Virgin Money 9.25% Perp (Ba2/B/BB) (Moody's/S&P/Fitch)
The Virgin Money 9.25% Perps offer close to a mid-6% yield to call (YTC) for what is effectively a B-rated security. This compares to the average 5% YTC on other European Financial Perps. The structure would suit investors as illustrated by the high reset margin and the credit is in decent shape with a solid MDA cushion and adequate CET1 buffer to cover unexpected losses.
Virgin Money is aiming to disrupt the status quo – however, this is no challenger bank – and it is arguably already apart of the UK banking landscape. We would expect these securities to outperform the sector and would be a good addition to a balanced fixed income portfolio.
Virgin Money UK PLC (formerly CYBG plc) operates as a holding company. The company, through its subsidiaries, provides banking services. The bank offers savings, cards, mortgages, checking accounts, investments, cash management, certificates of deposit, money market, commercial lending, and online banking services.
Virgin Money is the UK’s seventh largest bank, which was the result of mergers between Clydesdale Bank, Yorkshire Bank, Northern Rock, and Virgin Money. Virgin Money has positioned itself as a pioneering growth story aiming to disrupt the status quo. Over 80% of its loan book is in the highly competitive and low margin UK mortgage market.
Chart 1. Key Metrics
Source: CreditSights
Virgin Money’s revenue margin continues to improve after being hit by UK interest rate cuts in 2020. COVID-19 led to reduced revenues and higher impairments. However, the bank has reprioritised its objectives to enable the bank to become a part of the UK banking landscape.
With a CET1 ratio of 14.9% (Transitional), a UK leverage ratio of 5.0% (Fully-Loaded), and a Liquidity Coverage Ratio (LCR) of 151%, Virgin Money looks solidly positioned for a mid-tier bank with growth ambitions.
Its minimum capital requirement (and MDA threshold) is 9.2%. That means its MDA cushion at FY21 was around 5.7% or around EUR1.6bn. This places it in the upper echelon of European Financials. Available distributable items (ADI) of GBP792m equates to c.13x the annual AT1 coupon of around GBP59m.
Chart 2. MDA Cushion
Source: CreditSights
Chart 3. Distance to Trigger
Source: CreditSights
With a CET1 ratio of 14.9% (Transitional), Virgin Money also has around 7.4% or around EUR2bn in capital before the mechanical equity CET1 conversion trigger is met.
Relative Value
The Virgin Money 9.25% Perps offer close to a mid-6% yield to call (YTC) based on a June 2024 call. This compares to the average 5% YTC on other European Financial Perps. We note that the reset coupon is currently above the coupon (9.25%), which again would incentivise the issuer to call.
Note: in a rising interest rate environment, the base underlying UK Gilt rate will also rise – meaning there is a higher probability of a call on these securities from an economic standpoint.
Whilst Virgin Money is effectively a challenger bank, the Bank of England (BoE) published full 2021 stress test results for UK banks. Virgin Money passed a severe macroeconomic shock and would not have been required to convert their AT1s into equity as the company remained above the Fully-Loaded 7% CET1 trigger.
One additional positive was that the Virgin Money 9.25% Perps held up well with the recent uncertainty and volatility. The change in price on the bonds in the last six months has been c.GBP8 – basically in line with the rest of the European Financial Perps sector.
Chart 4. Relative Value
Source: Bloomberg
Chart 5. European Financial Perps
Source: Bloomberg
