Carclo Share Discussion Threads

[tradertrev] 18/10/2022 11:37

If the pension trustees have exposed pensioners (and shareholders) to a 40%+ reduction in the value of the scheme assets (as auggested in post 3343 then they should all be sacked (along with the investment consultants and fund managers) and replaced by people who understand the risks that are being taken. I'm confident that a vanilla equity portfolio would have produced vastly better results over the period that these LDI investment structures have been held and not exposed everyone to such volatility.
I have been deeply skeptical of LDI ever since it first appeared.

[1gw] 18/10/2022 10:28

Away from the pension scheme commentary, the rest of the TU struck me as better than the recent shareprice trend might have suggested.

Disappointing to read of the delay in ramp-up of new product lines and net debt increasing. But sales slightly ahead of, and operating profit in line with, the Board's expectations strikes me as good.

On outlook, the most significant comment may be on the expected increase in borrowing costs driven by the level of interest rates. This together with the continuing inflation and supply chain challenges perhaps explains the "need" for the new CEO.

"his experience in the plastics industry is what is needed in the business now."

[1gw] 18/10/2022 10:15

garth - yes, most of their assets are likely to have been hit to some extent. Diversified growth funds (£65m at end-March) are likely to have taken quite a hit over the period, as are unleveraged investments (not just LDI funds) in the "Bonds and liability-driven investment funds" (£88m at end-march).

But the main point for me is that because they had largely hedged their interest rate risk at end-March, we can't just look at the liability side of the equation and think that the big increase in discount rate means the big fall in estimated liabilities will translate through to a big fall in pension fund deficit.

What isn't clear to me is whether they would have felt obliged to tell us in this TU if they had moved materially away from 96% hedging, as a result of a conscious decision not to add to leveraged LDI funds as their value fell, or as a result of being forced by the fund managers to reduce leverage. I feel like they probably should have done, so my base assumption is that they are still largely hedged against interest rate risk, having met any margin calls on the way down.

[1gw] 18/10/2022 09:58

PWC have published their latest review of pension accounting trends which estimates the typical discount rate at 5.2% (median) at end-September compared to 2.7% at end-March. 2.7% is the actual discount rate used to evaluate the Carclo pension liabilities in the annual report (end-March valuation) so this PWC estimate looks like it might be reasonable for Carclo.

The AR estimates a £6.7m fall in liabilities for a 0.25% increase in discount rate. So a 2.5% increase in discount rate might be expected to cause a £67m fall in liabilities, although it's probably not strictly a linear relationship.

Total assets in the pension fund were valued at £156m at end-March. If they have fallen by something like £67m that would represent a 40%+ fall in value over the half-year.

End September:


End March:
[March]

[1gw] 18/10/2022 09:33

On the pension, it's difficult to tell but it looks like, at least until the end of September, they chose to and were able to keep LDI hedges in place as was detailed in the annual report:

"Approximately 96% of the Scheme’s funded liabilities are currently hedged against interest rates using liability-driven investments." [AR statement]

The result then being a big drop in estimated liability values due to the rise in discount rate, but an almost equally big drop in actual asset values due to the fall in value of assets in LDI funds, and possibly sale of other assets (at values much lower than the annual report valuation) to meet LDI margin calls.

"...both asset and liability values reducing significantly during recent high volatility in equity and bond markets." [today's TU]

[garth] 18/10/2022 09:24

The Group pension scheme IAS 19 accounting deficit has reduced slightly since March 2022, with both asset and liability values reducing significantly during recent high volatility in equity and bond markets.

Does that reduction in asset values imply liquidation to meet margin calls, as discussed last week?

EDIT: Actually, typing without thinking on my part - equally could be reduction in underlying asset values or a combination of both.

G.

[wigwammer] 18/10/2022 08:48

Yes, as expected if not slightly better. And no big warning about pension blow up, in fact slight fall in IAS deficit to end September.

[jackbal] 18/10/2022 08:43

Hello SOS100,
That trading update is pretty much on line with mgmt expectation (is actually think the market expected worse)
I’ve been buying back in to Carclo from 19 down.
I think there’s good value here and bottom can’t be far off imo and I’m having a few more

[fostany99] 18/10/2022 07:44

As expected

[fostany99] 18/10/2022 07:44

As expected

[sos100] 18/10/2022 07:27

Any views on todays update....

looks good to me

[zho] 14/10/2022 14:51

Yes, nearly, but they haven't recovered yet!

[tradertrev] 14/10/2022 14:46

I think that Japan's debt currently sits at about 300% of GDP

[zho] 14/10/2022 14:31

>>I remember 'money week' stated no country has ever recovered from the amount of debt Britain now carries....>>

I thought that the UK's debt stood at 250% of GDP at the end of WWII?

[beeezzz] 13/10/2022 22:17

Obviously when Brown changed rules on pension dividends, was the beginning of the end for final salary pensions.

I can see the day when these pensions will have to be reduced, if the country is willing to let companies go bust over pension payments,it will be the end.....

I remember 'money week' stated no country has ever recovered from the amount of debt Britain now carries....We are heading towards a Greek tragedy, we all know how that turned out.

[ali47fish] 13/10/2022 13:57

william black whoever he is is adding to his holding

[1gw] 12/10/2022 20:32

Looking further at the AR, I see they quote "present value of funded obligations" at [correction] £182m at the end of the financial year. So if this is the same as the "funded liabilities" in the hedging statement then 96% x £182m = £175m was hedged against interest rates.

The funds talk about 3:1 leverage. So to hedge £175m might require £175m/3 = £58m of investment in the fund.

Say they had £58m invested in the fund, hedging £175m of liabilities, i.e. they are exposed to £175m of gilts through the fund for their £58m investment (the rest is essentially borrowed I think). As gilt yields rise the value of the fund falls, as do the liabilities they need to hedge, assuming the AA corporate bonds are moving in line with the gilts. But they're leveraged on the investment so that causes difficulties on the way down.

Say the value of the gilts falls by 20% or £35m to £140m and that the value of their pension liabilities also falls to £140m (AA bond yields moving in line with gilts). The value of their investment in the fund has gone down by £35m, so they now have £23m in the fund, enough to hedge only £69m of gilts at 3:1 leverage. So if they want to continue to hedge the £140m they have to meet a margin call for the balance of £24m (£140m/3 = £47m).

What do they do? If they think this is the beginning of a big and sustainable move in gilt yields then they might choose not to increase their investment in the fund and instead let their hedged position reduce (to the £69m in the example above). However, the whole point of the position is that it is a hedge against their liabilities, and after a historically large move in gilt yields their biggest concern might be that yields snap back down again. So the easier decision is probably to leave the hedge in place and meet the margin call, at least while they have cash on hand to do so. It gets a bit trickier when they get short of cash and have to consider selling other investments to meet the margin call. But again, the path of least resistance, at least at the start of the move in gilts, is probably to try to maintain the hedge and sell some liquid assets (gilts!) to raise the cash.

The truth is, we just don't know. They might have decided to reduce the percentage of liabilities hedged as gilt yields rose. Or they might have tried to keep it unchanged. Their fund manager might have chased them for margin, or might have insisted on a reduction in leverage.

I am by no means an expert in this area, so could be materially wrong in the above analysis - but I find it an interesting area so happy to discuss alternative views on what might be happening.

No advice intended.

[wigwammer] 12/10/2022 19:30

The £20m of course was picked out of thin air btw! A "proposition" of £88m is all we know.

[wigwammer] 12/10/2022 19:29

Good questions, 1gw. But it isn't clear to me whether BMO or the Carclo scheme are responsible for honouring the margin calls. The BMO fund offers them a "degree" of matching, it helps diversify and offset some of the interest rate risk, and perhaps the fund is now worth zero and they have lost all they put in. But beyond that original investment - perhaps £20m or so - Carclo have no further exposure. On the other hand, as a result of the 200bp rise in AA bonds - the liability has shrunk £60m...

[1gw] 12/10/2022 17:59

The danger (at least potentially) is in the leverage though. Consider these statements from the AR:

"Approximately 96% of the Scheme’s funded liabilities are currently hedged against interest rates using liability-driven investments.

Note that the Scheme hedges interest rate risk on a statutory and long-term funding basis (gilts) whereas AA corporate bonds are implicit in the IAS 19 discount
rate and so there is some mismatching risk to the Group should yields on gilts and corporate bonds diverge."

That appears to say that as the funded liabilities went down because AA corporate bond yields went up, the liability-driven investments would also have gone down (96% hedged). So that raises three questions:

1. What do they mean by "funded liabilities" (which accounting measure) or rather how material are the unfunded liabilities which presumably are not hedged and so would benefit from the rise in yields?
2. Did they at some point get closed out on, or walk away from, the LDIs as they went down, or did they continue to increase the position (meeting margin calls) to maintain the hedge?
3. Have yields on gilts and corporate bonds diverged sufficiently during the market dislocation to have a material impact on the hedging position?

[wigwammer] 12/10/2022 17:27

I agree, gw1, more transparency would help. Just checked again the sensitivity on the liability side to a 1% move in the discount rate = £30m... seems crazy if true... so the circa 200bp increase in the AA Corp rate would result in a circa £60m reduction in the IAS liability. That equates to nearly three quarters of the £88m held in bond and LDI. Be pleased if someone could double check this..

[1gw] 12/10/2022 16:37

That 2nd point is what I hope we might get some commentary on for Carclo's pension scheme in the TU. "A proportion of the Scheme's assets" provides no meaningful transparency, especially since the LDI funds are leveraged.

[wigwammer] 12/10/2022 16:28

Hmm.. the article fails to make two key points, IMO. 1) Bank of England policy has been inappropriately expansionary for around 20 years - effectively a teaser rate which has allowed vast amounts of debt to build up in the system. It has got to such a level, that now even normal expansionary fiscal policy - such as the recent mini budget - is met by immediate market resistance. They have printed money, allowed debt to build, undermined stability. That is what the Bank of England DO.2) The losses on LDI will be confined to that portion of pension assets invested in LDI, a fraction of the total. But by entirely failing to quantify this amount, all the article does is contribute to the frenzy. It does nothing to scale the problem. So well done to the guy for his post event commentary, but it doesn't help us quantify the risk, and thus predict what is going to happen - and that's the valuable bit. ATB

[1gw] 12/10/2022 16:21

Looks like the Outlook reminder on the Carclo site for the "Mid-October" trading update has been pushed back to 20th October, from 14th previously. However, if this was a firm date I would have expected them to change the "Mid-October" headline date rather than the Outlook link, so I think we're still left guessing when it's really going to be.

[1gw] 12/10/2022 14:36

Yes, not particularly reassuring.