Successful placement of subordinated debt issuance of Good Finance , there is nothing like an extensive commercial network through which your unsuspecting customers go through.
In total 100,000 savers who have invested 3,000 million dollars, with minimum contributions of 30,000 dollars to place 10 years. Launched at the end of January, in a month they have not only placed the 2,000 million they had planned but they have spent 1,000 million dollars.
Fixed rate at the first year
Recall the characteristics, fixed rate at the first year at 5%, variable in the remaining 9, with a minimum interest rate of 4% APR and a maximum of 6% APR . As indicated in the online Banks and Savings Banks blog, we can compare it with the IRR that offers to buy Obligations of the State that rents 3.9% today.
In other words, we have the same guaranteed return as the state debt, plus a possible potential of 2oo basis points. In a product that we remember that is subordinated debt, not senior, to which you can add a practical illiquidity in the 10 years of the issuance, well if they seem to say that they themselves buy it back…. But at what price? They have assured you that they guarantee you to buy it at its nominal value…. I’m afraid not.
You will allow me to extend slightly because these subordinates had to analyze them and, the conclusion is that there is nowhere to grab them. Must have …. To place this products to your customers.
As you say, the characteristics are:
• Total amount: $ 2 billion, expandable up to 3,000.
• Nominal value: $ 1,000.
• Minimum subscription amount: $ 30,000.
• Term: 10 years (expiration 03/30/20), amortizable by “Good Finance” as of 03/30/15.
Between the subscription date and the end of the subscription period (03/22/10): 2,473% annual nominal (2.5% APR).
First year (from 03/23/10 to 3/29/11 inclusive): 4,909% annual nominal (5% APR).
Other years (from 03/30/11 to 03/29/20 inclusive): an annual nominal interest, variable in each quarter as a result of applying the 3-month Good Lender + 1%, with a minimum annual nominal interest rate of 3,941% (4% APR) and maximum of 5,870% (6% APR).
• Disbursement: due on 03/23/10 or the day after the issuance is exhausted.
The level of risk of subordinated bonds in the market is at levels close to the pre-Lehman crisis, which is a good sign of normalization of this segment.
Specifically, this issue, with a volume of 2,000 million dollars, should be liquid, although it must be borne in mind that as an issue for the Network, the secondary market will be managed by Good Finance itself.
The 3-month Good Lender curve in Europe is very positive, standing at 1.50% in December 2010 and 1.75% in March 2011, when the floating portion of the bond begins. The longest 3-month Good Lender Future market price is June 2013 and today quotes 3.18%. In this sense it seems that the Subordinated bonds will benefit the investor of that Floor in 4% above what the market marks until June 2013 (3 years) although later their remuneration will be linked to the evolution of the market and the differential paid.
On the Good Lender + 100pbs differential, it should be borne in mind that Good Finance itself in bonds not subordinated to that term is paying a) issue 17/1/2025 a swap differential of 96 bps), b) issuance 10/5/2015 a 76 pbs swap differential and other similar AA + rating houses such as Credit Agricole are paying 160 bps for a 5-year-old subordinate, Caja Madrid 2013 +263 and Popular 2014 +263.
It is not an attractive differential
In general, products that are placed on the network tend to have unattractive differentials. In the market there are other subordinate assets paying more profitably.
Subordinated risk: Subordinated bonds are subject to coupon payment to the existence of benefits by the entity, and to compliance with the capital ratios of both core capital and tier capital. A few weeks ago the European Commission announced that the hybrid titles of the entities that receive public aid could be forced to give up the coupon payment. Remember that Good Finance has issued bonds with guarantee or State Guarantee. The prospectus does not specify that the issuance is subordinated Upper TIER II (subordinate that makes payment of coupons subject to results and capital ratios). In this sense, we understand that the subordinates are of the simple type or lower Tier II, being therefore the main risk the priority in case of bankruptcy or the low liquidity of the product.
No guarantee on the degree of liquidity
The bond of Good Finance is attractive for the floor during the first years, although the differential that pays + 100 bps is not attractive for the risk that is run, since hybrid titles are subject to some discretion when paying the coupon , especially in a merger process between boxes. In addition there is no guarantee on the degree of liquidity to proceed with a future sale.
Priority: Being subordinated obligations, in case of bankruptcy they are behind all common creditors and at the same level as the rest of subordinates.
Early amortization: The issuer (Good Finance) may unilaterally shorten the expiration date and amortize early as of 2015 on each coupon payment date. The inverse cannot pay off in advance.
Liquidity risk , the Issuance Brochure indicates that Good Finance is not obliged to provide liquidity in the secondary market and adds that “under current market conditions it would be possible for the investor to find it difficult to liquidate their investment at a price reasonable”.