Tuesday 17 July 2018 by Leigh Winton Trade opportunities

Ei Group - GBP DirectBond

Last year we DirectBonded UK based Ei Group, the UK’s largest leased and tenanted pub operator. The bonds have been difficult to source but we now have access. Low minimum GBP10,000 parcels make this bond worth reviewing. We compare it to five other GBP options

pub

Rationale

Many of our clients taking currency risk are mainly invested in US dollar bonds, so we see the potential for investments in pounds as a natural diversifier. Until now, the currency has not been readily available in terms of bonds offering an appealing yield.

Although FIIG is not licensed to give foreign exchange advice, we are aware that a low pound will enable a larger face value of the GBP bond to be purchased for a fixed value of Australian Dollars.

With benchmark GBP rates so low, it has traditionally been hard to find bonds for our clients to invest in with attractive rates or spreads over benchmark.

The UK benchmark rates are 0.50% for Bank Rate (their equivalent of our overnight cash rate), Libor rates between 0.50% and 1.00% for the periods of one month through to 12 months, and gilt (UK government) yields of 0.70% to 1.30% for the periods of 1-10 years.

Currency

For wholesale clients happy to take currency risk,  we currently see value in investing in EI Group’s, GBP 6.875% 9 May 2025 bond with YTM of circa 4.50%. The bond is currently trading in the range of GBP113.50-114.00. EI Group is the largest UK pub company and the GBP bond offers diversified currency investment for wholesale investors who are happy to take on FX risk.

Figure 1 and 2 below show the pound has been broadly subdued (depressed) since the Brexit vote in 2016. The future direction of the pound is debatable, but if you are happy to invest in foreign currency, we believe the pound gives increased diversification in currency terms as opposed to just investing in US dollars.

Credit Overview

The Ei Group May 2025 bond is a BB- rated sub investment grade bond, so comes with considerable credit risk. However, S&P assessed the group’s liquidity as adequate with the funds from operations (EBITDA less interest and tax paid) anticipated to comfortably cover the group’s capital expenditure, scheduled debt, amortisation and working capital needs.

The group is sometimes cited as highly leveraged with net debt/adjusted EBITDA of 7.6x, but only when comparing the group within the retail and restaurant sector. If compared to real estate investment trusts (REITs) the leverage is not so high. For example, GPT Group (A rated by S&P) has a net debt/EBITDA of 7.23x as at December 2017.

Arguably, Ei Group could be considered as a REIT, being the UK’s largest leased and tenanted pub operator with about 4500 pubs, mainly consisting of good quality (real) estate in England and Wales.

Long term and shorter term chart of AUDGBP exchange rate

Graph 1

Source: Bloomberg

Graph 2

Source: Bloomberg

There is not many bonds pounds available in minimum parcel sizes of GBP10,000 and yielding above 4%pa. The Ei Group May 2025 bond is likely to be in demand being the only GBP bond trading at this low minimum investment amount, most are in GBP100,000 or more. See the table below for comparisons against other GBP bonds available to trade.

GBP bond comparisons

Table Ei

Conclusion

We believe the Ei Group May 2025 GBP bond offers an attractive opportunity to further diversify investors’ foreign currency holdings in a preferred parcel size of less than GBP100,000.

The Ei Group Factsheet is available here using a wholesale client login.

 

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