August 2019

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  • 1. Given the latest commentaries more dovish from the ECB and now from the FED, several clients are asking the impact on the subordinated debt space (CoCos and other hybrid securities in particular).

    The main effect that this has had is a rally in subordinated financials debt in the last few days – with AT1 CoCos up close to 2% and subordinated insurance up c1%. Nevertheless spreads remain highly attractive (around 450bps on EUR AT1s CoCos for example) and wide in a historical context and hence we continue to see further price upside.

  • 2. Analysis of the recent holdlings for the funds in terms of the Bloomberg BVAL Score? Each holding has usually a BVAL score (excpet ABS, CLOs, etc.).
    GAM Star CreditOpportunities EUR BVAL Score % of fund
    BOND Average:               7.493 80.56
    N/A 0.00 2.15
    PrefShares 0.00 2.11
    CASH 10 15.18
    FUND Average: 9.01 100.00
    Fund average Net of Cash 8.83


    Please note that using BVAL to assess the liquidity of the bonds we hold could result quite an approximation as we do hold bonds which do not report a BVAL score like pref shares which are actually quite liquid positions but score a 0 in the attached as Bloomberg considers them as Equity.

  • 3. Client Just reached out further to news on the Pershing SQ PP deal financed by Guggenheim

    We actually sold our holdings of Pershing Square at a profit during the 1st half of year. The main reason being that we felt the spread had tightened quite significantly and that we could find better relative value elsewhere. Looking at the Guggenheim deal, it is important to note that the Pershing Square 5.5% 2022 have a limit of indebtedness covenant.

  • 4. A client is asking about the Regulatory Par Call, example on Lloyds 12% on which can apply a regulatory par call after 12/2021 despite the first call date being 12/2024. He understands about legacy papers that the banks are incentivized to call them after 2022 (when they will be no longer part of the regulatory capital required by Basel), but these papers are obviously passed their first call right? The legacy papers we have in the Credit Opps funds are all trading with a discount?

    Yes the Lloyds 12% Perp can be called at the end of the grandfathering period (Jan-22) at par at the election of the issuer, significantly reducing the yield of the instrument from c6.9% (Dec-24) to 2.4% (Jan-22).

    This is why it is paramount to fully understand the terms of bonds and hence reading through the prospectus before investing in these instruments. We always assess the yield/spread given the issuers’ call options to have a true picture.

    Issuers are definitely incentivized to redeem these instruments as they are increasingly inefficient from a regulatory capital perspective. Some have call dates still in the future while others have indeed passed their first call date, and some are trading at discounts (especially legacy Discounter Perpetual FRNs) while some above par. For those trading above par, we focused on instruments with “make-whole” features – where the issuer can only redeem the bonds at a fixed spread above the current risk-free rate (government bond yield). For example, Commerzbank 8.151 Perps are only callable in 2029, but from Jan-22 the issuer will have the option to repay those at the US treasury rate plus 50bps, equivalent to a price of 139% (based on today’s levels) and hence a yield to make-whole in Jan-22 of 6.6% (spread of 480bps) – highly attractive.

    Overall – we are invested in different types of legacy securities where we see value and with favorable outcomes for us in case of redemptions such as discount FRNs callable at par or legacy instruments with “make-whole provisions”. In any case we incorporate the different redemption options into our assessment of each security when making investment decisions.

  • 5. Is there any limit of CoCo bond which is available to be accepted as ‘eligible capital’ under European regulation? e.g. In Korea, CoCo bond is recognized as capital up to 25% of total capital.

    Under current European regulation, the limit for AT1s is 1.5% of RWAs (for UK and Nordics this is slightly more – c2%). For example for BNP (on the right), the group’s capital requirement is 13.33%, of which 9.83% in CET1, 1.5% AT1 and 2% Tier 2 (all as a % of RWAs).

    More into details, the maximum limit of RWAs is 1.5% (anything above has limited capital efficiency – but issuers can have more than 1.5%). In terms of AT1 requirements within the capital structure, this is 18.75% of Pillar 1 requirements (8% total, of which 4.5% CET1, 1.5% AT1 and 2% Tier 2). There is no actual minimum and in theory they could fill their AT1 requirements with CET1 capital – but it is more efficient to use AT1 given the lower cost vs. the banks’ cost of equity.



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