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Provident Financial debt has become interesting

Gilts, bonds, and interest-bearing shares
Gan020
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Re: Provident Financial debt has become interesting

#396343

Postby Gan020 » March 17th, 2021, 8:29 am

Laughton wrote:Given the speed with which the FCA usually/historically operate though what danger do you see that PF won't make it through to September when the 21s (are due to) mature?


The price of the shares and the 23's suggest the market thinks these are safe enough. The market cap is £480m after the news so that's a lot of shareholder capital to chew through before the bonds become exposed

I wonder whether PFG will offer bondholders of the 21's the option to roll the issue into something new rather than let it mature.

PFG currently has a CET1 ratio of 34.5% and £145m headroom based on the current balance sheet but it might feel it prudent to roll perhaps half of the current issue? The other thing is it is reducing the exposure in CCD by lending less month on month so that's going to help improve their CET1 further.

I have a small amount totalling just over 1% of my portfolio across the two issues. I'm not too worried (yet) because if the market thought there were real risks here the 23s would be trading at 75p not 91p.

I find the law of the land poor as I believe group companies should have to stand by the actions of their subsidiaries, however in this case I find myself the potential beneficiary of a law I don't approve of! I'm not sure how I feel about that. Relieved it seems.

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Re: Provident Financial debt has become interesting

#396362

Postby GoSeigen » March 17th, 2021, 9:24 am

Gan020 wrote:The price of the shares and the 23's suggest the market thinks these are safe enough. The market cap is £480m after the news so that's a lot of shareholder capital to chew through before the bonds become exposed


Wow, amazing statement. Market cap is NOT NOT NOT shareholder capital.

GS

Gan020
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Re: Provident Financial debt has become interesting

#396388

Postby Gan020 » March 17th, 2021, 11:16 am

GoSeigen wrote:
Gan020 wrote:The price of the shares and the 23's suggest the market thinks these are safe enough. The market cap is £480m after the news so that's a lot of shareholder capital to chew through before the bonds become exposed


Wow, amazing statement. Market cap is NOT NOT NOT shareholder capital.

GS



I think it likely most are aware that market cap is not shareholder capital and it reflects what investors think the company is worth. Also we are aware that in general the market cap is more dependent on the future value of profits rather than net assets (Tesla being the most extreme example). I'm happy to accept I may be wrong on this view.

The market cap does however give some reflection of the value of the company (and therefore it's abilty to do a rights issue for example). With a £480m market cap a rights issue of £100m would be easy enough. Not so easy if the market cap was £50m. These things have to be taken in context.

On reflection it's clear I should have chosen my words more carefully and I'm happy for you to point it out as it's important no-one is misled into thinking that the company can absorb £480m of exceptional costs from it's market cap before the bonds will be in trouble.


Is the "wow, amazing statement" necessary though? Perhaps I'm being over-sensitive?

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Re: Provident Financial debt has become interesting

#396467

Postby GoSeigen » March 17th, 2021, 3:35 pm

Gan020 wrote:
GoSeigen wrote:
Gan020 wrote:The price of the shares and the 23's suggest the market thinks these are safe enough. The market cap is £480m after the news so that's a lot of shareholder capital to chew through before the bonds become exposed


Wow, amazing statement. Market cap is NOT NOT NOT shareholder capital.

GS



On reflection it's clear I should have chosen my words more carefully and I'm happy for you to point it out as it's important no-one is misled into thinking that the company can absorb £480m of exceptional costs from it's market cap before the bonds will be in trouble.


Is the "wow, amazing statement" necessary though? Perhaps I'm being over-sensitive?


I was amazed, maybe over-reacted. But really market cap as you clarified is only a measure of the popularity of the share and little else. It's a measure of investors assessment of a very long stream of future cashflows and that estimation can change overnight without any corresponding material change in the actual company or its business or its net worth.

When it comes to protection of bondholders, the important metric is how much actual capital is ahead of the debt. Now the accounts may be lying about this number, that is always a risk, but at least it is a concrete, objective amount. In analysing the company it can be adjusted for vanishing goodwill, bad loans etc to give an idea of how bullet proof the debt is. People did this on the old TMF banking boards to pretty decent effect in the banking crash, where the market valued market-cap at zero, but we bond buyers decided there was actually a decent equity buffer protecting the bonds and were happy to buy them at huge discounts and then see their values rise rapidly as the market came to appreciate their solid position.

There's certainly a school of thought that the market value of a company is the best estimate of the value of a company at any moment but I think that idea is deeply flawed: it's very hard to marry it with the extremely sharp movements in valuation which can happen in a short time without any obvious associated real-world changes.

I think reading Gan020's latest post we are in broad agreement on this point.

GS

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Re: Provident Financial debt has become interesting

#396529

Postby 88V8 » March 17th, 2021, 7:59 pm

GoSeigen wrote:...market cap as you clarified is only a measure of the popularity of the share and little else. It's a measure of investors assessment of a very long stream of future cashflows and that estimation can change overnight without any corresponding material change in the actual company or its business or its net worth.

If the CCA does not come to pass, I think we will see a rapid evaporation of popularity.
Albeit with reason.

Not selling the 21s, nor buying. One of those decisions will be wrong ;)

As to the ytm, they will roll over, will they not? Keep the cash in the company....
Wonder what the new coupon will be.

V8

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Re: Provident Financial debt has become interesting

#410672

Postby Wozzitworthit » May 10th, 2021, 7:48 am

Closure of their "Doorstep Lending" division now confirmed

https://www.londonstockexchange.com/new ... t/14969103

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Re: Provident Financial debt has become interesting

#410715

Postby 88V8 » May 10th, 2021, 10:29 am

Wozzitworthit wrote:Closure of their "Doorstep Lending" division now confirmed

And sufficiently well trailed that it has been greeted by the market with a resounding yawn... :)

V8 (still neither selling nor buying)

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Re: Provident Financial debt has become interesting

#410765

Postby hiriskpaul » May 10th, 2021, 1:33 pm

88V8 wrote:
Wozzitworthit wrote:Closure of their "Doorstep Lending" division now confirmed

And sufficiently well trailed that it has been greeted by the market with a resounding yawn... :)

V8 (still neither selling nor buying)

I have looked through the accounts and other than CCD they are doing well, considering the pandemic. It looks like they may lose about £100m running down CCD and paying compensation. I think there is a risk here though that the FCA will not let them get away with capping the future compensation liabilities at £65m. They may insist the group increases this cap, or even pay every claim in full. In a worse case scenario that might mean the group having to sell off Vanquish. Then we really would be in a mess.

I have decided to sit on my hands for now as well. The 23s would be a cracking buy though if Provident get away with this.

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Re: Provident Financial debt has become interesting

#410789

Postby Laughton » May 10th, 2021, 3:06 pm

Hmm - still sitting on my 21s on the basis that 4 months is simply too short a time for the FCA to decide what to do, given their history.

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Re: Provident Financial debt has become interesting

#410853

Postby 88V8 » May 10th, 2021, 7:16 pm

Laughton wrote:Hmm - still sitting on my 21s on the basis that 4 months is simply too short a time for the FCA to decide what to do, given their history.

So, do you think they will redeem?
Rather than roll over? Which I expect.

V8

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Re: Provident Financial debt has become interesting

#410975

Postby Gan020 » May 11th, 2021, 9:44 am

88V8 wrote:
Laughton wrote:Hmm - still sitting on my 21s on the basis that 4 months is simply too short a time for the FCA to decide what to do, given their history.

So, do you think they will redeem?
Rather than roll over? Which I expect.

V8



My guess is that they will roll about half the existing £65m issue.

By closing the home credit business they are going to collect a decent proportion of the cash they have lent out. Set against this will be the cost of redundancies and diseconomies of scale as they wind it down.

Having said that I am unconvinced the exit around the home credit division will go as smoothly as expected. I suspect the FCA are not impressed. They've got a banking licence and good bankers don't just dump their liabilities onto consumers on the basis that otherwise it brings down the whole business. I suspect the FCA will continue to not act on an immediate basis.

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Re: Provident Financial debt has become interesting

#410999

Postby Laughton » May 11th, 2021, 11:34 am

I'm betting (that's probably not the best terminology for a fixed income investment) that they will want to roll over some and offer an incentive to do so.

For me I will decide come September whether the incentive is enough. Fingers crossed it doesn't come crashing down before then.

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Re: Provident Financial debt has become interesting

#411027

Postby hiriskpaul » May 11th, 2021, 1:16 pm

I have little doubt they will be redeemed. These are senior unsecured bonds and not redeeming would put the company in default. The bonds are not capital securities that require permission to redeem from the PRA and there is no option not to pay the coupons or principal on maturity date.

The only thing that might stop redemption is the FCA stepping in and taking control of the Group using its powers of resolution. Or the company going into administration before maturity for some other reason. Or I guess some kind of restructuring with the agreement of shareholders and bondholders, but there is little time for that, nor any need at present.

The bonds (and the 5.125% 23s) can be redeemed at par earlier than the maturity date, but not later!

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Re: Provident Financial debt has become interesting

#411170

Postby 88V8 » May 11th, 2021, 7:55 pm

hiriskpaul wrote:The bonds (and the 5.125% 23s) ....

It surprises me that the 23s (66WS) show little movement.
Ytm c 7%, not much risk premium there.
Still sitting on my hands.

V8

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Re: Provident Financial debt has become interesting

#411262

Postby Gan020 » May 12th, 2021, 8:48 am

88V8 wrote:
hiriskpaul wrote:The bonds (and the 5.125% 23s) ....

It surprises me that the 23s (66WS) show little movement.
Ytm c 7%, not much risk premium there.
Still sitting on my hands.

V8


The 100k minimum 23's are at 8%

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Re: Provident Financial debt has become interesting

#411264

Postby Gan020 » May 12th, 2021, 8:53 am

hiriskpaul wrote:I have little doubt they will be redeemed. These are senior unsecured bonds and not redeeming would put the company in default. The bonds are not capital securities that require permission to redeem from the PRA and there is no option not to pay the coupons or principal on maturity date.



I have a question. IPF1 was "rolled" into IPF2 and ALP1 was "rolled" into ALP2. There are other examples.

Are we using the word "rolled" loosely in that what actually happenned was that IPF1 was redeemed in full and the bond holders given preference in buying IPF2. So, yes their was no default on IPF1 but the bond was just refinanced with a new issue in the same way I'm sure Lloyds or Aviva or BP do in their normal course of business

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Re: Provident Financial debt has become interesting

#411454

Postby hiriskpaul » May 12th, 2021, 6:51 pm

Gan020 wrote:
hiriskpaul wrote:I have little doubt they will be redeemed. These are senior unsecured bonds and not redeeming would put the company in default. The bonds are not capital securities that require permission to redeem from the PRA and there is no option not to pay the coupons or principal on maturity date.



I have a question. IPF1 was "rolled" into IPF2 and ALP1 was "rolled" into ALP2. There are other examples.

Are we using the word "rolled" loosely in that what actually happenned was that IPF1 was redeemed in full and the bond holders given preference in buying IPF2. So, yes their was no default on IPF1 but the bond was just refinanced with a new issue in the same way I'm sure Lloyds or Aviva or BP do in their normal course of business

Ah that's different! As you say, no default with that kind of thing as long as the arrangement is entirely voluntary and holders can simply accept redemption instead.

I would question how much borrowing is needed at the Group level once CCD is run down, which may happen very quickly. Vanquis can borrow really cheaply at present and they don't seem to be trying too hard. On the 5 year fix they are only offering 0.5%.

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Re: Provident Financial debt has become interesting

#415324

Postby 88V8 » May 26th, 2021, 3:35 pm

Amigo has had its proposals for short-changing customers thrown out by Justice Miles in the High Court https://www.irishtimes.com/business/financial-services/court-rejects-rescue-plan-for-subprime-lender-amigo-1.4574689 (other newspapers are available) which may have read-across to Provident.

So far, no effect on PF21 or 66WS.

V8

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Re: Provident Financial debt has become interesting

#415547

Postby murraypaul » May 27th, 2021, 11:53 am

The FCA's statement is a pretty clear shot across the bows:

https://www.fca.org.uk/news/statements/ ... high-court

This is an important judgment and any firm considering a scheme of arrangement should take it into consideration.

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Re: Provident Financial debt has become interesting

#415674

Postby murraypaul » May 27th, 2021, 10:06 pm

The Amigo judgement is available on Bailii: https://www.bailii.org/ew/cases/EWHC/Ch/2021/1401.html

On the face of it, much of the FCA's objections, which were accepted by the judge, seem to apply to Provident as well.

In the first place the impression that would have been conveyed by the Explanatory Statement to a financially unsophisticated consumer in the position of the Redress Creditors was that a formal insolvency would be the automatic and immediate consequence of a negative vote about the Scheme. Creditors could therefore decide to accept something (10% with a chance of something more or less than that) or nothing. In my judgment, given the nature and capacities of the constituency of Redress Creditors, the Explanatory Statement failed fairly and fully to explain to those creditors the realistically probable alternatives. As already explained, if this particular Scheme is not passed and approved, the informal moratorium on payments to Redress Creditors will continue and this will give a breathing space for the directors to explore further restructuring proposals. There is no pressing cashflow or other reason for the directors to decide to place the Group into an immediate insolvency. Again as already explained, I would expect the directors, in light of their statutory and fiduciary duties, to liaise further with the FCA and give careful thought to further restructuring proposals. I consider that the Explanatory Statement gave the constituency of Scheme Creditors the false impression that, absent this Scheme being passed, the directors would have no choice in the matter and that insolvency would be automatic and imminent.

The Redress Creditors would also have very little grasp of the usual range of outcomes available to distressed companies seeking to recapitalise themselves. They are unlikely to have understood that the choice was not necessarily the binary one presented – it's this Scheme or nothing.

Secondly, I accept the submission of the FCA that the Explanatory Statement should have explained the basis on which it was being proposed by the directors that the shareholders were to retain the full equity interest and that this was in the best interests of the Scheme Creditors. This was far from a financially literate or experienced audience and it is most improbable that the Redress Creditors (or at least many of them) would have appreciated that the shareholders rank last in a company's corporate structure and that (accordingly) it is commonplace in corporate restructurings for the equity holders to be compelled to sacrifice at least part of their interests. There was nothing to explain why the directors of the Company were proposing that the shareholders should (subject to the contributions of ALL to the Scheme Fund) retain the whole of their interest in the Group while the Scheme Creditors should accept a 90% haircut. There is no material or analysis to explain why the directors were saying that this outcome was in the best interests of the Scheme Creditors (as expressly represented by the Explanatory Statement). There was indeed no financial information or analysis at all to explain the allocation of the financial sacrifices of the two groups of stakeholders.


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