All three of the Australian Unity Group’s major businesses (Healthcare, Financial Services ‑ including Big Sky Building Society – and Retirement Living) operate in areas subject to significant regulatory scrutiny and/or political pressure to minimise price increases
• Increasing exposure to project and construction risks inherent in property development within the Retirement Living business
• Restricted financial flexibility, given Australian Unity Limited’s mutual status precludes future equity raising

The ‘GREEN’ Product Complexity Indicator of bonds is confirmed. A GREEN designation indicates the terms and conditions of the AUNs are simple and straightforward with a very low level of complexity on Australia Ratings’ five point Product Complexity Indicator scale.

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A rating of ‘A’ represents that the Fund has a high degree of protection against loss from credit risk on the rating scale used by Australia Ratings for fixed income funds. The rating primarily reflects the credit quality of the Fund’s investments as well as the experience and skill of the Funds Management division of Sandhurst Trustees Limited. Sandhurst Strategic Income Fund was launched in July 2011 and is a product of Bendigo Wealth, part of the Bendigo and Adelaide Bank Group.
 
Australia Ratings analyst Chris Dalton said “the Sandhurst Strategic Income Fund represents a new breed of fixed income fund seeking to deliver an income return above bank bills while protecting the capital value of the units”.

Dalton also said, “Investors in the Fund benefit from a diversified portfolio of term deposits and fixed income securities across a range of maturities with the current portfolio being comprised of investment grade assets.”

 The units provide investors with a quarterly distribution of income and a return of principal via a redemption request. Australia Ratings has also assigned its Product Complexity Indicator of ‘BLUE” to the Fund’s units to indicate that an investment in the units represents a relatively straightforward type of fixed interest investment.

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However Australia Ratings considers that the changes in and of themselves are unlikely to be “game changers”. Nonetheless, the Government initiative is encouraging in signalling to the market the importance of having a larger and more active bond market in Australia.

Such an outcome will benefit companies who may wish to diversify their sources of debt finance and provide a larger pool of “plain vanilla or simple corporate bonds” for Australians to invest in as part of the capital stable component of their investment or retirement income portfolios.

Assuming the stipulation that to qualify for the revised treatment under the Corporations Act bonds need to be secured is a drafting error (we believe this was intended to be that bonds are not to be subordinated to other unsecured creditors), the most interesting item of the Government announcement is the new depository interest mechanism which will potentially allow trading by retail investors through the ASX of bonds held in the Austraclear clearing and settlement platform. The first bonds to trade through this mechanism will be bonds issued the Australian Government.

The use of a depository interest mechanism for bonds lodged in the Austraclear system and deemed to be simple corporate bonds will in the medium term unlock a larger pool of bonds in which retail investors will be able to invest.

The ‘game-changer” for the bond market will be when retail investors have access to a more diversified supply of investment options and a pool in which there is both retail and institutional investor trading.

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This rating is the highest long-term rating in the intermediate category of creditworthiness on the rating scale of Australia Ratings (see the rating scale below). The bonds are senior and unsecured debt obligations of Heritage Bank Limited.  A coupon of 7.25% p.a. is payable quarterly in arrears until maturity of the bonds in June 2017.

Australia Ratings’ credit analyst, Chris Dalton said “the ‘BBB+’ rating continues to reflect the credit quality of Heritage Bank”.

Dalton added, ”earnings and profitability in FY2012 were are at levels similar to those in FY2011, partly reflecting slow growth in new residential mortgages.  Heritage’s business strategy remains consistent with a focus on residential mortgage lending, retaining buffers to regulatory minimums for capital and liquidity and pursuing some modest diversification through pre-paid cards and origination of mortgages in Western Australia, Tasmania and Northern Territory”.

The credit rating reflects the following key strengths of Heritage Bank’s business:

• a low risk portfolio of residential mortgages with below industry average arrears and losses
• a conservative risk appetite with regard to maintaining capital and liquidity above regulatory capital requirements
• a diversified funding base with experience in raising funds via both wholesale and retail funding markets.

The credit rating also reflects the following key risks to Heritage Bank’s business:

• a slowing of demand and increased competition in the residential mortgage market which may constrain earnings growth
• a reliance upon retained earnings to build capital base for future asset growth.

The ‘GREEN’ Product Complexity Indicator of bonds is confirmed. A GREEN designation indicates the terms and conditions of the bonds are simple and straightforward with a very low level of complexity on Australia Ratings’ five point Product Complexity Indicator scale.

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