Hybrids with Power

Hybrids with Power: Battery not required

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We have been big fans of hybrid securities since the liquidity crisis of ’08-’09. Now we have even more reason to favour these investment vehicles.

A hybrid security is a debt instrument which pays a fixed-coupon interest payment that will convert to a floating rate over LIBOR after set number of years. Our regard for these securities stems from the inherent protection against deflation and inflation of the coupon structure. They’re a win/win in today’s macroeconomic environment. The high initial coupon (6%-8%) provides a buffer during deflationary periods (as the case has been since 2008) and the switch to a floating rate above the interest-rate linked LIBOR provides protection against future inflationary concerns.

Now a new a catalyst has arisen in this sector. One-by-one, financial institutions have approached the market looking to right-size their balance sheet by tendering for their low-priced securities. A recent example is Bank of America, who went to the market offering a premium to the market price to purchase (for cancellation) $1.5 billion in low priced securities (including a significant amount of hybrids). In effect, they were offering just over $70 for securites that were trading at $60 or lower, a huge premium for bondholders. This action is mutually beneficial, as Bank of America lowers their overall debt levels by purchasing outstanding debt at a discount-to-par which benefits shareholders at all levels of the capital structure.

We have a number of hybrid issues in both the Vertex Fund and the Enhanced Income Fund from the likes of Wells Fargo, Aegon, RBS that we think are candidates for such an announcement. Redeeming their low-priced securities is in each institutions best interest to remain competitive.

We expect this theme to continue and are positioning ourselves to take advantage of this latest market trend.

until next time. . .
@The Vertex Team

For information on this update and the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)
604.408.5660

Michael Lindblad
(GTA & Eastern Ontario)
416.200.4457

James Wilson
(GTA & Western Ontario, Maritime Canada)
519.902.7780