Monthly Commentary September

GAM Star Credit Opportunities (USD)

November was another strong month for the fund despite geopolitical headlines with performance driven by a combination of positive earnings and dovish central banks. Spreads on the subordinated debt of financials tightened during the month and legacy bonds continued to perform strongly. In this low interest rate environment, we feel the fund is well-positioned by capturing spreads of more than 300 bps. Moreover, lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Within the legacy space, prices of the securities continued to benefit from the positive developments linked to the Santander call last month. Moreover, Commerzbank announced the call of a legacy security during the month. This was a EUR floating rate bond paying 12-month Euribor + 200 bps of interest, trading below par (around 95%) and redeemed at par, strong upside for bondholders. we expect this trend to continue over the coming quarters as these bank legacy bonds do not fully comply with requirement set by Basel III and as such will lose their eligibility as regulatory capital by the end of December 2021. As these instruments are becoming an expensive form of non-compliant regulatory capital for issuers, this creates unique opportunities for investors as these bonds will have to be called/tender in the near future at attractive conditions. Therefore, there is a lot of optionality in terms of having issuers tendering or calling these bonds over the coming quarters / years at a significant premium to current prices, as has been demonstrated by Commerzbank.

Most of our issuers have reported Q3 earnings. From a credit perspective, results have been strong, capital ratios are stable, and deleveraging continues. For example, Société Générale’s results were impacted by low interest rates and challenging market conditions for corporate and investment banking (CIB). However, the group continues to boost its capital position with now close to EUR 9 billion in excess capital to requirements.

We also saw strong demand for new issues. For example, EDF, rated A- by S&P, came with a new hybrid. This junior bond is rated Baa3 by Moody’s. Demand in the primary market exceeded the issuance size of EUR 500 million by more than 10 times and the bond has performed well. The transaction was priced at very attractive levels and if not called in eight years, its coupon resets based on five-year swap + 3.198%. It currently yields close to 3%, compared with around 0.2% on EDF’s senior unsecured debt.

The fund is well-positioned to capture high and predictable income, in our view, and given the attractive valuation levels, we feel the fund has scope to benefit from further capital gains.

GAM Star Credit Opportunities (GBP)

November was another strong month for the fund despite geopolitical headlines with performance driven by a combination of positive earnings and dovish central banks. Spreads on the subordinated debt of financials tightened during the month and legacy bonds continued to perform strongly. In this low interest rate environment, we feel the fund is well-positioned by capturing spreads of more than 300 bps. Moreover, lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Within the legacy space, prices of the securities continued to benefit from the positive developments linked to the Santander call last month. Moreover, Commerzbank announced the call of a legacy security during the month. This was a EUR floating rate bond paying 12-month Euribor + 200 bps of interest, trading below par (around 95%) and redeemed at par, strong upside for bondholders. we expect this trend to continue over the coming quarters as these bank legacy bonds do not fully comply with requirement set by Basel III and as such will lose their eligibility as regulatory capital by the end of December 2021. As these instruments are becoming an expensive form of non-compliant regulatory capital for issuers, this creates unique opportunities for investors as these bonds will have to be called/tender in the near future at attractive conditions. Therefore there is a lot of optionality in terms of having issuers tendering or calling these bonds over the coming quarters / years at a significant premium to current prices, as has been demonstrated by Commerzbank.

Most of our issuers have reported Q3 earnings. From a credit perspective, results have been strong, capital ratios are stable, and deleveraging continues. For example, Société Générale’s results were impacted by low interest rates and challenging market conditions for corporate and investment banking (CIB). However, the group continues to boost its capital position with now close to EUR 9 billion in  excess capital to requirements.

We also saw strong demand for new issues. For example, EDF, rated A- by S&P, came with a new hybrid. This junior bond is rated Baa3 by Moody’s. Demand in the primary market exceeded the issuance size of EUR 500 million by more than 10 times and the bond has performed well. The transaction was priced at very attractive levels and, if not called in eight years, its coupon resets based on five-year swap + 3.198%. It currently yields close to 3%, compared with around 0.2% on EDF’s senior unsecured debt.

The fund is well-positioned to capture high and predictable income, in our view, and given the attractive valuation levels, we feel the fund has scope to benefit from further capital gains.

GAM Star Credit Opportunities (EUR)

November was another strong month for the fund despite geopolitical headlines, with performance driven by a combination of positive earnings and dovish central banks. Spreads on subordinated debt of financials tightened during the month, and legacy bonds continued to perform strongly. In this low interest rate environment, we feel the fund is well-positioned by capturing spreads of close to 400 bps. Moreover, the lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Within the legacy space, prices of the securities continued to benefit from the positive developments linked to the Santander call last month. Moreover, Commerzbank announced the call of a legacy security during the month. This was a EUR floating rate bond paying 12 month Euribor + 200 bps of interest, trading below par (around 95%) and redeemed at par, strong upside for bondholders. we expect this trend to continue over the coming quarters as these bank legacy bonds do not fully comply with requirement set by Basel III and as such will lose their eligibility as regulatory capital by the end of December 2021. As these instruments are becoming an expensive form of non-compliant regulatory capital for issuers, this creates unique opportunities for investors as these bonds will have to be called/tender in the near future at attractive conditions. Therefore there is a lot of optionality in terms of having issuers tendering or calling these bonds over the coming quarters or years at a significant premium to current prices, as has been demonstrated by Commerzbank.

Most of our issuers have reported Q3 earnings. From a credit perspective, results have been strong, capital ratios are stable, and deleveraging continues. For example, Société Générale’s results were impacted by low interest rates and challenging market conditions in CIB, however the group continues to boost its capital position with now close to EUR 9 billion of excess capital to requirements.

We also saw strong demand for new issues. For example, EDF, rated A- by S&P, came with a new hybrid. This junior bond is rated Baa3 by Moody’s. Demand on the primary market exceeded the issuance size of EUR 500 million by more than 10 times and the bond has performed well. The transaction was priced at very attractive levels and, if not called in eight years, coupon resets based on 5-year swap +3.198%. It currently yields close to 3%, compared to around 0.2% on EDF’s senior unsecured debt.

The fund is well-positioned to capture high and predictable income, in our view, and, given the attractive valuation levels, we feel the fund has scope to benefit from further capital gains.

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