Markets are in good shape, and as expected, the new-issue market cranked back into gear last month – an opportunity to find good quality cash flows for our portfolios.
What can be astonishing (and pleasing) in this market is the difference in relative valuations between companies in a sector. Take, for example Equinix versus SoftBank.
Internet storage provider Equinix came to the market last month with a euro new issue. While we are typically cautious about the fast-changing nature of tech companies, we see structural demand for server space and connectivity between different organisations and Equinix benefits from this as a market-leading data centre operator.
As the old saying goes, we would rather sell shovels to prospectors during a gold rush rather than join in the prospecting ourselves – and these bonds offer cash flows, regardless of which online business gains or loses.
Equinix also has a very well-diversified client list (the largest customer is under 3% of revenues) across very different industries and can host its customers’ servers in multiple locations. This increases the stickiness of its customer base.
This high quality story was offered at a spread of almost 3%, which we think compares very favourably against better-known SoftBank. That is despite the lack of fundamental certainty over SoftBank’s long-term cash flows, as it spends huge amounts on highly uncertain early-stage tech investments – in effect trying to join the prospecting herd.
It seems that the yield penalty for choosing quality over quantity is at historic lows, in a market that is more concerned with all-in yield than differentiating between company fundamentals. This is the stock picker’s idea of striking gold.