Bonds – Opportunities appearing in Basel III compliant hybrids

In the hybrid space we have been vocal about our abstinence from investing in the Basel III compliant hybrid securities, where we argue the new ‘point of non-viability’ clause exposes holders to greater downside risk in times of financial stress. Private investors are seldom equipped to value these increasingly equity-like, deeply subordinated instruments. In periods of risk-off the price action of these securities tends to be correlated to equities. This stands to reason given the deeply subordinated nature of these securities and the limited investor protections. In our views the risk premium offered on these securities at issue was insufficient compensation for these risks. However, there has been a substantial sell-off in the CBA Perl 7s which traded as low as $86 from an issue price of $100. They are now trading above spreads of 480bps over cash. We will look to potentially add exposure to the new-style Tier 1 securities as spreads begin to represent value under our methodology. We explore this further in “The Fix: Credit investing in an uncertain world” (VIEW LINK)