My advice on ASX listed bonds

Co-founder of the Switzer Report
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Many self-managed super fund investors want to know how they should invest in fixed-interest securities. Unfortunately, you don’t have a lot of options in Australia because the retail fixed-income market here is very small.

Let’s look at what options you do have. Perhaps the simplest is to invest in longer duration term deposits (RaboDirect is currently offering 6.80% for five years, interest paid annually, or 6.70% at ING Direct for two years). There are also Government Treasury Bonds, which can be purchased directly from the Reserve Bank (, however they are yielding less than 4.30% for three years and 4.95% for 10 years at the moment because long-term interest rates have fallen quite dramatically over the last month.

Of course, there are several professionally managed fixed-income funds. Most of the larger fund managers offer these investments and for most trustees, this can be one of the best ways to get exposure to this asset class.

For something a little different, there are also two listed retail fixed-interest bonds that are traded on the ASX. These can be bought or sold through your broker. Perhaps not for the feint hearted and certainly in the higher risk category, they are worth having a think about, although in small doses. Let’s take a closer look at these now.

Heritage Notes (ASX:HBSHA) were issued in October 2009 by Heritage Building Society. Heritage is one of the largest building societies in Australia, with more than 300,000 members and assets in excess of $7 billion. Initially rated BBB- from Standard & Poors and Baa1 from Moody’s, these notes are subordinated, unsecured debt securities. Details are as follows:

Technically, the Heritage Notes don’t mature until 25 October 2019. Heritage has a ‘step-up’ date that requires them to pay effectively a penal interest rate if they don’t redeem the notes in October 2014. This penal rate is set as a floating margin over the 90 day bank bill rate of 6.48% – a huge margin – meaning that barring but the worst of circumstances, the notes will be redeemed in 2014. Accordingly, the notes are being priced on a yield to maturity basis as though they will mature in 2014.

Healthscope Notes Limited (ASX:HLNG) were issued in November 2010. The Company is part of the Healthscope Group, which is a leading Australian private healthcare services provider. Within Australia, Healthscope is the second largest operator of private hospitals, and the third largest pathology services provider. In the year to September 2010, the Group generated over $1.9 billion in revenue.

The notes are subordinated to the senior debt of the Group. As the prospectus prominently said, “the Healthscope Group has a substantial amount of debt” – so these notes are close to the “junk” category (and hence the high yield to maturity).

There are two other points worth noting. The issuer can redeem early by paying a premium to the face value of the note (probably unlikely given the current market price). Also, as the Healthscope Group is owned by private equity players, if the Group is taken to the ASX via an IPO, note holders will have the right to exchange their notes for shares at a 2.5% discount to the retail issue price.

Details of the issue are:

So what should you do? I think the Heritage Notes represent reasonable value, although they are probably over-priced at the moment as the market hasn’t fully adjusted to the notes going ‘ex-interest’. One of the challenges about dealing in these thinly traded markets is that they are very much a ‘supply and demand’ market, and often don’t trade according to fundamentals. Patience can be required in building a parcel – so look to put in a “bid” rather than taking the “offer” (ie a ‘limit order’, rather than a ‘market order’).

With Healthscope, while this is in the high category, high returns also come from taking risk. However, the golden rule in this case is always about diversification – so an investment size of more than 1% or 2% of your total SMSF assets would be considered by some as imprudent.


Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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