Mckay Securities Share Discussion Threads

[nil desperandum] 18/7/2013 08:50

Yes, I liked that bit. Normally I'd ignore the M2M because it won't materialise, but the counterparties do have a couple of calls which could force M2M - hence this is a real potential saving. If no call, or no penalty then very significant upside!!

[jimbo3352] 18/7/2013 08:37

Bit of "a steady as she goes" trading statement with some minor lease renewals, a small acquisition at 11.1% initial yield and a marginal deterioration in voids but the best was saved to last: an improvement of 16p in the net tangible asset value [from 157 to 173pps I make it]

[ivancampo] 31/5/2013 14:40

Looks like it wants to move higher irrespective of the issues above....

[horndean eagle] 30/5/2013 17:34

PCTN and SREI took the funding from the insurance companies but they had to pay out to close the swaps. Not sure MCKS will be in a position to do so. These swaps currently have 20 years and 25 years to go. Rates will likely be higher in 3 years but even then you are looking at circa £25m to close them out. That crystalises the losses on the swaps and bring NAV down sharply. Suddenly the discount doesn't look that attractive.

[horndean eagle] 30/5/2013 16:08

Lord Gnome - Can you give examples of companies financing at lower margin rates than 300bp? MCKS will have to pay margin rates of this order on top of the swaps they are tied in to. It won't be 300bp above base rate or gilt yields. An insurance company may lend all in at circa 5% for 10 years. In the meantime MCKS will have to pay the counterparty they have the swap with the difference between that rate and whatever the base rate is at the time. Its why they highlighted the problem in the statement.

[lord gnome] 30/5/2013 15:15

I don't agree HD. Other propcos have been refinancing at much lower rates than previously. They have been locking in current low rates. Deals have been struck with insurance companies who have been only too willing to advance money secured against property at 50% gearing. Take a look at SREI and PCTN.

[horndean eagle] 30/5/2013 14:24

I would be very wary of MCKS medium term. That swap liability is a huge millstone around their neck. The real problems will come about when the loans come up for renewal. It was highlighted in the results:-

The main financial risks to the Group are compliance with financial covenants on bank borrowing, major tenant default, lack of liquidity, interest rate hedging instruments and future interest rate costs on bank borrowings. The first of the Group's four standalone facilities, which are all on pre-recession low margins, is not due for renewal until February 2016. The future interest cost applicable to new facilities will be dependent on rates available at the time, but are likely to be higher.

I imagine the margin they are paying above swaps is circa 100bp. If they were going for debt now the banks are likely to charge 300bp. Add that to the swaps they are tied in to and they will be facing borrowing charges nearing 8%.

[ivancampo] 30/5/2013 07:56

From yesterday, fwiw.....IC VIEWWith a 5.6 per cent dividend yield, McKay's shares are useful for income. They would benefit hugely from a recovery in the south-east office market, which is increasingly attracting investors priced out of its more global London counterpart. Buy.Last IC view: Buy, 137p, 20 Nov 2012

[flying pig] 30/5/2013 07:32

Clarity would be helpful but I believe that the underlying risk of a big swap cost is fairly minimal. If the MCKS credit quality deteriorated the risk would increase but I think that unlikely in the short term.
ND is right, a probable bonus over time. Sit in SIPP and take the dividends until then.

[nil desperandum] 30/5/2013 07:07

Well, except that the basic NAV we're buying at takes into account the MTM swaps hit ... so if any of it is avoided then it's a big time bonus!

[scburbs] 29/5/2013 22:08

Agree with all that has been said today after a strong set of results. As a non-holder who is impressed with the business and interested in investing it is crazy that they make no effort to clarify thereby making it impossible to invest unless you are happy to buy at NAV (or are prepared to bet on interest rates being substantially higher come 2016).

[topvest] 29/5/2013 20:55

Thanks Jimbo - they would really help the share price if they explained this in plain english. I think my view is that there is unlikely to be any early close out. In which case all is fine and these are a buy when the opportunity arises. If there is a chance that the bank could demand cash it definitely makes you think twice about adding to your holding. Surely they could make it clearer!

[ivancampo] 29/5/2013 17:43

Wouldn't be surprised to see a few of the trades today show up as Director buys....

[jimbo3352] 29/5/2013 15:34

The link below gives some background info, see col 3 for credit breaks. I have edited my post 679 to try to clarify why I think the break cost would be much less than £50m

[coolen] 29/5/2013 14:40

I second that.
Someone should direct that exact question to one of the non-execs at the next AGM to ensure that they too fully understand.

[topvest] 29/5/2013 12:46

Yes, very good results.

Can anyone clarify exactly what this means as it seems clear as mud:

Interest rate risk
The Group adopts a policy of ensuring that its exposure to interest rate fluctuations is mitigated by the use of financial instruments. Participating swaps and interest rate swaps have been entered into to achieve this purpose. The swaps mature over the next 26 years and have swap rates ranging from 4.31% to 5.17%. Provision is made within the terms of the financial instruments for the counterparty bank to terminate the instruments by invoking credit breaks, the first of which is in 2016. If such a credit break were exercised, a payment would be made between the parties dependent on market value at that time. The instruments also provide the counterparty bank with additional break options from 2014. Should these breaks be exercised, there would be no payment liability on the Group. The Group does not hold or issue derivative financial instruments for trading purposes.

Could they be made to pay circa £50m or not in 2016?

[jimbo3352] 29/5/2013 10:06

An encouraging set of results. Yes the fair value adjustment of the swap both in the company and its associate has almost wiped out the profit but the investment property values have been resilient, the void rate is down markedly, the ltv has improved and epra net asset value has increased.

As scburbs has pointed out the accumulated fair value of the swap liability wipes out the surplus of epra net asset value over the share price. Personally I take a more optimistic view: interest rates have another 3 years to rise before the counterparty can exercise a break with payment in 2016. Break clauses are usually inserted to cover the risk of deterioration in credit risk which does not apply here. Even if the counterparty were to collapse the swap, the liability would I believe normally be calculated by reference to the fixed interest rate available to MCKS in 2016. In other words,even if MCKS suffered a break cost they should able to lock into a new lower fixed rate in 2016 and, when interest rates rise, enjoy the benefit.

[housemartin2] 27/5/2013 08:55

Thanks Scburbs. Looks like I understood more than I thought. Thanks for the detail. it confirms my unease with this company. After a small purchase a while ago, I have held off making further purchases for these very reasons. Looks like I was correct !

[scburbs] 22/5/2013 13:12

Jimbo3352,

By doing nothing I mean they have done nothing to negotiate away the banks options to terminate or reach agreement on extension. This is ignoring the separate question as to why they entered into such long dated swaps with a break option for the bank - madness (nothing wrong with long dated swaps provided you hold to maturity, so the last thing you want is a break option for the bank).

The longer they do nothing and the longer interest rates stay where they are the greater the prospects that the liability is a real liability that will be crystallised and the EPRA NAV should be ignored.

If they can negotiate an extension or issue an explanation of any conditionality on the banks option to break then that would help get investors (or at least me) more comfortable.

If they can hold the swaps to maturity then the liability is an illusion, it will tend to nil over many many years with the interest and swap payments funded out of future profits.

However, if the bank exercises and they have to pay it then it is a real liability that will have to be funded with more borrowings and even if they new borrowings have a lower interest rate this will no where near compensate for paying such a huge liability.

For me this issue is the difference between investable and uninvestable (at the current price). The company needs to be doing much more to deal with this. The very least they can do is provide clarity on the terms of the bank's break option.

[housemartin2] 22/5/2013 12:36

jimbo3352. Ref your last sentence, its only a cash cost if some action is taken either perforce ( because the contract with the lender has provisions which crystalise ) or the borrower takes some action to eliminate the swap. Falling interest rates do not, in themselves, cause a cash cost - unless I have failed to understand even more than I thought ?
Its the 'perforce' bits in the swaps contract that concern me as I do not really understand what they mean in the real world.( though all the above posts are helpful)

[jimbo3352] 21/5/2013 17:32

It's a little unfair on the company to suggest they have done nothing regarding the interest rate swaps. I recollect that in 2011 they paid c£6m to bring the swaps into line with the actual level of indebtedness, reducing the total swaps from £155m to £105m and improving the weighted interest rate charge from 5.9% to 5.3%. One factor which would cause the bank counterparty to exercise the break clause would be if the company remained 50% over-hedged.

An interest rate hedge could be compared to a fixed rate mortgage: in return for knowing what his outgoings will be the borrower incurs a potential liability for early termination charges, reflecting the cost to the lender (who may have a floating rate) of unwinding the transaction. If interest rates subsequently go down, the borrower suffers a cash cost and vice versa.

[lord gnome] 20/5/2013 20:06

But.... a number of other prop coys have had swaps in place and they have been expensive to run and even more expensive to break as this capitalises a loss. They are perfectly horrid and were no doubt mis-sold by our usurious banks. Probably seemed like a good idea at the time.

[patviera] 20/5/2013 19:50

Hi guys
The swaps are a non factor
The swaps liability will reduce to zero either because rates rise or just thru the passage of time.

Nav is 230 and I'm being paid to hold this as yield is around 7pct
A no brainer for me..my average in price is 130p.

[coolen] 20/5/2013 19:25

Don't fully understand either.
I assume that if rates stay low, there's an actual cash loss to face. But what if rates rise during 2015, would this reduce the liability ?

[jonwig] 20/5/2013 18:55

scburbs - right, I thought it was a mutual decision. I can't find any clarification. Page 56 of the 2012 AR doesn't help.