GAM Star Credit Opportunities (EUR)

Despite positive macroeconomic data, markets were slightly softer in September following concerns of Covid-19 second waves. With spreads of around 580 bps, valuations within our securities are still close to two times wider than where spreads were in February.One asset class that did perform relatively strongly during the month of September was our allocation to legacy securities. This was partly due to the tender of two legacy NatWest Tier 1 bonds with around 4 percentage points of upside compared with previous trading levels. After the announcement, we saw increased interest within the legacy space, leading to prices moving higher. However, we feel that there is significantly more upside. Moreover, during Q4, the European Banking Authority (EBA) will publish a note clarifying the prudential treatment of legacy instruments. This should be positive for the legacy space. Instruments which have been issued under Basel II and Solvency 1 (so-called legacy / grandfathered bonds) do not comply with the new regulatory framework. Over time, these bonds are becoming an inefficient source of regulatory capital for institutions. Therefore, there is a lot of 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 saw with the NatWest bonds this month. Rabobank certificates have also performed strongly. This is related to the fact that Rabobank announced in August its intention to pay a scrip dividend this year. Therefore, we expect those securities to continue performing strongly.We do expect prices to continue to recover, given the strong fundamentals of our issuers and the attractive valuations of our securities. Moreover, the continuation of strong fiscal support, combined with central bank easing, should be supportive for the valuation of our securities.

GAM Star Credit Opportunities (GBP)

Despite positive macroeconomic data, markets were slightly softer in September following concerns of Covid-19 second waves. With spreads of around 580 bps, valuations within our securities are still close to two times wider than where spreads were in February.One asset class that did perform relatively strongly during the month of September was our allocation to legacy securities. This was partly due to the tender of two legacy NatWest Tier 1 bonds with around 4 percentage points of upside compared with previous trading levels. After the announcement, we saw increased interest within the legacy space, leading to prices moving higher. However, we feel that there is significantly more upside. Moreover, during Q4, the European Banking Authority (EBA) will publish a note clarifying the prudential treatment of legacy instruments. This should be positive for the legacy space. Instruments which have been issued under Basel II and Solvency 1 (so-called legacy / grandfathered bonds) do not comply with the new regulatory framework. Over time, these bonds are becoming an inefficient source of regulatory capital for institutions. Therefore, there is a lot of 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 saw with the NatWest bonds this month. Rabobank certificates have also performed strongly. This is related to the fact that Rabobank announced in August its intention to pay a scrip dividend this year. Therefore, we expect those securities to continue performing strongly.We do expect prices to continue to recover, given the strong fundamentals of our issuers and the attractive valuations of our securities. Moreover, the continuation of strong fiscal support, combined with central bank easing, should be supportive for the valuation of our securities.

GAM Star Credit Opportunities (USD)

Despite positive macroeconomic data, markets were slightly softer in September following concerns of Covid-19 second waves. With spreads of around 450 bps, valuations within our securities are still close to two times wider than where spreads were in February.One asset class that did perform relatively strongly during the month of September was our allocation to legacy securities. This was partly due to the tender of two legacy NatWest Tier 1 bonds with around 4 percentage points of upside compared with previous trading levels. After the announcement, we saw increased interest within the legacy space, leading to prices moving higher. However, we feel that there is significantly more upside. Moreover, during Q4, the European Banking Authority (EBA) will publish a note clarifying the prudential treatment of legacy instruments. This should be positive for the legacy space. Instruments which have been issued under Basel II and Solvency 1 (so-called legacy / grandfathered bonds) do not comply with the new regulatory framework. Over time, these bonds are becoming an inefficient source of regulatory capital for institutions. Therefore, there is a lot of 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 saw with the NatWest bonds this month. Rabobank certificates have also performed strongly. This is related to the fact that Rabobank announced in August its intention to pay a scrip dividend this year. Therefore, we expect those securities to continue performing strongly.We do expect prices to continue to recover, given the strong fundamentals of our issuers and the attractive valuations of our securities. Moreover, the continuation of strong fiscal support, combined with central bank easing, should be supportive for the valuation of our securities.

Spotlight: NatWest legacy bonds

NatWest (previously RBS) has announced a tender on several legacy Tier 1 and Tier 2 bonds (total USD 4.4 billion). While this is in line with our view of a gradual take-out of these legacy bonds, the timing sends a positive signal. Despite heightened uncertainty due to Brexit and Covid-19, regulators allowed the bank to optimise its capital stack by taking-out several increasingly inefficient capital securities, as these do not comply with requirements set by regulators under Basel III. The group’s strong capital position (17.2% common equity tier one (CET1) ratio and GBP 15 billion excess capital) and excess of subordinated debt compared to requirements, helped obtain approval. Nevertheless, we continue to see the catalyst for these old-style bonds to be taken-out until the end of the grandfathering period as intact, irrespective of macroeconomic developments.

Going into more detail, the main focus is the tender of two legacy Tier 1 bonds with around 4 percentage points of upside compared previous trading levels. For example, the USD-denominated 7.648% perpetual legacy Tier 1s (callable in 2031) are tendered 154% (fixed spread of 140 bps over the treasury yield) compared to previous levels of around 150%. We see this as generous and reflects NatWest’s track record as a debtholder friendly issuer. Both legacy Tier 1s have make-whole clauses, where upon full loss of capital eligibility (ie in December 2021) these can be repaid at favourable levels. In this case, NatWest is paying investors close to the favourable make-whole levels, sending a strong signal. As the future make-whole price is based on market conditions at the time (make-whole price is calculated based on a fixed spread over US treasury rates), there is no certainty that the future make-whole price will be as attractive, and therefore this provides a strong exit opportunity for bondholders

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