Tuesday 07 July 2015 by Justin McCarthy Trade opportunities

GBP DirectBonds – Plenty to choose from


With currency and credit spread movements topical at present, we remind readers of the numerous options available in GBP

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Many of our clients have invested in USD bonds over the past two years but only a small number have considered GBP denominated bonds.

Craig Swanger recently wrote about GBP currency trends and the pros and cons of investing in GBP bonds in his article “Rule Britannia – Britain’s economy beats the odds” published on 23 June.

As a follow up to that article, we have reviewed the GBP market and highlight the following “old style” Tier 1 (perpetual hybrid) and Tier 2 (subordinated debt) securities as our preferred DirectBonds. Being the “old style” structure, we expect all to be called at first opportunity although Old Mutual has higher call risk (see the Old Mutual factsheet for further details).

GBP Old Style Tier 1 Securities relative value by credit margin1

There is a range of securities available with varying credit quality. The QBE security is Tier 2 and the other four are Tier 1 securities, but all are classified as “old style” and were issued pre-Basel III/Solvency II. All of the securities above are available to wholesale investors only.

Old Mutual trades at the widest credit margin to call date of the five chosen (circa +550bps over swap) but is rated sub-investment grade, two to four notches below the other securities which are all investment grade. At the other end of the spectrum is Rabobank, one of the strongest banks in the world, with a credit margin to the first call date of around +330bps.

Factsheets are available for the Friends Life, Old Mutual and QBE securities – please follow the links in related articles to download these. The Swiss Re and Rabobank Tier 1 securities don’t have factsheets but are similar in structure to the step-up AUD Tier 1 securities that many readers will be familiar with.

For further details, including research reports, please contact your FIIG representative.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.