Tuesday, January 1, 2013

Newbie's bond portfolio - Trade #4

I bought 3,590 shares of ING 7.375% USD Perpetual Capital Securities (Ticker: IDG) as my fourth trade.

At a client price of 25.05, it works out to:
YTM = 7.36%
YTC (next possible call date 15th April 2013, and every coupon date thereafter) = 6.64%

I will be using USD loans to fully fund the purchase.

Assuming this bond is fully supported by USD loans up till the approved lending ratio, the projected Net leveraged yields are:
Leveraged YTM = 21.01%
Leveraged YTC = 18.60%

Rationale for purchase:
Many debt securities have rallied in recent months to all-time highs. I needed to find a debt security that still returned relatively "value for risk" returns. This security has a split investment/junk rating of BBB-/Ba1, and thankfully the Financial Institution I am holding this new portfolio with has deemed this as Investment Grade.
This security has a relatively high coupon of 7.375% and having bought it near par, I would not be susceptible to any losses should the Issuer decide to call it at any coupon date.
This USD preferred security pays 7.375% fixed forever.

ING is one of the largest Deposit Taking instutitions in Netherlands. Given its huge importance to Netherlands, I believe that the Dutch governent would step it to help ING should it need help (and it did in 2008). The high coupon of over 7% is sufficient to buffer for future interest rate hikes in my opinion. Given ING is subject to Basel/Solvency rules, I believe there is a high chance that this preferred security will be called back by ING at par at or around 2015.

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