Two of the largest contributors during October were certificates from Rabobank and our legacy holdings.
Firstly, Rabobank announced that it will pay a scrip dividend on certificates we own, which will fully compensate investors for the 6.5% of coupon which was not paid this year after a request from the European Central Bank (ECB). Following this announcement, the price of the certificates increased noticeably and drove the performance of the funds significantly.
Secondly, we saw strong momentum among our legacy holdings following an opinion by the European Banking Authority (EBA) on the prudential treatment of legacy bonds for banks. This was an additional catalyst for the legacy space after NatWest tendered some of their legacy bonds at 3-4 percentage points above market levels in September.
Subsequently, discounted perpetual floating rate notes (FRNs) performed well – with Aegon’s perpetual FRNs (coupons of USD swap rate + 10 bps) up around 3% on the month and legacy FRNs broadly moving up a few points on the month. At 77%, the bonds remain very cheap, in our view, with a yield to call in December 2025 of 6% at which point the bonds lose all capital value and will need to be bought back or tendered.
Furthermore, HSBC’s 10.176% perpetual securities (callable in 2030) benefitted from the NatWest story due to the structural similarities of the instruments. The bonds are up more than 6% since September and HSBC can only redeem the bonds at a very favourable price of around 172% or an 8% yield to call.
Overall, we believe Rabobank’s 6.5% certificates have scope to increase further. As well as seeing strong value in the legacy space, we believe this asset class exhibits significant potential upside for investors as issuers continue to clean-up old bonds.