KILLIK & Co
KILLIK & Co
BOND RESEARCH
FIXED INCOME NOTE
5 AUGUST 2016
Government Bond Yields Yield Today, %
Macro Overview & Government Bonds
Change on Week, bp
Change YTD, bp
UK 2 yr Gilt
0.13
1.50
-52.60
UK 10 yr Gilt
0.65
-3.20
-130.70
UK 30 yr Gilt
1.49
-6.10
-117.60
German 2 yr Gvt Bond
-0.61
1.40
-26.60
German 10 yr Gvt Bond
-0.09
3.40
-71.40
German 30 yr Gvt Bond
0.40
6.10
-108.50
US 2 yr Gvt Bond
0.65
-0.49
-39.72
US 10 yr Gvt Bond
1.50
4.24
-77.39
US 30 yr Gvt Bond
2.25
6.36
-76.95
Japan 2 yr Gvt Bond
-0.19
5.70
-18.40
Japan 10 yr Gvt Bond
-0.09
9.80
-35.70
Japan 30 yr Gvt Bond
0.39
12.70
-88.60
France 10 yr Gvt Bond
0.14
3.90
-84.60
Portugal 10 yr Gvt Bond
2.88
-5.60
36.20
Ireland 10 yr Gvt Bond*
0.42
0.80
-72.90
Italy 10 yr Gvt Bond
1.16
-1.30
-44.00
Greece 10 yr Gvt Bond
8.31
15.20
2.20
Spain 10 yr Gvt Bond
1.04
1.70
-73.50
Source: Bloomberg (Rates comprised of Generic bonds) * New Irish 10-year benchmark issued on 07/01/2014
Monetary Policy Committee cuts rates and embarks on new round of QE Japanese government bonds weaken, with 10-year yields almost turning positive US employment data are mixed ahead of nonfarm payrolls report
Corporate Bonds Half year results - Ladbrokes, London Stock Exchange, Tullett Prebon Macro Overview & Government Bonds
UK government bonds outperform following Bank of England meeting UK government bonds outperformed this week as gilts rallied on a series of fresh stimulus measures from the Bank of England. In contrast, yields on German, US and, in particular, Japanese government debt rose, the latter following the announcement of a fiscal spending package designed to bring stronger growth and inflation to the Japanese economy. On the data-front, PMI surveys have been in focus as well as unemployment data ahead of this afternoon's US nonfarm payrolls report.
pl
UK 10-year Gilt yield, % 3.5 3.0
2.5 2.0
1.0 0.5
2012
2013
2014
Source: Bloomberg
GBP / USD
2015
2016
The Bank of England held its latest Monetary Policy Committee meeting on Thursday. Alongside the release of its Inflation Report, members of the Bank voted to cut interest rates by 25bps and embark on a new round of quantitative easing, which will see the Bank buy £70bn of bonds over the next six months, £60bn of which will be government bonds with the remaining being corporate debt. In order to ensure that lower borrowing costs for banks are passed through to households, the Bank introduced a £100bn Term Funding Scheme for high street lenders which will provide funding at close to the 0.25% Bank Rate. Governor Mark Carney also indicated that rates are likely to be cut further going forward, however, he seemed to rule out negative rates for the UK. The Inflation Report itself, which includes updated economic projections, painted a somewhat gloomy picture of the economy, with the MPC expecting the UK to only narrowly avoid recession over the next six months. The Bank also expects unemployment to rise, wage growth to slow and house prices to fall. In light of the depreciation in sterling, inflation is expected to pick up, reaching 2.4% in 2018, up from 2.1% forecast in the last inflation report. The impact of the round of fresh monetary stimulus and new economic projections on the market was for sterling to weaken, while UK government bonds strengthened, with 10-year gilt yields falling to new record lows.
Ex
1.8
am
Monetary Policy Committee cuts rates and embarks on new round of QE
1.5
0.0 2011
UK government bonds outperform following Bank of England meeting
e
Government Bond
1.7
1.6
1.5
1.4
1.3
1.2 2011
2012
2013
2014
2015
2016
Source: Bloomberg
Japan 10-year yield, %
Japanese government bonds weaken, with 10-year yields almost turning positive
1.3
Elsewhere, Japanese government bonds sold off this week, with the yield on the country's 10-year debt almost moving back into positive territory, having turned negative back in February. The move came following last Friday’s smaller than expected monetary stimulus package from the Bank of Japan, with many taking the Bank’s statement that it would reassess monetary policy at its next meeting to be a hawkish one. This week, Japanese Prime Minister Shinzo Abe revealed the government’s latest fiscal stimulus package worth 4.6tn yen this year, including welfare spending, spending on infrastructure, and investment in small and medium-sized businesses.
1.1 0.9 0.7 0.5 0.3 0.1 -0.1 -0.3 2011
2012
Source: Bloomberg
2013
2014
2015
2016
Analysts: P Gordon, CFA; M Malek, CFA; M Nelson
KILLIK & Co
BOND RESEARCH US employment data are mixed ahead of nonfarm payrolls report
US ISM Employment Surveys
In the US, following a relatively hawkish tone to the Federal Reserve’s statement on monetary policy last week, this afternoon’s nonfarm payrolls report has the potential to influence whether there will be an interest rate rise in the States before the end of the year. Data so far this week have included ISM surveys for the manufacturing and services sectors which were marginally weaker than expectations, with employment components that declined from the previous month. Employment change, according to ADP, was +179K in July, above expectations. Expectations for this afternoon are for a 180K increase in nonfarm payrolls, with the unemployment rate forecast to fall to 4.8%. Average hourly earnings are expected to increase to 2.6% in July.
60 58 56 54 52 50 48 46 44 2011
2012
2013
Manufacturing
2014
2015
2016
Corporate Bonds
Non-Manufacturing
Source: Bloomberg
Ladbrokes
Ladbrokes 5.125% 2022, Ask Price
e
112
Ladbrokes released stronger than expected half-year results this week. The company reported solid performance across all key channels, benefiting from good staking and favourable sporting results. However, the bookmaker-friendly results of last year’s unpredictable Premier League and the European Championship were partially offset by the worst Cheltenham Festival on record and a very customer-friendly Royal Ascot. First half revenues grew by 13% to £661.8m, while EBITA grew by 34% to £52.3m. Strong free cash flow generation led to a significant reduction in net debt (£227.2m vs. £414.3m in 1H 2015) and leverage (Net debt/EBITDA 1.3x vs. 2.1x in 1H 2015). Regarding the merger with Coral, Ladbrokes is currently engaging with potential buyers for the 350-400 shops that are required to be sold by the Competition and Markets Authority before the merger can go ahead. The management believes that the process can now be successfully completed by the end of Q3 and the timetable from then would be for completion of the merger in autumn. Ladbrokes is currently rated BB by S&P, Ba2 by Moody’s and BB by Fitch.
110 108
pl
106 104 102 100
96 2014
2015
am
98
2016
Source: Bloomberg
LSE 4.75% 2021, Ask Price 118 116 114 112
London Stock Exchange Group (LSE) announced its interim results for the six months ended 30 June, with highlights including an increase in revenues of 9% to £722m (H1 2015: £663m) and total income up 11% to £786m (H1 2015: £706m). The group experienced growth across all core business areas, in particular in Information Services, Capital Markets and at LCH. LSE’s balance sheet has continued to strengthen, with adjusted net debt reduced to £870m and adjusted pro forma leverage (net debt/EBITDA) falling to 1.3x (from 1.7x at 31 December 2015). Good progress has been made on the merger with Deutsche Börse, that was announced in March 2016, with shareholder approvals achieved in July and work underway on regulatory consents. London Stock Exchange Group is rated Baa1 with a ‘positive’ outlook by Moody’s and BBB+ with a ‘positive’ CreditWatch from S&P.
Ex
110
London Stock Exchange
108 106 104 102
100 2013
2014
2015
2016
Tullett Prebon
Source: Bloomberg
Tullett 5.25% 2019, Ask Price 108 107 106
105 104 103
102 101 100
99 98 2013
2014
Source: Bloomberg
2015
2016
Tullett Prebon announced half-year results this week which showed resilient performance from the broking business despite challenging markets. Revenue of £430m was 4% higher than in 2015 with underlying operating profit increasing by 11% to £67m. Whilst performance in traditional interdealer broker products remained subdued, as expected, it was more than offset by Equities and Energy and Commodities products. Additionally the results were helped by a strong contribution from Information Sales and Risk Management Services and positive currency movements (in the six months to 30 June 2016 over 80% of revenue was in non-sterling currencies). The management stated that planning for the integration of ICAP's global hybrid voice broking and information business ("IGBB") is progressing well and the acquisition is expected to complete in the latter part of 2016. In July the company repaid the £141.1m 7.04% Sterling Notes on their maturity by drawing down from its committed revolving credit facility, which leaves Tullett’s ORB bond as their only bond outstanding. Tullett Prebon is currently rated BBB- by Fitch and Ba1 by Moody’s, both with ‘stable’ outlooks. 05/08/2016
KILLIK & Co
BOND RESEARCH
For a selection of corporate bonds, please see the table below. Please note that these investments have differing risk profiles and if you have any questions about the nature of the investments you should speak to your Broker. FIXED-COUPON SENIOR BONDS ISIN
Coupon
Maturity
Indicative Offer Price*
GRY*, %
Provident Financial Group
XS0762418993
7.000
04-Oct-17
105.42
ICAP
X50805454872
5.500
31-Jul-18
107.82
Tesco Personal Finance
XS0591029409
5.200
24-Aug-18
Intermediate Capital Group
XS0716336325
7.000
Tullett Prebon
XS0859261520
5.250
Primary Health Properties
XS0795445823
Beazley Workspace
Issuer
Net Redemption Yield*, %
Income Minimum Yield, % Size
Killik & Co Risk Rating
40%
2.22
0.86
-0.48
6.64
100
4
1.47
0.42
-0.63
5.10
100
4
105.21
2.58
1.56
0.55
4.94
100
4
21-Dec-18
109.08
3.01
1.67
0.34
6.42
100
4
11-Jun-19
107.02
2.68
1.66
0.65
4.91
100
4
5.375
23-Jul-19
107.14
2.86
1.81
0.78
5.02
2,000
4
XS0827693663
5.375
25-Sep-19
106.82
3.09
2.05
1.01
5.03
100
4
XS0832324981
6.000
09-Oct-19
108.18
3.29
2.13
0.97
5.55
100
4
St. Modwen Properties
XS0841076465
6.250
07-Nov-19
108.75
3.41
2.20
1.01
5.75
100
5
UNITE Group
XS0856594642
6.125
12-Jun-20
110.58
3.20
2.03
0.87
5.54
100
5
Intermediate Capital Group
XS0818634668
6.250
19-Sep-20
109.66
3.73
2.53
1.33
5.70
100
4
Tesco Personal Finance
XS0780063235
5.000
21-Nov-20
107.77
3.07
2.10
1.14
4.64
100
4
The Paragon Group of Companies
XS0891023086
6.000
05-Dec-20
105.51
4.63
3.45
2.27
5.69
100
6
Provident Financial Group
XS0900863084
6.000
27-Sep-21
112.29
3.40
2.26
1.13
5.34
100
4
London Stock Exchange Group
XS0846486040
4.750
02-Nov-21
115.59
1.64
0.76
-0.12
4.11
100
3
The Paragon Group of Companies
XS1018830270
6.125
30-Jan-22
A2D Funding
XS0975865949
4.750
18-Oct-22
Intermediate Capital Group
XS1200576699
5.000
Tesco
XS0248392812
Provident Financial Group
XS1209091856
A2D Funding II
XS1103286305
4.500
30-Sep-26
110.62
3.29
ISIN
Coupon
Maturity or Next Call Date
Indicative Offer Price*
Real Yield**, %
Tesco Personal Finance
XS0710391532
1.000
16-Dec-19
109.89
National Grid
pl 102.66
5.63
4.39
3.17
5.97
100
6
113.60
2.39
1.50
0.61
4.18
100
3
24-Mar-23
103.34
4.46
3.46
2.47
4.84
100
4
5.000
24-Mar-23
111.17
3.10
2.17
1.23
4.50
50,000
4
5.125
09-Oct-23
108.53
3.79
2.80
1.81
4.72
104
4
2.43
1.57
4.07
100
3
am
Issuer
e
20%
Retail Prices Index (RPI) Base
Latest 06/16
Next Coupon
Minimum Size
Killik & Co Risk Rating
1.18
234.4
263.1
0.56
100
4
XS0678522490
1.250
06-Oct-21
119.00
0.06
231.3
263.1
0.71
100
3
Places for People Capital Markets XS0731910765
1.000
31-Jan-22
114.33
0.28
235.2
263.1
0.56
100
3
Severn Trent
1.300
11-Jul-22
118.03
-0.15
238.5
263.1
0.72
100
3
Ex
XS0796078193
Issuer
HSBC Bank Capital Funding
SUBORDINATED BONDS
ISIN
Coupon
Maturity or Next Call Date
Indicative Offer Price*
GRY or YTC*, %
XS0189704140
5.862
07-Apr-20
106.79
3.83
Net Redemption Yield*, %
Income Minimum Yield*, % Size
Killik & Co Risk Rating
20%
40%
2.71
1.59
5.49
1,000
6
2.45
5.16
1,000
6
Next call date is 7 April 2020. If not called, the coupon becomes the then 6-month Libor + 185 basis points, refixed every six months. HSBC Bank Capital Funding
XS0179407910
5.844
05-Nov-31
113.35
4.60
3.53
Next call date is 5 November 2031. If not called, the coupon becomes the then 6-month Libor + 176 basis points, refixed every six months.
The Killik & Co Risk Rating system uses categories which are intended as guidelines to the specific risks involved, as follows: Restricted Lower Risk (1), Restricted Medium Risk (2-3) and Unrestricted (4-9). Please see the Killik & Co Terms & Conditions for further detail.
The analyst, Mateusz Malek, has personal investments in the Provident Financial 7% 2017, ICG 7% 2018, IPF 6.125% 2020 and Premier Oil 5% 2020 bonds. Risk warning
Note that as with all investments there are risks involved in investing in corporate bonds. This includes the risk that the issuer may default. As a consequence you may get back less than you invest or lose your initial investment. Other factors which may affect the price of the bonds include, but are not limited to, the level of inflation, length of time until maturity, issuer’s financial position, demand for the bonds, and interest rates. Note that if interest rates start to rise then the amount of interest due to be paid on the bonds might become less attractive and as a consequence the price of the bonds could fall. Bonds are negotiable and consequently prices will fluctuate from issue until redemption at par (100). For some bonds the secondary market liquidity may be quite thin and the spread between the buying (offer) and selling (bid) price may be quite wide. Note that, unlike a bank deposit, a corporate bond is not covered by the Financial Services Compensation Scheme (FSCS). 05/08/2016
KILLIK & Co
BOND RESEARCH
Disclaimers Information for clients of Killik & Co This document has been issued by Killik & Co on the basis of publicly available information, internally developed data and other sources believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. This document does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Killik & Co does not undertake to keep the subject of all of its recommendations under review, therefore any recommendations in this publication are given at this point in time and will not necessarily be updated in future. Clients should seek advice from their Broker on the suitability for their personal circumstances of any investments covered by this publication prior to acting on its contents. The past performance of an investment is not a reliable guide to its future performance and the value of an investment may fall as well as rise. Higher volatility investments may be subject to sudden and large falls in value and you may realise a large loss equal to the amount invested. Some investments are not readily realisable and investors may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. Where a security is denominated in a currency other than sterling, changes in exchange rates may have an adverse effect on the value of the security and the income thereon. In addition, if the security is listed outside the United Kingdom (UK), the listing regime and local regulation may differ from that which pertains in the UK. This may affect the degree of protection that consumers receive. Prior to publication, this document may have been disclosed to the company that is the subject of the research and factual amendments may have been made at their request prior to publication. When producing investment research, Killik & Co acts independently and has implemented measures to manage any potential conflicts of interest that may arise. The institutional sales team that forms part of Killik Capital may provide broking services to some of the fund management companies that run funds recommended by and/or commented upon by the research team within Killik & Co. Details of these measures can be found in Killik & Co’s research policy which can be found on the website www.killik.com/research. Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No. OC325132. Registered office: 46 Grosvenor Street, London W1K 3HN. A list of Partners is available upon request. The Information within this publication is not directed at any person in the United States and is not intended to be used by any person in the United States unless those persons are already Killik & Co clients and they have applicable US exemptions. Information for clients of Killik Offshore
Ex
am
pl
e
Killik Offshore is regulated by the Dubai Financial Services Authority (DFSA) and is a branch of Killik & Co LLP which is authorised and regulated by the UK FCA and a member of the London Stock Exchange. Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise. They reflect only current views of the author and are subject to change without notice. Killik Offshore has not been a party to or had any material input towards this research publication. Killik Offshore has no obligation to notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The investments referred to in this publication do not take into account the recipient’s suitability requirements or investment risk appetite. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and Killik Offshore accepts no liability for any such loss or consequence. Please note past performance is not necessarily a reliable guide to future performance of an investment. Killik Offshore aims to be transparent, fair in business dealings and adhere to DFSA conflicts of interest requirements. For further information please contact the Dubai office. Killik Offshore Principal place of business: No 55, Level 2, The Gate Precinct Building 5, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. Tel: +971 (0) 4 425 0354 Fax: +971 (0) 4 425 0355. Website: www.killik.com.
05/08/2016
BOND RESEARCH
FIXED INCOME NOTE
5 AUGUST 2016
Government Bond Yields Yield Today, %
Macro Overview & Government Bonds
Change on Week, bp
Change YTD, bp
UK 2 yr Gilt
0.13
1.50
-52.60
UK 10 yr Gilt
0.65
-3.20
-130.70
UK 30 yr Gilt
1.49
-6.10
-117.60
German 2 yr Gvt Bond
-0.61
1.40
-26.60
German 10 yr Gvt Bond
-0.09
3.40
-71.40
German 30 yr Gvt Bond
0.40
6.10
-108.50
US 2 yr Gvt Bond
0.65
-0.49
-39.72
US 10 yr Gvt Bond
1.50
4.24
-77.39
US 30 yr Gvt Bond
2.25
6.36
-76.95
Japan 2 yr Gvt Bond
-0.19
5.70
-18.40
Japan 10 yr Gvt Bond
-0.09
9.80
-35.70
Japan 30 yr Gvt Bond
0.39
12.70
-88.60
France 10 yr Gvt Bond
0.14
3.90
-84.60
Portugal 10 yr Gvt Bond
2.88
-5.60
36.20
Ireland 10 yr Gvt Bond*
0.42
0.80
-72.90
Italy 10 yr Gvt Bond
1.16
-1.30
-44.00
Greece 10 yr Gvt Bond
8.31
15.20
2.20
Spain 10 yr Gvt Bond
1.04
1.70
-73.50
Source: Bloomberg (Rates comprised of Generic bonds) * New Irish 10-year benchmark issued on 07/01/2014
Monetary Policy Committee cuts rates and embarks on new round of QE Japanese government bonds weaken, with 10-year yields almost turning positive US employment data are mixed ahead of nonfarm payrolls report
Corporate Bonds Half year results - Ladbrokes, London Stock Exchange, Tullett Prebon Macro Overview & Government Bonds
UK government bonds outperform following Bank of England meeting UK government bonds outperformed this week as gilts rallied on a series of fresh stimulus measures from the Bank of England. In contrast, yields on German, US and, in particular, Japanese government debt rose, the latter following the announcement of a fiscal spending package designed to bring stronger growth and inflation to the Japanese economy. On the data-front, PMI surveys have been in focus as well as unemployment data ahead of this afternoon's US nonfarm payrolls report.
pl
UK 10-year Gilt yield, % 3.5 3.0
2.5 2.0
1.0 0.5
2012
2013
2014
Source: Bloomberg
GBP / USD
2015
2016
The Bank of England held its latest Monetary Policy Committee meeting on Thursday. Alongside the release of its Inflation Report, members of the Bank voted to cut interest rates by 25bps and embark on a new round of quantitative easing, which will see the Bank buy £70bn of bonds over the next six months, £60bn of which will be government bonds with the remaining being corporate debt. In order to ensure that lower borrowing costs for banks are passed through to households, the Bank introduced a £100bn Term Funding Scheme for high street lenders which will provide funding at close to the 0.25% Bank Rate. Governor Mark Carney also indicated that rates are likely to be cut further going forward, however, he seemed to rule out negative rates for the UK. The Inflation Report itself, which includes updated economic projections, painted a somewhat gloomy picture of the economy, with the MPC expecting the UK to only narrowly avoid recession over the next six months. The Bank also expects unemployment to rise, wage growth to slow and house prices to fall. In light of the depreciation in sterling, inflation is expected to pick up, reaching 2.4% in 2018, up from 2.1% forecast in the last inflation report. The impact of the round of fresh monetary stimulus and new economic projections on the market was for sterling to weaken, while UK government bonds strengthened, with 10-year gilt yields falling to new record lows.
Ex
1.8
am
Monetary Policy Committee cuts rates and embarks on new round of QE
1.5
0.0 2011
UK government bonds outperform following Bank of England meeting
e
Government Bond
1.7
1.6
1.5
1.4
1.3
1.2 2011
2012
2013
2014
2015
2016
Source: Bloomberg
Japan 10-year yield, %
Japanese government bonds weaken, with 10-year yields almost turning positive
1.3
Elsewhere, Japanese government bonds sold off this week, with the yield on the country's 10-year debt almost moving back into positive territory, having turned negative back in February. The move came following last Friday’s smaller than expected monetary stimulus package from the Bank of Japan, with many taking the Bank’s statement that it would reassess monetary policy at its next meeting to be a hawkish one. This week, Japanese Prime Minister Shinzo Abe revealed the government’s latest fiscal stimulus package worth 4.6tn yen this year, including welfare spending, spending on infrastructure, and investment in small and medium-sized businesses.
1.1 0.9 0.7 0.5 0.3 0.1 -0.1 -0.3 2011
2012
Source: Bloomberg
2013
2014
2015
2016
Analysts: P Gordon, CFA; M Malek, CFA; M Nelson
KILLIK & Co
BOND RESEARCH US employment data are mixed ahead of nonfarm payrolls report
US ISM Employment Surveys
In the US, following a relatively hawkish tone to the Federal Reserve’s statement on monetary policy last week, this afternoon’s nonfarm payrolls report has the potential to influence whether there will be an interest rate rise in the States before the end of the year. Data so far this week have included ISM surveys for the manufacturing and services sectors which were marginally weaker than expectations, with employment components that declined from the previous month. Employment change, according to ADP, was +179K in July, above expectations. Expectations for this afternoon are for a 180K increase in nonfarm payrolls, with the unemployment rate forecast to fall to 4.8%. Average hourly earnings are expected to increase to 2.6% in July.
60 58 56 54 52 50 48 46 44 2011
2012
2013
Manufacturing
2014
2015
2016
Corporate Bonds
Non-Manufacturing
Source: Bloomberg
Ladbrokes
Ladbrokes 5.125% 2022, Ask Price
e
112
Ladbrokes released stronger than expected half-year results this week. The company reported solid performance across all key channels, benefiting from good staking and favourable sporting results. However, the bookmaker-friendly results of last year’s unpredictable Premier League and the European Championship were partially offset by the worst Cheltenham Festival on record and a very customer-friendly Royal Ascot. First half revenues grew by 13% to £661.8m, while EBITA grew by 34% to £52.3m. Strong free cash flow generation led to a significant reduction in net debt (£227.2m vs. £414.3m in 1H 2015) and leverage (Net debt/EBITDA 1.3x vs. 2.1x in 1H 2015). Regarding the merger with Coral, Ladbrokes is currently engaging with potential buyers for the 350-400 shops that are required to be sold by the Competition and Markets Authority before the merger can go ahead. The management believes that the process can now be successfully completed by the end of Q3 and the timetable from then would be for completion of the merger in autumn. Ladbrokes is currently rated BB by S&P, Ba2 by Moody’s and BB by Fitch.
110 108
pl
106 104 102 100
96 2014
2015
am
98
2016
Source: Bloomberg
LSE 4.75% 2021, Ask Price 118 116 114 112
London Stock Exchange Group (LSE) announced its interim results for the six months ended 30 June, with highlights including an increase in revenues of 9% to £722m (H1 2015: £663m) and total income up 11% to £786m (H1 2015: £706m). The group experienced growth across all core business areas, in particular in Information Services, Capital Markets and at LCH. LSE’s balance sheet has continued to strengthen, with adjusted net debt reduced to £870m and adjusted pro forma leverage (net debt/EBITDA) falling to 1.3x (from 1.7x at 31 December 2015). Good progress has been made on the merger with Deutsche Börse, that was announced in March 2016, with shareholder approvals achieved in July and work underway on regulatory consents. London Stock Exchange Group is rated Baa1 with a ‘positive’ outlook by Moody’s and BBB+ with a ‘positive’ CreditWatch from S&P.
Ex
110
London Stock Exchange
108 106 104 102
100 2013
2014
2015
2016
Tullett Prebon
Source: Bloomberg
Tullett 5.25% 2019, Ask Price 108 107 106
105 104 103
102 101 100
99 98 2013
2014
Source: Bloomberg
2015
2016
Tullett Prebon announced half-year results this week which showed resilient performance from the broking business despite challenging markets. Revenue of £430m was 4% higher than in 2015 with underlying operating profit increasing by 11% to £67m. Whilst performance in traditional interdealer broker products remained subdued, as expected, it was more than offset by Equities and Energy and Commodities products. Additionally the results were helped by a strong contribution from Information Sales and Risk Management Services and positive currency movements (in the six months to 30 June 2016 over 80% of revenue was in non-sterling currencies). The management stated that planning for the integration of ICAP's global hybrid voice broking and information business ("IGBB") is progressing well and the acquisition is expected to complete in the latter part of 2016. In July the company repaid the £141.1m 7.04% Sterling Notes on their maturity by drawing down from its committed revolving credit facility, which leaves Tullett’s ORB bond as their only bond outstanding. Tullett Prebon is currently rated BBB- by Fitch and Ba1 by Moody’s, both with ‘stable’ outlooks. 05/08/2016
KILLIK & Co
BOND RESEARCH
For a selection of corporate bonds, please see the table below. Please note that these investments have differing risk profiles and if you have any questions about the nature of the investments you should speak to your Broker. FIXED-COUPON SENIOR BONDS ISIN
Coupon
Maturity
Indicative Offer Price*
GRY*, %
Provident Financial Group
XS0762418993
7.000
04-Oct-17
105.42
ICAP
X50805454872
5.500
31-Jul-18
107.82
Tesco Personal Finance
XS0591029409
5.200
24-Aug-18
Intermediate Capital Group
XS0716336325
7.000
Tullett Prebon
XS0859261520
5.250
Primary Health Properties
XS0795445823
Beazley Workspace
Issuer
Net Redemption Yield*, %
Income Minimum Yield, % Size
Killik & Co Risk Rating
40%
2.22
0.86
-0.48
6.64
100
4
1.47
0.42
-0.63
5.10
100
4
105.21
2.58
1.56
0.55
4.94
100
4
21-Dec-18
109.08
3.01
1.67
0.34
6.42
100
4
11-Jun-19
107.02
2.68
1.66
0.65
4.91
100
4
5.375
23-Jul-19
107.14
2.86
1.81
0.78
5.02
2,000
4
XS0827693663
5.375
25-Sep-19
106.82
3.09
2.05
1.01
5.03
100
4
XS0832324981
6.000
09-Oct-19
108.18
3.29
2.13
0.97
5.55
100
4
St. Modwen Properties
XS0841076465
6.250
07-Nov-19
108.75
3.41
2.20
1.01
5.75
100
5
UNITE Group
XS0856594642
6.125
12-Jun-20
110.58
3.20
2.03
0.87
5.54
100
5
Intermediate Capital Group
XS0818634668
6.250
19-Sep-20
109.66
3.73
2.53
1.33
5.70
100
4
Tesco Personal Finance
XS0780063235
5.000
21-Nov-20
107.77
3.07
2.10
1.14
4.64
100
4
The Paragon Group of Companies
XS0891023086
6.000
05-Dec-20
105.51
4.63
3.45
2.27
5.69
100
6
Provident Financial Group
XS0900863084
6.000
27-Sep-21
112.29
3.40
2.26
1.13
5.34
100
4
London Stock Exchange Group
XS0846486040
4.750
02-Nov-21
115.59
1.64
0.76
-0.12
4.11
100
3
The Paragon Group of Companies
XS1018830270
6.125
30-Jan-22
A2D Funding
XS0975865949
4.750
18-Oct-22
Intermediate Capital Group
XS1200576699
5.000
Tesco
XS0248392812
Provident Financial Group
XS1209091856
A2D Funding II
XS1103286305
4.500
30-Sep-26
110.62
3.29
ISIN
Coupon
Maturity or Next Call Date
Indicative Offer Price*
Real Yield**, %
Tesco Personal Finance
XS0710391532
1.000
16-Dec-19
109.89
National Grid
pl 102.66
5.63
4.39
3.17
5.97
100
6
113.60
2.39
1.50
0.61
4.18
100
3
24-Mar-23
103.34
4.46
3.46
2.47
4.84
100
4
5.000
24-Mar-23
111.17
3.10
2.17
1.23
4.50
50,000
4
5.125
09-Oct-23
108.53
3.79
2.80
1.81
4.72
104
4
2.43
1.57
4.07
100
3
am
Issuer
e
20%
Retail Prices Index (RPI) Base
Latest 06/16
Next Coupon
Minimum Size
Killik & Co Risk Rating
1.18
234.4
263.1
0.56
100
4
XS0678522490
1.250
06-Oct-21
119.00
0.06
231.3
263.1
0.71
100
3
Places for People Capital Markets XS0731910765
1.000
31-Jan-22
114.33
0.28
235.2
263.1
0.56
100
3
Severn Trent
1.300
11-Jul-22
118.03
-0.15
238.5
263.1
0.72
100
3
Ex
XS0796078193
Issuer
HSBC Bank Capital Funding
SUBORDINATED BONDS
ISIN
Coupon
Maturity or Next Call Date
Indicative Offer Price*
GRY or YTC*, %
XS0189704140
5.862
07-Apr-20
106.79
3.83
Net Redemption Yield*, %
Income Minimum Yield*, % Size
Killik & Co Risk Rating
20%
40%
2.71
1.59
5.49
1,000
6
2.45
5.16
1,000
6
Next call date is 7 April 2020. If not called, the coupon becomes the then 6-month Libor + 185 basis points, refixed every six months. HSBC Bank Capital Funding
XS0179407910
5.844
05-Nov-31
113.35
4.60
3.53
Next call date is 5 November 2031. If not called, the coupon becomes the then 6-month Libor + 176 basis points, refixed every six months.
The Killik & Co Risk Rating system uses categories which are intended as guidelines to the specific risks involved, as follows: Restricted Lower Risk (1), Restricted Medium Risk (2-3) and Unrestricted (4-9). Please see the Killik & Co Terms & Conditions for further detail.
The analyst, Mateusz Malek, has personal investments in the Provident Financial 7% 2017, ICG 7% 2018, IPF 6.125% 2020 and Premier Oil 5% 2020 bonds. Risk warning
Note that as with all investments there are risks involved in investing in corporate bonds. This includes the risk that the issuer may default. As a consequence you may get back less than you invest or lose your initial investment. Other factors which may affect the price of the bonds include, but are not limited to, the level of inflation, length of time until maturity, issuer’s financial position, demand for the bonds, and interest rates. Note that if interest rates start to rise then the amount of interest due to be paid on the bonds might become less attractive and as a consequence the price of the bonds could fall. Bonds are negotiable and consequently prices will fluctuate from issue until redemption at par (100). For some bonds the secondary market liquidity may be quite thin and the spread between the buying (offer) and selling (bid) price may be quite wide. Note that, unlike a bank deposit, a corporate bond is not covered by the Financial Services Compensation Scheme (FSCS). 05/08/2016
KILLIK & Co
BOND RESEARCH
Disclaimers Information for clients of Killik & Co This document has been issued by Killik & Co on the basis of publicly available information, internally developed data and other sources believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. This document does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Killik & Co does not undertake to keep the subject of all of its recommendations under review, therefore any recommendations in this publication are given at this point in time and will not necessarily be updated in future. Clients should seek advice from their Broker on the suitability for their personal circumstances of any investments covered by this publication prior to acting on its contents. The past performance of an investment is not a reliable guide to its future performance and the value of an investment may fall as well as rise. Higher volatility investments may be subject to sudden and large falls in value and you may realise a large loss equal to the amount invested. Some investments are not readily realisable and investors may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. Where a security is denominated in a currency other than sterling, changes in exchange rates may have an adverse effect on the value of the security and the income thereon. In addition, if the security is listed outside the United Kingdom (UK), the listing regime and local regulation may differ from that which pertains in the UK. This may affect the degree of protection that consumers receive. Prior to publication, this document may have been disclosed to the company that is the subject of the research and factual amendments may have been made at their request prior to publication. When producing investment research, Killik & Co acts independently and has implemented measures to manage any potential conflicts of interest that may arise. The institutional sales team that forms part of Killik Capital may provide broking services to some of the fund management companies that run funds recommended by and/or commented upon by the research team within Killik & Co. Details of these measures can be found in Killik & Co’s research policy which can be found on the website www.killik.com/research. Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No. OC325132. Registered office: 46 Grosvenor Street, London W1K 3HN. A list of Partners is available upon request. The Information within this publication is not directed at any person in the United States and is not intended to be used by any person in the United States unless those persons are already Killik & Co clients and they have applicable US exemptions. Information for clients of Killik Offshore
Ex
am
pl
e
Killik Offshore is regulated by the Dubai Financial Services Authority (DFSA) and is a branch of Killik & Co LLP which is authorised and regulated by the UK FCA and a member of the London Stock Exchange. Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise. They reflect only current views of the author and are subject to change without notice. Killik Offshore has not been a party to or had any material input towards this research publication. Killik Offshore has no obligation to notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The investments referred to in this publication do not take into account the recipient’s suitability requirements or investment risk appetite. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and Killik Offshore accepts no liability for any such loss or consequence. Please note past performance is not necessarily a reliable guide to future performance of an investment. Killik Offshore aims to be transparent, fair in business dealings and adhere to DFSA conflicts of interest requirements. For further information please contact the Dubai office. Killik Offshore Principal place of business: No 55, Level 2, The Gate Precinct Building 5, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. Tel: +971 (0) 4 425 0354 Fax: +971 (0) 4 425 0355. Website: www.killik.com.
05/08/2016
