Julius Baer’s new NC7 perps looking good at IPG of 4.25%

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This article was first published on Bondsupermart.com on 15 Sep 2021 and updated on 16 Sep due to its much lower FPG of 3.625%.

As the call date of BAERVX 5.750% Perpetual Corp (SGD) draws near and with interest rates likely to increase next year, Julius Baer is probably making use of this opportune time to launch new notes for refinancing. The initial price guidance of 4.25% looks attractive for Julius Baer’s credit ratios.

About the perpetual notes

Julius Baer is offering a USD Additional Tier 1 (“AT1”) perpetual note Julius Baer is rated ‘Baa1’ (positive) while the new note is expected to be rated ‘Baa3’ (hyb) by Moody’s. Like other AT1 bonds, they are ranked junior subordinated and have write-down trigger event and viability event features. The perps are callable in 7 years’ time and will reset then too, if not called. After that, the perp will reset every 5 years, and will be callable on every interest payment date.

1H21 Operating results

Julius Baer continued to grow despite a stellar performance in 2020. Its assets under management (“AuM”) grew by 12% YoY to CHF 486b with CHF 9.9b of net new money. Operating profit rose by 8% YoY to CHF 2.0b with net commission/fee income driving the bulk of it. Net interest income fell as US rates decreased, driving down income from their loans and treasury portfolio. Operating expenses remained stable, increasing by only 1.4% YoY to CHF 1.25b. Cost/income ratio decreased by 5 percentage points to 61%, reflecting benefits of their cost reduction programme. All in all, profit before tax rose by 22.5% YoY to CHF 706.9m in 1H21.

Table 1: 1H21 Operating results by segment

Source: Company’s financial statements, iFAST compilations

Credit ratios continued to improve with common equity tier 1 (“CET1”) capital increasing due to strong profit growth. Other factors also contributed such as CHF 75m from positive currency translation differences and CHF 146m from shares buy-back. Their capital ratios are also comfortably higher than the regulatory minimum.

Table 2: Credit ratios

Source: Respective companies’ financial statements, iFAST compilations

The AT1 bonds

Looking at Julius Baer’s existing notes, we find the new notes to be well-priced at 4.25% and should be attractive even at a final price guidance of 4.00%. The notes will most likely be used to refinance the BAERVX 5.750% Perpetual Corp (SGD) that will be callable in 20 Apr 2022.

With the USDCHF currently at a rate of 0.9194 (bid) and the 7-year forward rate at 0.8306 (ask), Julius Baer also stands to gain from hedging the proceeds from the new perp. To elaborate, assume Julius Baer issues USD 1000m of new notes and proceeds to sell them for CHF 1087.7m. They enter the forward contract to sell CHF 1087.7m in 7 years’ time for USD 903.42m, thus gaining USD 96.6m on paper.

Figure 1: Yield-to-call for Julius Baer AT1 bonds

We can also compare Julius Baer to other Swiss banks, which you can read in greater detail here. We also included Societe General bonds, having done an Societe Generale – one of the unnoticed high yield opportunities in Europe earlier. Julius Baer has generally better credit ratios as seen in Table 3.

Table 3: Credit ratios

Source: Bloomberg Finance L.P., iFAST compilations

Comparing the banks’ USD AT1 bonds, the new issue also looks relatively good for value.

Figure 2: Relative valuation among other banking USD perpetual notes

There are also other bonds that caught our eye. For example, the BAERVX 4.750% Perpetual Corp (USD) which has much a much higher YTC than other SOCGEN bonds. It also has a similar YTC as the BAERVX 4.875% Perpetual Corp (USD). This is probably due to its lower initial spread as compared to the 4.875% perp.

The SOCGEN 8.000% Perpetual Corp (USD) also has a much lower YTC thanks to its relatively higher initial spread of 5.873%. This thus skews the SOCGEN curve. On the other hand, the SOCGEN 4.750% Perpetual Corp (USD) seems to be a decent investment for SOCGEN bonds.

Table 4: Characteristics of perpetual bonds among peers

Despite its low spread, we still favour the BAERVX 4.750% Perpetual Corp (USD) as Julius Baer has a good track record of calling their bonds. Julius Baer chose to call the BAERVX 5.900% Perpetual Corp (SGD) and issued the BAERVX 4.875% Perpetual Corp (USD) in October 2020, although the former will reset to a rate of 3.32%. This anecdote may suggest that Julius Baer will do the same for the BAERVX 4.750% Perpetual Corp (USD) even if it will issue a new perp at a higher coupon rate than the 4.750% bond’s new reset rate.

Update: The final price guidance of 3.625% is much lower than the IPG of 4.25% and places the perp below SOCGEN's curve, and rightly so. Subsequently, the other two USD BAERVX perps seem to be more attractive options now.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in CS 5.625% Perpetual Corp (SGD) and UBS 5.875% Perpetual Corp (SGD), and the analyst who produced this report holds a NIL position in the abovementioned securities.

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