Unrated Junk Bond Sold in Australia as Risk Appetite Returns

The first high-yield unrated bond sale in Australian dollars this year is adding to signs that investors are taking more risks as rates stay close to zero.

Evolve Education Group Ltd., a provider of childcare education in New Zealand and Australia, priced A$35 million ($26 million) of five-year notes to yield 7.5% last week. It’s the first corporate deal in Australia’s high-yield unrated market in 12 months, according to arranger FIIG Securities Ltd.

The debt sale is part of a broader push by investors for alternative sources of income, as returns on traditional assets stagnate with central banks keeping interest rates ultra low. High-net-worth individuals are among the buyers for such securities and as the pandemic drags on, they’re increasingly looking for ways to boost portfolios.

“Central bank actions will inflate asset values, which will encourage people to take more risk both in equities and also high-yield bonds,” said Erryn Lloyd-Jones, head of debt capital markets and private debt at FIIG. “We are confident that calendar year 2021 will be a better year than calendar year 2020.”

Unrated Junk Bond Sold in Australia as Risk Appetite Returns

Monetary and fiscal stimulus is seeing confidence return to the local high-yield bond market after spreads blew out and volumes dried up as the pandemic unfolded, Lloyd-Jones added.

Amid the hunt for yield, there are of course pitfalls. One of the few issuers in Australia’s small market for high-yield local bonds that have ratings, Virgin Australia Holdings Ltd., collapsed earlier this year as the pandemic stalled global travel.

But for many the risks have been worth it. Investors have been diving into junk securities globally since late March after central banks stepped in to support markets and stem a tide of defaults. Global high-yield bonds have returned more than 30% since late March, with returns year-to-date of about 4%.

©2020 Bloomberg L.P.

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