Firstgroup bonds just the ticket

BOND OF THE WEEK: A juicy yield and easy dealing, but keep an eye on the credit rating

December 16, 2009

Retailers, property and banks are over-represented in the UK bond market. So I'm always on the look-out for potential investments from other sectors. FirstGroup is one that might fit the bill. After all, a large portion of its revenues come from regulated bus and rail services, and subsidies underpin many of those.

IC TIP: Buy at 100.12p

Bonds form a considerable part - around £1.4bn - of the group's debt, which is shown at £2.3bn in the company's latest annual report. Firstgroup, which also owns the Greyhound bus operation in the US, has stated its intention to reduce its reliance on bank funding and has a program of issuance into the sterling bond markets. On this basis, it is worth taking the time to look at this credit, given that further issuance can be expected. The company currently has four bonds outstanding in Sterling, with maturities ranging from three to thirteen years.

The most noteworthy issue is the FirstGroup 6.125 per cent Jan 2019 (XS0181013607), a £250m issue launched back in 2003 at a price of 99.03. At that time, the bond was priced to offer a yield of 120 basis points over benchmark gilts. Subsequent price action saw the instrument trade a range between 95 and 105 up to 2007, before plunging (along with most other issues) down to touch 80 in the spring of this year. The travails of rival National Express have probably not helped sentiment.

The strong recovery in corporate bonds saw the price of the bond recover quickly, and the FirstGroup 6.125 per cent Jan 2019 can now be found trading around par, effectively bang in the middle of the pre-crisis trading range. This places the bond at a yield of 6 per cent, an incremental yield of 2.2 per cent over the 4.5% 2019 Gilt. This looks generous compared to the average yield to maturity in the Bondscape universe, which is around 5.1 per cent seen in the 9-10 year maturity range.