We have located Aa3 rated Lloyds Banking Group Brazilian Real bond maturing July 2015, and are anticipating a better than 10% yield for our clients.
Corporate Bond linked to Brazilian Real
Lloyds Banking Group has bonds denominated in the Brazilian real with an expected yield of over 10.00 % for 48 months. This debt instrument compares well with other European banks, with slightly higher yields and a bit longer maturity than other recently targeted Brazilian real denominated bonds. This four year bond provides diversification into a country that was one of the first emerging markets to begin a recovery after recession hit in late 2008, and whose GDP growth returned to positive in 2010. Brazil’s strong growth and high interest rates continue to make it an attractive destination for foreign investors, and we are pleased to enable our clients with the ability to take advantage of a very high yielding bond that will extend through a debilitating period of U.S. political gridlock. The slightly longer maturity date, marginally higher risk, and significantly higher yield that it offers works well with an overall laddering strategy to diversify our clients away from the risk of overweighted US dollar based assets, and it is why we have returned to Brazil and Lloyds Banking Group for This Week’s Best Bond.
US Dollar Concerns
After strengthening slightly in the wake of the Greek financial crisis and its impact on the euro, the longer term weakening trend of the dollar against many world currencies appears to have resumed, possible as a side effect to the prolonged wrangling (and failure) of our lawmakers to raise the US debt ceiling. While political jousting and head butting will likely remain a spectator sport on FOX or CNN, evidently economists and treasury holders view the smoke and haze of the flaming rhetoric as being far too feeble to effect much, if any, change in direction for the economy, and the declining value of the dollar relative to other global currencies.
By far the largest and most populous country in South America, Brazil continues to pursue industrial and agricultural growth and development of its interior. Exploiting vast natural resources and a large labor pool, it has large and well-developed agricultural, mining, manufacturing, and service sectors. It is the world’s largest producer of coffee, sugar and orange juice and the second-largest exporter of iron-ore and soybeans. Brazil’s offshore oil fields have turned it into a net crude exporter, helping it expand its presence in world markets, and its economy outweighs that of all other South American countries.
Despite concern about the impact of slower Chinese growth, Brazil, the world’s eighth-largest economy, is expected to grow more than 4 percent this year (see trade flow chart below.) This robust economic growth underscores the importance of emerging markets as the developed world struggles with a sluggish rebound from the global economic slowdown.
The inflation rate in Brazil was last reported at 6.75% in mid-July, but analysts expect the country’s benchmark IPCA inflation rate to reach 6.31% by year’s end. Yesterday, inflation expectations for 2012 were placed at 5.28 percent, up from 5.20 per cent the previous week. Brazil’s real is hitting new 12 year highs against the dollar, as Brazil’s government had recently resolved not to use forex to fight inflation. While the real’s gains concern Brazil’s exporters, the stronger real also helps contain consumer prices by boosting cheap imports. With Brazil’s 12 month inflation rate above target (2.5-6.5%) for more than 3 months now, some analysts have speculated that the government could tolerate a stronger real as a means to fight inflation.
Last Monday, Brazil’s Finance Minister Guido Mantega cast blame for some of the real’s gains on the ultra-loose monetary policy of the United States giving investors a source of plentiful cheap money to pour into emerging markets in search of high returns. He reportedly stated that the problem isn’t overheating in the Brazilian economy, but that it’s underheating in advanced economies, and that the problem would only get better when there’s a recovery in the U.S. economy.
Lloyds Banking Group
Lloyds TSB Group plc was renamed Lloyds Banking Group plc on 19 January 2009, following the acquisition of HBOS plc, making them the largest retail bank in the UK, serving over thirty million people. On July 15th of this year, Lloyds Banking Group (the ‘Group’) was subject to the 2011 EU-wide stress test conducted by the European Banking Authority (EBA), and is reported here. These steps were taken by the EBA to assess the resilience of financial institutions across the EU to adverse market developments, and to contribute to the overall assessment of systemic risk in the EU financial system, primarily as a result of concerns over a possible Greek sovereign default.
At the end of March 2011, as confirmed in the Group’s Q1 2011 Interim Management Statement, the Group’s core tier 1 capital ratio was 10 per cent. In addition, the Group has contingent capital which was not taken into account in the EBA exercise. This would be available to absorb losses in a more severe stress. As expected, the Group’s core tier 1 capital, when stressed in accordance with the EBA’s defined methodology, remains well above the capital benchmark required.
Lloyds took a series of bail-outs from the government in 2008 and 2009 to withstand the financial crisis and recapitalize its operations as part of its merger of Lloyds TSB and HBOS PLC. The bank has already cut thousands of jobs since the merger, though some people have taken other jobs within the bank. Late last month, Chief Executive Antonio Horta-Osorio revealed that as part of its ongoing restructuring program the 41% state-owned bank plans to cut 15,000 jobs, simplify its business and focus on four key U.K. units as it seeks to cut annual costs by GBP1.5 billion within three years.
The most recent credit ratings for Lloyds Banking Group are A+ from Standard & Poor’s, Aa3 from Moody’s and AA- from Fitch, and compares very well with the Royal Bank of Scotland, which is also partly owned (83%) by the U.K. government and reported on in last week’s best bond review. In our Australian denominated debt analysis last week we found the Royal Bank of Scotland bonds to have consistently higher yields than those of Lloyds Banking Group.
The default risk is Loyds Banking Group’s ability to perform. Given its ongoing restructuring progress, current quality credit rating, and underlying 41% U.K. government ownership, as outlined above, and the short to medium term maturity of this bond, it is our opinion that the default risk is significantly less than the currency risk of the Brazilian real.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Brazilian economy.
Even with the strong growth outlook, many global investors still consider emerging markets relatively risky. Despite some progress, organizing new investment and production in Brazil remains cumbersome and bureaucratic. The world growth scenario has been made more difficult by European and United States debt woes, and when international growth sentiment weakens many investors sell such assets and buy assets traditionally considered safer, such as gold, the U.S. dollar and Swiss Franc.
Brazil continues to show no shortage of potential investors. However, much of the money flowing into its economy is of a volatile and short-term nature – “hot” money originating in the fiscal easing by which developed economies have flushed their financial systems with liquidity in the hope of restarting domestic lending. Recently, Tokyo based investment bank Nomura reported that Japanese retail investors were pumping about $4bn into Brazil every month via mutual funds and had no intention of giving up what has become one of the hottest trades in the post-financial crisis era.
How can investors participate in Brazilian real denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.
The ongoing debt ceiling debate has put the credit rating of US treasuries at risk, and now appears to be a drag on the dollar against many other global currencies. As the Brazilian economy continues to expand as a result of strong domestic growth and robust commodity exports, it will continue to be seen as a vigorous, young, high-growth market, where the risk lies primarily in overheating rather than national bankruptcy. As a result, it is our opinion that the combination of a short to medium term, higher yielding debt in Brazilian real, offered by a relatively sound financial institution, make the risk/reward consideration very attractive and an above average selection, which is why we are adding it to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients may currently own these bonds.
To know more about this Lloyds Bank bond call our fixed income specialist at 971-327-8847.