Analysis & Comment  > Bond of the Week

Share |
Back to 2013

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

Disclaimer

www.fixedincomeinvestor.co.uk is a division of Stockcube Research Ltd which is authorised and regulated by the Financial Services Authority. 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.