Ishrc � Discussion Threads

[scatty] 22/1/2009 23:50

Ptolemy - I am not convinced NRK bondholders have lost out yet. I have looked at some LSE codes and they still have reports of bond interest being paid under RNS (e.g 84YQ - refer link at bottom). However, the LSE site does not provide any current price info. Separately, I have a recent statement from a stockbroker including NRK 2015 MTNs and the market value provided is about 75p/£.

I think B&B is a different matter. Was it not allowed to fail, before HMT stepped in to divide the pieces?? If so, it was not a nationalisation of a going concern. Someone may wish to correct me on this. I believe there was a B&B bond issue which was due to mature just before Christmas - I'm not sure what happened.

Needless to say, if a big clearing bank was nationalised without value being given to bondholders by HMT, there would be a huge markdown across the sector - and the implications would be counter-productive immediately, and in the long term (how would you encourage private capital back?) The impact would also hit insurance companies, pensions funds and other banks in pulling their asset-values on balance sheets further down, and further stressing asset-liability matching. The flight of foreign investment would also be terrifying. I cannot envisage such an outcome (but we live in uncertain times!)



Separately, with SLXX tracking 46 constituents - I could probably tolerate two dropping out every year, as long as the remainder kept paying to replace capital lost! Are my sums correct?

[jimbox1] 22/1/2009 21:16

Mog, I think the point about quantitative easing is that the B of E buys bonds or equities, but doesn't issue guilts. The B of E just sends a cheque, so that is how money is created. When the economy picks up, it should reverse the easing, buy selling the bonds and equities back into the market, thus withdrawing the money previously created. It could even make a profit.

[mog] 22/1/2009 18:42

PS Ptolemy, your Dec 11 post was very perceptive, but like you I didn't expect the news from the banks to get so much worse. And that's useful to know about Northern Rock bonds, this govt just couldn't care less about savers.

[mog] 22/1/2009 18:35

Just looking at some potential upside with the government buying of corporate bonds coming up, anyone know whether the cash will come from issue of gilts or printing money? Seems a bit strange to issue gilts to buy corporate bonds as that would drive up gilt yields at the same time as tending to reduce corporate bond yields, but what do I know?! On the other hand I've read that this "quantitive easing" is a euphemism for printing money...

[ptolemy] 22/1/2009 15:06

Forgot to add FT recently reported that tier 1 bond holders were 'wiped out' in Northern Rock.

[ptolemy] 22/1/2009 15:01

As I posted on 11 December:

"I'm taking a rather contrary view and taking the position that diversity is NOT what is best in this climate but that CONCENTRATION is the best strategy. I'm putting most of my bond money into a select group of high quality bonds. Yields are high because defaults are expected to be high and this fund just tracks an index (the chosen constiuents are not managed). Some of the constituents will go under IMO. Either bonds are extremely undervalued or bond spreads are reflecting that defaults will be high. The rather laboured progress of SLXX (compared with my portfolio) suggests to me there are some laggards in the SLXX portfolio. The ailing gazelles will be picked off by the approaching tigers.."

Bonds in HSBC, Barc, LBG, Stan, etc all lost 9-12% yesterday and spreads widened considerably. A portfolio of say, BATS, tesco and Utilities went up.

Having said that I do hold some SLXX (I didn't expect the bank news to get so bad so early in the year).

[jonwig] 22/1/2009 14:05

Morgs - more or less, but actually it goes, for companies;

1. Administrator's expenses,
2. Taxman ...

I'm inclined to think that debt (secured or unsecured) would be honoured by HMGov as holders and potential investors may, in part, be overseas, and would write off any further involvement in UK (including gilts) if that defaulted.

[morgs] 22/1/2009 13:35

NRK and BB are 'in Administration' they are not bust. If my memory serves me right, that as Bonds are a Debt instrument issued by the Company, they sit at the same level as Trade Creditors, ie no different than the Company getting a loan from someone else. Equity, Prefs etc, sit right at the bottom of the pile and do get wiped out as their capital is allocated higher up the pecking order.

It goes (correct me if I am wrong)
1.Taxman (numero uno)
2.Staff
3.Trade Creditors (in Banks Depositors sit here)
4.Bonds and Debt Instruments
5.Prefs
6.Ords
7.(pond life?)

So as the structure is wound up each step is cleared and the balance passed down to the next, until it runs out which is where it stops.Technically a company is not bankrupt if +1p goes into prefs and wouldn't be in administration in the first place.

[mog] 22/1/2009 12:02

Just looked at the index that SLXX net asset value is based on - it's the Markit iBoxx £ Liquid Corporates Long Dated and can be viewed at www.indexco.com after registering. The price is updated only daily but by yesterday it hadn't gone below its October low of 87.8 and had risen slightly on the day to 88.7, which is some good news. SLXX has been trading about 2% above NAV recently but today seems to have retreated to its NAV after £600k of sales knocked it back earlier, which may explain some of the drop.

Alun, we can look at Northern Rock and B&B as examples of what happens to bondholders if banks are nationalised. From what I can see they haven't been wiped out, can anyone give any more detail on what's happened to them?

Now seems to be a lot of buying of SLXX since the £600k sales.

[alun rm] 22/1/2009 11:58

Kiwi,

I agree with you, the consequences of not honouring the debt would be disasterous! But bond values would plumet whilst we waited for clarification. Also, the government may consider some radical solution, such as swapping debt for equity, or offering a percentage below par.

Given that SLXX only holds top rated debt, I think that they would be forced to sell any bonds that were downgraded. I have no idea how that would play out in the event of a full nationalisation of UK banks. But I suspect that no one really knows what will happen if they nationalise. The consequences would be wide ranging and extremely painful for every UK citizen. Let's all hope that alternative solutions can be found.

[ted32] 22/1/2009 11:37

Kiwi

Me thinks that the UK will inflate their way out of it's debt obligations.

[kiwi2007] 22/1/2009 11:27

AlunRM - The UK has to honour it's debt obligations - it's not Iceland - taxes might have to go up a bit though !

[alun rm] 22/1/2009 11:03

Kiwi,

It is the uncertainty as to whether Lloyds and Barclays may need to be nationalised, along side the uncertainty as to what that will mean for their corporate bonds, which is sapping confidence in SLXX.

If they are nationalised then SLXX will get slaughtered, but even if all of their exposure to the UK banks is wiped out there is still value, unlike the equity holders!

[kiwi2007] 22/1/2009 10:44

They have a 9% exposure to LLOY, Barc and HBOS - maybe that's what's s[ooking the market... Hoever, I suspect that HMG would still honour those bonds even if forced to nationalise all three (sorry two).

[mog] 22/1/2009 10:37

Ptolemy, thanks I'll take a look at those threads.

The bonds I mention above aren't actually prefs as far as I know. There's a NRKP thread and this description of perpetuals: "If the issuer is liquidated, noteholders rank for repayment after other creditors (as they are subordinated debts) but before shareholders. Perpetual subordinated loans and notes are also called perpetuals."

Hence perpetuals rank below other bonds and so have fallen. But they haven't been converted to equity or defaulted as far as I can see. Hence the bonds in SLXX look safer than these perpetuals and so are even less likely to default.

[dasv] 22/1/2009 10:36

Phew, Glad I did some research before blindly following moneyweek. They have been tipping SLXX issue after issue, but have failed to point out exposure to bank bonds.

[the bounty hunter] 22/1/2009 10:21

Who issued the SLXX?

Price fall is tracking nav decrease

[alun rm] 22/1/2009 10:18

There she goes!!

The question is, how high does the yield have to go to before this paper looks attractive. Theoretically SLXX only holds top quality paper, but being overweight in financials is killing this fund.

Hey mathematicians, what does the yeild rise to if we hit 100? or even 90?, just out of interest.

[ptolemy] 22/1/2009 10:10

mog,
If you have the stamina there's some related info on the HBOA/LLPC threads.

My understanding is the other way round. Given that ordinaries are subordinate to prefs, a divi on the ordinaries cannot be paid unless the prefs are paid. Each pref has different articles but usually pref will be paid if there are sufficient distributable reserves.

[mog] 22/1/2009 07:44

Kiwi, Interesting article, but surely this is rubbish: "If a company is no longer paying dividends [to equity investors], then it cannot pay coupons".

I've been trying to find out what happened to Northern Rock and B&B bonds after nationalisation. The only bonds I can find are NRKP and BBM & BBN which are all perpetual subordinated bonds, which I believe rank below other debt and therefore have fallen a lot. Anyone know of any other bonds and what happened to them after nationalisation?

[hazelton] 22/1/2009 07:12

The chart just does not look like its rearing to rise up to me. If we get inflation in a while then these sort of bonds will erode. The recent drops in banks must reduce confidence in it if it holds a lot of financials.

[kiwi2007] 21/1/2009 22:36

The sting is in the tail of this report :o(


Corporate bonds to outperform gilts, says Leaviss
Natalie Kenway


Jim Leaviss, the manager of the M&G Gilt and Fixed Interest Income fund, says that corporate bonds will outperform gilts in 2009 unless the recession is worse than the Great Depression.

His fund has moved into an overweight corporate bond position and added to its high-yield exposure, he told advisers at the Joint Investment Forum in London today.


He predicts that we are two-thirds of the way through the recession, and anticipates more economic bad news regarding employment – which he predicts could reach 8% – and more corporate downgrades.

In the gilt market, he says that there are two competing forces that will affect returns. The huge issuance could depress prices and government debt could be downgraded from AAA to AA, but deflation, which is expected to hit Britain in the second half of 2009, will mean that gilts may perform well.

"However, I do think that corporate bonds will dramatically outperform the government bond sector. As a result, we have moved almost entirely into credit," he says.

Leaviss holds a bond from BAA, the airport company, which he says has a yield at maturity of 10.1%. It is a strong, stable business that he is confident will pay up, he says.

He adds that corporate bond yields– at 7.50% more in Britain and 7.75% more in America – are wider than during the Great Depression. In 1933 a BB bond yielded 7.25% more than gilts.

"This widening is justified as we are going into a default cycle, but I do not think it is going to be worse than the Great Depression. The default rate could edge up to 15% in the next five years, which is a similar level to the early 1930s, but even with the highest default rate in history, corporate bonds would still outperform cash."

He also points out that the rolling five-year average of global defaults between 1920 and 2007 is only 3% for BBB bonds.

Leaviss says, "The coupons are so high, corporate bonds can cope with defaults and price deterioration."

However, he is avoiding Tier 1 bank bonds, which he suggests will not recover. "If a company is no longer paying dividends [to equity investors], then it cannot pay coupons. When this bank debt defaults on its payments we go from buying a 10-year bond with a 9% coupon to a perpetual bond with zero coupon – the worst kind of bond.

"Also, if further bail-outs take place in the banks, tier 1 bank debt could be turned into equity and/or wiped out under nationalisation," he says.

[jimbox1] 21/1/2009 13:07

Dasv, My guess would be broad-based buying, maybe in line with the index. Given that the buying will be multi-billions it cannot be too concentrated. If the bond buying spree is successful in driving down yields, one would expect further bond issues from the banks.

[mac15] 21/1/2009 12:22

Sold some av.a prefs yesterday as started to drop (along with other prefs). Fall has continued today. I'm not sure if recent bank carnage has fully reflected on these yet considering percentage in financial.

[dasv] 21/1/2009 11:39

SLXX being a tracker of an index is more exposed to financials than some managed unit trust bond funds. (For this reason I went for M&G Corporate Bond instead)

Do any of you have any thoughts on if King is implying he will be buying the corporate bonds of financials over less distressed sectors?