The latest Investing Matters Podcast episode featuring financial educator and author Jared Dillian has been released. Listen here.
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Bloomberg-
Altice International, one of the three branches of billionaire Patrick Drahi’s troubled telecommunications empire, has won some time to tackle its debt load by refinancing a bond in the loan market.
The firm raised €800 million ($846 million) — up from the €500 million originally marketed — in a term loan due Oct. 2027 via borrowing unit Altice Financing. Priced with a discount of 96 and a margin of 5 percentage points over Euribor, it will redeem a €600 million junk bond due in Jan. 2025 and repay drawn amounts of the revolving credit facility.
Santander just skipped an AT1 call option. It is not one in Bips but does show that at least some banks are reluctant to re-finance at the current level. It looks to have been expected as bond price has not moved much, it should be noted that this was the first skipped call since March.
A comparative review of Bips/HDIV/NCYF
https://citywire.com/investment-trust-insider/news/james-carthew-soft-landing-vs-recession-weighs-on-bond-funds/a2423262
BIPS will be presenting at the AIC conference in October.
A good opportunity to quiz the manager, it is live (in London) and online.
The Italian Government has announced it is proposing a windfall tax on Bank profits. Bips holds bonds of Unicredit and IntesaSanpaolo, Whilst the companies share prices have, understandably, fallen it is still not clear whether this will impact bond prices. Arguably, if the companies are profiting enough to be subjected to a windfall tax then the risk for the bonds is already considered very low so it should have limited impact.
Spain has also gone down this route and looks like other countries are following. it may turn out that the perp bonds are a better investment than holding the equity in a high interest environment as less scope for governments to skim off the payments (with the exception of the Swiss with its handling of Credit Swiss...)
Why Bips?
I purchased most in the dip last summer/Autumn using funds from selling out of NCYF, so for me I did capture some of the discount to nav at the time. The rational was it is more diversified both in holdings and countries, I felt NCYF was a bit higher risk going into a potential recession especially with some of their property company exposure, it also was trading on quite a high premium when I sold.
The divi is currently around 7% , they had enough cover to also put money into the shareholder reserves in the last financial year. MtM is around 9% without gearing.
The divi from Bips combined with 9%+ from TFIF gives a 8% return on this part of my portfolio which I am happy enough with. I rebalance between them as and when the situation demands/opportunity arises.
Following the performance of a couple of the bonds they hold I was surprised that the nav had not increased more last week. Now I know why. They have (had?) 1.1% over 4 bonds in Altice. - below is an excerpt from an article on Bloomberg.
'Altice makes up such a large part of the European junk bond index that the news police had detained one of the media giant’s co-founders as part of a corruption investigation is proving a major headache for the region’s high yield portfolio managers.
Since July 14, bonds issued by Altice International and Altice France Holding SA have lost €420 million ($467 million) in market value, while the rest of the index increased by €519 million over the same period. Without them, the Bloomberg Euro High-Yield index would have recorded double its gains over the past week'
'Subordinated bonds issued by Altice International due in 2028 dropped to as low as 50.19 cents on the euro following the news, before recovering somewhat to 56.26. Meanwhile, another bond issued by Altice France dipped to lows of around 36% of face value.'
Why does this routinely (since October of last year) trade at a premium of around 2.5%? It only pays 7%. Surely there is better value elsewhere?
They have (at least had in March) 0.53% in a Thames Water bond which has (unsurprisingly) tanked from 88 to 53p over the past couple of days.
One of the good things about Bips is that it is very well diversified so problems with individual companies have limited impact on the overall performance of the trust.
I should give up commenting! AT1 off over 1% today on the back of the Fed meeting yesterday. Interesting that Bips is up, the sceptic in me says it has probably being taken up to issue some shares when the nav drops, they typically do this at around 2.5p over nav.
Reuters (on LSE) -
'ING said in a note on Tuesday that BBVA's new issuance would make it "very likely" that the Spanish lender's 5.875% bond will be called in September.'
This is the final step needed to keep the AT1's on an upward trajectory.
Ivz AT1 is now back at 3200, still well below its peak of 3700 in February but it has showing a nice steady up trend since the CS turmoil. I also follow a Banco de Sabadell S.A. 5,75% bond (ISIN: XS2310945048) which is in BIPS and has shown a comparable trend (now at 85, compared to a peak of 93 in Feb and a low of 70 in mid March).
Also reported by Bloomberg today-
'The market for the riskiest type of bank debt is reopening, with Banco Bilbao Vizcaya Argentaria SA and Bank of Cyprus Holdings Plc selling the first AT1 bonds in Europe after a controversial wipeout of Credit Suisse Group AG’s notes.
The Spanish bank is looking to raise between €750 million ($810 million) and €1 billion from the sale of Additional Tier 1 notes, offering an initial yield of around 8.75%
The Bank of Cyprus is offering €220 million notes at an initial yield of around 12.5%'
With the confidence instilled by the placing new AT1 debt we should (hopefully!) see continued recovery in this section which was around 30% of the fund.
According to Reuters Lloyds did indeed say they "will redeem 135 million pounds ($169 million) outstanding from its original 1.5 billion pound fixed-rate notes at the first opportunity, which is on June 27."
Is the next expected BOE base rate rise priced in?
Having posted the above the AT1 markets then promptly slipped back a bit....
News today is that yesterday ' UniCredit said that they were calling their 6.625% AT1 bond. Lloyds are next up, with their call window opening tomorrow, Friday 28th April, and markets are very much expecting a call from them as well – and if they do so we think this should help bring further confidence to the AT1 market.' (Source Twentyfour)
Unicredit are not replacing theirs at the moment but with some strong results in from the European Banks it all looking positive going forward.
It has been slowly recovering with the Ivz AT1 now (after a couple of bumps) now trending nicely upwards and is comfortably at its highest since the problems at CS, even although it is still well down from Februarys highs.
However, in a sign that confidence is returning , a Jananese Bank, Sumitomo Mitsui Financial Group Inc. just sold 140 billion yen ($1 billion) of AT1 debt, becoming the first major global bank to issue such notes since the finance-sector crisis erupted last month.
'The sale is one of the largest deals in the yen corporate bond market so far this year, indicating that at least in Japan there’s firm demand for the riskier debt sold by local lenders. Another big Japanese bank, Mitsubishi UFJ Financial Group Inc., is also planning a two-part AT1 bond deal as soon as mid-May.'
Although not likely to be imminent, the next big jump would come if one of the major European banks calls and reissues.
Nav is now 161.4, however with the recession fear now in play it looks like the AT1's are peaking for now. I think the next (At1 driven) steps up will be more gradual until one of the banks calls one in and reissues. One of the Japanese banks had planned on a AT1 issuance but has now pulled it.
The yield on Bips is currently 7.14% so I am happy enough to sit and let the pull to par unwind over a few years.
AT1's look to have bottomed out and now seem to be on the rise (famous last words!). The ivz AT1 is up 3.5% today following a slight rise yesterday and is now sitting comfortably over 3000, the highest it has been since March 20th. Hopefully it will see us back to nav's over 160 again.
Invesco came back to me and finally answered almost all of my queries, some in greater detail than I was expecting, so complements to them for being responsive.
I will not go through them all but if you wondered why the undistributed current year revenue dropped from approximately 4 to 3p after last weekend, then it is because the excess from last year has been transferred to the revenue reserve. Nice to know they are building a buffer and that we still have more than enough left to pay this quarters divi with spare to provide a good head start for the following quarters.
Well I have to say that Invesco were rather disappointing with providing responses to my requests for information. Whilst a couple of the points have been addressed with more general statements on their website (such as percent AT1 holdings), they failed to answer questions about call dates . I also questioned why the same fund manager adopted opposing strategies for their Credit Swiss holdings between the open and closed funds, with Bips increasing from the end of February and all of the other open funds decreasing.
What was odd was that they would not comment if they had increased or decreased any holding -despite having already published this exact information on the Invesco website!
Fortunately Twentyfour are much better at customer relations and have provided a good running commentary on their Insights page most of which has relevance to Bips, note, I pair TFIF (mainly ABS) with bips (HY) along with a smaller holding in smif (HY, ABS,+other).
Here are some recent comments that may be of interest.
'CoCo bonds suffered from the worst contagion we’ve seen since their inception back in 2013. Dispersion has been huge though with Swiss and low reset bonds lagging the recovery from intraday lows last Monday. Compared to the recent peak in early February, CoCo bonds are down anything from 3-4 points (for example HSBC’s 6 call 2023) to 30 points (such as DB’s 4.789 call 2025). A reasonable number of these bonds are trading at levels we saw briefly in March 2020 when fears of a very deep global recession took hold with non-performing loans (NPLs) spiking to GFC levels or higher. Others are trading at levels similar to those we had in late September/early October last year when, in the context of an expectation of a severe energy crunch in Europe, the ramifications of the UK’s mini budget added further pressure on European bank bonds as well as risk assets more generally.
At these levels the CoCo Index (excluding Credit Suisse bonds) trades at a weighted average price of close to 83 cents. Given that these bonds are perpetual with call schedules this translates into a majority of bonds being priced to perpetuity. In other words the yield to worst calculation equates the price of the bond with a perpetual stream of coupons and no principal payment, forever. The resulting weighted average yield to perpetuity at time of writing is close to 9%. Whereas if we price the bonds to their first call the resulting yield is approximately 11.5%. '
AT1's under a bit more pressure today. Deutsche Bank(DB) is now in the spotlight. DB AT1's down about 4.5% today reversing most the gains from the past few days. BIPS holds/held around 1% in total in AT1's from DB. The AT1's of stronger banks such as Barclays are only off a tad. Hard to see that the EBA will let this go down the same route as CS or they will have both a major banking crisis and little chance of banks being able to raise capital via CoCo's again.
From what I can discern generally non financial HY has held up OKish over the past week . Outside the AT1's the main fallers seem to have been bonds from insurers, these have moved in tandem with those of the banks and probably accounts for most of the remaining decrease in nav.
Thanks. I appreciate it when others post useful info so it is nice to reciprocate when I can.
I do have quite a large holding in this so I have been trying to find out as much as I can. I am still waiting for them to clarify a few points still though.
Yesterdays closing nav was 160.3 so its still continuing to recover. quite nicely. The share price has typically been sitting a couple of pence above this so this should we should soon see it in the range 162-164.
Appreciate you input and knowledge on this Monkshood.
This is what these boards should be used for, not the blatant ramping/deramping that goes on every day. Refreshing to read rare posts from someone without an agenda.
At bit more clarification from Invesco. BIPS has around 30% in subordinate financials, of this around 20% is in AT1's. Although it is rather Bank specific these will be down around 10% since the highs in February so approximately 2% of the nav then add in the 0.65% write off in CS round it all up to 3%, so about 5p is off the nav specifically due to the banking/AT1 problems.
Barring the 0.65% this should hopefully unwind over time.
I have taken this from Twentyfours website - as they seem better at keeping their customers informed than Invesco!
'AT1s fell sharply on Monday morning by between 7-15 points with higher beta names and UBS underperforming. Nonetheless, the importance of the European and the UK’s regulatory rebuttal to the weekend’s proceedings became apparent as post their respective statements, a quick rebound took place and by the end of the session roughly half of the move down had been recovered. The positive momentum has continued through yesterday and this morning with some bank AT1 bonds now back to last Friday’s prices – i.e. recovering all of the post-Credit Suisse action, but still lower than pre the US regional bank led sell off.
To give a few examples, at time of writing BNP 7.375% and BARCLAYS 8.875% are two AT1 bonds to have recovered to Friday prices. Though it should be said that both bonds are still down over 10 points from their February highs and are yielding over 10% to call in sterling terms and around 10% even when priced to perpetuity'
Not sure about the BPN bond but I think that BIPS holds around 0.9% in the Barclays bond (hard to be sure without exact bond number).
Nav has come off its low of 157.5 back up to 159.1 (at close on the 21st).
It was interesting to note that they added to CS (doubled?) over the first two weeks in March in BIPS, but the same fund manager either held or reduced in their open ended fund(s), Why the different strategy?
They have increased repo borrowing by 1%, assumedly to take advantage of the price falls. Most AT1's are now paying double digit yields, so as long as the market settles, there are no more defaults and the bonds are called when expected (there are 'perpetual' but are still called), then I am quite happy taking a >7% divi whilst I wait for the nav to recover.
They already have almost 4p of undistributed income, so no problem covering the next 2.875 divi that they have just announced.
It is the benefit of the higher rates now available that the fund can bare the odd default with no impact upon payouts.