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Trading on the LSE's new retail investor bond trading platform is restricted to gilts and less than a dozen corporate bonds, but it is expected that both existing low-minimum denomination corporate bond and new issues targeted at small investors will be added to the platform as time goes on. With this in mind, Royal Bank of Scotland has stepped up to the plate and launched a new ten-year "Royal Bond" with a 5.1 per cent coupon to get the party started. The term sheet for this issue is available for download here.
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The RBS bond is what is known as a "vanilla" deal in the fixed-income market - it's plain and simple. The bonds pays a single annual coupon, has a set maturity date of 1 February 2020 and contains no unpleasant puts, calls or other features to trip up the unwary retail investor. RBS currently has an A+ rating from Standard & Poor's and best of all, the bond is available in minimum denominations of just £100, a refreshing change from the unmanageable £50,000 chunks we have seen of late. The new bond qualifies for both Isas and Sipps, and RBS expects to hold the bid-offer spread in the secondary market at 0.75 basis points (bp).
But the question is whether it is good value, and as ever with bonds, the actual valuation is only a relative measure. Compared to ten-year gilts, the bond offers an incremental yield of 1.2 per cent. That looks tight compared to existing senior longer-dated RBS bonds trading in the secondary wholesale market, which trade at around 1.80 per cent yield premium over gilts. If we compare it with other issues trading in the ten-year sector, then the 5.1 per cent yield is about mid-range; the BBB+ rated British American Tobacco 6.375 per cent Dec 2019 bond, for instance, offers a bit more yield at 5.2 per cent. However, the Tesco 5.5 Dec 2019, rated A-, trades a little tighter, and investors will only be able to get 4.7 per cent from the mega-grocer's debt.
The new bond looks less tempting when compared with RBS's previous issues, though. The Royal Bond 5.3% August 2015, launched last summer is offered at 102.9 at the time of writing. There is an interesting twist to this; the first Royal Bond was launched on the back of RBS's derivatives trading platform and due to the constraints of this system, the bond is offered with a so-called "dirty" price, meaning the rolled-up interest is included in the valuation. According to my calculations, that means that the true or "clean price" of the security is only 100.6 - a yield to maturity of 5.2 per cent. This is slightly more than the longer-dated new issue and perhaps 200bp over gilts of equivalent maturity.
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The RBS 5.1% 2020 bond is a useful addition to the list of tradeable fixed-income securities available to private investors.Whilst the bond compares reasonably with other sterling corporate bonds in the ten-year maturity band, it is not cheap. I am also a little wary of longer duration bonds at the moment because of perceived interest rate fears, and investors can expect the secondary market price of this instrument to be fairly volatile. But overall, this is a decent attempt at opening up the bond market.
Bond of the week is supplied by fixedincomeinvestor.co.uk and is subject to their disclaimer.
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-IC-2.1.3g-prod - 17/03/2010 18:13:09 - ben.wheeler
