Seven infrastructure-based bonds to keep on radar

Based on their high barriers to entry, ability to pass on costs, and typically strong dividend yield, it is hardly surprising investors have been attracted to the inflation hedge embedded within the handful of regulated infrastructure stocks during a rising interest rate environment.

It’s these strong defensive qualities that have also attracted private equity to recently pick off the listed stocks within this sector.

Given current valuations, there could within the next 24 months be no pure-play infrastructure stocks left listed on the ASX.

ASX listed infrastructure stocks

Play the bond

But beyond buying ordinary shares in these stocks, a less volatile way for income investors to play the infrastructure sector for consistent, known income - especially at this stage of the economic cycle - could be by investing in the bonds that many of these companies bring to market.

The trick is to have spare funds available for when your fixed interest broker brings these opportunities to your attention.

You may need to qualify as a wholesale investor which may require a minimum investment per bond of $50,000.

Given the companies bringing these bonds to market tend to have valuable assets, with long term contracts, the bonds they issue are typically regarded as low-risk and this usually affords them an investment grade credit rating.

Source: Income Asset management

As you will see in the above table provided, some of these investments are significantly discounted, trading well below their $100 face value.

For example, while QPH Finance (trading as the port of Brisbane), has the longest term to expected maturity of eight years, it is also the most deeply discounted, with the bond trading at $78.37.

Had you bought this bond early October you’d be expecting to earn a yield of around 6.22%. While some of the return is the bond’s capital appreciation, the remainder comprises semi-annual interest payments.

The running yield –the annual income on an investment divided by its current market value – is at 3.64%.

By comparison, AusNet Services, the only bond trading at a premium, is the most junior in the capital structure, and as such is more lowly rated along with Pacific National Bond.

Assuming interest rates exceed what the market has already priced-in, the interest income can be expected to continue rising.

Do your homework

But just like ordinary shares, it pays to do your homework before investing in bonds.

Remember, companies issuing bonds tend to be finance subsidiaries of the parent.

Here are some questions to ask

What you need to check is the underlying financial health of the business:

• Will the company still be around when your bond matures.

• What access does the company have to debt?

• Do shareholders have deep pockets or are there assets that could be sold if the company gets into trouble?

Company snapshot

Aurizon Finance: The freight operator acquired One Retail Australia (ORA) from Macquarie Asset Management for $2.35bn.

Keep your eyes on the company’s debt maturity profile, and group interest cost, which is expected to go up.

Interestingly, the bond matures after major debt refinancing is required in 2024, 2025, and 2026.

ElectraNet: Owns and manages SA’s high voltage transmission network (valued at $2.5bn) and is privately owned by the Australian Utilities, State Development Asia and Australian Holdings Co.

QPH Finance: The Port of Brisbane is managed and developed by Port of Brisbane Pty (PBPL) under a 99-year lease from the Qld government. PBPL is owned by APH Consortium, which comprises four the world’s largest infrastructure investors.

Origin Energy Finance: The integrated energy company has benefitted from elevated commodity prices. Being able to sell 10% interest to Australia Pacific LNG helped to reduce debt and initiate a $250m share buyback. The company is currently considering an $8.00/share takeover offer.

Dampier to Bunbury Natural Gas Pipeline (DBNGP): Constructed by the WA government, DBNGP supplies gas to gas to residential and industrial customers for electricity generation.

Pacific National Finance: Is Australia’s largest private rail freight operator, serving customers across the continent.

AusNet Services Holdings: Is an Australian energy delivery services business with $11bn-plus electricity and gas assets. The company is privately owned by Australian Energy Holdings No 4, which is controlled by Brookfield asset Management.