GAM Star Credit Opportunities (EUR)

 November was a strong month for markets and for the fund with positive catalysts for the securities we hold. Firstly, the UK Prudential Regulatory Authority (PRA) gave its opinion on legacy bonds from UK banks and the message is the same as previously indicated by the European Banking Authority (EBA) for EU banks, which is that UK banks should call / redeem all their legacy hybrids to the extent possible. Sequentially, Lloyds announced an exchange offer of legacy Tier 1s into Basel III compliant Tier 2s. The conditions were extremely favourable as the legacy Tier 1s were tendered at a six percentage point premium and the Tier 2s were being offered at a very widespread and are now trading three percentage points higher. We should see a continuation of these positive developments within the legacy space as, over time, these bonds are becoming an inefficient source of regulatory capital for institutions. Therefore, there is a lot of positive optionality in terms of having issuers tendering or calling these bonds over the coming quarters or years at significant premiums to current prices, as we have already seen. Secondly, Rabobank confirmed the details for the payment of a scrip-dividend equivalent to 6.5% on its certificates. The price of those securities continued moving up, but they have scope to increase further, in our view. Thirdly, Q3 earnings season has been strong from a credit perspective. Loan loss provisions have decreased significantly and should be at the lower end of initial projections for the year. Most of the banks have reported higher capital ratios, as profits before provisions remain elevated. This is in line with our view that banks should be able to withstand the Covid-19 shock through pre-provision profits, as banks should generate enough income, and have built up enough excess capital to cover future expected credit losses. Positive vaccine developments combined with a continuation of central banks easing, as well as strong fiscal support, should be supportive for the valuation of our securities. With spreads of around 460 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)

 November was a strong month for markets and for the fund with positive catalysts for the securities we hold. Firstly, the UK Prudential Regulatory Authority (PRA) gave its opinion on legacy bonds from UK banks and the message is the same as previously indicated by the European Banking Authority (EBA) for EU banks, which is that UK banks should call / redeem all their legacy hybrids to the extent possible. Sequentially, Lloyds announced an exchange offer of legacy Tier 1s into Basel III compliant Tier 2s. The conditions were extremely favourable as the legacy Tier 1s were tendered at a six percentage point premium and the Tier 2s were being offered at a very widespread and are now trading three percentage points higher. We should see a continuation of these positive developments within the legacy space as, over time, these bonds are becoming an inefficient source of regulatory capital for institutions. Therefore, there is a lot of positive optionality in terms of having issuers tendering or calling these bonds over the coming quarters or years at significant premiums to current prices, as we have already seen. Secondly, Rabobank confirmed the details for the payment of a scrip-dividend equivalent to 6.5% on its certificates. The price of those securities continued moving up, but they have scope to increase further, in our view. Thirdly, Q3 earnings season has been strong from a credit perspective. Loan loss provisions have decreased significantly and should be at the lower end of initial projections for the year. Most of the banks have reported higher capital ratios, as profits before provisions remain elevated. This is in line with our view that banks should be able to withstand the Covid-19 shock through pre-provision profits, as banks should generate enough income, and have built up enough excess capital to cover future expected credit losses. Positive vaccine developments combined with a continuation of central banks easing, as well as strong fiscal support, should be supportive for the valuation of our securities. With spreads of around 440 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)

November was a strong month for markets and for the fund with positive catalysts for the securities we hold. Firstly, the UK Prudential Regulatory Authority (PRA) gave its opinion on legacy bonds from UK banks and the message is the same as previously indicated by the European Banking Authority (EBA) for EU banks, which is that UK banks should call / redeem all their legacy hybrids to the extent possible. Sequentially, Lloyds announced an exchange offer of legacy Tier 1s into Basel III compliant Tier 2s. The conditions were extremely favourable as the legacy Tier 1s were tendered at a six percentage point premium and the Tier 2s were being offered at a very widespread and are now trading three percentage points higher. We should see a continuation of these positive developments within the legacy space as, over time, these bonds are becoming an inefficient source of regulatory capital for institutions. Therefore, there is a lot of positive optionality in terms of having issuers tendering or calling these bonds over the coming quarters or years at significant premiums to current prices, as we have already seen. Secondly, Rabobank confirmed the details for the payment of a scrip-dividend equivalent to 6.5% on its certificates. The price of those securities continued moving up, but they have scope to increase further, in our view. Thirdly, Q3 earnings season has been strong from a credit perspective. Loan loss provisions have decreased significantly and should be at the lower end of initial projections for the year. Most of the banks have reported higher capital ratios, as profits before provisions remain elevated. This is in line with our view that banks should be able to withstand the Covid-19 shock through pre-provision profits, as banks should generate enough income, and have built up enough excess capital to cover future expected credit losses. Positive vaccine developments combined with a continuation of central banks easing, as well as strong fiscal support, should be supportive for the valuation of our securities. With spreads of around 370 bps, valuations of our securities are still significantly wider than pre-Covid-19 levels, and therefore they should benefit going forward.

Spotlight: Banks and ESG

More than a decade on from the global financial crisis (GFC) and the subsequent overhaul of banking regulation, banks’ corporate governance (G) profiles – the big ESG issue for banks pre-GFC – have significantly improved and are now a positive driver for European bank credit investors. As we enter a new decade and phase of regulation, a progression from G to environmental (E) is occurring, with climate risk the new area of focus. Although climate risk is material for the European banking sector, regulation will continue to act as a positive catalyst for banks’ ESG profiles, building on a positive track record of transforming the banking sector post-GFC. Banking-led initiatives are also gaining momentum and given their dominant role in financing the European economy, banks are likely to play an increasingly active role in the environmental transition.

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