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Bond of the Week: 5 March 2015
Bond of the Week : 5 March 2015
Here are the terms of the new retail bond issue.
Issuer: Intermediate Capital Group plc
This is Intermediate Capital Group's (ICG's) third ORB issue. I refer you to what I wrote last time on 31st August 2012.
The main risks lie with the investment management company and some future blow up in the world economy or a collection of individual bad decisions. Here I would make the following points: a) Single name risk is much lower than in 2012. To use the rather ghastly modern lingo, the book is becoming more granular. b) ICG does have a good track record (89% of investments make a cash profit) and their micro management of investments, although doubtless more costly to run, appears to pay off. c) On the negative side much of their investment is in the Eurozone and France is their biggest office. In part France is justified by the local expertise they have acquired, in part because of strong legal debt holder protection. I do seem to remember something along the lines that writing a bouncing cheque in France is not for the frivolous. However, France appears to be the new laggard of the eurozone and I did seem to get some sort of acknowledgement that there have been some recent restructurings there. Apparently if you go to court as part of a bail out plan and say you are going to fire all the employees it does not go down well and you are told to think again. Therefore, if I have understood it correctly, there is a tendency to murky obfuscation in re-organisation when things are not going too well as job preservation comes first.
This new issue has unusually been targetted at both retail/ wealth managers and institutions, unlike other ORB new issues. This should make for greater depths of liquidity (good) but bear in mind the more of a stake institutions have in the issue the more likely it is the issue will track Gilts. This could affect returns if there is a substantial government market sell off. I would also note that there was a rather unhappy Enquest style episode post the last issue (August 2012) when CFO Mr. Keller tried to do an institutional deal offering a huge 8%+ coupon (which would certainly have caused ructions with ORB bond holders who had been offered and bought into a 6 1/4% coupon). But the institutions turned round and said no thanks which in the long run prevented egg on face all round. However, the past is the past and the whole attitude to credit has improved since then. I assume institutions will be more happy to invest in ICP than they were then, and anyway the issue can still be got away even if institutional support is moderate.
Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.
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