Gen.acc.8se.pf Discussion Threads

[gary1966] 18/9/2009 14:19

enviro,

I think that time was the end of last week when you could have sold GACA for £1.09 and bought NWBD for 74p. Now you can sell NWBD for 87p. Mandatory coupon with scrip alternative if insufficient distributable reserves, which they have bundles of. EU isn't even challenging the mandatory coupons and so still a fantastic buy after the recent rise imho.

[envirovision] 18/9/2009 11:55

It may well make sense to switch out of these one day, but i suspect that could be a few years away imo, unless you know something i dont?

[mac15] 17/9/2009 17:43

Hi Enviro,by rerating I meant the SPs which have been very strong for a while. Sometime in future it will make sense to switch out of these into something else, but for timing you need good idea when "fair value" has been reached. I don't think thats anywhere near yet. Most big yields in ordinaries were imaginery and now gone which makes prefs more attractive.

[envirovision] 17/9/2009 16:04

Hi mac, theres not a general re-rating of prefs but aviva is likely to be under review for a couple of the agencies to issue improved ratings a couple notches. So in a word, yes its exactly where its heading, BP.A being a good indicator and infact you can argue a fair bit higher for them to go as well

[mac15] 17/9/2009 15:29

Now the threat of going bust have passed, the price level on these should be driven by interest rates and inflation. There is certainly now a rerating of prefs taking place. In "normal times" GACA and AV.A had comparable share price to BP.A. As BP.A is now around 150 is that where GACA is heading?

[badtime] 12/9/2009 20:11

Useful post tht...saw it on the nwbd thread

[gary1966] 12/9/2009 10:23

Enviro,

Hopefully this helps allay your concerns. Couldn't dream of writing a piece like this myself and so will just cut and paste.


WShak - 11 Sep'09 - 23:29 - 395 of 396



I thought it might be a good time to review the different products available to investors who are interested in RBS's hybrid debt, which still yields between 15% - 20% in its varying forms. Each one has a slightly different risk profile, with accompanying rewards but there are still some glaring anomalies which the market has yet to correct.

I believe there are four different basic risks which apply to RBS hybrid debt:

1. Nationalisation
2. Coupon deferral due to EC pressure or management discretion
3. Coupon deferral due to lack of distributable reserves
4. A debt for equity swap, although this may be a profit opportunity rather than a risk.

Those who believe that there will be no coupon deferral should probably plump for the RBS Argon Series 1 Sterling bonds (ISIN XS0323839042) at about 44p. It is the highest yielding and coupon deferral on these would have the greatest impact on capital restrictions for RBS going forwards. The next dividend after the one just declared is to be Sep 2010 so failure to pay out on that would put RBS under severe restrictions until Sep 2011, unable to redeem pari passu or junior capital or pay a dividend on ordinaries. I also believe that the payment of a single day's interest on HMG's proposed B shares after Sep 30 2009 would make the entire payment to Argon holders on Sep 2010 mandatory. Finally, after Sep 2012, these bonds revert from an interest rate of 8.162% (paid annually) to quarterly payments at LIBOR + 2.33%. Some might view that as negative but I see it as a positive. There is no way of knowing what state the world economy will be in in a few years time – it's changed dramatically in just six months – and the variable rate will be a natural hedge against inflation. If rates stay low, there will still be demand for the Argons as long as RBS is in the clear by that point.

As has been discussed, there are different series in the American dollar prefs, with three of them (RBS-F, RBS-H and RBS-L) having slightly more protection than the others because they are viewed as debt so coupons are mandatory if there are distributable reserves. EC pressure or board discretion should not enter the equation. Here, I believe it is therefore best to go for the F, H or L series over any of the others because this extra level of protection must have value. Of these, I personally favour the lower priced L series (assuming yields are equal) because of the greater upside in a future debt for equity swap.

Those who are ultra cautious have gone for Natwest sterling preference shares (NWBD), which offer a 9% yield on par but are currently priced at 74.5p. The reason that these are attractive to investors is because the dividend payment is mandatory so long as there are distributable reserves and Natwest (a subsidiary of RBS) has massive distributable reserves. Furthermore, it has been highly profitable throughout the crisis so the chances of coupon deferral look extremely low from a capital adequacy perspective. It is rock solid, whatever the ratings agencies think – I don't believe they can have read the prospectus. In the almost impossible event that the dividend is missed, it must still be paid in further preference shares in lieu of cash. I don't believe Collins Stewart, who recently announced dividend deferral concerns, can have read the prospectus.

There is one more option, however, that has been briefly mentioned on these boards but attracted very little attention. I have recently been heavily buying the dollar preference shares in Natwest (NW-C) at up to $13.10, which currently pay a dividend of $1.94 over four quarters, or a yield of about 15%. Remarkably, that is currently higher than the yield available on the later American dollar prefs in RBS, despite the protection on the dividend being so much greater. Historically, this has traded broadly in line with its sterling equivalent, NWBD, but it seems to have fallen out of step in the last couple of weeks. For those of a nervous disposition, they are an outstanding buy. If they get back to trading in line with NWBD they should be at $18.5. The only material difference is that, in the absence of distributable reserves within Natwest, there is no obligation on the bank to give more preference shares in lieu of cash as dividend payment. However, given the massive distributable reserves, this is really a non-issue and shouldn't have a material effect on the price. Either NWBD has to come down or NW-C must go up, assuming the exchange rates stays constant.

The Natwest interims announced recently are a thing of great beauty, showing pre-tax profit of £241m (down from £1.448b last year), even after huge impairment charges of £1.7b . I'm assuming that nationalisation would affect the Natwest preference shares but I'm far from sure about that since the company is in such good shape. Natwest debt holders shouldn't really give a monkey's about their parent since Natwest is a separate legal entity in it's own right, and clearly a very profitable one.



There is £13.2b of shareholders equity on the balance sheet so, given that the bank is still heavily profitable, Natwest looks bulletproof. A dividend yield in of almost 14% on NW-C prefs is quite remarkable.

On the topic of exchange rates, I know some will be wary of a weaker dollar affecting the rate of return from dollar based preference shares and I have some sympathy for that view fro those that aren't used to hedging. However, the current FX rate of 1.67 seems to be a decent entry point so I take the view that one is just as likely to gain from exchange rate movements as one is to lose out. Obviously, anyone who doesn't want the dollar exposure could always hedge it away at very little cost.

In summary, if I had to own just one security of those mentioned above, it would be the RBS Argons. My 'widows and orphans' pick would be NW-C, trading on the NYSE and after that, the L series. Fortunately, I'm not restricted and I have all three in size.

WShak

[envirovision] 11/9/2009 12:52

Yes but lloyds and rbs are special cases the debt has junk credit rating, they have been bailed out by the tax payer. Aviva have investment grade ratings being revised upwards and have not been bailed out.

Life/Pension funds are not allowed to hold this stuff, its not investment grade.

Its not like comparing apples and pairs, its like trying to compare chalk and cheese!

Still im sure your well aware of all this and the risks.

[gary1966] 10/9/2009 20:58

envirovision,

What do you think the implications would be for the life/pension funds if they did. Hybrid debt would be worthless if terms could be changed retrospectively. Would be carnage in the market I would have thought that would take down the likes of Aviva as well. Not saying there couldn't be some capital re-organisation but I would guess that it would be at a premium to current prices. Lawyers would have a field day.

[tiltonboy] 10/9/2009 16:32

Got it. Will e-mail you now. All will become apparent.

[gary1966] 10/9/2009 16:30

Edited off original message with my e-mail address.

New posting

Different view re bank prefs hence taking profits on 2/3 of my GACA holding and rotating in to NWBD. Coupon is mandatory subject to distributable reserves which they have an abundance of. If they don't pay the cash then they have to issue prefs as a scrip at a 4/3 ratio and so enhances the return. Based on cash divi, yield is now 12%, 16% if scrip divi. GACA about 8% currently, hence my decision.

EU didn't even stop the KBS from paying their mandatory dividends so not much chance of it happening on NWBD imho.

[tiltonboy] 10/9/2009 16:24

Gary,

Leave me an e-mail address, and I will come straight back to you. You can then delete it.

tiltonboy

[kiwi2007] 10/9/2009 16:24

Gary _ I occasionally use Fyshe Horton Finney Ltd - they're not experts on bonds (well not my local FHF one anyway) but the will work the market for you... that said I'll pay far more commission to them then Iweb or InvestDirect (HSBC).. though occasionally Iweb can be quite good if the markets quiet and you speak to the broker in their dealing room direct, but that's not always possible..

[gary1966] 10/9/2009 16:17

tiltonboy - rather than intimating about this wonderful broker, could you not just tell us the name and phone number. Is that not the point of a BB to share information? Why so secretive?

[tiltonboy] 10/9/2009 16:07

dave,

Very few at the moment, which is as much down to their substantial rise in recent months as anything else.

On the face of it, with interest rates and inflation low, they are all still attractive. However, concerns that problems may re-appear in the financials, leads me to be doing nothing at the moment. Yield chasers will push prices higher in the short term, but thereafter....

If I could pick up some CPBC in the mid 120's I would be pleased.

I have taken some money off the table in Corporate Bonds recently due to yield considerations, and I'm now looking for special situations in equities again. I've already mentioned the attractions of ICV elsewhere.

tiltonboy

[davebowler] 10/9/2009 15:54

What prefs are you keen on tiltonboy -I bought a few months ago CPBA, NWBD, 87UB and for general pref exposure recently HDIV as it is a bit below asset value.

[tiltonboy] 10/9/2009 15:30

You need to deal with a decent broker!!!

Tell me what you bought and I will see what I can get them at.

[envirovision] 10/9/2009 15:26

nope, tried td waterhouse quoted 66p but only after i reduced my order by 30k, so went for something else in the end

[tiltonboy] 10/9/2009 15:14

Not a buyer at these levels. Bought stock at 52p.

[envirovision] 10/9/2009 14:57

did you buy?

[tiltonboy] 10/9/2009 14:55

enviro,

I can find stock at 64p.

tiltonboy

[envirovision] 10/9/2009 14:53

I dont really understand the cpbc at discount because its 1.23-1.33 on crest only is it not? But 85UG would like some more but not at 70p, 64p maybe.

[tiltonboy] 10/9/2009 14:48

I can get prices on these prefs that on-line and normal brokers can't.

I bought CPBA at 49p when the price was 52-57p. I was buying CPBC at 120.5p when the quote was 120-130p.

LSE isn't the place to trade these stocks; there is a bigger universe of market makers than meets the eye.

[envirovision] 10/9/2009 14:30

til what broker ?