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 one debt security as investment ideas for this week: Southwestern Energy Corporation
The dynamics of the yield on the index of high-yield American corporate bonds LF98TRUU, which is literally one step away from its dock levels (see the chart below), prompted us to pay attention to the Southwestern Energy Corporation (SWN) Eurobond due in 2026. Although in terms of price, this issue has already overcome the consequences of the current crisis, its ratio of risk and profitability, in our opinion, is still very interesting.
Southwestern Energy is a somewhat unusual company in the sense that, unlike most other global producers, its problems began much earlier this March. SWN is a natural gas producer in Texas (USA). It must be said that the "shale" revolution, global warming (the past winter became the warmest in the United States over the past 140 years), and, more recently, the slide of the US economy into recession led to a steady decline in natural gas prices. As a result, since 2017, SWN's exchange capitalization has decreased by 3 times.
Along with the downward pressure on the gas market, the current crisis has added problems to the company. So, for the first time in a long time, SWN's operating profit in Q2. quarter of 2020 went into the area of negative values (see chart below). The market expects the company's earnings to recover to last year's levels no earlier than 2021.
With all this, the issuer's credit profile remains fairly stable. Thus, with an annual interest payment of $ 80 million, the adjusted operating cash flow for the last 12 months amounted to $ 1,175 million as of June 30, 2020.
The first large payments of the debt are expected in 2025 (see chart below). the weighted average maturity of SWN's debt portfolio is 5 years. The issuer declares that it has open credit lines in the amount of $ 1.3 billion. Interestingly, despite all the perturbations with natural gas prices (which did not come to light yesterday), credit agencies are in no hurry to downgrade their ratings on Southwestern Energy. As a result, the issuer retains double B ratings from all the Big Three agencies.
Note that the probability of default of the company's Eurobonds maturing in 2026 during the remaining term to maturity, according to the Bloomberg default risk model, is only 4.9%. At the same time, the issue's credit spread (z-spread) reaches almost 800 bp. P.
The senior unsecured issue with maturity April 1, 2026 in the amount of $ 650 million was placed in September 2017 on the global market. The largest holder of the Eurobond, according to Bloomberg, is Blackrock (6.8%).
There are four call options on the security, the yield to the closest of them (04/01/2021 at a price of 105.625%) is 20%. There are no options for revising the coupon level (7.5% per annum). The coupon is paid twice a year: April 1 and October 1.
The face value and the minimum lot for the paper are respectively $ 1,000 and $ 2,000. The paper is serviced by NSD and is available only to qualified investors.
Alexey Shternshis
Joint Managing Director
Capital Pi
Among the international issues that have lagged behind the market in their dynamics, we would like to highlight the Eurobond of the American corporation L Brands, which is part of our portfolio Rentier-Global, with maturity in 2035. I must say that both L Brands shares and the LF98TRUU index (tracking American corporate high-yield Eurobonds) fully won back all the losses of the current crisis, while the price of the issue with maturity in 2035 is still about 10 figures lower than its dock-like February values. In our opinion, this discount has every chance of narrowing.
Like most retailers, L Brands is in the forefront of the hit in the current crisis. For the first time in a long time, quarterly operating profit (from February to April) went into negative territory, analysts worsened their forecasts for the company (see table below). Worse, because of the crisis, the deal to separate the unprofitable Victoria's Secret segment from the company fell through: the deal announced at the end of February 2020 to sell 55% in Victoria's Secret to the investment fund Sycamore Partners for $ 525 million was canceled on May 4. However, L Brands management confirms plans to spin Victoria's Secret into a separate company. The spin-off of the unprofitable Victoria's Secret will allow L Brands to focus on developing its other brands, notably Bath & Body Works and PINK.
However, the current crisis has stimulated the company to engage in a long-overdue restructuring. Last week, L Brands announced a cost-cutting plan to lay off 850 people, which should result in $ 400 million in savings (including $ 175 million this year). In addition, L Brands is set to close 250 Victoria's Secret stores, which is about a quarter of its US volume. The announced plan was greeted with enthusiasm by the market - quotations of both L Brands shares and bonds rose to their local highs.
The market now expects the company to be able to generate $ 570 million of EBIT this year, while L Brands' annual interest payments are just under $ 400 million. Note that according to the company, the amount of cash on its balance sheet as of 24.07 .2020 amounted to $ 2.5 billion. As for the principal amount, in general, the debt repayment schedule of L Brands looks balanced, the weighted average maturity is about 8 years. Note that this year the company has no repayments, while in 2021 it has to repay a Eurobond in the amount of $ 450 million.This task looks feasible, given, for example, that the volume of undrawn credit lines opened by L Brands is about $ 1 billion.
The cost of insurance against default (5-year CDS) is gradually normalizing to its ancestral values (see graph above). The probability of the company's default over the next 5 years, according to the Bloomberg risk model, is about 6%.
The senior guaranteed unsecured issue with maturity in 2035 was placed on the global market in February 2016. The largest holders of the Eurobond, according to Bloomberg, are Alliance Bernstein (5.0%) and Blackrock (3.5%).
There are no options for revising the coupon level (6.875% per annum). The coupon is paid twice a year: May 1 and November 1. The issue is rated by the agencies Moody's and S&P at B2 and B +, respectively.
The par value and the minimum lot for the issue are $ 1,000 and $ 2,000, respectively. The paper is serviced by NSD and is available only to qualified investors.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Perpetual Eurobonds
Against the backdrop of tending to zero interest rates, we decided to pay attention to the most highly profitable segment of the market - the so-called "perpetual" Eurobonds. It is clear that these securities, due to the risks associated with them (non-payment of the coupon at the discretion of the issuer, the likelihood of write-off), offer the highest levels of yield on the debt market. However, now that the markets are not expecting an increase in the base dollar rate over the next 2 years (see chart below), issuers have ample opportunity to refinance their obligations at reduced rates. This is especially interesting for securities placed several years ago - when rates on the markets were at local maximums.
In our field of vision were "perpetual" securities of Russian issuers, calls on which are planned in the future until the end of 2022. The peculiarity of the first call option is that in case of non-call option, the coupon level is recalculated using a formula that takes into account some basic parameter (US Treasures or interest rate swap) and a certain premium to it. The table below shows the coupon levels for 4 issues, if the recalculation took place right now.
As you can see, if issuers had chosen not to withdraw their Eurobonds on calls, they would hardly have received significant savings compared to current payments. In general, even the coupons recalculated in the current reality of near-zero rates look, in our opinion, overestimated, and we believe that some of the issuers will prefer to replace the existing securities with cheaper issues for servicing.
Note that these issues look interesting both in terms of the yield to the next call and the current yield (the ratio of coupon payments over the next 12 months to the current market price).
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Freeport-McMoRan Inc
Against the backdrop of storming 18-month highs in copper prices, we decided to pay attention to one of its largest producers - Freeport-McMoRan Inc. The company's capitalization has fully recovered from the consequences of the current crisis. A role in this was played by the fact that the company is a gold producer, which is also in great favor with investors lately.
The issue of the company with maturity in 2034 feels great too. It not only recovered to the levels preceding the March collapse, but also outperforms the LF98TRUU index, which tracks international high-yielding dollar corporate Eurobonds. However, there is still a certain potential for price growth in output in terms of the size of its credit spread, which is now 90 bp. n. exceeds its levels at the end of February
Last week, the issuer placed two issues - with maturities in 2028 and 2030. To reduce the duration, we recommend shifting from FCX 2034 (duration 10 years, z-spread 413 bp) to an issue maturing in 2028 (duration 5.4 years, z-spread 375 bp).
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Moscow Domodedovo Airport
The information that the Russian Federation plans to partially resume international flights from July 15, prompted us to pay attention to the issues of Moscow Domodedovo Airport. On July 3, Moody's confirmed the issuer rating at Ba1 with a “negative” outlook. The agency, therefore, completed a review of the ratings of the company, which it initiated on April 3 this year in the midst of an epidemic. Moody's expects the company to continue implementing measures aimed at restoring its financial profile and maintaining good liquidity. According to Moody's current estimates, the company's credit indicators can recover to levels that correspond to the current rating level by 2022.
At the end of March, Fitch downgraded the issuer ratings from BB + to BB, noting that, despite the shock of 2020, the company Has sufficient liquidity to cover expenses in the next 12-18 months.
Given the industry, it is not surprising that the company's Eurobonds were under significant pressure during the current crisis. For example, the issue price maturing in 2023 collapsed in March by more than 10 figures. Moreover, as can be seen in the chart below, in contrast to the EMUSTRUU index, which has already almost compensated for “conceivable” losses, the price recovery of the Eurobonds at Moscow Domodedovo Airport is far from being so active. The credit spread of the issue has expanded 2.5 times since February 25, 2020, which may be excessive.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Kinross Gold Corporation
The price of gold breaks historical records, which is not surprising, given that gold not only provides protection during crises, but is also an asset that benefits directly from rising dollar money supply - which is still observed now, during the period of intensive pumping of liquidity by markets. In this regard, it is logical to pay attention to the debts of gold mining companies, which, apparently, should continue to rise in price. For example, the Eurobond of Kinross Gold Corporation, one of the ten largest gold mining companies in the world, maturing in 2041. Note that the issuer has two active assets in Russia: Kupol and Dvoynoe (both in the Chukotka Autonomous Region).
It is not surprising that the market is very positive regarding the financial results of the company in 2020-2021. (see table below). We note the stable positive dynamics at the level of operating cash flow (FCF). It is expected that fuel prices and exchange rates favorable for gold miners will fully compensate for the additional costs of emergency measures taken during the crisis.
The debt repayment schedule is not worrying: the weighted average maturity is about 6 years, until 2024 the company has to make only one major payment - to pay off the Eurobonds in the amount of $ 500 million.
Net Debt / EBITDA metric is 1.0, as of March 31 .2020, the volume of cache on Kinross Gold's balance sheet amounted to $ 1.1 billion, in addition, the company opened credit lines worth $ 0.7 billion. High credit quality is primarily based on growing revenue indicators.
All Big Three agencies hold an investment rating for the issuer. Note that Moody’s upgraded its Kinross Gold Corporation Eurobonds rating with maturity in 2041 to “investment” (Baa3) in the midst of March sales in the markets.
The probability of default for the company over the next 5 years, according to the Bloomberg model, is about 2.5%, which corresponds to the performance of the most highly reliable issuers. Due to the high duration (12 years), the probability of a company’s Eurobonds defaulting with maturity in 2041 over the remaining maturity period is, according to the Bloomberg default risk model, 14%.
It should be noted that in contrast to the LBUSTRUU index (which tracks the price dynamics of dollar-denominated Eurobonds of the "investment" category), which has already reached its "dock" levels (see the chart below), the price of KCN 2041 is still 8 lower than its highs in early March 2020
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Petropavlovsk PLC
On June 23, 2020, S&P upgraded the rating of the gold mining company Petropavlovsk PLC from B- to B with a "stable" outlook. "The upgrade is a recognition of the progress made by the company in several key areas, including ensuring strong operating performance, following its strategy, and reducing its debt burden," S&P notes. "We expect that Petropavlovsk will continue to show stable results in 2020-2021 due to the stabilization of operations and favorable gold prices," the press release said.
According to the agency’s forecast, Petropavlovsk will maintain the net debt to EBITDA ratio at the target level (below 2x), as well as maintain an acceptable level of liquidity, including through active refinancing of bonds with maturity in 2022.
The company's Eurobond yield maturing in 2022 pretty steadily declined throughout 2019 (see the chart below), reaching 5.0% at the end of February this year. It is curious that now it is about the same value (5.2%), however, the credit spread of the issue expanded from February 24, 2020 from 375 to 501 bp. item, which looks illogical given the gold that has risen in price since then. In this regard, we expect a decrease in the yield of the Petropavlovsk Eurobonds with maturity in November 2022 to levels below 5%.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: Howmet Aerospace
Against the background of, apparently, inevitably tending to the negative area of returns of high-rated securities, interest is growing in issues that can offer a fairly high level of yield with acceptable risk. One of these papers is the release of Howmet Aerospace, an American manufacturer of jet engine components, aerospace and industrial fasteners, and parts for the aircraft and defense industries. Now, with respect to the issuance of this issuer with maturity in 2037, it is possible to fix a yield of 5.6%. The Eurobond, although it is trading above par, has not yet fully played back the consequences of the March collapse. Note that this issue is part of our portfolio of Global Ranking.
April 1, 2020 American aluminum producer Arconic Inc. completed the division of its business into two separate companies. The division for the production of rolling products, aluminum profiles and building systems is called Arconic Corp. The remaining operations, including the production of jet engine components, parts for the aircraft and defense industries, remained assigned to the existing company, which was renamed Howmet Aerospace. Capitalization of Howmet Aerospace is approximately 85% of an undivided company (Arconic Inc.). Accordingly, most of the obligations of Arconic Inc. (including the Eurobond maturing in 2037) moved to Howmet Aerospace.
The reorganization of the company does not allow a direct comparison of current data with the results of previous years, however, it can be noted that the market is rather optimistic about the dynamics of Howmet Aerospace in 2021 (see table below). A program to reduce costs by $ 100 million, a refusal to pay dividends and a twofold reduction in CAPEX will contribute to maintaining the company's free cash flow in a positive area.
Currently, the Net Debt / EBITDA metric is 2.8, the amount of cash on the balance sheet is sufficient to fully repay the debt until 2024. In addition, the company still has a non-selected revolving credit line of $ 1.5 billion ., which may cover a potential shortage of liquidity.
Nevertheless, due to the uncertainty generated by the current crisis, credit agencies diverge significantly in their assessments of the issuer's credit quality. If S&P and Fitch agencies hold "investment" ratings for the issuer and its obligations, then Moody’s agency is three steps lower (Ba3). Moreover, the Moody’s agency even has a “negative” outlook on its rating, expecting the issuer to have significant problems amid ongoing turbulence in the aircraft industry. Note that the Big Three was revising its forecasts for an already split company.
Although the probability of default of Howmet Aerospace over the next year, according to the Bloomberg model, is rather moderate (2.1%), the probability of default over the next 5 years looks too big for a company with an "investment" rating of 7.6%. Note that due to a rather high duration (10 years), the probability of default of the Eurobonds with maturity in 2037 during the remaining period until maturity is 21%.
As can be seen in the graph below, from the beginning of March 2020 - the time of the onset of the storm in global markets - the dynamics of the price of Eurobonds with maturity in 2037 generally corresponded to the American second-tier corporate bonds index (LF98TRUU). Interestingly, a year ago - in the middle of June 2019 - the Eurobond yield was consistent with the current one: the drop in benchmark yield (corresponding to UST duration) was offset by the expansion of the credit spread. Thus, the upside potential of the Howmet Aerospace Eurobonds seems to be very substantial. However, a necessary condition for its implementation is the normalization of the situation in the economy, and, in particular, in the American aircraft industry.
The issue is serviced by NSD and is available only to qualified investors.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at few debt security as investment ideas for this week
Against the backdrop of the placement of the ruble Eurobonds by Veon, we decided to pay attention to this segment of the market, which, I must say, traditionally remains somewhat in the shadow of the interests of investors. Meanwhile, a number of large Russian companies attract ruble funding in the foreign market, which allows them to diversify their investor base. For example, RZD state corporation has in circulation as many as 5 issues of Eurobonds denominated in Russian currency, with a total volume of 80 billion rubles.
The sector successfully survived the March surge in volatility, fluctuating along with the OFZ market following expectations on the path of the key rate of the Central Bank of the Russian Federation. The rate reduction to the historically minimum level of 5.5% was also ensured by the recent placement of the Veon bond with a coupon of only 6.3% per annum.
Now ruble Eurobonds are traded with an average premium of about 120 bp. p. to the OFZ curve. Note that this is slightly higher than the average premium in the yield of ruble corporate bonds placed on the domestic market to OFZs (90 bp). In our opinion, Alfa-Bank issues with maturity in 2021-2022 look rather interesting, according to which you can fix the yield at the level of 5.7%. For example, an issue maturing in February 2022 with a coupon of 9.25%. Note that the OFZ yield maturing in December 2021 is 4.5%. Thus, the Alfa-Bank ruble Eurobonds gives a premium of 120 bp. n. to the curve of the Ministry of Finance, which seems to be an attractive level in such a short period of duration.
In addition, an additional factor in increasing the comparative attractiveness of ruble Eurobonds is the cancellation of tax privileges in 2021 on coupons on federal loan bonds and corporate bonds issued since 2017. Meanwhile, we note that a natural limit on the interest, for example, of retail investors in ruble Eurobonds is their high minimum lot - 10 million rubles.
Alexey Shternshis
Joint Managing Director
Capital Pi
Today we will look at one debt security as investment ideas for this week: ABH Financial Ltd
Last week, Alfa-Bank's parent company (ABH Financial Ltd) placed a 3-year eurobond of 350 million euros at 2.7% per annum. The expansion of the line of securities with Russian risk denominated in euros made us pay attention to this market segment. The March crisis did not pass him by: as can be seen in the graphs below, by now global securities nominated in the single European currency have won back about half of the losses. Note that before the March sale, the indices presented on the charts were near their historical highs.
Russian Euro papers were also battered during the March storm. However, like global Eurobonds, they are pretty confident in catching up. For example, a Gazprom issue maturing in 2023, which was trading at 0.6% at the end of February, could be purchased on March 23, 2020 with a yield of 3.0%. Now it is possible to fix the yield at 1.6%.
As for the ABH Financial Ltd. issue placed last week, it is trading at a premium for relatively higher-rated Russian securities (see chart below). Note that the issue looks quite competitive against the background of international Eurobonds with a rating of BB-.
Alexey Shternshis
Joint Managing Director
Capital Pi
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