Live From the Desk: Hybrids with Power

LIVE FROM THE DESK

Hybrids with Power: Battery not required

We have been big fans of hybrid securities since the liquidity crisis of '08-'09. Now we have even more reason to favour these investment vehicles.

A hybrid security is a debt instrument which pays a fixed-coupon interest payment that will convert to a floating rate over LIBOR after set number of years. Our regard for these securities stems from the inherent protection against deflation and inflation of the coupon structure. They're a win/win in today's macroeconomic environment. The high initial coupon (6%-8%) provides a buffer during deflationary periods (as the case has been since 2008) and the switch to a floating rate above the interest-rate linked LIBOR provides protection against future inflationary concerns.

Now a new a catalyst has arisen in this sector. One-by-one, financial institutions have approached the market looking to right-size their balance sheet by tendering for their low-priced securities. A recent example is Bank of America, who went to the market offering a premium to the market price to purchase (for cancellation) $1.5 billion in low priced securities (including a significant amount of hybrids). In effect, they were offering just over $70 for securites that were trading at $60 or lower, a huge premium for bondholders. This action is mutually beneficial, as Bank of America lowers their overall debt levels by purchasing outstanding debt at a discount-to-par which benefits shareholders at all levels of the capital structure.

We have a number of hybrid issues in both the Vertex Fund and the Enhanced Income Fund from the likes of Wells Fargo, Aegon, RBS that we think are candidates for such an announcement. Redeeming their low-priced securities is in each institutions best interest to remain competitive.

We expect this theme to continue and are positioning ourselves to take advantage of this latest market trend.

until next time. . .

@The Vertex Team

For information on this update and the funds we offer, please contact your local sales representative:

Noel Dattrino

(Western Canada)

604.408.5660

Michael Lindblad

(GTA & Eastern Ontario)

416.200.4457

James Wilson

(GTA & Western Ontario, Maritime Canada)

519.902.7780

The opinions expressed in this document are those solely of Vertex One Asset Management and do not represent advice or solicitation. Statistical information is intended to provide you with information about funds managed by Vertex One Asset Management Inc. Important information about the Funds are contained in their Offering Memorandum or Simplified Prospectus which should be read carefully before investing. You can obtain an Offering Memorandum or Simplified Prospectus from Vertex One Asset Management Inc. The Offering Memorandum and Simplified Prospectus for Vertex One Asset Management Inc.'s Investment Funds does not constitute an offer or solicitation to anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. The funds are not guaranteed; their values change frequently and past performance may not be repeated.