Market Signals Weekly Review
July 08, 2019
INVESTMENT IDEAS
Today we will look at two corporate debt securities as investment ideas for this week: Volkswagen AG and Borets International Limited.
Idea #1: Volkswagen AG
In the downward trend, not only dollar, but also rates in euros against the background of “dove” signals from the ECB. Traditionally, the highest levels of profitability offer “eternal” paper. Note that such Eurobonds are issued not only by banks, but also by companies in the real sector of the economy. For example, one of the world’s largest automakers — the Volkswagen AG concern has a whole line of “perpetual” issues, among which we highlight the Eurobond, placed in June last year with a coupon of 4.625% (the issuer has another “perpetual” issue with the same coupon placed in 2014).
The closest call option on this paper is provided for June 27, 2028 at face value, then calls will follow each year. In the event of a first call failure, the coupon rate will be recalculated using the formula = 10-year interest rate swap in euro + 3.982%. Please note that the minimum lot for the release is 100 thousand euros.
Since our recommendation for paper in early April, its yield to the nearest call has decreased from 4.6% to 3.5%. Meanwhile, the current yield of the issue (the ratio of coupon to receipt in the next 12 months to the current price) is 4.3%, which looks interesting.
Idea #2: Borets International Limited.
In the face of a frontal drop in yields, we decided to analyze the positioning of some Russian papers relative to their international peers. Our focus was the only Eurobond of Borets International Limited, one of the largest manufacturers of submersible electric pump systems for the oil and gas industry.
Last September, the issuer redeemed the dollar Eurobond, and at the current moment, the schedule for paying off its debt looks quite balanced. The financial stability of the company is marked by rating agencies: all three agencies of the “Big Three” hold a “stable” outlook on the change of Borets ratings.
Issuer issuance with maturity in April 2022 offers a 6% yield and looks very competitive against the background of securities of comparable credit quality.
Alexey Shternshis
Joint Managing Director
Capital Pi
