Flash G Fund Hybrid Corporate Bonds

12/06/2020

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In early May, three calls were exercised in the corporate hybrid debt market on their first call-date (Accor, Suez and Volvo).

Market environment

Issuers continue to exercise their calls

In early May, three calls were exercised in the corporate hybrid debt market on their first call-date (Accor, Suez and Volvo).

Although Accor is currently heavily impacted by the health crisis, it exercised its call on the first possible date for the 128 million euros still in circulation from its inaugural hybrid bond issue in 2014. The Group had previously had the foresight to finance this issue by two additional hybrid issues in January and October 2019.

 Volvo also announced that it was redeeming its 4.2% hybrid issue of 900 million euros on the first call-date of 10 June. The Group, which had issued the instrument in 2014, has experienced a major improvement in its credit rating, rising from BBB to A-. Although the market context of this auto manufacturer is currently very difficult, it has chosen to redeem this issue without replacing them, while maintaining its rating with the Credit Rating Agencies.

We consider that the exercise of these two calls by issuers that are particularly badly hit by the crisis will help to restore investors’ confidence, who will now envisage the next call-dates with greater serenity.

The problem of State aid: little impact for our investment universe, and even less for our fund

The update to the rules concerning State aid in the context of COVID-19 published by the European Commission on 8 May caused a stir on the hybrids market. Among other things, these rules specify the amounts and conditions of aid provided to companies by the EU member states.

 Paragraph 77(1) stipulates: “As long as the COVID-19 recapitalisation measures have not been fully redeemed, beneficiaries cannot make dividend payments, nor non-mandatory coupon payments, nor buy back shares, other than in relation to the State”.

This provision provoked volatility on issues such as Deutsche Bahn (AA) and EDF. This is because the injection of State aid for these issuers could lead to suspensions of coupon payments. 

 However, we would argue that this text should be seen in the perspective of the following qualifying factors:

  • Numerous exemptions are provided for green and carbon neutrality investments (which are fully in line with the investments of Deutsche Bahn. Also, the hybrids are green bonds).
  • In the hybrid debt universe, we are of the opinion that very few issuers are concerned by the risk of suspended payments, except for Lufthansa (the Group is now High Yield, and we have not had any exposure to this security). On the other hand, we do not believe that EDF and Deutsche Bahn, which are already held by their respective States, will be impacted by Paragraph 77;
  • The text stipulates that the State must be remunerated. So, if this remuneration is paid, coupon payment is no longer “non-mandatory” but “mandatory”:
  • Any unpaid coupon remains due in the case of corporate hybrid debt.

 

The hybrid debt market is reopening

In the course of its gradual normalization, and after several long weeks with no new issues, the hybrid debt market has recently seen a return of new primary issues.

 For example, at the end of May, there was the primary issue of Firmenich (Swiss fragrance and flavour company, rated BBB by the Credit Rating Agencies) for 750 million euros. This was the company’s first hybrid issue, with the aim of financing the acquisition of the DRT group. The issue met with considerable success from investors, and the security has increased significantly in value (up to +4.5 points on 8 June; subsequently, after some take-profits were taken on 10 June, performance was reduced to +3 points).

 This issue had a knock-on effect, and Repsol followed with a two-tranche issue to refinance its 3.875% hybrid issue with call-date in March 2021. The Group took advantage of the strong demand to issue 1.4 billion euros against 1 billion to be refinanced, thereby reinforcing its credit ratios.

  

Recent portfolio activity

Active on the primary market

We participated with conviction in these two primary market issues, and, in the case of Firmenich, we even reinforced our positions on the secondary market.

 We believe that the primary market could continue to be active over the coming weeks, with a high probability of strong representation of the Energy and Utilities sectors.

 

Adjusting the weights of two cyclical sectors

In terms of portfolio allocation, during May, we increased our allocation in two cyclical sectors, Automotive and Energy.

We therefore reinforced our position on Volkswagen, anticipating an improved market environment due to the various specific stimulus plans for the sector, which will naturally benefit this issuer.

In the Energy sector, after first reinforcing Total, we increased our exposure to Repsol. This is because we consider that the rapid drop in production in the United States and the progressive lifting of confinement measures should lead to a more positive outlook. At present, the Energy sector represents more than 4% of the portfolio.

  

Performance and volatility

Since the end of March, the net performance of G Fund Hybrid Corporate Bonds (part I-C, ISIN code LU2023296168) is approximately 5%, compared to approximately 4% for the Investment Grade (Barclays Euro Corporate Index) and 8.5% for High Yield (Barclays Pan European High Yield Index).

The hybrid debt universe (according to the Credit Suisse European Corporate Hybrid Index) has higher performance than the fund, but this is because of very high concentrations on Volkswagen and the Energy sector.

 Also, many of these issuers are classified as Major ESG Risks by our in-house analysts, and so we do not wish to be heavily exposed to these companies. For information, the performance aim of the fund is to provide higher performance than the universe of Senior Corporate Investment Grade debt, not to outperform the hybrid debt market. Therefore, we adopt a flexible, non-benchmarked approach, so that, whenever we wish, we can distance ourselves, often significantly, from the weightings of the hybrid debt indexes.

Net performance since 31 March 2020 (basis 100)

Data as on 29 May 2020. Source: Bloomberg.

Data as on 29 May 2020

Sources: Groupama Asset Management. Fund launched on 7 October 2019 G Fund Hybrid Corporate Bonds I-C – EUR: LU2023296168. Indexes denominated in euros. These indexes are quoted purely for information purposes and do not constitute benchmarks for the fund. Data as on 29 May 2020. Volatility calculated on a daily basis (in %.)

Past performance is not a reliable indicator of future performance.

 

The main risks associated with the fund are interest rate risk, credit risk, risk intrinsic to hybrid or subordinated debt instruments and liquidity risk.

 

(1)https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_2nd_amendment_temporary_framework_en.pdf

 

DISCLAIMER

This document is not intended for “non-professional” European Union investors, as defined in “MiFID” (EU Directive 2004/39/EC dated 21 April 2004) or any other local regulation. Similarly, in Switzerland, this document is not intended for investors not classified as “qualified investors” under the applicable legislation. As a general rule, this document must not be transmitted to private clients or individuals as defined in any legislation, nor to “US Persons”.

This document contains information concerning G FUND – HYBRID CORPORATE BONDS, a compartment of G Fund (also referred to as “the SICAV”), a Luxembourg-based undertaking for collective investment in transferable securities (UCITS), covered by part I of the Law dated 20 December 2002 and constituted in the form of a “SICAV”(Société d’Investissement à Capital Variable – a European publicly traded investment company structure for open-ended funds). The SICAV is registered with the Luxembourg Trade and Companies Register under number B157527. Its registered office address is 5, allée Scheffer, L-2520 Luxembourg. G Fund was authorized for trading by the Luxembourg financial authority CSSF (“Commission de Surveillance du Secteur Financier”). 

Investors are advised that not all compartments of the SICAV are necessarily registered, authorized for commercialization or accessible to all investors in all jurisdictions. Before subscribing to a compartment, the client must take due note of the complete prospectus of the SICAV and of its latest annual and half-yearly reports and its articles of association. These documents are available free of charge at the registered office of the SICAV or at the registered office of the authorized representative accredited by the competent authority in each jurisdiction concerned.

Investment in the compartments of the SICAV involve risks. Investors must fully inform themselves of these risks before any subscription and must make sure that they have understood the present document. We recommend that all potential investors contact an advisor to determine whether this investment is suited to their profile.

The performance of a compartment is not guaranteed but can vary both upwards and downwards. The past performance of a compartment is not a reliable indicator of the future performance of the same compartment. Performance is quoted excluding the costs and commissions charged for subscription/redemption.

This document is not an investment recommendation. Similarly, this document does not constitute an offer of purchase or request to sell in countries where the compartments of the open-ended fund are not authorized to be traded or where any such offer or request would be illegal.

The commercial teams of Groupama Asset Management, the G FUND management company, are at your service if you wish a personal financial recommendation.

Published by Groupama Asset Management – Registered office: 25 rue de la ville l’Evêque, 75008 Paris – Website: www.groupama-am.com