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Bond of the Week: 20 September 2013

Aviva 6.125% 2036

    

Going through our new ORB bond universe we take a look at the Aviva 2036 6.125% bond.  There are 23 years to maturity a respectable coupon, trading around par at 101.215 with a yield of 5.569.  Extendible with coupon reset at issuer's option and callable at 2026.  We highlight this bond as it ranks in the top five if sorted by yield.  The others included have all been well covered recently and include the Enterprise Inns 2018 6%, International Personal Finance 6.125% 2020, Paragon 2020 6% and ICG 2020 6.25% (the 7% is trading near historic highs at the moment).  As the bond is subordinated debt it is expected that the credit ratings will be lower with a higher yield, although within the specialist finance sector it ranks higher than the ICG 6.25% and 7% (S&P BBB-) but lower than the S&P rated L&G’s Fitch A rated  5.875% 2031.  There are a couple of negative issues such as being subordinated the debt ranks lower should the company fail and the £10,000 minimum denomination.

Terms of the bond
Maturity: 2036
Callable: 2026
Coupon: 6.125%
Rating: S&P BBB, Moody’s Baa1
ISIN: XS0138717441
Listing: ORB (LSE)
Denominations:  £10,000

Comparative to the FTSE ORB index the bond has generally pre-performed the market rising at a greater rate since November 2011, before the market retracted in May 2013.  In  fact the bond price tends to mirror the FTSE 100 index rather than the ORB (2 year charts below)

The underlying share price has recently broken through the recent resistance levels around 380, and is no longer showing signs of being overbought suggesting that it has further to go on the upside.  As with the Insurance sector in general the price momentum is strong in this one with potential to rise above 1800.

The Aviva bond ended its bull run near 109. Indicators were extremely overbought and a sharp sell off occurred in response. Note that the RSI had become deeply oversold before the recovery from around 94 began.

More recently, the bond has become stuck in a sideways ranging pattern, between approximately 92.5 and 101.5. The upper boundary is under pressure. Should it yield, bulls will aim for the previous highs near 108 and 109.

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