GAM Star Credit Opportunities (EUR)

December was a positive month for markets and for the fund. Despite the rise in Covid-19 infections, we saw the beginning of vaccination programmes within a certain number of countries. Moreover, there were positive developments on Brexit, where a deal was finally struck between the EU and the UK, as well as fiscal measures being approved in the US. Going into 2021, we are positive on the subordinated debt of high-quality financial issuers. With spreads close to 400 bps, valuations continue to remain attractive in the market. For banks, capital ratios and excess capital have in fact increased significantly during 2020. Asset quality has also surprised to the upside, with non-performing loans (NPLs) only modestly rising by 20 bps to 2.9%. The European Banking Authority (EBA) was of the same view in its latest risk assessment report, released in early December. We believe this highlights the strength of the starting point for European banks in 2021 and demonstrates that they should be able to withstand any negative surprises during the year. This is in line with our view that banks should be able to withstand the Covid-19 shock through pre-provision profits, as banks are generating enough income and have built up enough excess capital to cover future expected credit losses. The continuation of central bank quantitative easing, as well as strong fiscal support and the beginning of the vaccination programmes, should be supportive for the valuation of our securities. With spreads of around 400 bps, valuations of our securities are still significantly wider than pre-Covid-19 levels, and therefore they should benefit going forward.

GAM Star Credit Opportunities (GBP)

 December was a positive month for markets and for the fund. Despite the rise in Covid-19 infections, we saw the beginning of vaccination programmes within a certain number of countries. Moreover, there were positive developments on Brexit, where a deal was finally struck between the EU and the UK, as well as fiscal measures being approved in the US. Going into 2021, we are positive on the subordinated debt of high-quality financial issuers. With spreads close to 450 bps, valuations continue to remain attractive in the market. For banks, capital ratios and excess capital have in fact increased significantly during 2020. Asset quality has also surprised to the upside, with non-performing loans (NPLs) only modestly rising by 20 bps to 2.9%. The European Banking Authority (EBA) was of the same view in its latest risk assessment report, released in early December. We believe this highlights the strength of the starting point for European banks in 2021 and demonstrates that they should be able to withstand any negative surprises during the year. This is in line with our view that banks should be able to withstand the Covid-19 shock through pre-provision profits, as banks are generating enough income and have built up enough excess capital to cover future expected credit losses. The continuation of central bank quantitative easing, as well as strong fiscal support and the beginning of the vaccination programmes, should be supportive for the valuation of our securities. With spreads of around 450 bps, valuations of our securities are still significantly wider than pre-Covid-19 levels, and therefore they should benefit going forward.

GAM Star Credit Opportunities (USD)

December was a positive month for markets and for the fund. Despite the rise in Covid-19 infections, we saw the beginning of vaccination programmes within a certain number of countries. Moreover, there were positive developments on Brexit, where a deal was finally struck between the EU and the UK, as well as fiscal measures being approved in the US. Going into 2021, we are positive on the subordinated debt of high-quality financial issuers. With spreads close to 350 bps, valuations continue to remain attractive in the market. For banks, capital ratios and excess capital have in fact increased significantly during 2020. Asset quality has also surprised to the upside, with non-performing loans (NPLs) only modestly rising by 20 bps to 2.9%. The European Banking Authority (EBA) was of the same view in its latest risk assessment report, released in early December. We believe this highlights the strength of the starting point for European banks in 2021 and demonstrates that they should be able to withstand any negative surprises during the year. This is in line with our view that banks should be able to withstand the Covid-19 shock through pre-provision profits, as banks are generating enough income and have built up enough excess capital to cover future expected credit losses. The continuation of central bank quantitative easing, as well as strong fiscal support and the beginning of the vaccination programmes, should be supportive for the valuation of our securities. With spreads of around 350 bps, valuations of our securities are still significantly wider than pre-Covid-19 levels, and therefore they should benefit going forward.

Spotlight: Market Outlook

 We are constructive on the subordinated debt of high-quality financial issuers heading into 2021, supported by the prospect of a cyclical recovery, strong vaccine candidates, receding tail risks on the geopolitical front and central banks remaining accommodative. In our view, valuations continue to look attractive in a record low interest rate environment, and we believe subordinated debt offers value for investors that need to capture income but are unwilling to compromise on credit or interest rate risk. Our focus remains on high-quality issuers given remaining uncertainty around the long-term impact of Covid-19 and remaining geopolitical risks. Overall, for investors looking to capture a high income from strong issuers, we think subordinated bonds are a sweet spot in the credit market, for the below reasons:

  • Fundamentals remain rock solid, a rise in NPLs is manageable.
  • Valuations remain highly attractive in the subordinated debt of high-quality financial issuers and beyond already capturing attractive income, we continue to see some price appreciation potential.

Areas of focus: 

RT1s from insurers offer similar spreads (circa 400 bps) and yields (circa 4%) to AT1 CoCos, but with a far more favourable structure for bondholders. The very limited coupon risk that occurs if insurers breach remote requirements, as well as no bail-in regimes, means that these should trade significantly tighter than AT1s. More limited risk levels are also reflected in ratings, which are BBB- / BBB for RT1s compared to BB / BB+ for bank AT1s. 

Legacy bonds from banks and insurers rallied in the second half of 2020, as several issuers engaged in attractive tenders (offering 4-5 percentage points above market levels) and regulatory pressure continues to mount for issuers to take out bonds. We continue to see strong value in taking a pure bottom-up approach when selecting bonds. For example, we continue to see attractive value in: 

i. Insurance legacy undated floating- rate notes (FRNs) which offer circa 5% yield to call until loss of eligibility after December 2025.

ii. Grandfathered AT1 CoCos offering similar yields compared to fully eligible AT1 CoCos while having zero extension risk due to loss of eligibility.

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