European Credit: Seeking Symmetry From Senior to Subordinated Vianney Hocquet, Corporate Portfolio Manager

Transcription

1 European Credit: Seeking Symmetry From Senior to Subordinated Vianney Hocquet, Corporate Portfolio Manager For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

2 Yield is Getting Harder to Find Yield pick-up can be achieved through: However, there are underlying risks: 1. Longer-dated bonds 1. Longer duration: interest rates may increase 2. Higher credit spreads 2. Moving into sub-investment grade bonds: default risk could increase 3. Exposure to Emerging Markets 3. Potential for increased volatility A POTENTIAL SOLUTION: SUBORDINATED DEBT Page 2 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

3 Our Solution: Pioneer Funds Global Subordinated Bond GLOBAL Allocate to different geographies / sectors / structures FUNDAMENTAL Leverage on 25 Credit Analysts globally* EXPERIENCED Portfolio Manager with long track record in this space CREDIBLE Raised more than 350m Euro since launch (Dec 2015) *Source: Pioneer Investments as at 31 December Page 3 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

4 (years) (bps) Subordinated Debt Investors: A Potential Opportunity Glbl Hybrid NonFin Corp Glbl Hybrid Contingent NonFinl HY Cap Preferred Stock Perpetuals Euro High Yield Const Euro Corp Euro Corp Large Cap Euro Subord Financial EUR Sub Insurance 0 OAS (RHS) Effective Duration (LHS) Source: Bloomberg as at 6 April Page 4 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

5 Subordinated Debt Investors: Beware! Key Risks Specific to Subordinated Bonds Extension Liquidity Coupon Skip Write-down / Conversion Default Page 5 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

6 Extension Risk The Most Significant Risk Most subordinated bonds are PERPETUAL Issuers have THE OPTION to buy the bond before maturity i.e. five/seven/ten years after issuance BEFORE the final maturity Investors price the bonds assuming they will be called at the first call date i.e. they price bonds to-the-call If the issuer does NOT call the bond it trades to the maturity a markdown that could exceed 10 points Page 6 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

7 Price Managing the Extension Risk Relative Value Know Regulation Example: Bond A Know Issuer Know Downside Source: Bloomberg as at 23 March Page 7 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

8 Liquidity Risk the Cost of Doing Business, Intensified? Corporate Bonds are a dealer-dominated market. While the stock of bonds has increased, dealer bond inventories have not followed Index: Dec 2001=100 Index: Dec 2001= Note: Corporate bond dealer inventories data reflect a change in definition in Apr Source: Haver Analytics, SIFMA, Deutsche Bank Research as at 29 February Ratio-inventories to Amount Outstanding* (RHS) Corporate Bonds Outstanding 600% 200% 100% 0% Bid-offer Spreads Relative to their Average. EUR Sovereign EUR Corporate USD Corporate USD Sovereign > 100% - worse than pre-crisis EUR Equities USD Equities Source: Markit iboxx. Bloomberg Finance LP. IMF. Deutsche Bank as at 31 December Number of 2 Std Dev Spikes in Implied volatility in the Last 18 Months European Equities US Equities FX Source: Bloomberg Finance LP. IMF. Deutsche Bank as at 31 December Page 8 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

9 Cash & Govvies % NAV Managing Liquidity Risk Higher Portfolio Yield means we also receive an interesting yearly coupon (currently around 6.2%*) => Between cash, maturity and coupons, approximately 25% of the Portfolio may be very liquid over the next year Tranching holdings through different call dates 50% 13% 12% 7% 9% 5% Diversifying also among the same issuer across different maturities Potential use of derivatives to hedge the Portfolio in case liquidity disappears Issuer Number of Bonds Total Weight in Portfolio Company A % Company B % Company C % Company D % Company E % Company F % Source: Pioneer Investments as at 31 March Data refers to Pioneer Funds Global Subordinated Bond. * As at 31 March 2016, yearly coupon amount not guaranteed and is subject to change. Please note that these figures exclude any cash holdings. Page 9 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

10 Coupon Risk Real risk for AT1 not so much for hybrids Coupons for non-financial hybrids are cumulative very defensive structure Skipped coupons for Tier 1 securities cannot be recovered Main Reasons for Which AT1 Coupons can be Skipped Regulatory discretion => favour regulator with a friendly stance (interpretation of regulations/eba guidelines/ ) Combined buffer breach => favour issuers with a large buffer/ who satisfy all requirements ADI breach => avoid banks exposed to litigation risk / favour stable business models with predictability of cash flows/ favour creditor friendly banks (banks can choose to pay bonuses or dividends or coupons when such payments are restricted) Focus on quality Page 10 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

11 Portfolio Summary Write-down/Conversion risk Very relevant for Contingent convertible securities T2 (CoCo) (1.05%) Permanent Write- Down (0.61%) (Note coupons NOT deferrable) CET 1 7% Trigger (0.61%) Order of preference Equity Conversion (0.43%) CET 1 7% Trigger (0.43%) Temporary write-down Conversion to equity Permanent write-down (only 5% of the Portfolio invested in such structures*) Equity Conversion (4%) CET % Trigger (0.25%) CET 1 7% Trigger (3.8%) Structure is important Know the issuer (and assess the likelihood of a trigger) more important Trigger-levels and regularly published capital-ratios gives the illusion that this risk is easy to quantify In the end, the only way to limit is through diversification** Tier 1 / AT1 (22.73%) Old Structure Tier 1/Trust preferred (6.8%) Tier 2 (9.6%) Temporary Write-Down (12.17%) Permanent Write- Down (5.5%) CET % Trigger (7.9%) CET 1 7% Trigger (4.28%) CET % Trigger (3.1%) CET 1 7% Trigger (1%) CET 1 8% Trigger (1.4%) Source: Pioneer Investments as at 31 March * Internal guideline, subject to change ** Diversification does not guarantee a profit or protect against a loss. Pioneer Funds Global Subordinated Debt. Page 11 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

12 Global Default Rate (%) Default Risk HY Rated Issuers IG Rated Issuers Source: Merrill Lynch and Moody s as at 31 December Page 12 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

13 Performance 2016 Performance 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% -2.00% Jan-16 Feb-16 Pioneer Funds - Global Subordinated Bond (A class, net) Reference Benchmark Delta Source: Pioneer Investments as at 29 February The comparison to BofAML Cont Cap Index (Hedged to EUR) 25%, BoFAML Global Hybr Non-Fin Index (Hedged to EUR) 35%, BofAML Global Hybr Non-Fin HYL Index (Hedged to EUR) 15% and BofAML Perpet Pref Sec Index (Hedged to EUR) 25% is provided for illustrative purposes only. This is not the benchmark of the Pioneer Funds Global Subordinated Bond and does not represent the holdings of the Fund. It is not meant as a direct comparison in terms of fund performance and no reliance should be placed on it in this respect. Page 13 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

14 Recap Slide 01. In a low-yield environment, where corporate QE hides credit risk at senior levels, subordinated debt appears to be a good way to get yield without taking much duration risk while being exposed to IG issuers 02. Like most of the finer things in life, subordinated should be handled with care to fully enjoy its benefits 03. Our approach is focused on how to limit downside risk while aiming to generate a steady income Page 14 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

15 Thank You! Questions? Page 15 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public

16 Important Information Unless otherwise stated all information contained in this document is from Pioneer Investments and is as at 29 February Pioneer Funds Global Subordinated Bond is a sub-fund (the Sub-Funds ) of Pioneer Funds (the Fund ), a fonds commun de placement with several separate sub-funds established under the laws of the Grand Duchy of Luxembourg. Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. More recent returns may be different than those shown. Please contact your local Pioneer Investments representative for more current performance results. The Sub-Fund s investments may include, but are not limited to, subordinated bonds, senior bonds, preferred securities, convertible securities such as contingent convertible capital bonds and corporate hybrids bonds. The Sub-Fund may invest in investment or sub-investment grade bonds. The Sub-Fund may use derivatives to reduce various risks, for efficient portfolio management and as a way to gain exposure to various assets, markets or income streams. Investors should be aware of the increased risk of investing in emerging markets, sub-investment grade securities, contingent convertible bonds, subordinated and senior bonds, corporate hybrids bonds, convertible and preferred securities and the leverage generated by investing in financial derivative instruments. A portfolio containing subordinated securities might be more volatile than a more broadly diversified portfolio. Additional details on these risks can be found in the Special Risk Considerations section in Appendix III of the prospectus. This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any units of the Fund or any services, by or to anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. For additional information on the Fund, a free prospectus should be requested from Pioneer Global Investments Limited ( PGIL ), 1 George s Quay Plaza, George s Quay, Dublin 2, Ireland. Call Fax or your local Pioneer Investments sales office. This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any Restricted U.S. Investor (as defined in the prospectus of the Fund). The Fund has not been registered in the United States under the Investment Company Act of 1940 and units of the Fund are not registered in the United States under the Securities Act of This document is not intended for and no reliance can be placed on this document by retail clients, to whom the document should not be provided. The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is directed at professional clients and not at retail clients and it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority ( FCA ) are available from us on request. The Fund is an unregulated collective investment scheme under the UK Financial Services and Markets Act 2000 and therefore does not carry the protection provided by the UK regulatory system. Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA ( PFD ), a U.S.-registered broker-dealer, provides marketing services in connection with the distribution of Pioneer Investments products. PFD markets these products to financial intermediaries, both within and outside of the U.S. (in jurisdictions where permitted to do so) for sale to clients who are not United States persons. For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: 13 April 2016 Page 16 I For Boston Investment Conference 2016 Attendees Only and Not to be Distributed to the Public