Three unusual bonds for large investors

Chilean salmon could prove lucrative

© 2016 Wolfgang Kaehler

Bonds often appear dull cousins to equities. Not only do prices tend not to move far from par, but also the credits themselves are likely to be more stable with less of a story about them.

This is particularly the case for bonds that filter down to the sphere where they are visible to the private investor and their stockbroker. However, this is not always the case. By way of contrast to the run-of-the-mill bond, I set out here three bonds I have been involved with this year that offer both a high return and an interesting story.

None of them are very liquid, but they can be traded. The only problem is that two of the three bonds have large denominations thanks to a European Union directive aimed at preventing the private investor investing in any bonds that might be deemed risky. At least one positive to come from Brexit might be the removal of this insistence on bonds having £100,000 and £200,000 denominations. But for now, these are only available to larger investors.

A stable outlook for salmon

Below the Straits of Magellan in the icy waters of Tierra del Fuego, Nova Austral operates the southern-most salmon farm in the world. This Chilean company, which is owned by private-equity firms Altor and Bain Capital, issued a first-lien four-year bond in July this year, in order to reload the company with debt (in true private-equity style).

Salmon farms have previously suffered from wild fluctuations in the price of the commodity, with large swings in supply causing periodic gluts. Owing largely to environmental and welfare concerns and also limited suitable global sites (fjords and inlets in cool waters) new licences are now rare and the outlook for salmon prices is stable.

Nova Austral has some unique advantages. The current flows northward up from the deeps of Antarctica arriving free from sea lice the number one curse of salmon farmers.

This means chemical treatment is not necessary and the fillets attract a price premium in the US. To prevent depopulation of the ice-blasted lands of the Cape, the Chilean government offers subsidies, largely in the form of absolution from tax. Against that fish grow more slowly in the cold waters and operating costs are higher because of the remote location.

Since issue, salmon prices have been stable and the information is that the business is proceeding to plan. The bond has traded up to 102.50-103.50, where it yields just shy of 7% on the offered side.

The case for lithium

Over in the arid hot deserts of Western Australia, Pilbara Minerals operates the Pilgangoora hard-rock lithium mine. The company launched a five-year bond and an equity rights issue in June to finance the development of the mine and production is expected to start within a year. Pilbara Minerals is listed in Australia with a market cap of A$1.18bn and the shares have doubled in price since June.

The case for lithium is obvious: it's a crucial component of batteries for electric cars. It is important to understand that the element is widespread and the question how to extract. There are two markedly different methods: extraction from sub-surface naturally occurring brine solutions or by hard rock crushing. Brine mining has lower operating expenditure but higher capital expenditure than hard rock crushing.

World production is 50/50 from each source and a third of total current world production comes from a brine mine beneath a dry lake bed in the Atacama Desert (in Chile again). The news on Pilbara has been good and the bond price is now 106.50-107.50 (9.89% yield on the offer price).

A riskier bet on a deepwater rig

Returning to chilly waters the subarctic edge of the Norwegian continental shelf in this case Master Marine is a single-asset company that owns a harsh-weather jack-up rig accommodation unit used to service offshore oil wells. These units are surprisingly low tech and long-lived (some are still operating from the 1970s).

Norway's Statoil has started operating the largest new North Sea field since the 1980s, and has hired the unit, but the field sits in deep water and so the rig needs leg extensions.

A two-year payment-in-kind note (PIK) finances the new legs, which are being built in a specialist shipyard in Dubai. These legs will be hydraulic vital should the unit return to shallow waters. As a Norwegian analyst said to me, a jack up rig is like a woman: neither can ever have legs that are too long. An existing first-lien 7% bond for Master Marine, due in 2019, should approximately be paid off by the Statoil contract.

This PIK relies on the reasonable expectation of future hirings that are as yet unordered post the Statoil contract although there is some hope the contract will be renewed albeit at a lower day rate. There's no news since issue, but the bond is trading around 100.50-101.50, yielding 16.2%.