Bonds see large inflows as equities retreat

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A market update from Rezaah Ahmad, CEO, WiseAlpha.

According to the Financial Times, the prospect of future Bank of England rate cuts saw investors pile £2.4bn into bonds in June, while £744m was pulled from equities – not helped by the ongoing Woodford redemption’s. With this outlook likely to continue for some time and the US also entering an environment of rate cut expectations, bonds are fast becoming the asset class of choice. Falling rates and weakening equity markets make the income from bonds more attractive for investors while the greater stability of returns versus equities also makes bonds more attractive in uncertain markets.

At a company-specific level, there have been a number of announcements that are of interest. Refinitiv announced that it was being bought by the London Stock Exchange with financing arranged to repay the existing bonds, causing the EUR 6.875% bonds that recently arrived on the WiseAlpha marketplace to jump 10%. Virgin Money bondholders are currently awaiting the outcome of a consent solicitation that could see a 5% fee windfall provided to holders, while Virgin Money also announced a solid third-quarter trading update and reported a strong core equity ratio of 14.6%.

The AA recently announced a trading update saying it is, “on-track to deliver Trading EBITDA growth this year (FY20) in line with current market expectations and we expect to generate strong free cash flow growth in line with our guidance”. More AA bonds have just been added to the WiseAlpha market.

New Day recently announced strong results with Q2 total income up 14.3% YoY to £165m and adjusted EBITDA up 159% YoY to £37.3m while net leverage was 2.6x vs 3.2x in Q1-19.

Aston Martin, on the other hand, disappointed investors as the company posted a H1 loss amid lower vehicle pricing and higher spending. The bonds weakened around 5% on the news, while the equity fell by over 50%. Aston Martin has now performed almost as badly as Funding Circle equity since issuance. Investors can learn something from this: equities and P2P lending can be highly volatile when compared to bonds and those looking to take less risk may want to consider lending via corporate bonds as an alternative way to get exposure to major UK corporates.

For those interested in how corporate bonds fare when compared to equities and P2P lending (please note we expect P2P returns to continue deteriorating) when it comes to returns, we’ve put together some statistics here.

In new issues, the recent Domestic & General bonds issue saw attractive interest rates of 6.5% placed on the senior secured and 9.25% on the unsecured. Not bad for a market leader with a history of stable growth. This bond issue was viewed more positively than the Sirius minerals bond that investors ultimately shied away from given the high-risk project finance nature of the bond. Investors also balked at the recent London Stock Exchange ORB issue from Urban Exposure. This bond was launched with a 6.5% rate but then pulled due to a lack of demand as retail investors balked at the risk/return, as is increasingly common with the ORB. Another reason why we view WiseAlpha’s bond market as superior to that of the London Stock Exchange ORB. The market is also still awaiting more news about the Enterprise InnsStonegate takeover and which bonds will be refinanced and how the capital structure will look post-deal.


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