bond of the week 20/6/14 (Impala bonds)

edited June 2014 in General Bond Discussion
As Oliver requests a new discussion thread on the BoftW subject...
I have been an avid FixedIncomeinvestor reader and occasional contributor since it started, more importantly perhaps I've put my money where my mouth is and invested heavily in corp bonds and despite the crooks at the Co-Op done quite well. However it seems to me that in the last 2 years or so an element of desperation has set in as yields are chased lower. The trouble with age is maybe that one starts to think one has seen it all before? I had a mortgage of 15% in the late 80's who'd of thunk that in the late 60's? Investec's solution is a so called structured product which superficially has lots of built in protection but in reality when the proverbial hits the fan the little guy wont have a hope in hell. It could well be that all will be well over the next 20 years and investors will get their interest paid on time and in full by Investec....or it could be the reverse. I might be prepared (if available) to invest in Thames Water bonds directly, but to invest in Investec 'structure products' in order to invest in Thames Water as a mechanism to gain an extra few basis points isn't worth the candle. If interest rates rise, we bond investors might start to get more choice but in the interim investing in the weird and the wonderful is not bond investing it's 'exotic', which I will leave to the more adventurous.

Comments

  • John, thanks for starting this thread.

    Investec has immunised these bonds from "contamination" risk with themselves by placing the purchased bonds in an account with Deutsche Trustee Company Ltd who hold them for the benefit of the holders of the Impala bond via a fixed charge. I think this should work although you can always create Armageddon scenarios where counterparty risk does for you.[A purist could even argue holding bonds via a clearing system, Euroclear, Cedel or Crest, is a risk].

    I think the essential point is this. Currently investors without £100,000 to invest per Impala issue are excluded from buying the bonds. If we assume for the sake of argument that Investec risk has been taken out of the Impala issues, would you as investors consider buying the bonds if it meant an additional 15bp cost {total cost about 40bp] to bring down the denominations to £1,000. It might of course be that a) you would resent the charge (although I think it is quite reasonable for the work involved), or b) the resultant bonds are just not interesting enough.
  • Developments along such lines, offering the prospect of a wider choice of individual bond investments in affordable denominations, are much to be welcomed. An offer of such investments which reduce interest rate risk is of particular interest in the current environment.

    At present, retail investors have the opportunity to spread risk through ORB and a limited number of retail type bonds. But arguably not in sufficient degree.

    The additional cost of Impala issues is unfortunate but understandable.

    Perhaps one way of looking at this is to make comparison with the cost of the limited alternatives currently available to the retail investor. Annual charges levied by bond fund managers are greater than the "one off" 40bp envisaged here, whilst the opportunity to take control of ones own bond investments over a range of chosen credit risks and maturity dates is surely one to be prized by the active investor. The wider the choice, the better.

    These bonds are no doubt at the esoteric end of what is available in the corporate bond arena. If to be a success, much may be down to such as Oliver to explain the merits of investment in a manner the retail investor can readily understand.
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