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Clients are asking details on the two positions we hold in Rabobank, how have them been performing and what’s our view on the new AT1 coco vs the old Certificate?

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  • December 2019
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  • Clients are asking details on the two positions we hold in Rabobank, how have them been performing and what’s our view on the new AT1 coco vs the old Certificate?

Context: Tighter spreads YTD masks “hidden” opportunities across the capital structure, a practical example on Rabobank

Impact for the fund:Diversify across the capital structure aloud to capture interesting opportunities with high potential for strong performances from technical and valuation standpoint

 

We have been mentioning that current valuation levels are very attractive and we have been referring to the AT1 Cocos index to assess the valuation of the financial subordinated debt, despite this very interesting opportunities can be found along the capital structure, looking more in the specific to two examples from the same Issuer, Rabobank 4.625% (AT1 Cocos) and Rabobank 6.5% (Tier1)

 

Rabo 4.625% (AT1 Cocos) is trading at ca. 320bps, so the Rabobank 6.5% (Tier1) is indeed really cheap at over 501bps (if the certificates were too tightening to 450bps, all else being equal the cash price would go from 127 to 141).

The Rabobank 6.5% (Tier1) only really performed because of the rates down-movement, and not really because of spread tightening.

This makes this security extremely cheap and very attractive.
Moreover, it gives close to 7.5% income when hedged back to USD. Therefore, we believe the Rabobank 6.5% are extremely cheap.

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