Monthly Commentary Mid-March

Given the extraordinary market conditions that are currently taking place, we wanted to provide you with our latest thoughts regarding fund performance.

GAM Star Credit Opportunities (USD)

 We are becoming used to periods of turbulence such as we have seen this week and in our view the USD fund is well positioned to absorb such external shocks. Our markets remain liquid. We are not changing anything in terms of the underlying credit, interest rates and liquidity risks in the USD fund.

We believe this could be a significant buying opportunity. We currently see valuations as extremely attractive, with a very steep widening of spreads, for example 600 bps on AT1 CoCos, or more than 7% yield-to-worst (YTW). Moreover, most of the these instruments have re-priced to non-call (less than 2% of AT1s trade to call) reflecting market worries of increased extension risk (ie non-call). In our view this represents a significant mis-pricing and a significant buying opportunity for investors.

We have seen sell offs of the asset class in the past (2016, 2018 and at the time of writing) and as the market recovers these assets tend to quickly re-price to call, generating significant upside for bondholders. Instruments have mostly been called in the last few years, as issuers pre-fund calls as early as 12 months ahead.

One example is ING. The bank just announced on 17 March that it will call one of its AT1 in USD at 100%, this AT1 CoCo had been issued in 2015, paying an annual coupon of 6% and will be called on 16 April 2020. The bond was trading at a price of 95% or a yield to call of 72%. This highlights how distorted the market has become but at the same time what a buying opportunity this also creates for the “braves”, especially as ING is for example rated A- by S&P. Overall, the re-pricing of bonds to perpetual reflects the overselling and therefore a very attractive entry point into the asset class.

GAM Star Credit Opportunities (EUR)

We are becoming used to periods of turbulence such as we have seen this week and in our view the EUR fund is well positioned to absorb such external shocks. Our markets remain liquid. We are not changing anything in terms of the underlying credit, interest rates and liquidity risks in the fund.

We believe this could be a significant buying opportunity. We currently see valuations as extremely attractive, with a very steep widening of spreads, for example 600 bps on AT1 CoCos, or more than 7% yield-to-worst (YTW). Moreover, most of the these instruments have re-priced to non-call (less than 2% of AT1s trade to call) reflecting market worries of increased extension risk (ie non-call). In our view this represents a significant mis-pricing and a significant buying opportunity for investors.

We have seen sell offs of the asset class in the past (2016, 2018 and now) and as the market recovers these assets tend to quickly re-price to call, generating significant upside for bondholders. Instruments have mostly been called in the last few years, as issuers pre-fund calls as early as 12 months ahead.

One example is ING. The bank announced on 17 March that it will call one of its AT1 in USD at 100%, this AT1 CoCo had been issued in 2015, paying an annual coupon of 6% and will be called on 16 April 2020. The bond was trading at a price of 95% or a yield to call of 72%.This highlights how distorted the market has become but at the same time what a buying opportunity this also creates for the “braves”, especially as ING is for example rated A- by S&P. Overall, the re-pricing of bonds to perpetual reflects the overselling and therefore a very attractive entry point into the asset class.

GAM Star Credit Opportunities (GBP)

We are becoming used to periods of turbulence such as we have seen this week and in our view the GBP fund is well positioned to absorb such external shocks. Our markets remain liquid. We are not changing anything in terms of the underlying credit, interest rates and liquidity risks in the GBP fund.

We believe this could be a significant buying opportunity. We currently see valuations as extremely attractive, with a very steep widening of spreads, for example 600 bps on AT1 CoCos, or more than 7% yield-to-worst (YTW). Moreover, most of the these instruments have re-priced to non-call (less than 2% of AT1s trade to call) reflecting market worries of increased extension risk (ie non-call). In our view this represents a significant mis-pricing and a significant buying opportunity for investors.

We have seen sell offs of the asset class in the past (2016, 2018 and at the time of writing) and as the market recovers these assets tend to quickly re-price to call, generating significant upside for bondholders. Instruments have mostly been called in the last few years, as issuers pre-fund calls as early as 12 months ahead.

One example is ING. The bank announced on 17 March that it will call one of its AT1 in USD at 100%, this AT1 CoCo had been issued in 2015, paying an annual coupon of 6% and will be called on 16 April 2020. The bond was trading at a price of 95% or a yield to call of 72%. This highlights how distorted the market has become but at the same time what a buying opportunity this also creates for the “braves”, especially as ING is for example rated A- by S&P. Overall, the re-pricing of bonds to perpetual reflects the overselling and therefore a very attractive entry point into the asset class.

© 2017 Atlanticomnium.

Authorised and regulated by Swiss Financial Market Supervisory Authority FINMA. Authorised and regulated by the Financial Conduct Authority FCA. The information and materials on this site do not constitute any form of advice. This website and all the information contained in it does not constitute a formal commitment by the company Atlanticomnium. Any form of reproduction, dissemination, copying, disclosure, modification, distribution and/or publication of this website and all the information in it is strictly prohibited. We decline all responsibility for any errors or omissions in the contents of this website and all the information contained in it which arise as a result of electronic transmission. If verification is required please request a hard-copy version. This website and all the information contained in it should not be construed as an invitation or offer to buy or sell any securities or related financial instruments.