3. corporate bonds and agency bondsp8.storage.canalblog.com/85/99/366275/101475943.pdf · 3....
TRANSCRIPT
11/01/2015 Pr. Didier Folus 1
3. Corporate bonds and agency bonds
• A corporation can go bankrupt
• Bondholders have a prior legal claim (on corp. assets)
over stockholders :
Assets Liabilities
Asset 1
Asset 2
Asset 3
Asset 4
…
Covered bonds
Unsecured bonds
Subordinated bonds
Preferred stocks
Common stocks
Strong claim
on assets
Weak claim
on assets
assets are pledged
by the borrower
to secure repayment
to bondholders
bondholders have the claim of
general creditors
on all assets of the issuer
not pledged to secure other debt
3.1. Common bonds & notes
3.1.1. Fixed rate : Carrefour 4.00 % April 2020
Notes features Issue final terms Status & Provisions
Nominal amount 1,000,000 1 000 EUR Unsubordinated
Issue date April 9, 2010
Maturity date April 9, 2020
Redemption price par value Not callable
Coupon per annum 4.00 %
Rights date April 9, 2010
Credit rating S&P : A
Distribution syndicated
Offered issue price 99.806 %
Listing & trading Bourse de Luxembourg ISIN : XS0499243300
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3.1.2. Issuance by syndication
• Bank syndicate : book building, discovering yield & price
• ract is the investor expected return to maturity
%024.4
1
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1
00.4
1
00.4806.99
102
act
actactact
rrrr
Source : www.financefi.fr
Feb 27, 2014
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3.1.3. Corporate bond credit spread
• Yield spread on February 27, 2014 :
– OAT 3.5 % Apr 2020…….. 1.242 %
– Carrefour 4.0 % Apr 2020... 1.865 %
• Credit spread
evolution :
– economic sector
– investors risk aversion
– uncertainty level
Euro Corporate
Bond spreads of
non-financial
corporations(basis points,
monthly averages)
BBB from March 15, 2012
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Long term US Corporate bond yields
of non-financial corporations(basis points, monthly averages)
3.2. Other corporate bond categories
3.2.1. Secured bonds
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3.2.2. Subordinated bonds (junior debt)
Fact sheet Société Générale TSR AXA TSDI
Issue date……………….. October 29, 2004 March 8, 2000
Issue amount…………… EUR 100 000 000 EUR 500 000 000
Total nb of bonds………. 100 000 20 000 000
Issue price……………… 99.963 % 100 %
Nominal value…………. EUR 1 000 EUR 25
Coupon rate……………. 4.40 % annually 7.25 % quarterly
Repayment date………… October 29, 2016 undefined
Repayment price……….. Par Par
Subordination…………... Yes Yes
Provisions………………. Not applicable Call provision
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3.2.3. Equity-linked bonds
• Stock redeemable bond : redemption in issuer’s stocks. (lower yield-to-maturity than non-convertible bonds)
• Convertible bonds : holder can convert the bond into shares of the issuer’s common stock under defined terms. (lower yield-to-maturity than non-convertible bonds)
• Exchangeable bond : holder can convert the bond into shares of the issuer’s common stock or the common stock of a subsidiary. (lower yield-to-maturity than non-convertible bonds)
Air France OCEANE
Fact sheet
Issue date……………………………… 22/04/2005
Issue amount…………………………... EUR 449,999,989.5
Total number of bonds………………… 21,951,220
Issue price……………………………... EUR 20.50
Nominal value…………………………. EUR 20.50
Coupon rate……………………………. 2.75 %
Repayment date……………………….. 01/04/2020
Repayment price………………………. par
Conversion ratio………………………. 1 to 1
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3.3. High yield bonds
• High risk (default)
• High return (volatile)
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Ex. European developped market HY bond issues:
Source : SIFMA, Oct 2014.
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3.4. Agency bonds (low risk)
• Agency = national or federal public body :
– Student Loan Marketing Association, SLMA or Sallie Mae
– SNCF, RATP…
• Government-sponsored enterprises :
– Federal National Mortgage Association, FNMA or Fannie Mae
– Federal Home Loan Mortgage Corp., FHLMC or Freddie Mac…
• An agency unlikely goes bankrupt (implicit/explicit
State guarantee)
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Quote 81.19 %
on 9-Jan-15
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4. Bond markets
4.1. Issuance & turnover
US government securities
Source : SIFMA, March 2014.
US corporate bonds
Pr. Didier Folus
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4.2. Fixed income marketplaces
• Banks
• Multilateral trading facilities :
– Electronic platforms
– Wholesale markets
– Only for professional dealers
– OTC or regulated
• Exchanges :
(everybody accessing)
Daily 85 bn EUR, min. lot 2.5 M€
Largest exchanges by
value of bonds traded
Source : WFE,
Jan 2014.
4.3. Bond quotation
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TESCO PLC 5.50 % notes
Trading venue : LSE
Transaction
price
109.197 %
Quote
on 01/09/15
108.76 %
Accrued coupon
27 + 2 days
0.437 %
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5. Pricing a corporate fixed-income security
5.1. Pricing using a gov. bond benchmark rate
• Pricing date : December 13, 2014
• Tesco Plc. 5.50 % 2019 fixed rate bond :
– residual maturity………….. 5 years
– 5 year-UK Gilt yield……… 1.22 %
– S&P credit rating…………. BBB-
– « A- » yield spread……….. 248 bps
•
• Overpriced ? Underpriced ?
%081.108
037.01
50.105...
037.01
50.5
037.01
50.55214Dec13
PVBond
Discounting rate 3.70 %
Quote on 12/13/14
108.30 %
5.2. Pricing using a yield curve
• Yields generally
increase with
maturity
• What about credit spread evolution ?
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%308.1080370.1
50.105
0348.1
50.5
0323.1
50.5
0295.1
50.5
0285.1
50.55432
'
1413 DecV
UK Gilt yields
Data source : BoE.
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5.3. Bond sensitivity to credit spread
• If yield spread increases by 100 bps :
– because investors are more risk-adverse
– because Tesco credit rating declines
new bond value…………… V’13-Dec-14 = 103.492 %
previous bond value………. V13-Dec-14 = 108.300 %
• Possibility to hedge with credit derivatives
Discounting
rate is now 4.70 %
Moody’s: Baa3 (9-Dec-14) to Ba1 (8-Jan-15)
S&P: BBB- negative outlook in Dec-14
Fitch: negative outlook in Dec-14
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5.4. Bond sensitivity to interest rate
• If the yield curve increases by 1 %
• New bond value V13-Dec-14 = 103.492 %
• Volatility :
• Macaulay duration :
• Modified duration (elasticity) :
%440.41
actdr
dV
Vvol
years
r
Ft
VD
T
t
t
act
t 517.41
1
1
Discounting
rate is then 4.70 %
Determinants :
- maturity
- coupon
actr
D
1