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Dominion income Trust

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Dominion income Trust

Hello team, With Bank hybrids disappearing from retail investors domain is Dominion Income Trust paying BBSW+4% worth the risk? John

Answer

Hi John,

It looks a good security, from a good manager, targeting a realistic return, charging a reasonable fee (0.5% incl GST).

Here’s what we wrote on Wednesday about it;

New Issue – The Dominion Income Trust (DN1)

The first of no doubt many new issues launched this week, as managers look to fill the void left from the abolition of bank hybrids from the retail market progressively between now and 2032. Realm, a locally based Credit and Fixed Income manager with ~$7.4bn under management, have created a structure to look and feel as much like a hybrid as possible, including;

  • Set to be listed on the ASX under code DN1 – proposed listing date 3rd March 2025.
  • $100 face value and a fixed term to maturity (6 years) with an optional call date at year 5 – much like a hybrid.
  • Targeted floating rate with a 3.5% margin over the bank bill swap rate, in line with median hybrid margin over time (less so recently as hybrids have tightened).

While it looks and feels like a hybrid, there are several points worth highlighting.

  • The 3.5% margin over BBSW is targeted, not set like a hybrid, and it’s in excess of the 1-month BBSW given the trust pays monthly distributions (not 3-month BBSW like a hybrid).
  • Distributions are all cash, with no franking. Hybrids are franked (with the margin quoted inclusive of franking).
  • The trust will invest in a globally diversified portfolio of credit exposures across government, bonds, corporate bonds and structured credit (including public and private debt) with a target average credit rating of BBB.
  • Banks (and therefore hybrids) are exposed to credit cycles and what’s playing out economically, and while that’s also true for the Trust, the underlying exposures are different as outlined above.
  • The BBB target is aligned with major bank Hybrid ratings (which are also BBB), which implies they are both low risk, however, for the Trust, it’s a target average credit rating across the book.
  • History has shown that listed investment trusts (LIT’s) can trade at a discount to their Net Asset Value (NAV) on the ASX, not possible with a Hybrid, and this has been an issue for the structure.
  • However, no LIT’s have had a fixed term whereby, investors will be able to get the NAV at maturity if it’s not being offered by the market. This should address that issue in MM’s view.
  • The Trust is paying a higher return than hybrids are currently offering.

The Trust structure proposed by Dominion (which is owned by Realm) is an innovative one, whereby they raise up to $300m (they already have the min $150m done) and invest it in a credit note that pays 1m BBSW + a 4.00% margin. The note invests in an underlying portfolio at a 4% margin, they charge a 50bps fee and pass through the 3.5% targeted margin net of fees to the LIT.

With the 1-month BBSW at 4.3% + the margin at 3.5%, the initial yield would be 7.8% net. Assuming market pricing is correct, and we get 0.8% of interest rate cuts before Christmas, the yield is more like 7%. Realm are also funding an equity buffer of $10m which is designed to absorb any credit losses. The structure is set out below.

The Broker offer is now live, with a closing date of the Broker Firm being 11 February 2025, however, it is subject to early close, which we think is likely. Allocations can be bid for through the following brokers for sophisticated and professional investors. Morgans, E&P, Commsec, Canaccord, Shaw and Partners & Wilsons. The presentation is available here and research from Bond Adviser is here, keeping in mind this is paid research, not independent of the issuer. Also important to read the Product Disclosure Statement (PDS) here.

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Structure of DN1 security
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