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Investing in subordinated financials debt versus corporate hybrids

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  • August 2020
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  • Investing in subordinated financials debt versus corporate hybrids

In general, we find both subordinated financials and corporate hybrids attractive. Corporate hybrids are a good tool for us to diversify our exposures.

Nevertheless, we find the best value in financials (European banks and insurers) given:

  • – More attractive spreads, with around 500 bps on financials versus 200-300bps on corporate hybrids. We therefore see more upside on financials where spreads are extremely wide
  • – Legacy bonds with significant optionality in subordinated financials that does not exist in corporate hybrids

In terms of earnings, click here to read a recent article on Q2 results of banks and insurers.

In short, fundamentals of the sector remain strong, as the Covid-19 impact is absorbed by earnings and excess capital has increased year-to-date – providing a very strong buffer for banks to protect bondholders.

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