This week, we examine a debt instrument denominated in Swiss francs, from one of Europe's most reputable insurance companies, SRLEV N.V. (SNREF.PK). This high yielding investment grade (BBB-/BAA3) bond has a first call date in 2016, at which time it will either be called by the company, or it will reset its coupon rate to the 5 year CHF swap rate (the Swiss National Bank's key lending rate, currently at about .62) plus the initial spread of 5.625%. We have been able to acquire this bond at below par value, which currently returns its holders a yield better than the current 7% coupon rate. This is the best rate that we have been able to find for investment grade debt denominated in Swiss francs, and believe this to be a great opportunity for adding this traditionally strong currency into our Foreign and World Fixed Income holdings.
Wealth Preservation Concerns
As the weapons for global economic warfare continue to be invented or forged by the illuminati of central bankers, political leaders, and sovereign wealth funds around the world, wealth preservation and risk aversion remain top priorities for many of the more common and "less enlightened" (and fading fast) middle class. Declining equity and property prices, ultra-low interest rates, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the Fed's (and the ECB's) easy money policies, have all precipitated into a widespread erosion of wealth that will likely continue until the aforementioned conditions begin to change. What little progress might be being made stands in significant danger of being squashed or wiped out by the looming fiscal cliff that current political leaders seem perfectly content to ignore until after their re-election (or firing) this November.
Last week, ECB President Draghi introduced the new "Outright Monetary Transactions" (OMT) program aimed to reduce sovereign bond yields of troubled eurozone countries. I can hardly think of a more befitting name, unless there is some way to sterilize it in a way similar to their intent to "sterilize" their bond purchases. While it may prove itself to be much less effective that the Fed's "Quantitative Easing," perhaps the boldness of its name may give it an added jolt. One might initially (or even logically) think that this might or would result in a weaker euro. Against some foreign currencies, perhaps, but evidently NOT against the U.S. dollar. The FX markets evidently know that no one can provide a better or faster stimulus than our own Helicopter Ben Bernanke can. If anything, it appears to have simply been taken as a sign the euro will live to fight another day. But, as U.S. central bank official James Bullard forewarned previously while speaking behind closed doors in Beijing, nations that tie their currency to the dollar are at risk of importing inflation in the current environment.
We have undertaken the effort to protect our client's assets against the persistent destruction associated with an ever increasing supply of federal dollars by scouring the globe in search of sound investments in the strongest global economies, and it is why we have chosen this high yield, 5 year re-adjusting (floating) rate, perpetual Swiss franc bonds as This Week's Best Bond for our clients.
Switzerland is a peaceful, prosperous, and modern market economy with low unemployment, a highly skilled labor force, and a per capita GDP among the highest in the world. Switzerland's economy benefits from a highly developed service sector led by financial services, and a manufacturing industry that specializes in high-technology, knowledge-based production. Its economic and political stability, transparent legal system, exceptional infrastructure, efficient capital markets, and low corporate tax rates also make Switzerland one of the world's most competitive economies. The Swiss have brought their economic practices largely into conformity with the EU's, to enhance their international competitiveness, but some trade protectionism remains, particularly for its small agricultural sector. The fate of the Swiss economy is tightly linked to that of its neighbors in the eurozone, which purchases half of all Swiss exports.
The demand last year for the Swiss franc by investors seeking a safe haven currency resulted in the independent Swiss National Bank (SNB) conducting major market interventions to prevent further appreciation of the Swiss franc, as the franc's strength made Swiss exports less competitive and weakened the country's growth outlook. In the final quarter of 2011, exports fell 6.8% due to its strong currency. While unemployment is low at 3.1%, GDP fell to 1.4% in 2011, and the debt to GDP remains lower than most nations at 55%. The inflation rate for Switzerland was reported at -1 percent in March of 2012, with expectations for more to the downside. However, judging from the SNB's own quarterly report (released today) on the inflation forecast, it appeared to be heading towards a bottom, then a gentle upwards slope.
As deflation concerns begin to wane, there will be increasing pressure for an exit strategy from the EURCHF "floor," along with other unconventional policy strategies. Furthermore, there is increasing evidence of international and internal pressure to limit continued intervention. The SNB took a huge risk, which has paid off so far, in its strategy but the SNB's balance sheet is slowly expanding, increasing the risk that the 1.2000 floor might come with a heavy price. From a historical perspective, the last time the SNB pegged the franc to another currency (the Deutsche mark) it lasted for about years before it was unwound.
Public debt to GDP
|102.8%||US$ 1.29 Trillion||1.474 Trillion||2.239 Trillion|
Swiss franc (CHF) per U.S. dollar:
SRLEV N.V. provides insurance services in the Netherlands. The company was formerly known as REAAL Levensverzekeringen N.V. and changed its name to SRLEV N.V. in July 2009. The company was incorporated in 1904 and is based in Alkmaar, the Netherlands. SRLEV N.V. operates as a subsidiary of REAAL Verzekeringen N.V., the insurance division of SNS REAAL (SNREF). The group formed by SNS REAAL and its subsidiaries has a long history that is closely related to the social democratic movement and the worker's movement, and its roots lay in two insurance companies connected to those movements incorporated by the trade union at the beginning of the 20th century. In 2007, SNS REAAL acquired Zwitserleven from Swiss Life Holdings, making it the second largest life insurer in the Netherlands.
In the first half of 2011, SRLEV, the legal entity comprising most of the life Insurance activities of SNS REAAL, successfully placed €400 million of 30-year Tier 2 notes and CHF105 million of perpetual subordinated notes. These transactions were part of the capital management of SRLEV and were related to the replacement of internal funding by external funding, a significant portion of which were to the Dutch government. The Supervisory Boards of SNS Bank NV, REAAL NV and SRLEV NV are composed of the same individuals as the Supervisory Board of SNS REAAL.
While Moody's currently rates these bonds at Baa3, most aspects of SRLEV's Insurance Financial Strength rating scorecard (including market position and brand, product focus and diversification, asset quality, capital adequacy, liquidity and ALM, reserve adequacy, and financial flexibility) all received the higher A rating. Weakest in the overall rating was their diversity of distribution and geographic diversification. Moody's also includes the financial flexibility at the SNS REAAL Group level in its analysis, and earnings are expected to remain under pressure, in line with expectations of constrained profitability of both the insurance and banking operations. Standard and Poor's evaluation of the strong stand alone credit profiles of both REAAL Verzekeringen N.V. and SRLEV N.V. was reduced one notch (BBB) as a result of a notional group operating rating for the SNS REAAL group.
In our opinion, SRLEV's life insurance business appeared to have a higher portion of stronger fundamentals than the parent banking group (SNS REAAL), and the additional benefit that would more normally come from the "bank guarantee" associated with this bond might actually be bringing with it the perception of added risk.
The default risk is SRLEV N.V.'s ability to perform. While the higher yield of this debt issue reflects a higher degree of risk typically associated with hybrid/perpetual issues, given its sound business fundamentals, its quality investment grade rating, and its hefty 5.65% spread above the CHF swap rate, it is our opinion that the default risks for these rate adjusting bonds is quite low relative to the remarkably high yields that they offer.
The currency risk of the Swiss franc could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Switzerland's economy and the policies of the Swiss National Bank.
Accessibility and Liquidity
Aside from owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail, the question arises as to how a retail investor might own or acquire individual, maturity definite Swiss franc denominated bonds. Many times broker/dealers require an institutional sized single bond purchase. However, with a broker and advisor's assistance, it is possible for a number of retail clients to be combined together to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as US $10,000.
We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant devaluation of the U.S. dollar. We acknowledge that a stronger U.S. dollar would directly reduce the total returns of this Swiss bond. Conversely, if the U.S. dollar continues on the longer term path of relative weakness to the Swiss franc that it has been on, this alone would add significantly to the already higher positively accruing returns of this bond.
The combination of offering a remarkably high yield, some protection against a further loss of wealth with a continuation of the U.S. dollar's weakness against the Swiss franc, and a diversification away from heavily overweight U.S. dollar-based assets into one of the world's top tier fiscally conservative countries are the reasons why we are adding SRLEV N.V. bonds to our Foreign and World Fixed Income holdings at this time.
SRLEV Coupon: 7.01
First Call: 12/19/2016
Current Yield: 7.17%
Disclosure: Durig Capital and certain clients may have a position in SRLEV NV bonds. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports.