GAM Star Credit Opportunities (EUR)

May was a stable month for the securities held within our portfolio. At the beginning of the month, concerns about inflation created volatility across financial markets. However, those concerns eased following comments from central bankers. In our view, a key question is whether the inflation is temporary or whether it is set to be more permanent. Irrespective of the answer, we believe our holdings should not be affected by any potential increase in interest rates. This year, and numerous times in the past, our fund has shown resilience to such moves as it has low sensitivity to interest rates. Spreads within our securities stayed stable during May, but are still wider than pre-Covid-19. This is despite the fact that the financial sector demonstrated its strong health during the real-life stress test of the global pandemic. As such, we believe that our holdings should benefit from the continued accommodative stance by central banks, combined with the gradual reopening of European economies.

Q1 earnings have been coming to an end and results from financials have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even provision releases in some cases (ie provisions made for expected losses which have not materialised and hence are written back into the profits). Therefore, from a credit quality standpoint, we believe that financials are in a strong position, as they have large amounts of excess capital, combined with strong earnings, low cost of risk and in some cases excess provisions for expected credit losses.

In conclusion, the fund continues to generate relatively high income. The strong credit quality of our holdings ensures that we have good visibility on this high income. Moreover, valuations remain attractive. Finally, with our low sensitivity to interest rates, we believe our holdings are well-positioned to benefit from the current environment.

GAM Star Credit Opportunities (GBP)

May was a stable month for the securities held within our portfolio. At the beginning of the month, concerns about inflation created volatility across financial markets. However, those concerns eased following comments from central bankers. In our view, a key question is whether the inflation is temporary or whether it is set to be more permanent. Irrespective of the answer, we believe our holdings should not be affected by any potential increase in interest rates. This year, and numerous times in the past, our fund has shown resilience to such moves as it has low sensitivity to interest rates. Spreads within our securities have stayed stable during the month. This is despite the fact that the financial sector demonstrated its strong health during the real-life stress test of the global pandemic. As such, we believe that our holdings should benefit from the continued accommodative stance by central banks, combined with the gradual reopening of European economies.

Q1 earnings have been coming to an end and results from the financial sector have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even in some cases, provision releases (ie provisions made for expected losses which have not materialised and hence are written back into the profits). Therefore, from a credit quality standpoint, we believe that financials are in a strong position, as they have large amounts of excess capital, combined with strong earnings, low cost of risk and in some cases excess provisions for expected credit losses.

In conclusion, the fund continues to generate relatively high income. The strong credit quality of our holdings ensures that we have good visibility on this high income. Moreover, valuations remain attractive. Finally, with our low sensitivity to interest rates, we believe our securities are well positioned to benefit from the current environment.

GAM Star Credit Opportunities (USD)

May was a stable month for the securities held within our portfolio. At the beginning of the month, concerns about inflation created volatility across financial markets. However, those concerns eased following comments from central bankers. In our view, a key question is whether the inflation is temporary or whether it is set to be more permanent. Irrespective of the answer, we believe our holdings should not be affected by any potential increase in interest rates. This year, and numerous times in the past, our fund has shown resilience to such moves as it has low sensitivity to interest rates. Spreads within our securities stayed stable during May, but are still wider than pre-Covid-19. This is despite the fact that the financial sector demonstrated its strong health during the real-life stress test of the global pandemic. As such, we believe that our holdings should benefit from the continued accommodative stance by central banks, combined with the gradual reopening of European economies.

Q1 earnings have been coming to an end and results from financials have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even provision releases in some cases (ie provisions made for expected losses which have not materialised and hence are written back into the profits). Therefore, from a credit quality standpoint, we believe that financials are in
a strong position, as they have large amounts of excess capital, combined with strong earnings, low cost of risk and in some cases excess provisions for expected credit losses.

In conclusion, the fund continues to generate relatively high income. The strong credit quality of our holdings ensures that we have good visibility on this high income. Moreover, valuations remain attractive. Finally, with our low sensitivity to interest rates, we believe our holdings are well-positioned to benefit from the current environment.

Spotlight: Improving macro picture provides boost to bank earnings

The corporate hybrid market has remained buoyant in 2021, with more than USD 20 billion of new supply. This follows a year of record growth in 2020 for corporate hybrids – a market now estimated at close to USD 250 billion across currencies. For issuers, corporate hybrids remain an attractive value proposition as these are de facto ‘cheap equity’. Rating agencies assess hybrids as part equity (typically 50% equity content) up to a certain limit. This means that for issuers, printing new hybrids at a cost of even 4-5%, tax deductible, remains attractive compared to a cost of equity for 7-10%. The acceleration of growth of the market has been driven by several factors:

  • Issuers have not used hybrids extensively in the past, although it could make sense for up to two thirds of issuers to optimise or strengthen their balance sheet.
  • The hybrid market has become more mature, with a critical size reached and a strong investor base. The standardisation of bond structures (now very similar across issuers) has also been a positive driver – with hybrids now a homogeneous asset class.
  • Hybrids are an efficient tool for issuers to strengthen their balance sheets. We have seen a significant number of issuers increase their hybrid base to execute on their rating upgrade strategies (real estate sector), to help finance mergers and acquisitions (M&A), as in some cases shore up their balance sheet during Covid-19 or in a challenging environment (oil & gas majors during the oil slump) to protect ratings.

The rapid increase of supply has led to attractive opportunities for investors, with new deals offering value in a challenging fixed income context.
As a reference point, investment grade-rated hybrids still offer spreads of around 200 bps or an attractive multiple of circa 2.3 times senior investment grade bonds. With spreads of up to 300 bps for select issuers in the market, we continue to see hybrids as an attractive source of yield from high-quality issuers looking to maintain to improve their credit profile (issued for capital purposes).

One example of a recent attractive deal involves Veolia. The French company came back to the hybrids market in order to help finance its buyout of Suez, its main competitor. Hybrids allowed

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