- We called it right on this stormy summer
- Mosts assets have clawed back their post-Brexit losses
- RBS and Thomas Cook bonds had very robust recoveries
- Investors in RBS and Thomas Cook shares should take care
Thomas Cook bonds have staged a convincing recovery. Pic: iStock
By Michael Boye
A couple of months ago we warned, that this year the summer period might not be as calm and uneventful for financial markets as investors are used to. If nothing else, at the very least it's fair to say we nailed that one!
Unsurprisingly, given the above development, on an individual basis the biggest positive performance contributors have been Royal Bank of Scotland
and Thomas Cook
bonds. Apart from their British roots, both issuers have been facing other extraordinary industry specific challenges as well, such as the European banking crisis and terror threats respectively.
But while these issues are likely to remain and continue to weigh on each of these companies respective earnings power, we think shareholders have the most reason to worry, as the solvency of neither is put at immediate risk.
The recent performance of bonds and shares seem to support our view, as both bonds have rallied, while equity performance has been far more subdued as evident below:
Share performance of Royal Bank of Scotland and Thomas Cook has significantly underperformed its bonds since Brexit. Source: Bloomberg
Another interesting case of different outlooks for shareholders versus bond holders might be found for the Singapore commodity trader Noble Group, which has been on a recovery journey of its own since the great commodity price slump. So far, the company has opted to let shareholders carry the bulk of the refinancing burden through a rights issue, and protected credit investors
by refinancing bank lines.
Despite the market arguably already pricing in an even more dire scenario, the price of its 2020 USD bonds dropped a few points further to a price of 78 with an effective yield of more than 15% reflecting high risk, but in our view also a reasonable reward for investors.
– Edited by Clare MacCarthy
Michael Boye is a fixed income trader at Saxo Bank
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