As riders were preparing to take part in the 116th Tour de France cycling race, a large French bank was offering investors a new hybrid security on the other side of the globe which was notable for a number of reasons. It was the inaugural hybrid security by an offshore issuer in Australia, and BNP Paribas’ first hybrid security in Australian dollars (AUD).
The details make it crystal clear that investors stridently still seek yield, including in the institutional and sophisticated market where this hybrid was targeted. BNP Paribas issued $300m but was overrun by an order book that peaked around $3bn. Because of the strength of demand, the initial expectation of a 5.25% fixed coupon for an initial term of 5 years was revised lower to eventually price at a coupon of only 4.5%. Stupéfiant!
We see this as a particularly good deal for BNP Paribas, whereby after hedging the proceeds back into Euros would see an all-in cost of just a little over 5.2% per annum. Remember that this type of security is only one step above equity.
The reason the deal was able to earn a yellow leader’s jersey was the coupon of 4.5% was, at the time of issue, well ahead of the peloton where yields were much closer to 4.0%.
At Daintree, we have the ability to search for value across multiple currencies. We considered the recent AUD issue and undertook a relative value analysis. What we found was very interesting. We found a BNP Paribas hybrid security issued in USD with a call date that was 11 months shorter than the AUD issue AND a yield that was 90 basis points higher! We were suitably satisfied with what we uncovered and added it to our High Income portfolio.
Figure 1: Hybrid gross yields, 3 July 2019
Source: ASX, Bloomberg
As interest rates around the world continue to fall and income remains a focus for investors, by having a global outlook we are ensuring we have the broadest tool kit to participate in the sprint for income when necessary, as well as having the resilience to hold the line on the uphill stages. At Daintree we are race fit for income!
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