The ECB decision to lift its ban on dividend payment is a positive catalyst for the Rabobank certificates, the top holding of our fund.
On Friday July 30, the ECB announced its decision to remove the cap on dividend payments for European banks, starting from 1 October onwards. While this is not really a surprise (it represented our base case scenario), it is still a strong signal from the ECB on the strength and resilience of the European banking system.
This type of news is usually more of an equity story but, in this case, it has positive implications for the top holding of our fund, i.e the Rabobank certificates. The instrument usually pays a 6.5% coupon but distribution was suspended in 2020 following the ECB dividend ban, even though the bank has one of the strongest credit profile in Europe. The bank decided to compensate bondholders with a payment of the coupon in kind, an already excellent outcome for us. In 2021, the ECB allowed banks to distribute dividends again, but limiting them to 15% of cumulated 2019-2020 profits and not higher than 20bps of the CET1 ratio. This led to a 2.2% coupon on the Rabobank certificates for 2021.
Following the ECB decision to lift the cap on dividend, we were expecting the management of the bank to announce that the coupon was to reverse back to 6.5% next year and its intention to pay a 4.3% supplemental coupon this year to bring the total distribution to 6.5%.
This is exactly what the bank announced on August 2nd. The price of the bond jumped 3 points on the news and is up 7 points since the beginning of last month. And we still think that the instrument trades significantly below its fair value. We would thus expect the position to remain highly valuable, offering a relatively high income (5% yield), as well as the potential for further price appreciation.
