Credit-default swaps on Australian consumer and service companies are more expensive than the nation’s benchmark index measuring bond risk for the first time since 2009 as household spending slows.
The cost of protecting the debt of Woolworths Ltd. (WOW), Australia’s biggest retailer; Qantas Airways Ltd. (QAN) and four other companies has risen 13 basis points this year to 108 basis points on average, compared with an increase of 2.5 to 106 in the Markit iTraxx Australia, CMA prices show. Contracts on Woolworths are the most expensive relative to Asian peers in seven weeks and those on Qantas are the highest since February compared with the global airline industry.
Consumer confidence fell in three of the past six months and retail sales in March declined for the first time since October after the Reserve Bank of Australia boosted interest rates to the highest in the developed world. While shipments of iron ore and coal to China and India amid a mining boom are driving growth, they have also spurred the currency to record levels, hurting non-resource industries such as manufacturing and tourism.
“Australia’s multi-speed economy is a key focus for us,” said Chris Viol, a credit analyst at UBS AG in Sydney. “Combined with the high Australian dollar and global issues such as the opaque situation in Europe, the corporate credit implications are far-reaching.”
Swaps on Tabcorp Holdings Ltd., Australia’s biggest gambling company; casino owner Crown Ltd.; Wesfarmers Ltd., the nation’s second-biggest retailer; and brewer Foster’s Group Ltd. have also risen faster than the iTraxx index this year, CMA prices show. The average price of contracts on the six companies has exceeded the benchmark since the end of April. The last time they were higher was August 2009.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Retail sales declined 0.5 percent in March from a month earlier, the Bureau of Statistics said last week. Spending at department stores fell 3 percent, and consumers spent 0.4 percent less at food retailers, the report showed.
RBA Governor Glenn Stevens increased borrowing costs seven times between October 2009 and November 2010, raising the benchmark interest rate by 1.75 percentage points to 4.75 percent to contain inflation as the mining-investment boom bolsters growth. The U.S. Federal Reserve has kept its main interest rate near zero since December 2008.
Australian employers unexpectedly cut workers in April by the most since 2009 as hiring weakens in states less affected by the resources bonanza, the statistics bureau said in a report today. The number of people employed declined by 22,100, after a revised 43,300 gain in March, according to the report. The jobless rate held at 4.9 percent.
Consumer prices may rise an annual 3.03 percent in the next five years, according to the gap between yields on government bonds and inflation-indexed notes. The RBA aims to hold inflation between 2 percent and 3 percent on average.
The yield on the benchmark 10-year government bond fell 6 basis points to 5.36 percent today, or 221 basis points more than similar-maturity Treasuries.
The Australian dollar climbed 19 percent against the U.S. dollar over the past year to $1.0612 at 12:31 p.m. in Sydney today. The so-called Aussie touched $1.1012 on May 2, the highest since exchange controls were scrapped in 1983.
The nation’s manufacturing contracted in April for the seventh time in eight months. Short-term arrivals to Australia fell 0.8 percent in March from February, according to the most recent trend estimates from the Bureau of Statistics, the fifth straight monthly decline.
The central bank, which has left interest rates unchanged for the past five meetings, said last week that household spending is subdued and personal savings have increased to the highest level since the 1980s.
“Some areas of the economy are expected to be very strong, while conditions will be quite difficult in others due to the appreciation of the exchange rate and subdued consumer spending,” the RBA said May 6 in a quarterly review.
Five-year credit-default swaps on Woolworths rose 4.8 basis points this quarter to 70, compared with a 1.9-basis-point decline to 82.5 for an index of seven retailers in Asia including Japan’s Marui Group Co., Bloomberg data show. The gap between Woolworths and the Asian index was 11.3 on May 9, the least since March 23.
Woolworths cut its profit forecast in January, the first time in at least 10 years the company has reduced its growth prediction. The retailer expects annual profit to rise between 5 percent and 8 percent, down from an earlier prediction of as high as 11 percent.
‘Pressure on Consumers’
Woolworths’ A$500 million ($543 million) of 6.75 percent notes due March 2016 returned 0.52 percent this quarter, compared with average gains of 0.84 percent for bonds in Bank of America Merrill Lynch’s Australian Industrial Index.
Clare Buchanan, a Sydney-based spokeswoman for Woolworths, declined to comment.
“There is some pressure on consumers,” Woolworths Chief Executive Officer Michael Luscombe said last month. “No doubt discretionary spending will feel the brunt of that.”
Myer Holdings Ltd. (MYR) and David Jones Ltd., Australia’s biggest department store chains, said yesterday that sales declined in the three months ended April 30 amid flooding in the northern state of Queensland and stalled consumer spending.
Westfield Group, the world’s biggest shopping center developer by assets, said yesterday that sales in its Australian malls declined 0.3 percent to A$21.5 billion in the 12 months to March 31. U.S. sales climbed 5.5 percent to $6.8 billion in the same period, it said.
“Earnings growth is suffering as consumers become more cautious and save more,” said Ben Byrne, a Sydney-based credit analyst at Nomura Australia Ltd. “Still, corporate balance sheets remain quite strong.”
Default-swaps on Woolworths, Wesfarmers and Crown may also have risen on the risk they will make acquisitions to generate growth, he said.
Qantas, which has about 66 percent of the Australian market, has posted four consecutive months of declining passenger yields on domestic routes. The company filled 78.4 percent of seats in March, down from 81.1 percent a year earlier, according to company filings.
Contracts on Qantas have climbed 11.7 basis points this quarter to 157.7 and were the most expensive relative to the global airline industry on May 6 since the end of February, data compiled by Bloomberg show.
The extra yield investors demand to own the airline’s $514 million of 6.05 percent bonds maturing in April 2016 instead of similar-maturity Treasuries has risen 12 basis points this quarter to 249, Australia & New Zealand Banking Group Ltd. prices show.
Luke Enright, a spokesman for Sydney-based Qantas, declined to comment.
“The Reserve Bank and government know they have to adjust the economy for this very large lift in resources investment,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. The resulting spending restraint from consumers is “exactly the opposite of what retailers and the like will want to hear,” he said.