Convertible Bond Research 4 February 2013 Convertible Weekly Volatility returns CB InsightTM Revisiting financial convertibles: After a buoyant period for returns and issuance, today’s https://live.barcap.com/keyword/ selloff follows some jitters and profit-taking last week. We now ask whether this bout of CBINSIGHT Our online convertibles portal, providing volatility will be sustained or transient. Although our strategists remain constructive on risky interactive analytical tools, market data assets and recommend the financials sector in both equities and credit, albeit mostly for and research core euro area subordinated debt, last week’s SNS REAAL nationalisation also raises concerns. We take the opportunity to survey financial convertibles, which offer a variety of Angus Allison equity, credit and structure risks. Our preferences include the Ageas FRESH, BES - Bradescos, +44 (0) 20 7773 5379 [email protected] Fortis CASHES, and Temasek - Standard Chartered. Barclays, London Also in this Weekly: Our equity strategist believes Oil & Gas is well positioned to benefit Luke Olsen in a shift from bonds to equities; we provide a screen of these bonds. The convexity +44 (0) 20 7773 8310 profile of Parpublica – Galp ‘17 makes it preferable to ENI – Galp ‘15. However, we [email protected] believe there is merit in diversifying between the bonds but recommend a slightly Barclays, London higher allocation towards the former. Kim Berg Upcoming action dates: Altran ’15 and Clariant ’14 are very close to becoming +44 (0)20 3555 0289 callable; KfW --- Deutsche Post ’14, Atos ‘16, Subsea 7 ‘13 and Eurazeo --- Danone ‘14 [email protected] remain just below their triggers. Barclays, London Chart of the Week: Our equity strategists’ sector quality metrics. www.barclays.com FIGURE 1 Chart of the Week: What sectors could benefit from bond investors shifting into equities? Chart recreated from European Strategy Elements: Sectors that benefit from Yieldfall, 30 Jan 2013 7.0% Good mix of dividend yield and quality SXKP SX6P 6.0% 5.0% SX86P* SXIP SXEP SXOP SXMP SXFP 4.0% SXDP SXAP SXRP SX7P SXNP SXQP Dividend Yield (12m Yield fwd) Dividend 3.0% SX3P SXTP SX4P SXPP 2.0% SX8P 2 4 6 8 10 12 14 16 Sector dividend quality score (payout ratio + leverage) Source: Barclays Research. *Quality score for Real Estate could be considered invalid given the nature of the sector Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 18. Barclays | Convertible Weekly Market movers FIGURE 2 FIGURE 3 Global equity indices (rebased as of 25 January 2013) Cumulative change in global government bond yields (bp) 104 S&P 500 €STOXX 50 Gilt 5 yr UST 5 yr FTSE 100 Hang Seng 16 103 Nikkei Bund 5 yr HK 5 yr 14 102 12 101 10 100 8 99 6 98 4 97 2 96 0 95 -2 94 -4 25-Jan 28-Jan 29-Jan 30-Jan 31-Jan 01-Feb 25- Jan 28- Jan 29- Jan 30- Jan 31- Jan 01- Feb Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research FIGURE 4 FIGURE 5 Global currency moves over the past week (vs. USD) Commodity price moves over the past week 2.0% 5.0% 1.5% 4.5% 4.0% 1.0% 3.5% 0.5% 3.0% 0.0% 2.5% -0.5% 2.0% -1.0% 1.5% -1.5% 1.0% -2.0% 0.5% -2.5% 0.0% EUR GBP SGD INR JPY Oil Gold Aluminium Copper Palm Oil Zinc Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research FIGURE 6 FIGURE 7 Global credit spreads (bp) Term structure of €STOXX – implied volatility 220 €BBB z-spreads (left) 460 30% Min (6M) Max (6M) JACI Quasi-Sov spread (left) 455 Week ago Current 210 iTraxx Xover (right) 450 25% 200 445 190 440 20% 180 435 430 170 425 15% 160 420 150 415 10% 25-Jan 28-Jan 29-Jan 30-Jan 31-Jan 01-Feb 1M 3M 6M 1YR 3YR 5YR Source: Bloomberg, Barclays Research Source: Barclays Research 4 February 2013 2 Barclays | Convertible Weekly FIGURE 8 FIGURE 9 EMEA weekly cross asset performance Asia weekly cross asset performance 0.0% 0.6% -0.2% 0.4% -0.4% 0.2% -0.6% 0.0% -0.8% -0.2% -1.0% -0.4% -1.2% -0.6% -1.4% -0.8% CB IG HY Eq CB u/l CB IG HY Eq CB u/l Source: Barclays Research Source: Barclays Research FIGURE 10 FIGURE 11 EMEA weekly convertible performance by profile Asia weekly convertible performance by profile 0.0% 1.4% -0.2% 1.2% -0.4% 1.0% 0.8% -0.6% 0.6% -0.8% 0.4% -1.0% 0.2% -1.2% 0.0% -1.4% -0.2% -1.6% -0.4% -0.6% -1.8% -0.8% IG HY NR IG HY NR Busted Typical Busted Typical Composite Composite Equity Sensitive Equity Equity Sensitive Equity Source: Barclays Research Source: Barclays Research FIGURE 12 FIGURE 13 EMEA convertible rich/cheap and total return year-to-date Asia convertible rich/cheap and total return year-to-date 1.0 1.8% 0.0 1.4% 0.5 1.6% -0.1 1.2% 0.0 1.4% -0.5 1.0% 1.2% -0.2 -1.0 1.0% 0.8% -1.5 -0.3 0.8% -2.0 0.6% 0.6% -0.4 -2.5 0.4% -3.0 0.4% -0.5 0.2% -3.5 0.2% -4.0 0.0% -0.6 0.0% Dec-12 Dec-12 Rich/-Cheap (Left) Total return (Right) Rich/-Cheap (Left) Total return (Right) Source: Barclays Research Source: Barclays Research 4 February 2013 3 Barclays | Convertible Weekly Market analysis and views January saw a continuation of the earlier trend for rising equity indices, tightening credit benchmarks and a recovery of the euro currency. Against this backdrop it is not surprising that convertible valuations continued to richen and new issuance volumes remained high. However, the past week has seen a growing uncertainty: EMEA new issuance was absent, equity markets suffered some missteps and valuations of longer-dated or volatility-sensitive names came under pressure. Today saw a worrying worsening of this condition, with European equity benchmarks down 1.5-2.5% at the time of writing. For our chart of the week, we take a snapshot of key index levels. FIGURE 14 Summary of market measures Field 31 Jan 2013 31 Dec 2012 Chg % / 3y min % or units 3y max % or units 30 Jan 2008 % or units index units above below above/ below EMEA Converts ex- 161 161 0.1% 133 21.0% 163 -1.4% NA NA mandos EURUSD 1.357 1.320 2.9% 1.195 13.6% 1.487 -8.7% 1.479 -8.2% Stoxx 600 289 280 3.2% 215 34.3% 291 -0.9% 322 -10.4% MSCI Asia ex-Japan 558 548 1.9% 416 34.1% 596 -6.4% 532 4.9% Nikkei 11114 10395 6.9% 8160 36.2% 11339 -2.0% 13345 -16.7% 5y iTraxx Xover 439 482 -44 352 87 874 -436 446 -7 5y iTraxx Main 111 117 -6 74 38 208 -97 73 38 Source: Bloomberg, Barclays Research Looking at the rich-cheapness measure the market has retraced somewhat in EMEA moving from c.0.5% rich to cheapness of c.0.1%. In Asia ex-Japan the richening has continued, reaching a level of 0.1% cheap compared with -0.4% cheap last week, this was achieved on the back of strong equity performance. EMEA Focus on Financials Our credit and equity strategists each cite the policy-driven benign backdrop for risky assets and the hunt for yield and value as drivers for financials, which are still recovering. Our strategists prefer core euro A key distinction between our credit and equity views is a preference for subordinated area sub financials in credit, financial credits in the “core” euro area given their likely outperformance versus the while peripherals equities “periphery” in any spread widening, while our equity strategists prefer peripherals, on more generally seem to have more compelling CAPE (cyclically adjusted price earnings) valuations. compelling valuations For details, please see European Credit Alpha: The shine comes off a little, 18 January 2013, pp.4-8 (the view has not changed in recent “Alpha” credit weeklies) and European Strategy Elements: Sectors that benefit from Yieldfall, 30 January 2013. SNS REAAL expropriation Our financial credit analysts have also published on the Netherlands’ nationalisation of SNS reinforces bank resolution REAAL, via the expropriation of the group’s equity and subordinated liabilities, and its precedents, with subordinated implications for subordinated and senior debt holders. The resolution process involves zero debt holders bearing losses recovery for equity and, probably, for sub holders while senior holders would bear any while senior holders do not burden. This reinforces the post-financial crisis bank resolution precedents already set in, for example, Denmark, Ireland, Spain and the UK. For details please see European Banks: SNS Reaal nationalisation highlights eroding bondholder protection, 1 February 2013. For convertible investors, this event mainly serves to sharpen our focus on the potential for similar actions on other banks with relatively weak or weakening profiles.