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Guaranteed Investment Contracts -
Another Name For Private Placement Bonds
Robert P. Blanchard, CFA
Director of Research and Assistant Vice President
Fiduciary Capital Management, Inc.

The implied lower level of liquidity may be the major reason for the next similarity. Both private placements and GICs have been shown to offer meaningful yield premiums over comparable quality and duration issues available in publicly traded markets. Research conducted by a major buyer of private placements has shown this to be true, while FCM’s own internal research has verified a GIC yield premium as a regular occurrence in the marketplace, with premiums averaging 40 basis points or more.

While these fixed income alternatives are alike in many aspects, there are also key differences, the most important of which is credit quality. Most GICs are issued by high quality insurance companies as investments within 401(k) plans. In contrast, the average credit quality of most private placements is typically lower, either at the lower end of the investment grade scale or below investment grade, because companies issuing private placements may find it more difficult or too expensive to raise capital in public markets.

A common thread throughout this article is that both private placement and GIC instruments are subject to negotiation, providing the flexibility needed by both investor and issuer. Both instruments are flexible to the point that, if it is mutually beneficial to all parties, renegotiation may also be a consideration, thereby regaining some of the liquidity lost in the absence of a broad secondary market.

In general, private placements and GICs are effective tools for the institutional investor to improve the performance of fixed income portfolios. Although differences between the two instruments dictate different uses, these investments provide valuable benefits that can be exploited with the appropriate knowledge. Moreover, with the high credit quality of insurers issuing GICs, the relatively low supply of public insurance company debt and the historic yield premiums, GICs are a valuable investment tool that can provide diversification and performance benefits to the traditional fixed income manager, as further evidenced by the strong historic performance of the FCM Stable Value Composite.

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