Lloyds Grp 9.25 Discussion Threads

[jonwig] 14/11/2009 17:49

Hi, David.

Your Para 1: Yes, if the coupon of 10.75% is paid, the NPV of the relevant ECN comes out at about 106p. (My calculation used 8.6%.)

Your Para 3: My LLPC are held outside a tax-wrapper, and I hadn't really thought of the tax implications so thanks for the reminder!

Your Para 4: The NPV of LLPC of 76p becomes 92p on the basis of the same calculation if you don't assume two missed years. So I'm really assuming (hoping!) that LLPC will act in the same way as a ZDP as resumption of dividends approaches.
Of course, there's risk: it's a UK-economy exposed bank, and the dealing spread might get uncomfortable if I need to sell.

The maths I'm using is "Geometric Progressions".
It's not easy to do maths notation here but this website is a pretty good introduction to the ideas:

[wilmdav] 14/11/2009 17:12

jonwig - using the same calculation basis and terminology (NPV = FPV in your earlier post?), NPV for ECNs looks to me to be 106p for standard rate tax payers if held in a tax wrapper. Presumably this is what they would be worth to non tax paying institutions in the less than probable event that LLPC did convert. In which case, EPNs would receive an immediate uplift in capital value in response to the demand (with a proviso that if LLPC converts it would mean demand is lower than the market is currently expecting).

For LLPC held in a tax wrapper, application for conversion to ECN looks like a no brainer for standard rate payers (SRPs). This is probably also true for higher rate payers ((HRP) but for the sake of simplicity I will stay with SRPs.

Outside a tax wrapper, the capital uplift referred to in paragraph 1 above would carry an income tax liability of 20% This assumes that LLPC ECNs would be classified as a 'deep discounted security', which needs checking. But that suggests an opportunity to sell any converted ECNs into the market, make a decent profit and reinvest, maybe even in LLPC prefs!

In the more likely event that LLPCs do not convert, they will also receive a capital uplift albeit a more gradual one up to the point where dividends resume. This will carry with it a capital gains liability of 18% less allowances. The gain can presumably be looked upon as missed dividends.

As a rough guide to what LLPC would be worth today without the interruption in dividends, NWBD's (9.0%) mid price is currently 84.75p. If the coupon were 9.25% I reckon the price would be 87.3p, which is 17.7p more than LLPC's current mid price of 69.5p. It would be an oversimplification but if you add 8.85p as virtual dividends in 2010 and 2011, LLPC's NPV becomes 92p - and that strikes me as a better reflection of the fair value of LLPC unconverted.

This does not mean that LLPC is worth more unconverted than converted because to be comparable, an estimated amount would have to be added to the equivalent EPN calculation to allow for the immediate capital gain.

If you, SteMiS or anyone would let me know if the above is rubbish, I would be grateful!

Finally,

FVP = 9.25/R^3 + 9.25/R^4 + 9.25/R^5 ...

where R is the discount factor (ie. R = 1.05 if the rate used is 5%).

A bit of maths gets FVP = (9.25/R^3)*[1/(1 - 1/R)].

The final equation works fine for an irredeemable with dividend gaps but not for an EPN with an end date. I can reach your 90p on a spread sheet but don't have the expertise to modify the equation to produce the same result.

Any chance of more help?

[jonwig] 12/11/2009 08:23

Kiwi - the TMF post suggests a rather low willingness to convert to ECNs higher up the waterfall than LLPC stands. hence the argument that LLPC will partially convert. I really don't go along with that!

Using a 10% discount rate I calculate the NPV of the relevant ECN to be 90p (net coupon 8.6%) against 76p for LLPC. So I'm going to opt for conversion and see what happens.

I really can't see the logic in LLPC being pushed down as low as it has been, so I agree with you there.

[kiwi2007] 11/11/2009 21:12

From...



Shows LLPC having an 'effective yield' of over 11% so why, taking into account the very favorable tax treatment of the prefs compared to the ECNs, are PIs not snapping these (LLPC) up?
I suspect I'm missing something?

[kiwi2007] 11/11/2009 10:46

Thanks guys - looks like I'll offer the LLPG as I prefer not to sell them due to the proceeds attracting lots of CGT. If it fails then I'll hold for the income in two years. Same with my LLPC and E - In fact I bought two more 5K (circa7500) slugs of LLPC this a.m. for my sipp and for my own account and I may buy more especially if the price falls further.

Jonwig - yes LLPG only runs to 2018.

Wilmdav - the nice thing about Kiwi's is that they are laid back - the worst thing about Kiwis in business is that they are laid back ;0)

[wilmdav] 07/11/2009 10:59

jonwig

Re LLPG. See the first post in the TMF thread of my previous post by daverees. I have not delved into it but would certainly do so if I held LLPG.

Your FVP calc are a great asset. The market is currently applying a discount rate of 11% to the LLPC offer price. Presumably yields on high class commercial bonds give an indication of what sort of discount rates would apply if a magic wand were to transform Lloyds into a safe bank tomorrow. At least, that's the process used for arriving at discount rates for pension scheme liabilities. Anyway they certainly give a pointer to what kind of yields LLPC would be providing post that magic wand. Not sure why an irredeemable should be higher than a 40 year.

23 year HSBC = 5.7%
40 year Barc = 6.8%
irred Barc = 8.0%

SteMiS

No probs at all with the spreadsheet. Now feeling much better equipped to make decisions on these prefs. In view is the percentage of my portfolio now in them I need to be!

[jonwig] 07/11/2009 08:52

Holding LLPC now is a bit like having a ZDP. In a couple of years' time, the NPV will have risen to 91p (same basis as my earlier calculation), and I'm sure there will be a lot of interest as the resumption gets closer.

Unlike some institutions, most PIs probably don't need the income stream immediately.

Kiwi - isn't LLPG in much the same situation? Or are there redemption issues?

[wilmdav] 06/11/2009 23:28

Many thanks jonwig. I'm well equipped now with your formulae and two spreadsheets, one from SteMiS and one from PertEagle on TMF. No need to aplogise for the explanation. You have no doubt saved me a lot of work.

kiwi2007
I have suffered the NZ internet service! Was out there for 3 months in 2006 (one month in Auckland).
I would recommend the Banking Board on Motley Fool. It's easy to pick who the star contributors are by the number of recs. There won't be a Lloyds pref that has not been mentioned. You will need to do a fair amount of sifting because the number of posts is considerable. With luck you should find LLBG mentioned in some titles. If not, I would focus on the heavily recced posts and see if its mentioned in one of those. Just noticed that LLPG is mentioned by daverees in this recent thread. He clearly knows what he is talking about.



Wilmdav (DukeofYork on TMF)

[kiwi2007] 06/11/2009 21:37

Thanks for the confermation jonwig - I guess I'll just continue to hold the few I've got and perhaps pick some more up.

My real query on what to do is with LLPG of which I have quite a few but unfortunately there's no LLPG board to ask on ADVFN. Being back in Auckland and with only intermittent internet access (and you thought BT was bad!)I'm well out of the loop unfortunatley.

[jonwig] 06/11/2009 17:36

Hi, David.

For (b) I did this:

FVP = 9.25/R^3 + 9.25/R^4 + 9.25/R^5 ...

where R is the discount factor (ie. R = 1.05 if the rate used is 5%).

A bit of maths gets FVP = (9.25/R^3)*[1/(1 - 1/R)].

Finally, add 4.625 to FVP as you'll get an immediate half-year dividend - it goes ex on 11/11.

As an improvement, use 4.625 instead of 9.25 and halve the discount rate (ie. 2.5% and r = 1.025):

FVP = 4.625/r^5 + 4.625/r^6 + ...

since my original assumed first payment at the end of year 3.

What discount rate to use?
I actually thought 10% (R = 1.1) would be a decent compromise between greater safety going forward and higher inflation (hence interest rates). That might be a bit cautious, but it gives me a FVP of 81p including the coming divi. So I was buying on Wednesday and Thursday.

I've given more explanation than you asked for - sorry about that!

[wilmdav] 06/11/2009 16:06

jonwig/SteMiS

Would you be willing to quote the formula used in preceding posts for producing:

a) net yield at a given price with a 2 year gap

b/ fair value price at a given discount rate with a 2 year gap?

No need for any interpretation or further explanation. It would give me a lead to explore the process further.

[jonwig] 06/11/2009 10:02

FF - the prospectus wasn't designed for oiks such as ourselves - nor were the offer terms!

[future financier] 06/11/2009 09:46

Why can't they just produce a simplified guide with key info like this that will give 99% of shareholders all the info they need - not all of us can spare the time to work thru 300 pages of a complex document searching out the fine detail!

[jonwig] 06/11/2009 07:27

Kiwi - yes, I think you are.

1) with the provoso that they have always been able to skip the pref divis, and that risk hasn't changed. (But the new precipice bonds make it much less likely.)

2) changing a settlement method is quite a lot of work, I'd think. (As opposed to setting it up in a new security.)

Another point - if none of the LLPC get converted to ECNs or cash/ords, trading needn't be illiquid, it will be much as before.

[kiwi2007] 05/11/2009 21:51

Just to clarify my understanding if I continue to hold these :
1. They will miss dividend payments for 2 years but continue from then on?
2. They will remain tradable in Crest as LLPC?

Am I correct in those assumptions?
If so I'm more than happy to keep them and collect the dividends thereafter.

[solomon9] 04/11/2009 20:36

TD Waterhouse can access Euroclear; spoke with them this evening.

[future financier] 04/11/2009 15:58

So are the ECN only going to be traded through Euroclear - is that the issue??????????

[jonwig] 04/11/2009 15:32

FF - nor, in fact, do I!

But, as far as I go, transfer of shares, etc, between owners needs to go through an appropriate clearer who transfers stock one way and money the opposite way.
For almost all UK stocks the transfer company is CRESTco. (When you sign a transfer form, it's called a CREST transfer.)

Most UK online brokers can't handle transfers by any other method. (Why? Probably because it would put up their costs.) The transfer method LBG are using is called Euroclear.

One question I can't answer: if you get your new 'Co-Cos' can you take a certificate of title and then arrange to move it to a broker which 'does' Euroclear. Possibly, unless transfer on acceptance from LBG to your broker in the first place involves Euroclear!

A couple of points - CRESTco is now part of Euroclear (that begs the question ...) and you just might have time to transfer your holding to a broker which is OK with Euroclear. Try T D Waterhouse, which I use.

[future financier] 04/11/2009 14:32

Don't fully understand the CREST issues - can you enlighten me.

[jonwig] 04/11/2009 14:31

FF - non-CREST is spooking pref holders, I'm pretty certain. Anyway, I've added to LLPC and will again, at least once.

[future financier] 04/11/2009 14:27

But, since the conversion into LLPC, I have always worked on the assumption that we were likely to miss a couple of years - and LBG will be desperate to restore some modest level of divis on the ords - so 2 years is probably about right for that as well.

[p@] 04/11/2009 14:22

Stem-It appears that the prefs will only have to start paying divs again if they want to pay a div on the Ord,might be longer than 2yrs.

[future financier] 04/11/2009 14:05

Just that I get worried when the share price collapses like it is at present - worry I am missing something.

[stemis] 04/11/2009 13:40

I agree Jon.

LLPC ranks 16th on ECA priority. The total of these top 16 comes to just over £8 billion so I think the change of LLPC getting any ECA are probably low. Since all my LLPC are held in crest, I cannot elect for ECN. So I will end up just having to keep the LLPC.

At the moment you can buy for 73p so even missing 2 years dividend the net yield is around 10.4%.

The capital fund raising and conversion to ECN must strengthen Lloyd's ongoing solvency and make payment of the dividends post 2012 more certain.

When all this is settled down I can see LLPC trading at 115p i.e. 7% effective yield (taking account 2 years missed dividends).

55% capital gain anyone?

[jonwig] 04/11/2009 13:24

FF - none at all!
That's just the position I've been looking at, and I've posted this elsewhere:

The idea of holding on to the prefs is worth considering, and my reading of the tender offer is that it might 'fill up' before all the prefs are converted, so forcing that choice on you.

But what are the prefs worth, assuming kept and divis paid from 2012? That depends on the DCF discount rate you use, but here are my results for LLPC (9.25% coupon):

10% 76.4p
9 86.5
8 99.1
7 115.4
6 137.2
5 167.8

So fair value now using a 10% discount rate to infinity. (In practice, the value should be higher, as the stock would be sold at some point, with a residual value greater than the discounted remaining dividend stream.)

And there's 4.625p dividend to collect, not included in the above.

I think 10% is a reasonable compromise between near-term low interest rates and inflation, but higher ones in a few years' time.
That tempts me to add (LLPC) if this weakness continues - maybe PIs selling out who haven't access to non-CREST services?

No-one seems to be taking any interest in this kind of thing, though!!