Analysis & Comment:  

GKN brought out an upbeat trading statement last week, reporting a profit of £170 million for the six months to June 2010. The figures were received well by equity investors, who have bid up the shares from a recent low of 110p to 140p, the top of the medium-term range.

The company also has two bonds trading in the sterling market - the GKN 7% May 2012 (XS0147740335) and the GKN 6.75% 2019 (XS0103214762).

The latter is probably of the most interest to private investors. £300 million of this bond was issued back in 1999 at a price of 99.54 with a further £50 million added to the issue in 2002. Since then, the bond hovered under the 110 mark throughout the halcyon period of the early part of this decade before hitting a trough of 50 (along with most other bonds) during the credit crunch. After that came a fairly rapid recovery. The attractions of the 6.75% annual coupon, a well-known name, a decent yield and a sensible maturity have pulled the bond back up to around the the par mark

So are there any drawbacks for investors? Perhaps the sticking point is GKN’s low credit rating; with a BB+ from Standard and Poor’s the company fails to qualify for the all-important "investment grade" status (BBB and above). This makes it a "no go" area for many conventional fund managers. However, as private investors we can perhaps be a little less rule-bound in our selection of bonds.

I last covered the GKN 6.75 Oct 2019 for the Bond of the week in January of this year. At the time we rated the bond a "buy", adding £10,000 to our model portfolio at a price of 97.56. I liked the bond for a variety of reasons, particularly the management’s stated aim to recover its investment grade rating in due course. Since then the bond has traded a few points higher but at the indicated market offer price of 101, the yield to redemption continues to offer good value at 6.6%.

My view: I continue to view the GKN bond as a buy. The company remains committed to regaining its investment grade status. At the end of the day, this decision will rest with the ratings agencies and whilst the company’s fortunes appear to be improving, the strength of the engineering sector (particularly the automotive industry) will be a major factor in any re-rating . Assuming all goes well, a return to "investment grade" status will open up the credit to a much wider pool of investors, in turn leading to price appreciation. The recent positive and well-received results suggest that this process is still on track and the company’s results, due out on August 3^rd, will hopefuly provide more positive developments.

Mark Glowrey

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