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We have been asked if the GAM Star Credit Opportunities funds are investing more in legacy bonds from UK banks, compared to AT1 CoCos from UK banks (given the coupon risk on AT1 CoCos).

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  • August 2020
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  • We have been asked if the GAM Star Credit Opportunities funds are investing more in legacy bonds from UK banks, compared to AT1 CoCos from UK banks (given the coupon risk on AT1 CoCos).

We do own both legacy and new-style bonds from the UK banks. In our view, there is significant value in both, for example:

HSBC 6.375% USD AT1s callable in 2024 (coupon reset to the 5-year swap rate + 3.705% if not called) currently trades at 550 bps of spread, or 5.8% yield in USD. The bonds are rated Baa3 by Moody’s and BBB by Fitch, and therefore we are capturing high spreads for investment grade paper and see significant value

NatWest (RBS) Legacy Perpetual floating rate notes (FRNs) (floating coupon of Libor +232 bps) in USD currently trade well below par at 95%. NatWest (RBS) can redeem those at par from December 2021 at which point the bonds will no longer count as capital. This is equivalent to a 7% yield to call (or circa 650 bps of spread)

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