Analysis & Comment:
Previous 'Bond of the Week'
|
RBS 5.1% 2020: 2 February 2010 This week sees the launch of the London Stock Exchange’s new retail bond platform, a welcome addition to the current peer-to-peer and market-maker mechanisms for executing transactions in the sterling fixed income market. You can read more about this on my "Bond blog" here. For the moment, trading on the LSE is restricted to gilts and less than a dozen corporate bonds, but it is expected that both existing low-minimum denomination corporates and new retail targeted issues will be added to the platform as time goes on. With this in mind, Royal Bank of Scotland have stepped up to the plate, launching a new ten-year "Royal Bond" deal with a 5.1% coupon to get the party started. The term sheet for this issue is available for download here. The RBS bond is what is known as a "vanilla" deal in the market - plain and simple. The bonds pays a single annual coupon, has a fixed maturity date on the 1st February 2020 and contains no unpleasant puts, calls or other features to trip up the unwary investor. RBS has an A+ rating from Standard and Poor’s and best of all, the bond is available in minimum denominations of just £100, a refreshing change from the unmanageable £50,000 chunks we have been seeing of late. The new bond qualifies for both ISAs and SIPPs and RBS expect to make a 0.75% bid-offer spread in the secondary market. So is it good value? As ever with securities, valuation is a relative measure. Compared to ten-year gilts, the bond offers an incremental yield of 1.2%. This looks tight compared to existing senior longer-dated RBS bonds trading in the secondary wholesale market, which trade around 1.80% over gilts If we compare the bond to other corporates trading in the ten-year sector, the 5.1% yield does not look unreasonable; the BBB+ rated BATS 6.375% Dec 2019 offers a tad more yield at 5.2%. However, the A-minus rated Tesco 5.5 Dec 2019 trades a little tighter, and investors will only be able to get 4.7% from the uber-grocer’s debt. Interestingly, the new bond looks less tempting compared to RBS’s previous issue. The Royal Bond 5.3% August 2015, launched last summer is offered at 102.9 in the market at the time of writing. There is an interesting wrinkle in this. The first Royal Bond was launched off RBS’s derivative platforms and due to the contraints of this system, the bond is traded with a "dirty" price, i.e. rolled-up interest is included in the price. According to my vintage Hewlett Packard calculator, that means that the true or effective "clean price" of the security is only 100.6 - a YTM of 5.2%. This is slightly more than the longer-dated new issue and perhaps 200bp over gilts of the equivalent maturity. My view: The new RBS 5.1% 2020 bond is a useful addition to the list of tradeable fixed income securities available for private investors. At a redemption yield of 5.1%, the bond offers 120bp over gilts and whilst this compares reasonably to other sterling corporate bonds in the ten-year maturity band, it is not cheap. I am also a little wary of longer duration bonds at the moment. Investors in such instruments can expect the secondary market price of this instrument to swing around a fair bit - consider that ten year gilts are now nine points below their October 2009 peak. Mark Glowrey Disclaimer
The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested. Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own, the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency. None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such. For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated. The investments described by or in the services are not suitable for all investors. Investors who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser. These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website. |