Corporate Bonds 2014 Investment opportunities in a global environment
December 12, 2013
Disclaimer None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced for marketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly or through branch offices (“Saxo Bank”) make no representation or warranty, and assume no liability, for the accuracy or completeness of the information provided herein. In providing this material Saxo Bank has not taken into account any particular recipient’s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange, derivatives and commodities can be very speculative and
profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisor(s) in order to understand the risks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure of risks nor a comprehensive description of such risks. Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without
notice (neither prior nor subsequent). This disclaimer is subject to Saxo Bank's Full Disclaimer available at www.saxobank.com/disclaimer.
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Table of Contents 1. Bond Basics 2. Core global views 2014 3. Opportunities for bond positioning 4. Specific areas of interest
5. Summary
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What is a corporate bond? • Defined Cashflow
Maturity; coupon and return
• We can calculate annual return • How about Equities ?
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Coupon payments
Maturity
1
-90
Buy price
4
5
5
5
5
5
2
3
4
5
6
7
Yield Curve and Credit Curve 6%
Risk free rate
Credit spread Risk free rate
Government bond
Corporate bond
4% 2% 0%
6,00% 5,00% 4,00% 3,00%
As Investor we want to be compensated: • Inflation Risk • Credit Risk
I183 Upper Band Euro Curve I509 ECB AAA Euro Area Government Curve
2,00% 1,00% 0,00% 3M 6M 1Y
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2Y
3Y
4Y
5Y
6Y
7Y
8Y
9Y 10Y 15Y 20Y 25Y 30Y
Credit spreads and ratings
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AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC D
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C
5 year credit spreads in corporate bonds
INVESTMENT GRADE
Moody's
since 2008 (100 = 1 percent spread to risk free rate)
High Yield
HIGH YIELD
S&P
Investment Grade
Structure and collateral Accounting
English
Equity
Stocks
Tier 1 (old)
First loss absorbers
Covered Bonds
Perpetual
Senior Secured Debt Subordinated debt
Tier 1 (new)
Tier 2
Perpetual Senior Unsecured Debt
Tier 2 Subordinated Debt
Lower
Tier 1 Subordinated Debt (Perpetuals/Hybrid)
Upper Senior debt Colatteralized
Senior unsecured
Senior secured Covered bond
Last loss absorbers
Subordinated perpetual bonds - Hybrids – stock or bond? Many subordinated perpetuals – especially within financials – have in recent years experienced 100% losses in case of default, restructuring og government takeover
Called? ?
Floating coupon (i.e. EUR 3M + 200 bp)
Coupon Maturity 1
-90
Buy price
5
5
5
5
5
2
3
4
5
6
7
6
2
4
3
8
9
10
11
Maturity?
Beware of lots of different structures; convertable, call, rating triggers, change of control, perpetuals, fixed to float, step up coupon etc..
Volatility alert – Perpetual, subordinated = sensitive
4,625% VESTAS 2015 4,169% SOCIETE GENERALE 2049
8,125% UNICREDIT 2049
Types of Risk for Corporate Bonds • Specific name risk
• Bond type Risk • Credit market risk • Sovereign risk • Interest rate risk (inflation risk) 10
Portfolio Hedging • Combination of equities and bonds improves hedging ability for portfolio. • Negative correlation is normal with longer maturities, higher ratings. Dax Index
10 Year German Government Bonds
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Core Global Views 2014
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Core Global Views 2014 Central Banks to be Trigger Point FED to start tapering How much spillover and impact ? ECB could continue easing Inflation not a problem, deflation is. Possible BoJ to ease further
Trigger points will be the way of communication from Central Banks US Mortgage Yields & Home builder Index
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to Markets.
Market Expectations – Is a Tapering Storm coming ?
• Global core yields to shoot up
• Emerging markets to underperform
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Overall market theme: Rising yields…from tapering or inflation ? 10 year government yields since 2008
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Emerging Markets turmoil, have only seen little recovery.. 10 year government yields (local currency) in 2013 Being one of the biggest beneficiaries of global liquidity and ”hunt for yield”, Emerging Markets has been in the center of attention as this theme unwinds.
Biggest Fear is Rising Global Yields…..
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Core Global Views: Inflation Global inflation to be subdued in 2014. …Not coming from commodities…
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…or from capacity pressure..
Core Global Views: Inflation Development in Eurozone forced ECB to act.
Eurozone Headline and core inflation
Long Term unemployment rates
Larger risk for deflation, than inflation pressure in some regions.
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Core Global Views: Growth • Low interest rates and continued stimulus to underpin growth. • Better demand could help Emerging Markets stabilize. • Few critical triggerpoints at moment. • Downside risk centered on possible spillover from central bank policies.
Source: Reuters, CS
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Core Global Views: Corporates • Improving to good health in corporate sector.
• Very low levels of credit events, favours higher risk bonds. • Growth remains low but with an upward trend. • Low yield environment will support positive development.
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Core Global Views: Emerging Markets • Gradual recovery, but sensitive to monetary stimulus.
600
• FED tapering talk have initiated repricing.
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Risk Premiums
500 400 300
100 0
Latin America
• How much impact of actual tapering ? • LATAM most vulnerable but also hardest hit. • EEMEA to improve on the gradual recovery in Europe.
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EM Currencies
Europa (high yield)
Core Global Views: Emerging Markets • Negative circle: Bond outflows when return goes negative.
Performance
• LATAM underperformance opens for opportunities.
• EEMEA will be sensitive to FED tightening.. EM bond fund flows and return
• …But EEMEA spreads will look attractive to European contraction.
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Core Global Views: European High Yield • European recovery to continue. • Despite low core yield, Banking system and transmission mechanism do not function yet. • Credit will benefit from • Modest growth
• Further stimulus • Periphery convergence • Low inflation and core yields
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Government Debt% / GDP Ratio
Core Global Views 2014 • Low Inflation & Low interest rates • Orderly, but modest outlook • Corporates overall good health • Emerging markets to stabilize • Spread contractions likely to continue • Low present level of risk factors
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Opportunities for Bond Positioning
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Lower risk premiums justified by better climate • Investors need to be selective and look global for relative value.
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Balanced Scenario - Factors Which Bonds to choose in Which Scenario
Events : Europe Recovery ? Fed to start Tapering ? Impact on EM ? Setback in Equities ? Inflation ? Critical Risk Factors ?
Risk Factors: • Core Yields • Credit Spreads • Emerging market Spreads • Default Ratios
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Europe
Emerging Markets
Balanced Scenario – Bonds vs. Equities How can we use bond in an equity only portfolio ?
Equities
Core EUR/USD Government bonds Long Maturities
Corporate Bonds higher Rating / Longer Maturities
Core Countries
Less risk Negative correlation
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European Corporate Bonds High Yield
Peripheral
Emerging Markets Corporate Bonds
Emerging Markets Government Bonds
High Yield
EUR & USD
More risk Positive correlation
Local Currency
Balanced portfolio – What Bonds ?
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Maturity
Risklevel
Zone
Less Fed Tapering
Short to Medium
High yield, Corporates
EM, especially LATAM
Orderly but slow recovery Europe
Medium and upscale allocation
Medium and High yield
Europe Peripheral EEMEA
Positive Scenario, Equity Rally
Short
High yield
Europe Peripheral EEMEA, LATAM
Setback Europe
Long and upscale allocation
Medium
Core Europe
More Risk Factors
Long and upscale allocation
Low
Core Europe US
Specific Areas of Interest
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Trading Desk View Russia Fundamentals look brighter: • Growth should expand to 2.3%+ area. • Budget Oilprice can disturb reserve fund. Doing Business Rating
• Weaker RUB part of adjustment.
• Stocks and Corporate Bonds will become EC clearable
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Trading Desk View Russia Tapering Fears: ”timing is everything” • April could be month of action • Beginning upside potential, if FED goes dowish. • Underperformance due to continued Fund outflows
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Fund flows in EM
RUB weakness compared to Emerging Markets
• RUB less taper sensitive than classic Emerging Markets • RUB weakness probably result of domestic outflows
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Russian relative value higher as Europe rally. 500 400
iTraxx Europe Gazprom OAO Via Gaz Capital Sberbank of Russia Russian Federation
300 200 100 0 Jan-10
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Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Bond Inspiration – High Yield High Yield Bonds
Coupon Maturity Price Rating Yield Currency
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7,25% aug 2018 102,50 B1/B+ 6,5% EUR
Coupon Maturity Price Rating Yield Currency
7,75% june 2020 105,00 B/B+ 6,5% EUR
Russian Bond Inspiration: Oil & Gas
Coupon Maturity Ask price Credit rating Effective yield Currency Size
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3,85% 02/06/2020 97,25 Baa1/BBB 4,36% USD 200k
Coupon Maturity Ask price Credit rating Effective yield Currency Size
4,563% 04/24/2023 94,00 Baa2/BBB 5,39% USD 200k
Russian Bond Inspiration: Financials
Coupon Maturity Ask price Credit rating Effective yield Currency Size
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7,50% 09/26/2019 106,50 Ba3/BB6,15% USD 200k
Coupon Maturity Ask price Credit rating Effective yield Currency Size
5,125% 10/29/2022 95,75 Baa3/BBB5,74% USD 200k
Russian Bond Inspiration
Coupon Maturity Ask price Credit rating Effective yield Currency Size
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4,45% 03/19/2018 99,50 BB+ 4,58% USD 200k
VTB Bank – Perpetual
• Exposure to second largest bank. • USD to isolate creditspread. • Not rated bond, but VTB Capital is BBB. • Higher volatility in Perpetual. • Close to 8% Yield.
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Coupon Maturity Call Ask price Credit rating Effective yield Currency Size
9,50% Perpetual 12/06/2022 110 No rating 7,92% USD 200k
Sistema – Industrial Diversification • Diversified holding company • Good track • Exposure to Russia and CIS
Coupon Maturity Ask price Credit rating Effective yield Currency Size
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6,95% 05/17/2019 106,00 BB5,65% USD 200k
CMA CGM – High Yield - High Risk Large Shipping Rating upwards trend from Moodys Selling out harbour facilities
Moody’s: Focus on costcutting and among most efficient in the business. About the company CMA CGM is among world biggest container lines. Hard hit and in crisis in 2011. Freight rates and over capacity a big challenge
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Coupon Maturity Price Kreditrating Effektiv rente Valuta
8,875% 15/4-2019 98 Caa1/CCC+ 9,57% EUR
High Risk PDSVA – Petroleos de Venezuela State Owned Oil Company Geopolitical risk premium Political mis-management
Sovereign Rating of B PDVSA outlook negative by all 3.
About the company PDVSA Develope, Exploration, production crude oil and natural gas.
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Coupon Maturity Price Rating Yield Valuta
4,9% 15/4-2014 92.60 B+ 13,72% USD
Summary • Base Scenario – Orderly, but modest growth and return. • Downside risk from Central Banks and disappointing growth. • Good case for ”yield hunting”. • Use Safer, long bonds for hedging equities. • Use Higher Risk bonds as alternative to equities.
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Disclaimer None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced for marketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly or through branch offices (“Saxo Bank”) make no representation or warranty, and assume no liability, for the accuracy or completeness of the information provided herein. In providing this material Saxo Bank has not taken into account any particular recipient’s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange, derivatives and commodities can be very speculative and
profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisor(s) in order to understand the risks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure of risks nor a comprehensive description of such risks. Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without
notice (neither prior nor subsequent). This disclaimer is subject to Saxo Bank's Full Disclaimer available at www.saxobank.com/disclaimer.
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