The world of bonds it has made a comeback with the rise in interest rates by the main central banks to deal with other levels of inflation. A battle that now seems close to being won by the central banks. The market has thus begun to discount an easing of the strong restrictive measures implemented between 2022 and 2023, anticipating the first cuts in reference rates in the coming months.
In this scenario of expected falling rates, bond yields for future bond issues they could discount lower returns to investorsin particular those that provide for indexation to short-term variable rates such as the 3-month Euribor rate.
In this context, Societe Generale has returned to the Bond-X (EuroTLX) market of the Italian Stock Exchange with two new issues aimed at the retail market with a decreasing fixed rate, maximum duration of 15 years and possibility of early recall at the discretion of the issuer (callable) from the second year. The first bond is denominated in euros while the second is one denominated in US dollars, offering an opportunity for currency diversification. These issues add to Societe Generale’s range of retail bonds, which matters today 10 bonds issued from 2023.
The main characteristics of the euro bond
The first bond of Societe Generale (ISIN 7% for the first and second year. Subsequently, from the third to the fifteenth year, the rate is 3% gross. In practice, this bond has the peculiarity of paying a coupon on an annual basis based on the following scheme:
Years 1-2: 7%
Years 3-15: 3%
This emission is also characterized by“Callable” option. Starting from the second year and on an annual basis, the issuer (Societe Generale) has the possibility of repaying the bond early, paying investors a gross reimbursement amount equal to 100% of the nominal value (1,000 euros) plus the annual coupon relating to the year of early repayment.
However, if the issuer fails to exercise the early call option during the life of the bond, on the maturity date (17 May 2039) the bond will pay a gross amount equal to 100% of the face value (1,000 euros) increased by the annual coupon relating to the last year (equal to 3% gross).
How the new US dollar bond works
At the same time, Societe Generale launched a bond in US dollars on Bond-X (EuroTLX) of the Italian Stock Exchange (ISIN XS2813846438), mirror that denominated in euro in terms of mechanism and maturity. In this case, for the first two years the fixed rate is 10% gross, while from the third to the fifteenth year the rate is 4% gross, based on the following scheme:
Years 1-2: 10%
Years 3-15: 4%
This bond also has the “Callable” option. Every year, starting May 17, 2026, the issuer has the possibility of repaying the bond earlypaying investors a gross redemption amount equal to 100% of the nominal value ($2,000) plus the annual coupon relating to the year of early redemption.
However, in the event that the issuer fails to exercise the early recall option, on the expiry date (May 17, 2039) the bond will pay a gross amount equal to 100% of the nominal value ($2,000) plus the annual coupon for the last year (equal to 4% gross).
What are the strengths of the new bonds?
The main benefits of these two products can be summarized in these points:
First of all, the total capital protection in the currency of denomination (euro or dollar), as the bond gives the right to a reimbursement amount equal to at least 100% of the nominal value on the early maturity date (at the discretion of the issuer) or on the natural maturity (17 May 2039).
The decreasing rate structure also allows you to maximize the coupon flow in the first two years.
The financial strength of the issuer Societe Generale, to which they were assigned Investment Grade rating by S&P, Moody’s and Fitch. In particular, the three agencies assigned ratings of A, A1 and A respectively, confirming that the risk of insolvency is currently remote. The bond is senior preferred, therefore not subordinated.
Another strong point concerns the intra-day liquidity. Societe Generale, as the entity responsible for managing the secondary bond market on Bond-X (EuroTLX), provides intraday purchase and sale prices of bonds starting from the relevant date of admission to trading.
The obligation is traded at the dry rate, therefore the accrual of the annual coupons between two payment dates will be collected (respectively paid) by the investor in the sale (respectively purchase) transactions of the security. The expected taxation for coupons is 26%.
What are the main risks?
The main risks are the usual ones for an instrument of this type:
- First of all, Full capital protection is only valid in the currency of denomination (euro or dollar) and whether the bonds are held to maturity, whether the original maturity or earlier maturity at the discretion of the Issuer. There is therefore a risk of potential loss by exiting the investment early.
- As regards the dollar bond, if the investor wants to convert the flows into euros (i.e. into another currency other than the US dollar) he will be exposed to the changes in the exchange rate between the euro (or other currency) and the dollar. In particular, the exercise of the early redemption option at the discretion of the Issuer may result in a loss of capital if the redemption amount is converted by the investor into a currency other than the dollar in an environment in which the dollar has depreciated .
- Let us also keep in mind that during his lifetime the market value of the bonds may be different from the nominal value. The investor will therefore be able to buy the bonds at prices lower or higher than the nominal value, the payment of which is guaranteed only on the redemption date. By virtue of their maximum duration of 15 years and fixed rate structure, these bonds may be subject to significant price changes, particularly in the event of a rise in interest rates.
- Finally, it should be remembered that bonds they do not protect against possible increases in inflation.
For further details visit the issuer’s website: https://prodotti.societegenerale.it/
