The Fund's investment activities are intended for high net worth individuals who are considered to be sophisticated investors that are looking for a fund that aims to protect the capital invested whilst at the same time generating above average returns.
Attention! This investment falls outside AFM supervision. No license and no prospectus required for this activity.
This will be achieved through investments in public and corporate stocks and bonds, financial instruments, including futures and options, and certain types of real estate, although this type of investment will not represent anything other than a small percentage of the total investment fund. The nature of this alternative investment fund is that it is able to react swiftly to ever changing possibilities and risks in the markets and as such it
is assumed that other asset classes will be traded in the future if this is seen as being beneficial to the investors by the Fund managers. In addition, new sister Funds may be established in the future that will have a more specific investment focus if this is required by investors.
FULL DETAILS OF THE INVESTMENT POLICY CAN BE VIEWED DIRECTLY
Whilst the Fund aims to generate above average returns for Investors, the main priority of the Fund is primarily the safety of the funds that have been entrusted to us by our clients. It is for this reason that one of the main targets for investment is in Europe's largest firms. In addition, the priority given to debt instruments and, where appropriate, real estate is also considered to be an important element of the investment portfolio. At the same time we do not forget that in addition to minimizing the risk for our investors, we need to maximise the value of the investments made by our clients, and repay the trust demonstrated in us to manage these conflicting forces on their behalf.
For the purpose of maximising returns made by the Fund our managers and analysts constantly monitor the market situation in all the markets in which the Fund operates and any possible new markets. With the constant flow of informed market intelligence, decisions are made and assets traded between all the markets in order to ensure the best investment profile to maximise return and minimise risk. This technique ensures the maximum possible growth of the value of the assets but also makes it possible to hedge the possible risks of changes in market prices.
Our team consists of professionals with extensive experience in the Russian and global stock and commodity markets. Most have worked in large investment houses and our analysts are included in the TOP10 according to Bloomberg. With this extensive experience the team at Capital Pi aim to surpass your expectations and achieve good but safe returns on your investments through us.
The strategy is based on operation in debt markets of the G20 countries. Funds are invested in highly liquid, supranational, sovereign, municipal and corporate debt securities with an investment grade credit rating (at least BBB-) according to the key credit rating agencies (Moody’s, Standard &Poor’s, Fitch).
The investment instrument in this strategy is eurobonds from a limited range of issuers. In the selection of issuers to be included in the portfolio, the key factors are its balance across economic sectors and across the credit quality of issuers. The share of one investment instrument can be up to 25% of the overall portfolio. The key factor enhancing the expected return of this investment product is the opportunity to raise funds against securities in the portfolio at market rates. Thus, the expected return at portfolio maturity can be higher if borrowed funds are used.
This strategy is based on expectations of the Russian government bond curve. Normally, the yield curve is a monotone increasing upward-convex curve. It means that, first of all, the yield grows with time (positive slope) and, second, the rate of yield change decreases in time (tends to zero).
Today we will look at few debt securitiies as investment ideas for this week
The most liquid issue on the Moscow Exchange in the line of Eurobonds of the RF Ministry of Finance. The yield spread to UST remains wide (60 bp) relative to the dock levels, which creates potential for further price growth. Unlike Eurobonds of Russian banks and corporations, the bonds of the Ministry of Finance are completely devoid of ruble risk: when selling (redeeming) sovereign Eurobonds, the income in the form of exchange rate differences is exempted from paying personal income tax. Due to the sanctions, the RF Ministry of Finance does not place new Eurobonds, which creates a shortage of securities with Russian sovereign risk as the issues mature. The peculiarity of the Eurobond maturing in 2028 is that, due to its very high coupon rate (12.75% per annum), it offers a high level of current yield (the ratio of coupon payments expected over the next 12 months to the current market price).
The issue of the State Transport Leasing Company offers one of the highest yield levels among short-term securities on the Moscow Exchange, and looks interesting against the background of current dollar-denominated deposit rates. This issue is one of the few securities with Russian risk that have not yet overcome the consequences of the current crisis. This is due to the high dependence of STLC's financial indicators on the air carrier industry (about 40% of the leasing portfolio). Meanwhile, international agencies have not yet worsened their ratings of the issuer, maintaining a "stable" outlook on them. The main reason for this is the support of the company from the state (in fact, the issuer is 100% owned by the state). Even if we assume that the second wave of the pandemic will hit the air carriers again, the issuer's refinancing risks remain, in our opinion, low, given, for example, the free access of STLC to the primary foreign market. So, on October 19, 2020, the issuer placed an issue with maturity in 7.5 years, at the same time placing an offer for a partial redemption of the issue with maturity in 2021.
The coupon on Eurobonds is taxed, so we distinguish issues with a relatively low coupon, which includes, for example, the issue of Norilsk Nickel with maturity in 2025. It was placed in September this year - during the period when Russian issuers are placed at the lowest in post-Soviet history Russian rates. Thus, this 5-year issue was placed at 2.55% per annum. Note that it is listed on the Moscow Exchange, while circulation on the organized market enables holders to receive a tax deduction (recall that in addition to the coupon tax on corporate and bank Eurobonds is also levied on currency revaluation). If a security has been held in the portfolio for more than three years, the investor has the right to file for a tax deduction of up to RUB 3 million. per year for each full year after three years. Note that this issue includes a makewhole call option. This type of call allows the borrower to withdraw the issue before maturity, paying the holder a certain compensation, which is expressed in the form of a predetermined premium in the yield to the underlying security (for dollar securities, a comparable maturity UST is used). If Norilsk Nickel decided to withdraw this Eurobond on the makewhole call option now, it could do it at a price of 107.8% of the nominal.
If we consider a high probability of the scenario of credit spreads moving towards their dock levels, then it is obvious that this process is most favorable for the prices of the most distant securities. For example, the net (no-coupon) price of a dollar-denominated issue of Gazprom maturing in 2034 increased by 25 figures in 2019. This was due to an active decline in the yield on the underlying asset (UST) and a narrowing credit spread. At the same time, the holder of the paper also received a coupon (8.625%). Thus, an investor who bought this bond at the beginning of 2019 and closed his position exactly 12 months later had the opportunity to earn 2.5 times more on the growth of its price than on the coupon itself. Now the z-spread for this issue is widened by about 80 bp relative to its low of the end of 2019. If we assume that as the second wave of coronavirus progresses, it will gradually decrease to its dock-like level, then the net (coupon-free) price of the security will increase from the current 151% to 159% of par. Note that this Eurobond is not only very liquid on the Moscow Exchange, trading with a minimum lot of $ 1,000, but is also a margin bond in the Finam IG, as a result of which its yield can be increased.
Now that rates are at historic lows and markets are not waiting for the base dollar rate to rise until 2023, there is ample opportunity for issuers to refinance their debt at lower rates. This is especially true for securities placed several years ago, when rates were at local maximums. We propose to pay attention to those perpetual securities of Russian banks, the next calls on which are planned until the end of 2022. These are the issues of Alfa-Bank, VTB, MKB and Tinkoff. Note that in the current reality of close to zero interest rates, coupons on these securities look very overstated, and we believe that some of the issuers will prefer to replace the existing Eurobonds with cheaper issues for servicing, recalling them on the first call option. Note that in case of non-withdrawal on a call, the security holder is rewarded with a high current yield (according to this indicator, perpetual securities are the undisputed leaders in the Eurobond segment). Of the 4 issues noted above, we single out the VTB Eurobond, which is quite actively traded on the Moscow Exchange with a minimum lot of $ 1,000. Note that this Eurobond is margin-based in Finam IG, as a result of which its yield can be increased.
Unlike dollar-denominated Eurobonds, which have not only recovered in value relative to their dock levels, but have also rewritten their historic lows in yield, the Russian Euro segment has not yet fully recovered from the effects of the current crisis. This is due to the fact that the underlying assets in dollars and euros behaved differently: if European risk-free bonds have practically not changed in value since the beginning of the crisis, then UST has risen in price quite significantly. As a result, the widening of the credit spreads of eurobonds denominated in euros, which occurred due to the crisis, led to the fact that they are now on average 4 figures cheaper than at the beginning of the year. As the global economy recovers, credit spreads (risk premiums) can be expected to begin to normalize and euro-denominated Eurobonds will gradually compensate for the losses of the current crisis. Among the relatively short-term securities, our favorite in this segment is the senior issue of VEB.RF with maturity in February 2023. It is listed on the Moscow Exchange and has a minimum lot of 1 share (1,000 euros). If the credit spread of this issue normalizes to its levels before the start of the pandemic (about 100 bp, now it is about twice as high), its price could rise to 108% of par.
Among the relatively distant issues, we single out the Russian Railways issue with maturity in 2027. Like other Eurobonds in the common European currency, this issue is still far in price terms from its levels observed on the eve of the pandemic. However, we associate the prospects for its recovery not only with the general market trend - the reduction of credit spreads of borrowers from EM as the situation in the global economy normalizes, but above all with the fact that this Eurobond is a "green" issue. In fact, it became the first green bond placed by a Russian company on the foreign market (later, by the same Russian Railways, another issue in Swiss francs was placed). This segment of the bond market is one of the fastest growing in the world, the demand for such securities is generated by the so-called ESG funds (Environmental, Social and Governance). Note that the Euro Green Bond Index, which tracks green Eurobonds denominated in the single European currency, overcame the consequences of the current crisis in mid-October by rewriting its historical highs.
In mid-October 2020, Gazprom placed its debut “perpetual” issue in the single European currency. Thus, investors received a highly profitable euro-denominated instrument from a reliable issuer with a Russian risk (S&P assigned this subordinated security a rating 2 notches lower than the issuer's senior Eurobonds - BB). The issue provides for the first call at par in October 2025. The coupon (3.897%) is paid once a year. Unlike indefinite issuers in the financial sector, which can be written off or converted into shares if the bank's capital adequacy decreases, Gazprom's perpetual issue is not subject to this risk. True, the issuer at its discretion may not pay the coupon (which will not entail its technical default), however, the unpaid coupons will be capitalized. Note that the yield on the Gazprom issue is about 100 bp ahead of its closest competitor in the segment of Russian euro securities. etc., which seems to be a rather generous premium to the market. We expect it to narrow in the very near future.
Now the credit spread of this issue is widened relative to its pre-pandemic levels by about 75 bp. Note that the Russian Railways issue with maturity in 2031 is a distant security, so the potential compression of this spread is very favorable for its price. Meanwhile, the prospects for the price growth of this particular security are associated not only with the narrowing of the credit spread, but also with the trajectory of the underlying asset - the UK government bonds (United Kingdom Gilts). The fact is that recently it became known that the Bank of England has approached British financial institutions to assess their readiness for negative interest rates. In an address to the heads of banks, the British regulator said that it would like to receive information regarding their "operational readiness, as well as potential problems that may arise in connection with negative rates, mainly in terms of technical capabilities." At the same time, the Bank of England notes that an appeal to financial institutions for information does not mean that the Central Bank will switch to a policy of negative interest rates. Since March 2020, the Bank of England has lowered its base interest rate from 0.75% to the current 0.1% per annum. Note that approximately the same trajectory for this period was demonstrated by the yields of British government bonds.
The sector of ruble-denominated Eurobonds is somewhat overshadowed by the interests of investors, which is due to the over-the-counter nature of trading in these instruments, as well as the relatively high minimum lot (10 million rubles). Meanwhile, the duration of the Russian domestic ruble-denominated corporate bond market is small (less than 3 years), in particular, due to the fact that put options are provided for many even long-term securities. And this is not to mention the fact that the level of exchange liquidity of most ruble debt bonds placed on the local market leaves much to be desired. In this context, Alfa-Bank's senior ruble Eurobond maturing in January 2025, which does not provide options for early withdrawal and / or revision of the coupon level, in our opinion, deserves attention. Now on this security you can fix the yield of 6.5%. Due to the fact that this issue was placed relatively recently - in January of this year - its coupon is relatively small, which is important from the tax point of view. Note that one of the factors increasing the comparative attractiveness of ruble Eurobonds is the cancellation from 2021 of tax incentives for coupon income on OFZs and local ruble corporate bonds issued in 2017-2019. Thus, the “low coupon / high yield” ratio of the Alfa-Bank ruble Eurobond maturing in 2025 looks interesting in our opinion.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at few debt securitiies as investment ideas for this week
The most liquid issue on the Moscow Exchange in the line of sovereign Eurobonds. The yield spread to UST remains widened (70 bp) relative to the dock levels, which creates potential for further price growth. Unlike Eurobonds of Russian banks and corporations, the bonds of the Ministry of Finance are completely devoid of ruble risk: when selling (redeeming) sovereign Eurobonds, the income in the form of exchange rate differences is exempted from paying personal income tax. Due to the sanctions, the Ministry of Finance of the Russian Federation does not place new Eurobonds, which creates a shortage of securities with Russian sovereign risk. A feature of the issue maturing in 2028 is that, due to its very high coupon rate (12.75% per annum), it offers a high level of current yield (the ratio of coupon payments expected over the next 12 months to the current market price).
The issue of the State Transport Leasing Company offers one of the highest yield levels among short-term securities on the Moscow Exchange, and looks interesting against the background of current dollar-denominated deposit rates (1-2%). This issue is one of the few Russian-risk securities that have not yet overcome the consequences of the current crisis. This is due to the high dependence of STLC's financial indicators on the air carrier industry (about 40% of the leasing portfolio). Meanwhile, international agencies have not yet worsened their ratings of the issuer, maintaining a "stable" outlook on them. The main reason for this is the support of the company from the state (in fact, the issuer is 100% owned by the state). Even if we assume that the second wave of the pandemic will hit the air carriers again, the issuer's refinancing risks remain, in our opinion, low, given, for example, the free access of STLC to the primary foreign market. Thus, in October 2020, the issuer announced its intention to place a 7-year dollar issue, while at the same time placing an offer for a partial redemption of the issue with maturity in 2021.
The coupon on Eurobonds is taxed, so we distinguish issues with a relatively low coupon, which includes, for example, the issue of Norilsk Nickel with maturity in 2025. It was placed in September this year - during the period when Russian issuers are placed at the lowest in post-Soviet history Russian rates. Thus, this 5-year issue was placed at 2.55% per annum. It should be noted that it is listed on the Moscow Exchange, while circulation on the organized market enables its holders to receive a tax deduction (apart from the coupon, currency revaluation is also levied on corporate and bank Eurobonds). If a security has been held in the portfolio for more than three years, the investor has the right to file for a tax deduction of up to RUB 3 million. per year for each full year after three years.
If we assume the likelihood of the scenario of credit spreads moving towards their dock-like levels, then it is obvious that this process is most favorable for the prices of the most distant securities. For example, the net (no-coupon) price of a dollar-denominated issue of Gazprom maturing in 2034 increased by 25 figures in 2019. This was due to an active decline in the yield on the underlying asset (UST) and a narrowing credit spread. At the same time, the holder of the paper also received a coupon (8.625%). Thus, an investor who bought this bond at the beginning of 2019 and closed his position exactly 12 months later had the opportunity to earn 2.5 times more on the growth of its price than on the coupon itself. Now the z-spread for this issue is widened by about 90 bp relative to its low of the end of 2019. If we assume that as the second wave of coronavirus passes, it will decline to its dock-like level, then the net (coupon-free) price of the security will increase from the current 151% to 159% of par.
Now that rates are at historic lows and markets are not expecting an increase in the base dollar rate until 2023, there are ample opportunities for issuers to refinance their debt at lower rates. This is especially true for securities placed several years ago, when rates were at local maximums. We propose to pay attention to those perpetual securities of Russian banks, the next calls on which are planned until the end of 2022. These are the issues of Alfa-Bank, VTB, MKB and Tinkoff. Note that in the current reality of close to zero interest rates, coupons on these securities look very overstated, and we believe that some of the issuers will prefer to replace the existing Eurobonds with cheaper issues for servicing, recalling them on the first call option. Note that in case of non-withdrawal of the security, the holder is rewarded with a high current yield - according to this indicator, perpetual securities are the leaders in the entire Eurobonds segment. Of these 4 issues, let us single out the VTB Eurobond, which is traded on the Moscow Exchange with a minimum lot of $ 1,000. Note that this Eurobond is a marginal one in Finam IG, as a result of which its yield can be increased.
Unlike dollar-denominated Eurobonds, which have not only recovered in value relative to their dock levels, but have also rewritten their historic lows in yield, the Russian Euro segment has not yet fully recovered from the effects of the current crisis. This is due to the fact that European risk-free bonds have practically not changed in value since the beginning of the crisis, while credit spreads of securities have widened due to the crisis. This led to the fact that now they are on average 4 pieces cheaper than at the beginning of the year. However, all drawdowns are bought out sooner or later. As the global economy recovers, credit spreads (risk premiums) will begin to normalize and euro-denominated Eurobonds will gradually compensate for the losses of the current crisis. Among the short-term securities, our favorite in the segment is the senior issue of VEB.RF with maturity in February 2023. It is listed on the Moscow Stock Exchange and has a minimum lot of 1 paper (1,000 euros). If the credit spread of this issue normalizes to its levels before the start of the pandemic (about 100 bp, now it is about twice as high), its price could rise to 108% of par.
In the Euro segment, we also highlight the Russian Railways issue with maturity in 2027. Like other Eurobonds in the single European currency, this issue is still far in price terms from its levels observed on the eve of the pandemic. However, we associate the prospects for its recovery not only with the general market trend - the reduction in credit spreads of borrowers from EM as the situation in the global economy normalizes, but above all with the fact that this Eurobond is a "green" issue. In fact, it became the first green bond placed by a Russian company on the foreign market (later, by the same Russian Railways, another issue was placed). This segment of the bond market is one of the fastest growing in the world, the demand for such securities is generated by the so-called ESG funds (Environmental, Social and Governance). Note that the Euro Green Bond Index (tracking green Eurobonds denominated in the single European currency) just recently overcame the consequences of the current crisis, rewriting its historical maximums.
The sector of ruble-denominated Eurobonds is somewhat overshadowed by the interests of investors, which is due to the over-the-counter nature of trading in these instruments, as well as the high minimum lot (10 million rubles). Meanwhile, the duration of the Russian domestic ruble-denominated corporate bond market is not large (about 3 years), in particular, due to the fact that put options are provided for many even long-term securities. And this is not to mention the fact that the level of exchange liquidity of the majority of ruble debt bonds placed on the local market leaves much to be desired. In this context, Alfa-Bank's senior ruble Eurobond maturing in January 2025, which does not provide options for early withdrawal and / or revision of the coupon level, in our opinion, deserves attention. Now on this security you can fix the yield of 6.5%. Due to the fact that this issue was placed relatively recently - in January of this year - its coupon is relatively small, which is important from the tax point of view. Note that one of the factors increasing the comparative attractiveness of ruble Eurobonds is the cancellation from 2021 of tax incentives for coupon income on OFZs and local ruble corporate bonds issued in 2017-2019. Thus, the “low coupon / high yield” ratio of the Alfa-Bank ruble Eurobond maturing in 2025 looks interesting in our opinion.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt securitiy as investment ideas for this week: Volkswagen
Against the background of Gazprom's plans to place indefinite term in the foreign market, we note that such Eurobonds are quite actively placed by companies in the real sector of the economy. For example, you can mark the "perpetual" Eurobonds of such issuers as General Electric, Electricite de France or Petroleos Mexicanos. Among our top picks in the single European currency segment is the perpetual issue of automotive giant Volkswagen AG.
I must say that Volkswagen AG is a fairly active issuer of "perpetual" securities. Currently, there are 11 issues in circulation, including the junior subordinated Eurobond, placed in June 2018 in the amount of 1.5 billion euros with a coupon of 4.625% per annum. The issuer is the concern's subsidiary, Volkswagen International Finance N.V. At the same time, it is stipulated that the bonds of the issue are unconditionally and finally guaranteed on a subordinated basis by the Volkswagen Group. Compared to senior debt, the "perpetual" issue has ratings two notches lower, which, however, still allows it to correspond to the "investment" category.
As might be expected, Q2 2020 proved to be difficult for the company amid the unfolding pandemic. However, analysts expect a fairly confident recovery in the financial performance of the auto concern in 2021, although it will not be possible to reach the level of 2019. However, the company's free cash flow is not expected to go into negative territory by the end of this year.
Although the company is actively increasing its debt, its net value remains in the negative zone (-18.8 billion euros in the second quarter of 2020). With annual interest payments of € 3.2 billion, the automaker's adjusted operating cash flow over the past 12 months amounted to € 25.3 billion as of June 30, 2020. In 2020-2021 VW has to pay off a debt of 28 billion euros, while as of June 30, 2020, the volume of cash and equivalents on its balance sheet amounted to 61.3 billion euros.
In the current crisis, which hit the auto industry in the first place, rating agencies have downgraded their forecasts for VW.
However, the company's ratings remain at "investment" level with a certain margin. The probability of default by Volkswagen AG, calculated by Bloomberg, also slightly increased. For example, the probability of default has increased from 1.2% to 3.7% over the next 5 years. Nevertheless, even the increased value looks, in our opinion, quite moderate.
As with most Euro bonds, the coupon for this issue is paid once a year (June 27). The nearest call option on the security is scheduled for June 2028, further calls will follow once a year until 2168. If we estimate the probability of the next call option being exercised in 2028, then it is worth noting that the only "VW Eurobonds were withdrawn on the first call. According to the current repayment schedule, in 2028 the company will have to pay off a debt of 3.5 billion euros and the redemption of the "eternal" paper in the amount of 1.5 billion euros from this point of view should not create big problems.
Since the Eurobond is "perpetual", the main risk associated with it has to do with coupon payments. The fact is that this bond is "hybrid", that is, it has the qualities of both interest-bearing (debt) and equity securities. As a result, such bonds allow borrowers to defer interest payments without violating their obligations (in other words, non-payment of a coupon does not entail a technical default of the issuer). However, the deferred interest on the issue is cumulative. Note that unlike the "perpetual" Eurobonds issued by banks, the VW issue is not provided for write-off to compensate for losses.
Compared to late February levels, VW's current release price (perp) is 8 figures lower. Note that the issue looks quite competitive among the securities of the "investment" rating, denominated in euros.
Now the issue offers a yield to the next call in June 2028 at 3.6%, which is seen as an interesting level against the background of zero deposit rates in the single European currency.
The Eurobond is serviced by NSD and is available only to qualified investors. The minimum lot for paper is equal to the face value (100 thousand euros).
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt securitiy as investment ideas for this week: Turkey's senior unsecured sovereign Eurobond
Against the backdrop of growing global risk appetite in 2019, Turkey's senior unsecured sovereign Eurobond due in 2030 rose in price quite actively along with other EMs. However, at the peak of the sell-off that swept the global trading floors in the first decade of March 2020, the yield on the issue soared to near double digits. As the situation on the world markets stabilized by the beginning of June, the yield on the security corrected by the beginning of June 2020 to 6.4%. It would seem that it is high time to go (along with other EMs) to conquer the levels noted on the eve of the pandemic (5.5%), however, this did not happen.
The fact that the paper is trading at levels that, at first glance, are not too far from their dock-like levels, can create a deceptive impression of its relative well-being. Indeed, such a moderate underestimation, for example, could be attributed to the fact that the global demand for risk has not yet fully recovered in individual names. However, it is not the yield of the issue that is more indicative, but its credit spread, which is now at its highs over the past 15 years (see the chart below). The fact is that the current crisis has not only exposed the not very high credit quality of the issuer, but also worsened it. It must be said that investors, presenting an increased demand for risk in developing countries last year, apparently fully realized this, however, in the pursuit of high yields, the market largely turned a blind eye to this. Now, given the not yet fully recovered global appetite for risk, the deterioration of the issuer's credit quality is hard to ignore. In addition, investors have to take into account the geopolitical background around the issuer, which has been quite volatile recently. This led to an increase in the premium for investment in this instrument and its corresponding downward revaluation.
Speaking about the deteriorating credit position of the issuer, first of all, we note the situation with foreign exchange reserves, which have decreased by $ 35 billion since the beginning of 2020. True, this decline was to some extent offset by the growth of gold reserves. However, in the conditions of a stable departure in 2020, the current account balance of the balance of payments in the negative area, Turkey has to spend reserves to maintain the lira, as a result of which its gold reserves have decreased by about 20% ($ 20 billion) over the past six months. At the same time, given, for example, the negative impact of the pandemic on the tourism industry, the current account balance may remain negative, which means further pressure on reserves.
It must be said that Turkey's financial account of the balance of payments is under pressure in 2020. In an attempt to curb capital outflow, the Central Bank even recently took a step that is quite nontrivial in the current global macroeconomic context - it raised the 1-week repo rate by 200 bp at once. p. up to 10.25%. This was argued that inflation exceeded expectations, however, in reality, it looks more like an attempt to contain the currency crisis. As a result of attempts to support the economy with cheap money (the rate was lowered from 12% at the end of 2019 to 8.25% in May 2020) at double-digit inflation rates, the real interest rate in Turkey went into a deeply negative zone (-3.75 p. . P.). In combination with a fairly large external debt and a negative current account balance, this put pressure on the foreign exchange market (the Turkish lira against the dollar has fallen by more than 20% since the beginning of the year), and attempts by the monetary authorities to restrain this process with the help of foreign exchange interventions only led to depletion of foreign exchange reserves. However, even after the sharp increase in the rate, the real interest rate in Turkey remains in the negative zone, which creates risks for financial stability.
The deterioration of the issuer's credit position did not escape the attention of the largest international rating agencies. In August 2020, Fitch downgraded Turkey's rating outlook from stable to negative, keeping it at BB-. On September 11, 2020, Moody’s agency not only downgraded the rating of Turkish sovereign debt in foreign currency to the lowest level since the early 1990s. - B2, but also retained a "negative" outlook for it.
Moody’s analysts expect a crisis in Turkey’s balance of payments, which may prompt the government in an attempt to preserve the gold reserves to impose restrictions on the outflow of foreign currency, which, according to the agency, will also affect the interests of holders of the republic’s sovereign foreign currency debt.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt securitiy as investment ideas for this week: Tinkoff
One of the few securities that gained in price last week was the only Eurobond issue Tinkoff (dollar perpetual, placed in 2017) on the news of Yandex's purchase of TCS Group for $ 5.5 billion. The Tinkoff issue is one of those Russian eternal "securities that we recommended to pay attention to some time ago. Our idea is that now that rates are at historic lows and the markets are not waiting for the dollar base rate to rise until 2023, there is ample opportunity for issuers to refinance their debt at lower rates. This is especially true for securities placed several years ago, when rates were at local maximums.
We propose to pay attention to those "eternal" securities of Russian banks, the next calls on which are planned until the end of 2022. We are talking about the issues of Alfa-Bank, VTB, MKB and Tinkoff.
Note that in the current reality of close to zero interest rates, coupons on these securities look very overstated (for example, the coupon for the Tinkoff Eurobond is 9.25% per annum), and we believe that some of the issuers will prefer to replace the existing Eurobonds with cheaper ones for servicing issues, having withdrawn them on the first call option. In particular, the next call on the Tinkoff issue is scheduled for September 15, 2022, with a yield of 5.8%.
Note that in case of non-withdrawal of the security, the holder is rewarded with a high current yield (defined as the ratio of coupon payments within the next 12 months to the current market price of the Eurobond). For example, on the Tinkoff issue, the current yield is 8.7%. According to this indicator, perpetual securities are the leaders in the entire Eurobonds segment.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment idea for this week: VEB.RF
Against the background of the redemption of the sovereign issue of 750 million euros last week, we decided to pay attention to the dynamics of this segment of the Russian market. Unlike dollar securities, which have not only recovered in value in relation to their dock-like levels, but have also rewritten lows in terms of yield, the euro segment has not yet fully recovered from the consequences of the current crisis. And this despite the fact that credit spreads to underlying assets have grown for both dollar and euro securities by approximately the same amount (on average by about 70-100 bp for investment grade issues). What is the reason for such a different dynamics in the results? The fact is that, unlike European risk-free bonds, which have practically not changed in yields since the beginning of the pandemic, UST yields have corrected down quite noticeably. The decline in the yield on the underlying asset allowed the Russian dollar-denominated securities not only to compensate for the widening of credit spreads with a margin, but also to rewrite the minimum in terms of yield. But the euro securities failed to do this: their widened credit spreads caused the current drawdown of "investment" securities by an average of 4 figures compared to the levels noted on the eve of the pandemic.
However, Eurobonds denominated in euros are gradually compensating for the losses. Our favorite in the segment is the VEB.RF issue with maturity in February 2023, which is listed on the Moscow Exchange and is available to non-quotals (the minimum lot for securities is 1,000 euros). If the credit spread of the issue normalizes to its pre-pandemic levels (100 bp), its price may rise to 108% of the nominal.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt securitiy as investment ideas for this week: Sovkombank
On September 10, 2020, Fitch Ratings changed the outlook for Sovcombank's long-term issuer default ratings (IDRs) in foreign and national currencies from negative to stable. "The revision of the forecast of the Long-term IDR reflects the weakening of the pressure on the credit profile of Sovcombank, caused by the pandemic, the fall in oil prices and, as a result, the economic downturn in Russia," - the message says. Agency analysts point out that the bank's profitability remains good.
In their opinion, this will allow Sovcombank, despite the moderate size of capitalization, to cover credit losses even in the event of a longer and more serious recession than is currently expected.
Sovcombank issues, as well as other subordinated Eurobonds of Russian banks, have not yet won back their covid losses. For example, the z-spread of an SKB issue maturing in 2030 (and a call option in 2025) now exceeds 700 bp. p., while in February it dropped to 450 bp. n. The chart below shows a map of the international subord market with BB- / B ratings. As you can see, the SOVCOM 30 issue looks very interesting even against the background of securities that are inferior to it in terms of rating (the rating of the SKB Eurobond from Fitch is at BB-).
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt securitiy as investment ideas for this week: VEON Holdings B.V.
Last week, a new placement took place in the ruble section of the Russian Eurobond market - the second issue this year was placed by VEON Holdings B.V., a subsidiary of the VEON telecommunications holding. 5-year Eurobonds for RUB 10 bln. were placed at 6.5%. Recall that in June this year the company also placed 5-year Eurobonds for 20 billion rubles with a coupon of 6.3% per annum.
The sector of ruble-denominated Eurobonds is usually somewhat overshadowed by investors' interest, which is due to the over-the-counter nature of trading in these instruments, as well as the high minimum lot (10 million rubles). State-owned companies play the leading role among issuers here: for example, Russian Railways and RusHydro have 5 and 4 issues in circulation, respectively. The private sector is represented mainly by 4 issues of Alfa-Bank (the market map and the list of ruble Eurobonds issued by issuers with Russian risk are given on pages 21-22 of this review).
It should be noted that one of the factors increasing the comparative attractiveness of ruble Eurobonds is the cancellation from 2021 of tax incentives for coupon income on OFZs and local ruble corporate bonds issued in 2017-2019.
The duration of the Russian ruble corporate bond market is traditionally small (about 3 years), in particular, due to the fact that many securities have put options. And this is not to mention the fact that the level of exchange liquidity of most ruble-denominated debt securities placed on the local market leaves much to be desired. In this context, the Eurobond, for example, Alfa-Bank maturing in January 2025, which does not provide options for early withdrawal and / or revision of the coupon level, in our opinion, deserves attention. Now on this security, you can fix the yield of 6.5%. Due to the fact that this issue was placed relatively recently - in January this year - the coupon for it is relatively small (6.75% per annum), which is important from the tax point of view. Thus, the low coupon / high yield ratio of Alfa-Bank's ruble Eurobond maturing in 2025 looks interesting in our opinion.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at two debt securities as investment ideas for this week: Howmet Aerospace and Petropavlovsk Plc
The current reporting season is of particular interest in the light of the fact that companies are reporting data for the 2nd quarter - which turned out to be very turbulent due to the pandemic. For the American company Howmet Aerospace, the reporting for the second quarter of 2020 is doubly interesting, since this is the first quarter after its reorganization. April 1, 2020 aluminum manufacturer Arconic Inc. completed the division of its business into two separate companies. The Rolled Products, Aluminum Profiles and Building Systems division is renamed Arconic Corp. The rest of the operations, including the production of jet engine components, parts for the aviation and defense industries, remained with the existing company, which was renamed Howmet Aerospace.
The reorganization of the company does not allow direct comparison of the current data with the results of previous years, however, it can be noted that the market does not expect Howmet Aerospace's free cash flow to go into negative territory at the end of this year. This will be facilitated by a program to cut costs by $ 100 million, the refusal to pay dividends and a two-fold reduction in CAPEX.
In the second quarter, Howmet Aerospace's interest payments (including pension adjustments) amounted to $ 169 million, while the adjusted operating cash flow was only slightly higher at $ 200 million. However, some adjustment needs to be made for the special conditions of the 2nd quarter of 2020. when part of the company's production was actually closed due to the unfolding pandemic.
As of June 30, 2020, Howmet Aerospace reflected the cash on its balance sheet in the amount of $ 1.3 billion. In addition, the company has opened a credit line (revolver credit) in the amount of $ 1.0 billion, which could potentially cover the liquidity deficit. As for the debt repayment schedule, the first large payments ($ 1.2 billion) are expected only in 2024. Howmet Aerospace's weighted average debt maturity is 6.5 years.
However, due to the uncertainty generated by the current crisis, credit agencies differ significantly in their assessments of Howmet Aerospace's credit quality. While S&P and Fitch hold an "investment" rating for the issuer and its obligations, Moody’s agency is three steps lower (Ba3). Moreover, Moody’s even has a "negative" outlook on its rating. Note that the Big Three revised their forecasts in April for the already split company. And although the probability of default by Howmet Aerospace within the next year, according to the Bloomberg risk model, is only 1%, the probability of default within the next 5 years (6%) looks too high for a company with "investment" ratings.
Since Howmet Aerospace is capitalized at approximately 75% of the undivided Arconic Inc., most of Arconic Inc. (including Eurobond maturing in 2037) passed to Howmet Aerospace.
The senior unsecured Eurobond of the company with maturity in February 2037 in the amount of 625 million dollars was placed in January 2007 on the world market. The largest holder of the Eurobond, according to Bloomberg, is Allianz SE (3.3%).
Classic call options are not provided for this issue, however, the makewhole call option is prescribed. Recall that this type of call allows the borrower to withdraw the issue before maturity, paying the holder a certain compensation for this, which is expressed in the form of a predetermined premium in yield to the underlying security (UST comparable in terms of maturity is used). If the issuer decided to withdraw this Eurobond on the makewhole call option now, he could do it at a price of 173% of the nominal.
There are no options for revising the coupon level (5.95% per annum). The coupon is paid twice a year: February 1 and August 1.
As you can see in the chart below, the dynamics of the Eurobond price generally corresponds to the index of US second-third tier corporate bonds (LF98TRUU). It should be noted that the normalization of the situation in the economy, and, in particular, in the American aircraft industry, can contribute to a further narrowing of the credit spread of the issue.
The minimum lot for the issue corresponds to par and amounts to USD 1,000. The Eurobond is serviced by NSD and is available only to qualified investors. Note that this issue is included in our portfolio of Rentier-Global.
On August 17, Fitch upgraded the issuer default ratings of gold mining company Petropavlovsk Plc and its senior unsecured debt from B- to B. The rating outlook is stable. According to Fitch analysts, the rating upgrade is due to a significant strengthening of Petropavlovsk's financial profile due to improved operating results, high gold prices, as well as a slight decrease in the company's debt burden. For our part, we note that at the end of June this year, S&P also improved its issuer rating - also from B- to B with a "stable" outlook.
The corporate conflict at Petropavlovsk Plc has so far prevented its November 2022 Eurobond even approaching its February levels, despite a rally in the gold market. As Fitch notes in its press release: "Frequent and ongoing changes in the company's shareholder structure, board of directors and management limit the visibility of its future strategy and financial policies, and this limits the company's rating." Meanwhile, we note that now on the issue it is possible to fix the yield at a level above 6%, while, according to the Bloomberg risk model, the probability of default of the company's Eurobonds during the remaining term to maturity is less than 2%.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Volkswagen AG
Against the backdrop of a weakening dollar against the world's leading currencies (the DXY index has been at its lows since May 2018), we decided to look at the maximum profitability offered by instruments from high-quality borrowers in euros. It should be noted that the weakening of the dollar is also facilitated by the decrease in the dollar's advantage in yield. The rate spread on 10-year US and German government bonds, adjusted for inflation, fell to the lowest in the last 7 years.
The highest yield in the segment of Eurobonds is traditionally offered by the so-called "perpetual" issues. If we exclude issuers from the financial sector and consider sufficiently reliable borrowers, then the focus of attention is immediately drawn to the line of Eurobonds of one of the world's largest automakers - Volkswagen AG. For example, the company's issue, placed in June 2018 with a volume of 1.5 billion euros and a coupon of 4.625% per annum, now offers a yield to the next call in June 2028 at the level of 3.6%, which seems interesting against the background of zero deposit rates in single European currency.
The company has already provided data for Q2 2020, which has proven difficult amid the unfolding pandemic. However, analysts still expect a fairly confident recovery in the auto concern's financial performance in 2021 (see table below). In addition, we note that unlike, for example, American automakers and despite VW's extensive presence in China, the company's net operating cash flow is not expected to go into negative territory this year.
Although the company is actively increasing its debt, its net value remains in the negative zone (-18.8 billion euros in the second quarter of 2020). With annual interest payments of EUR 2.5 billion, the automaker's adjusted operating cash flow over the past 12 months amounted to EUR 24.5 billion as of June 30, 2020. In 2020-2021 VW has to pay off debt of 9.1 billion and 18.3 billion euros, respectively, while as of June 30, 2020, the volume of cash and cash equivalents on its balance sheet amounted to 61.3 billion euros.
In the current crisis, which hit the auto industry in the first place, rating agencies have downgraded their forecasts for VW. However, the company's ratings remain at "investment" level with a certain margin. The probability of default by Volkswagen AG, calculated by Bloomberg, also slightly increased. For example, the probability of default has increased from 1.2% to 3.5% over the next 5 years. Nevertheless, even the increased value looks, in our opinion, quite moderate.
Volkswagen AG is an active issuer of perpetual bonds. Currently, there are 10 issues in circulation, including the junior subordinated Eurobond, placed in June 2018 with a coupon of 4.625% per annum. The issuer is the concern's subsidiary, Volkswagen International Finance N.V. At the same time, it is stipulated that the bonds of the issue are unconditionally and finally guaranteed on a subordinated basis by the Volkswagen Group. Compared to senior debt, the "perpetual" issue has ratings two notches lower, which, however, still allows it to correspond to the "investment" category.
As with most Euro bonds, the coupon for this issue is paid once a year (June 27). The nearest call option on the security is scheduled for June 2028, further calls will follow once a year until 2168. If we estimate the probability of the next call option being exercised in 2028, then it is worth noting that the only "VW Eurobonds were recalled on the first call. According to the current repayment schedule, in 2028 the company will have to pay off a debt of 2.0 billion euros and the repayment of the "eternal" paper in the amount of 1.5 billion euros from this point of view should not create any problems.
Since the Eurobond is "perpetual", the main risk associated with it has to do with coupon payments. The fact is that this bond is "hybrid", that is, it has the qualities of both interest-bearing (debt) and equity securities. As a result, such bonds allow borrowers to defer interest payments without violating their obligations (in other words, non-payment of a coupon does not entail a technical default of the issuer). However, the deferred interest on the issue is cumulative. Note that unlike the "perpetual" Eurobonds issued by banks, the VW issue is not provided for write-off to compensate for losses.
Compared to late February levels, VW's current release price (perp) is 8 figures lower. Note that the issue looks quite competitive among the securities of the "investment" rating, denominated in euros.
The VW (perp) issue is serviced by NSD and is only available to qualified investors. The minimum lot for a Eurobond is equal to the par value (100 thousand euros).
Alexey Shternshis
Joint Managing Director
Capital Pi
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