Premium Bonds: alternative savings accounts which offer higher returns

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The nation’s favourite savings account

Premium Bonds are the nation’s favourite savings account, with an incredible £68 billion held in bonds across the UK in total, a staggering amount really.

In recent years, that number has jumped sharply as the maximum amount that could be held in bonds has increased, initially to £40,000 in June 2014 and then up to £50,000 the following year.

There are a few obvious attractions to putting your money into a Premium Bond. For starters, there’s the fact that your cash is completely protected by the Government.

Premium Bonds are run by the Government-backed National Savings & Investments, and so every pound you put into them is entirely safe.

 

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Investors scramble for riskiest ABS bonds in rush for yield

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Investors scrambled for the
riskiest tranches in one of the busiest weeks in the
asset-backed bond market when over US$9bn was raised by deals
that pooled everything from subprime auto and consumer loans to
shipping container leases.

The scramble for yield and diversity was clear: some of the
most subordinated bonds were multiple times covered, esoteric
trades were upsized and some issuers locked in their lowest
spreads yet.

“The subscription levels on subordinated tranches is
definitely very noteworthy,” Jay Steiner, co-head of US ABS at
Deutsche Bank, told IFR.

 

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Is this ‘guaranteed’ bond really certain to pay you 5pc interest for almost 10 years?

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If you are an income-starved investor, could you say no to a “5pc guaranteed sterling bond”? I suspect many would find the combination of annual interest of 5pc and a guarantee highly attractive.

This is what is on offer from a firm called Burford Capital, which makes its money by financing legal cases.

But if you take up the offer, are you really guaranteed to receive 5pc interest for the term of the bond, which is nine-and-a-half years?

The short answer is no.

The supposedly guaranteed bonds are simply “retail bonds” issued by Burford. Just like any company that issues corporate bonds, if it goes bust the bondholders stand to lose all of the interest and capital they were due.

 

Read more on Telegraph

Europe’s Asset-Backed Bond Market Is Growing More Mysterious

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Europe’s asset-backed securities market (ABS) is going underground.

Having been thrust into the spotlight after the financial crisis as regulators blamed the products and the bankers that structured them for causing the crash by obscuring risks, the ABS market is retreating further into the shadows.

Private bilateral sales of the bonds, which are typically backed by collateral such as car loans or mortgages, now outstrip public sales to investors, according to Bank of America Corp. analysts led by Alexander Batchvarov.

So-called retained transactions, which are kept on banks’  balance sheets, rose to 78 billion euros ($87 billion) in the first six months of the year, which is more than double the 30 billion euros sold in the same period of 2015, according to Bank of America data. For investors in the public market, new-issue supply totalled just 41 billion euros, or roughly half the volume recorded a year earlier.

Instead of using securitization — the process by which such ABS are created — to provide investors with new assets, banks are using the technique to manage risks and offload assets in private transactions that are typically unrated and where transaction data is often not available.

While many retained deals are destined for use as collateral at the European Central Bank’s liquidity programs, securitization of whole loan portfolios including non-performing loans, is a source of growth for retained deals, according to Bank of America.

Synthetic securitizations, in which credit derivatives are used to transfer risk, are also said to be growing in favor as banks seek to bolster their balance sheets — and even as regulators push back against use of such “regulatory capital” trades.

“Discussions with market participants suggest that the volume may be (much) larger,” Batchvarov wrote. “The revival of synthetic securitisations speak[s] to the need of the banks to manage their capital and credit risk of their balance sheet, but apparently this is now done through bilateral transactions, mostly not rated, and rarely seen.”

 

SOURCE: Bloomberg

Brexit Could Knock Hole in Covered Bond Market

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Brexit could knock a hole in the $1.4 trillion market for euro-denominated covered bonds, if collateral from Britain can no longer be used in European issues of this debt.

In this market, lenders use mortgages, commercial loans and public-sector debt to back payments on bonds. Covered bonds are a cheap form of finance across Europe.

In the European Union, the market is closely regulated by national watchdogs and trade organisations, and their rules set parameters on where the collateral must come from.

With its vote last month, the U.K. may have stepped out of those parameters.

European banks have been able to package U.K. assets into covered bonds on the basis that the country was a part of the European Economic Area.

In Germany’s Pfandbrief market, one of the largest covered-bond markets in Europe, collateral pools of domestic bond issuers include almost €10.2 billion of British assets, according to data by NordLB. Most of those assets are commercial mortgages, export credit and aircraft loans.

The U.K. has voted to leave the EU and may not afterwards join the EEA, which has access to Europe’s common market, given that would mean having to accept free movement of people, a key bugbear for many of those who voted for Brexit.

Lawyers are also asking what that may mean for outstanding bonds that have British assets as collateral.

“Grandfathering is the only practical solution for existing Pfandbriefe featuring U.K. collateral,” said Vincent Keaveny, a partner at law firm DLA Piper.

This could involve authorities publishing guidance that exempts outstanding German covered bonds from collateral location rules.

 

SOURCE: Wall Street Journal

Asset-Backed Debt Wins Targeted Capital Reprieve From Basel

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Global banking regulators softened capital requirements for some asset-backed securities as they look to jump-start lending while guarding against a repeat of the 2008 financial crisis.

The Basel Committee on Banking Supervision said a “modest reduction” in capital should be allowed for bonds made up of lower-risk assets. The regulator, whose members include the European Central Bank and U.S. Federal Reserve, said in a statement on Monday that minimum risk weights could be cut to 10 percent from 15 percent for the safest portion of the securities.

The lower capital charges will apply to the senior-ranking portions of bonds backed by assets that meet regulators’ criteria for so-called simple, transparent and comparable securitizations. The revised criteria rule out lower capital charges being applied to bonds backed by riskier assets, the committee said.

Basel’s updated securitization framework will come into effect in January 2018. The committee sets standards that are then implemented by regulators around the world.

Cash Flows

Regulators in Europe have looked to securitization markets, where lenders package assets and then sell investors bonds backed by the cash flows, as a way to boost growth by reviving lending to small companies. Rules put in place since 2008 have bolstered oversight of asset-backed securities after bonds backed by subprime mortgages soured in the financial crisis and spread risk through the system.

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European Union regulators and lawmakers are currently debating legislation to create a capital markets union in an effort to boost lending to companies that have traditionally borrowed directly from banks. The European Commission, the EU’s executive arm, proposed a plan last September in a bid to deliver as much as 150 billion euros ($166 billion) of new lending and diversify funding sources for companies traditionally reliant on banks.

The European Parliament is considering how much of a security must be retained on the books of the firm that originates the deal. Lawmakers and regulators want to ensure that a sponsor has skin in the game and scrutinizes underlying assets instead of passing along all the risk.

SOURCE: Bloomberg

Best in Class: Chasing value post-Brexit

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For want of stating the obvious, Europe is an interesting investment conundrum right now.

 Even before the Brexit vote, the European Central Bank (ECB) decided it would extend its asset purchase programme and buy investment-grade, euro-denominated bonds in a bid to increase confidence among corporates and boost the economy.

Last month marked the start of that new phase of its ¤80bn (£68bn) monthly buying spree. By adding corporate bonds to its buy list of government, agency and covered bonds, as well as asset-backed securities, the central bank has moved firmly into the realm of credit easing.

This move reaffirmed the ECB’s promise to do “whatever it takes” and, as we know, this type of quantitative easing is positive for risk assets. But Brexit has rather put a spanner in the works.

There’s now a question mark over firms that have a significant amount of trade with the UK. Perhaps more significantly, there is the worry of Brexit contagion and an eventual break-up of the EU and common currency. Political risk has risen in every European country.

Growth, which had been recovering, is likely to slow. Dividend yields will act as a support to some extent, but confidence will have taken a real knock.

Uncertain times to say the least, and we can expect volatility and some big divergences in market performance in the coming months. That said, opportunities will present themselves and investors should still have part of their core portfolio invested in European equities.

Good companies haven’t suddenly become bad companies and there are some world leaders based in the continent that are not dependent on the UK.

With all this in mind, the Henderson European Focus fund is worth a look. It’s a more concentrated version of the Henderson European Selected Opportunities vehicle (which I also like), with 30-40 holdings that are weighted by conviction.

The process is governed by early identification of industry or sector themes that will still be around a decade from now. This allows manager John Bennett to ignore the macro-driven fear or optimism that fills newspapers and focus on what matters – real or absolute value.

In addition, a focus on ‘investing in change’ is the mechanism through which Mr Bennett and his team invest early enough to maximise potential upside. And if there was ever a time when change is taking place, now seems to be it. In the post-Brexit world, these points will resonate with, and hopefully reassure, many worried investors.

The manager believes that inefficiencies persist across European markets as a whole, due to the diverse local, regional, industry and global supply and demand drivers, which exert uneven pressures on the various markets. By taking a thematic approach to focus on these drivers, he and his team can uncover pockets of opportunity – across all market conditions.

SOURCE: FT Adviser

Why Wall Street Wants Your iPhone Installment Payments

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An upcoming Verizon deal will be first-ever of its kind.

Wall Street bankers have cleverly sliced and diced payments on everything from home mortgages and cars to David Bowie’s song royalties to create new kind of bonds. Now comes the latest twist on securitizing streams of payments: iPhone and Android smartphone installment plans.

Verizon Communications is planning the first public debt offering backed by smartphone installment plans, which is expected to be priced and sold in coming weeks. AT&T  T 0.60%  and T-Mobile  TMUS -0.67%  could follow, while Sprint’s  S 0.00%  more difficult financial situation likely would make a public deal tougher to complete.

 The moves are intended to raise cheap capital for the carriers, which are under pressure to keep spending to expand and improve their networks. They need tens of billions of dollars to pay for airwave licenses up for auction just this year. Bond investors like mutual funds and pension funds hope to buy securities with comparatively higher yields than other asset-backed debt that could also provide diversification benefits.

The bet is that the vast majority of smartphone buyers will keep paying what they owe, even if the economy weakens or they lose their jobs. Phone installment plans have only been around for a few years and no one knows for sure how consumers will behave in the next recession.

The opportunity arises because the big four U.S. wireless carriers, led initially by T-Mobile, have been weaning their customers off of subsidized phones and trying to get everyone to pay for phones in full—in return for somewhat lower monthly service charges. The deals include an offer to let customers pay for the phones, which often cost $650 or more, in 24 monthly installments.

An upcoming Verizon deal will be first-ever of its kind.

Wall Street bankers have cleverly sliced and diced payments on everything from home mortgages and cars to David Bowie’s song royalties to create new kind of bonds. Now comes the latest twist on securitizing streams of payments: iPhone and Android smartphone installment plans.

Verizon Communications is planning the first public debt offering backed by smartphone installment plans, which is expected to be priced and sold in coming weeks. AT&T  T 0.60%  and T-Mobile  TMUS -0.67%  could follow, while Sprint’s  S 0.00%  more difficult financial situation likely would make a public deal tougher to complete.

The moves are intended to raise cheap capital for the carriers, which are under pressure to keep spending to expand and improve their networks. They need tens of billions of dollars to pay for airwave licenses up for auction just this year. Bond investors like mutual funds and pension funds hope to buy securities with comparatively higher yields than other asset-backed debt that could also provide diversification benefits.

The bet is that the vast majority of smartphone buyers will keep paying what they owe, even if the economy weakens or they lose their jobs. Phone installment plans have only been around for a few years and no one knows for sure how consumers will behave in the next recession.

The opportunity arises because the big four U.S. wireless carriers, led initially by T-Mobile, have been weaning their customers off of subsidized phones and trying to get everyone to pay for phones in full—in return for somewhat lower monthly service charges. The deals include an offer to let customers pay for the phones, which often cost $650 or more, in 24 monthly installments.

The shift, which now covers the vast majority of new phones sold, has helped improve the carriers’ profit margins while cutting into upgrade sales at phone makers, including Apple  AAPL 0.30%  and Samsung. The carriers didn’t make a profit on the old, subsidized phone plans, so they’ve benefitted from shifting the expense onto customers directly. Now, customers have discovered that they can trim their monthly bills by holding onto phones for longer than two years.

But the carriers’ improved profitability comes at a price. They have to pay Apple and other phone makers the full price of each device up front while getting paid back over two years. Customers don’t pay interest on the installment plans. That eats into the cash the carriers have available for other needs. Similar to retailers and other businesses operating under similar conditions, the carriers are turning to the securitization market to get immediate cash for receivables from their equipment installment plans, or EIPs.

“This is becoming increasingly common,” says Marah Formanek, research associate at Jefferies. “Due to the working capital pressure from EIP uptake, we’re not surprised to see the carriers factoring their sizable equipment receivable balance.”

Verizon  VZ 0.70%  declined to comment, but a spokesman pointed to remarks by CFO Fran Shammo during an investor conference earlier this month.

“We have been looking at, for over a year now, alternatives to really looking at ways to finance the handsets because I don’t want to be in the finance business,” Shammo said on June 7. After speaking with investors, the company believes it will be able to pay less interest on the public phone-backed securities than it paid on its private deals with banks, Shammo added.

Verizon’s move to sell public asset-backed securities follows a variety of similar, private arrangements that the company and other wireless carriers have struck with big banks. But selling public securities will be cheaper and improve Verizon’s financial position in the view of credit rating agencies, the company has said.

As Verizon’s deal is then first of its kind, the terms may be less generous than on subsequent issues. The carrier is putting up future installment payments worth over $1.5 billion to back the less than $1.2 billion of bonds. For the $1 billion of the bonds that will get paid back before other tranches, that provides a cushion of over 30%.

Some of that cushion is needed to pay interest to bondholders, however, because customers on installment plans don’t pay anything extra beyond the price of a phone. Discounted for the interest, the receivables in the deal are worth about $1.4 billion, according to an analysis published this week by Fitch Ratings.

Securitization has generally worked as advertised, although mortgage-backed securities and related derivatives were at the heart of the financial crisis almost a decade ago.

But the phone-backed securities market will be tiny in comparison to the multi-trillion dollar mortgage market—Verizon says it plans to securitize about $2 billion per quarter. With monthly payments on the order of $30 and mobile service at risk, phone owners should be far more likely to stay current on their payment plans than overburdened homeowners at the height of the housing bubble.

SPOILT FOR CHOICE! Asset-Backed Lending: Take your pick

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Europe offers good prospects for asset-backed lending with opportunities for investors to step into the shoes of banks in certain markets, reports Lynn Strongin Dodds

It is unsurprising that secured credit has gained a following in this prolonged depressed-interest-rate environment. There is a wide range of opportunities – from loans to asset-backed securities (ABS) and trade-receivable finance, while the returns are more promising than many other fixed-income instruments. However, fortunes do vary and certain sectors and geographical regions have fallen out of favour.

Take ABS, which many people still blame for triggering the financial crisis. Overall, figures from Nomura show that by January 2016 the European ABS market had shrunk to an estimated €500bn, a fraction of the €2trn recorded in the halcyon days of 2007. Issuance was roughly €85bn in 2015 but it was more than offset by over €100bn of repayments, according to Standard & Poor’s (S&P). The largest redemption at par was the £7.5bn (€9.4bn) of Granite, the former Northern Rock prime RMBS master trust nationalised by the UK government.

By contrast, the US market looks thriving, although it has not yet reached its pre-crisis peak. Issuance jumped 12% last year from 2014, according to trade groups, the Association for Financial Markets in Europe and the Securities Industry and Financial Markets Association.

The European Central Bank tried to resuscitate the region’s moribund market with a programme to purchase these securities as part of its measures to inject around €1trn into the euro-zone’s financial system but interest failed to ignite. This is mainly because the established participants such as banks and insurance companies have been restrained by their respective more onerous regulations – Basel III and Solvency II – which imposes higher capital charges on ABS versus similarly rated covered, corporate or financial bonds.

This is not the case with the commercial real estate loan market. The outlook is positive, with research from CBRE predicting that over €500bn of outstanding European commercial mortgage debt is due to mature and likely to be refinanced over the next three years. In the UK, about 72% is due for repayment during the four years from 2015 to 2018 inclusive.

“Banks are shadows of themselves and this creates opportunities for asset managers to replicate their activity in their own way,” says Shaheer Guirguis, head of secured finance for fixed income at Insight Investments, which targets residential loans across the entire risk-return profile. “We see opportunities at loans to value [LTVs] that range from 40% to 60% and spreads are anything from 250bps to 400bps, depending on the jurisdiction or mortgage type,” he adds. “The UK is very interesting because high street banks are restricted in what they can do. That allows specialist lenders to step in and take advantage of extremely wide spread levels for the risk that you take. In the Netherlands, this is much less of an issue as the banking system is meeting the demand for mortgage product by borrowers.”

M&G is also bullish on senior commercial mortgages – three to 10-year loans on commercial properties at loan-to-value (LTV) ratios of about 50-65%. “The main attractions are they sit at the top of the capital structure and offer investment-grade risk; quarterly interest payouts; the security of a first-ranking claim over a property; and a strong suite of financial covenants,” says Lynn Gilbert, head of senior commercial mortgages, M&G Investments. They can be fixed or floating rates, which gives a typical portfolio lower duration than an average corporate bond strategy. “

Around 70% of M&G’s investments are in the UK and they cover the full spectrum including offices, residential and hotels, while the rest are mainly in the Dutch residential sector and offices, hotels and retail in France, Spain, Ireland and Germany.

As for returns, Gilbert notes that at the lower end – 50-55% LTV ratios will generate 175-200bps over LIBOR, with spreads of 200-250bps for those at the 60%-plus LTV level.

Omni Partners is also mining the prospects in this segment but is solely focused on short-term loans sized at £3.2bn annually – secured against UK residential and commercial markets. Its latest fund – the Secured Lending Fund II (OSL II) – recently gathered additional commitments of $34m (€30m), taking the total to $240m. Since inception in April 2015, the fund has delivered a net return of 11.1% on loans that ranged from six to 18 months in duration with LTV ratios capped at 70%.

While London and the south-east of the UK still account for 50% of the firm’s lending, Steve Clarke, founder and head of risk at Omni also sees opportunities in the big six regions – Manchester, Birmingham, Leeds, Bristol, Edinburgh and Glasgow due to economic and employment growth. Particular areas of interest are student housing, as well as hospitals and conversions of office buildings to residential following new re-zoning laws that enable these types of development.

The main glitch on the horizon for this asset class in the UK is the impending EU referendum which could result in the country leaving the EU. “Just as we saw in the run-to the Scottish referendum last year, activity has slowed,” says Clarke. “However, we believe it will be a bump in the road either way. There is a lot of pent-up demand and people are waiting for Northern Rock to unload its next tranche of loans. However, if we do Brexit, there will be short-term negative sentiment but for long-term investors the UK market will continue to be attractive.”

Although it is difficult to predict the result, there is no doubt that these commercial real estate transactions are and will continue to be labour intensive. Gilbert believes it is important to have a one-stop shop that has the ability to write significant amounts, originate loans directly, handle greater complexity and negotiate bespoke terms: “We may do one deal out of the 30 that we look at but it requires the resources and proper infrastructure to do the due diligence, go through the documentation, rating procedures and reporting process.”

Clarke has similar views and notes that Omni has Amicus Finance Plc, which serves as the fund’s origination platform and is responsible for the entire front-to-back loan process. Credit analysis is also key, according to Guirguis. “You need to understand the quality of the people you are lending to as well as the valuation and collateral of the property you are lending against. Once you determine that quality you can move onto the structure in terms of the pricing, maturity and performance testing.”

Looking beyond real estate, Guirguis points to value in trade and auto finance but, as in real estate, credit analysis on the underlying pool is crucial. Fitch has fired a warning shot over a rise in delinquencies in the US car finance market but remains positive in Europe because of low projected delinquency rates and rising new car registrations across all five major EU economies as interest rates remain low.

Non-performing loans are another area of interest, particularly in Ireland, Spain and Italy, where the bank pressure is the greatest but the opportunity for enhanced returns is the highest, according to Guirguis. Overall, a detailed analysis of 105 banks across 21 countries in the EU conducted by the European Banking Authority (EBA) late last year, revealed that about €1trn of non-performing loans – nearly 6% of the total loans and advances of Europe’s banks or 10% when lending to other financial institutions –  is excluded. The equivalent figure for the US banking industry is around 3%.

There are also disparities in the collaterised loan obligation arena. “A single A-rated CLO will generate around 200bps of additional spread versus an equivalently rated corporate bond,” says David Milward, head of Henderson Global Investors’ loan portfolio. “In the secured loan and high-yield markets there are headwinds coming from the US and whilst spreads look a little wider than Europe today, this reflects fears over rising default rates. However, we expect default rates in Europe to remain low and European credit to continue to benefit from ECB action.”

Milward believes there is greater interest in the relatively safety of senior secured loans as they are higher up the capital structure and offer more downside protection. Northern Europe seems to be the favourite hunting ground, as the courts are more investor friendly than those in the southern part of the region.  “You will get to the same end result in southern Europe but the process of restructuring companies takes longer and there is more court involvement,” he adds.

Martin Rotheram, senior portfolio manager for European floating-rate loans at Neuberger Berman is also a proponent. “European loans returned around 4.6% last year. With below-average default rates expected to continue, the protection that being senior secured affords, as well as the potential ability to benefit from any future interest rate rises, floating rate loans certainly deserve consideration for most diversified portfolios.

The fund manager prefers the larger names in the index, typically with more than €500m in debt and €100m of EBITDA, as they tend to be more stable businesses with longer track records but also have deeper syndicates, which gives greater liquidity in each name.

 

SOURCE: ipe.com

ON THE LOOKOUT! Japanese Investors Seen Seeking Europe’s Mortgage-Backed Bonds

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Japanese investors are turning to European asset-backed securities in search of higher yields as negative interest rates at home erode investment income, according to Morgan Stanley.

Banks and insurers from the world’s third-largest economy are particularly interested in U.K. mortgage bonds, according to Srikanth Sankaran, head of European credit and asset-backed securities strategy at Morgan Stanley in London. Bank of America Corp. said last month it sees Japanese investors moving into commercial and residential mortgage-backed securities in the U.S. and Europe.

Unprecedented monetary stimulus by the Bank of Japan has suppressed yields on government bonds and driven investors into riskier securities. The migration could prove a boost for Europe’s 368 billion-euro ($419 billion) asset-backed debt market, which has contracted more than 25 percent in the past two years.

“There’s momentum coming from Japan,” said Sankaran. “The arrival of new investors is a bright spot for a market that has been shrinking, in terms of assets and market participants.”

Norinchukin Bank, a lender for Japanese farmers and fishermen, acquired more than 2 billion pounds ($2.9 billion) of U.K. mortgage-backed bonds sold by Cerberus Capital Management, people with knowledge of the matter said in April.

BOJ Governor Haruhiko Kuroda adopted a negative interest-rate policy in January in a bid to stimulate consumption and investment. Yields on Japanese government bonds with maturities as long as 10 years turned negative this year after the BOJ announcement.

“The Bank of Japan’s policies have been a clear catalyst,” said Sankaran. “Continuation of these policies will likely determine how sustainable the interest in European assets will be.”

 

SOURCE: Bloomberg