The Brexit vote has led to substantial turmoil in all UK assets due to the increased political and economic uncertainty. However, we think these concerns are overblown and that a far more market-friendly exit deal is highly likely.
As the worst performing sector, we think UK financials is the best rebound candidate. For Royal Bank of Scotland (RBS), which is still partially government-owned and where capital ratio has dramatically improved in recent years, we fail to see an increased solvency risk.
Source: Saxo Bank
Rating agencies have warned about downgrades for UK financials, which could derail the otherwise positive trajectory of RBS’ ratings (positive outlook with Moody’s and S&P), however we feel this is well versed in the market.
At a 5.4% current yield to maturity, this bond is priced in line with BB USD financials.
The bond has a low minimum trading size and can be bought down to 2,000 with 1,000 nominal USD increments.
Return objective is primarily seen as hold-to-maturity, while short term price gain is a possibility as well.
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Source: Saxo Bank
The main risk is centered on the Brexit fallout and reinforced political and/or economic uncertainty in the UK. Furthermore, changes to the government’s ownership commitment to RBS as well as capital events in other debt instruments may impact valuation as well.
This bond does not have a CoCo structure, hence coupons are firm and principal can’t be written down in “going concern”, however as subordinated capital the bond is exposed outside of “going concern”.
— Edited by Michael McKenna
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