3. corporate bonds and agency bondsp8.storage.canalblog.com/85/99/366275/101475943.pdf · 3....

11/01/2015 Pr. Didier Folus 1

3. Corporate bonds and agency bonds

• A corporation can go bankrupt

• Bondholders have a prior legal claim (on corp. assets)

over stockholders :

Assets Liabilities

Asset 1

Asset 2

Asset 3

Asset 4

…

Covered bonds

Unsecured bonds

Subordinated bonds

Preferred stocks

Common stocks

Strong claim

on assets

Weak claim

on assets

assets are pledged

by the borrower

to secure repayment

to bondholders

bondholders have the claim of

general creditors

on all assets of the issuer

not pledged to secure other debt

3.1. Common bonds & notes

3.1.1. Fixed rate : Carrefour 4.00 % April 2020

Notes features Issue final terms Status & Provisions

Nominal amount 1,000,000 1 000 EUR Unsubordinated

Issue date April 9, 2010

Maturity date April 9, 2020

Redemption price par value Not callable

Coupon per annum 4.00 %

Rights date April 9, 2010

Credit rating S&P : A

Distribution syndicated

Offered issue price 99.806 %

Listing & trading Bourse de Luxembourg ISIN : XS0499243300



3.1.2. Issuance by syndication

• Bank syndicate : book building, discovering yield & price

• ract is the investor expected return to maturity

%024.4

1

00.104...

1

00.4

1

00.4806.99

102

act

actactact

rrrr

Source : www.financefi.fr

Feb 27, 2014


3.1.3. Corporate bond credit spread

• Yield spread on February 27, 2014 :

– OAT 3.5 % Apr 2020…….. 1.242 %

– Carrefour 4.0 % Apr 2020... 1.865 %

• Credit spread

evolution :

– economic sector

– investors risk aversion

– uncertainty level

Euro Corporate

Bond spreads of

non-financial

corporations(basis points,

monthly averages)

BBB from March 15, 2012


Long term US Corporate bond yields

of non-financial corporations(basis points, monthly averages)

3.2. Other corporate bond categories

3.2.1. Secured bonds


3.2.2. Subordinated bonds (junior debt)

Fact sheet Société Générale TSR AXA TSDI

Issue date……………….. October 29, 2004 March 8, 2000

Issue amount…………… EUR 100 000 000 EUR 500 000 000

Total nb of bonds………. 100 000 20 000 000

Issue price……………… 99.963 % 100 %

Nominal value…………. EUR 1 000 EUR 25

Coupon rate……………. 4.40 % annually 7.25 % quarterly

Repayment date………… October 29, 2016 undefined

Repayment price……….. Par Par

Subordination…………... Yes Yes

Provisions………………. Not applicable Call provision



3.2.3. Equity-linked bonds

• Stock redeemable bond : redemption in issuer’s stocks. (lower yield-to-maturity than non-convertible bonds)

• Convertible bonds : holder can convert the bond into shares of the issuer’s common stock under defined terms. (lower yield-to-maturity than non-convertible bonds)

• Exchangeable bond : holder can convert the bond into shares of the issuer’s common stock or the common stock of a subsidiary. (lower yield-to-maturity than non-convertible bonds)

Air France OCEANE

Fact sheet

Issue date……………………………… 22/04/2005

Issue amount…………………………... EUR 449,999,989.5

Total number of bonds………………… 21,951,220

Issue price……………………………... EUR 20.50

Nominal value…………………………. EUR 20.50

Coupon rate……………………………. 2.75 %

Repayment date……………………….. 01/04/2020

Repayment price………………………. par

Conversion ratio………………………. 1 to 1


3.3. High yield bonds

• High risk (default)

• High return (volatile)


Ex. European developped market HY bond issues:

Source : SIFMA, Oct 2014.


3.4. Agency bonds (low risk)

• Agency = national or federal public body :

– Student Loan Marketing Association, SLMA or Sallie Mae

– SNCF, RATP…

• Government-sponsored enterprises :

– Federal National Mortgage Association, FNMA or Fannie Mae

– Federal Home Loan Mortgage Corp., FHLMC or Freddie Mac…

• An agency unlikely goes bankrupt (implicit/explicit

State guarantee)


Quote 81.19 %

on 9-Jan-15

11/01/2015 13

4. Bond markets

4.1. Issuance & turnover

US government securities

Source : SIFMA, March 2014.

US corporate bonds

Pr. Didier Folus


4.2. Fixed income marketplaces

• Banks

• Multilateral trading facilities :

– Electronic platforms

– Wholesale markets

– Only for professional dealers

– OTC or regulated

• Exchanges :

(everybody accessing)

Daily 85 bn EUR, min. lot 2.5 M€

Largest exchanges by

value of bonds traded

Source : WFE,

Jan 2014.

4.3. Bond quotation

11 January, 2015 Pr. Didier Folus 15

TESCO PLC 5.50 % notes

Trading venue : LSE

Transaction

price

109.197 %

Quote

on 01/09/15

108.76 %

Accrued coupon

27 + 2 days

0.437 %

http://www.londonstockexchange.com/home/homepage.htm

http://www.londonstockexchange.com/home/homepage.htm


5. Pricing a corporate fixed-income security

5.1. Pricing using a gov. bond benchmark rate

• Pricing date : December 13, 2014

• Tesco Plc. 5.50 % 2019 fixed rate bond :

– residual maturity………….. 5 years

– 5 year-UK Gilt yield……… 1.22 %

– S&P credit rating…………. BBB-

– « A- » yield spread……….. 248 bps

•

• Overpriced ? Underpriced ?

%081.108

037.01

50.105...

037.01

50.5

037.01

50.55214Dec13

PVBond

Discounting rate 3.70 %

Quote on 12/13/14

108.30 %

5.2. Pricing using a yield curve

• Yields generally

increase with

maturity

• What about credit spread evolution ?


%308.1080370.1

50.105

0348.1

50.5

0323.1

50.5

0295.1

50.5

0285.1

50.55432

'

1413 DecV

UK Gilt yields

Data source : BoE.


5.3. Bond sensitivity to credit spread

• If yield spread increases by 100 bps :

– because investors are more risk-adverse

– because Tesco credit rating declines

new bond value…………… V’13-Dec-14 = 103.492 %

previous bond value………. V13-Dec-14 = 108.300 %

• Possibility to hedge with credit derivatives

Discounting

rate is now 4.70 %

Moody’s: Baa3 (9-Dec-14) to Ba1 (8-Jan-15)

S&P: BBB- negative outlook in Dec-14

Fitch: negative outlook in Dec-14


5.4. Bond sensitivity to interest rate

• If the yield curve increases by 1 %

• New bond value V13-Dec-14 = 103.492 %

• Volatility :

• Macaulay duration :

• Modified duration (elasticity) :

%440.41

actdr

dV

Vvol

years

r

Ft

VD

T

t

t

act

t 517.41

1

1

Discounting

rate is then 4.70 %

Determinants :

- maturity

- coupon

actr

D

1

3. corporate bonds and agency bondsp8.storage.canalblog.com/85/99/366275/101475943.pdf · 3....

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