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Bond of the Week: 28 March 2013

Segro 5.75% 2035


The Cyprus bailout came and went. But the market sentiment remains highly uncertain. For some sectors, it is worsening, such as European banks. Their share prices are in a free fall because investors are not sure what to make of the new bailout template in Cyprus and its implications for banks.

Government bond yields are also plummeting, especially among developed markets. In a few weeks, the UK 10-year bond yield slumped from 2.2% to 1.7%; while the US 10-year bond yield nosedived from 2.05% to 1.85%. This is lifting bond prices of all types, especially those within the 7-20 year maturity (see last week’s Bond of the Week).

Looking further across the yield curve, the 20+ year bonds are too enjoying a strong advance. This week, I wish to highlight the Segro 5.75% 2035 bond, which is exhibiting an interesting chart pattern. One of the maxims in financial markets is to ‘ride trends’. Here, the bond is exhibiting a strong uptrend. The pattern of rising lows and rising highs over many years is an attractive proposition for buyers.

For those unfamiliar with this firm, Segro is a property firm, with diversified portfolio of industrial land assets (see the firm’s website, for more details,). Based in Slough – hence, formerly known as ‘Slough Estates’ – the firm fetches a market capitalisation of about £1.88 billion (stock ticker: SGRO LN). According to Segro’s website, the firm reported earnings of £145 million for the year ended Dec-2012, and paid dividends of 14.9 per share to its shareholders. A quick glance at its balance sheet shows it is a viable property firm, with no impending credit squeeze.

But the 5.75% 2035 bond is not only outstanding bond for Segro. In Morningstar’s website, it listed about 13 Segro bonds, totalling £2.1 billion. I have taken a snapshot of the screen so that readers can see the debt profile of Segro quickly. (Click here if readers want to find out more).

A simple comparison of these bonds shows the 2035 issue has the longest maturity, and with it, the highest yield.

Segro PLC bond
• Issuer – Segro Plc
• Maturity – 20 June 2035
• Coupon – 5.75%
• ISIN – XS0221324154
• Prospectus -
• Yield – 4.81%

My view: At 4.8%, the Segro 2035 bond is trading about 210bps above equivalent maturity gilts (20-year – 2.7%). Is this a reasonable spread? I think so. Coupled with the steady price uptrend, I assume the bond’s directional risk is tilted to the upside. In other words, there is space for further yield compression, especially if gilt yields keep falling.

Source: Morning Star

Dr Jackson Wong

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