Global Investment Limited In Crisis Mode- 48% of Its Net Assets Are In Bank Contingent Convertibles (CoCos).

It has been a long time since I last write-up on Global Investment Limited ("GIL"). GIL used to be one of my favourite counters as I find its market trading price to be grossly undervalued to its net asset value (which is mostly reflecting fair value accounting). Anyway, I have sold off most of my shares in GIL during September 2021 to October 2021 when it last traded at a high of S$0.154 to S$0.155 per share- my current residual shareholding is only 1 share which is an odd lot leftover from one of the shares for scrip dividends exercise.  Given that its price has slumped  by <27.1%> to S$0.113 per share and offering up till 6.7% dividend yield, is it a good buy now?

1. Banking sector crisis
Given the cracks appearing in the international banking systems, holders of Bank Contingent Convertibles (CoCos) are now being exposed to an all time high risk. CoCos are the lowest rung of bank debt created during the European debt crisis to buffer banking capital. CoCo bonds is structured around a loss absorption mechanism, so it is a product with extremely high risk.  When the regulatory authority makes a judgement that a bank is unable to continue its operation, it will reach the trigger point. This will force the conversion of CoCo bonds into ordinary shares or writing down of the principal of the bonds in accordance with the terms of its loss absorption mechanism. Holders of CoCo bonds might need to bear part of the loss or a total loss of their investment.

In short, the US$17 billion of CoCos held by bondholders of Credit Suisse are now worthless overnight with the takeover by UBS. The Swiss lender had 13CoCos outstanding issued in Swiss francs, US dollars and Singapore dollars.

2. GIL's exposure to CoCos

GIL has a whopping 47.7% of its net assets in CoCos. How much was its exposure to Credit Suisse is the big question mark here?

Parting thoughts

Personally, I think that this might be one of the worst time to be invested in GIL given the loss of confidence in the international banking systems. The demise of 3 US banks and 1 major European bank in a short span of just 1 week underlines how bad is the global economic climate.  I thought that GIL should actually reduces its holdings in risky CoCos and instead allocate more of its funds into global listed equities while waiting for the economies to rebound and the bull market to return.