The Lemon Fool

Aviva's preference share announcement is rightly getting a lot of attention today, but strangely nothing about West Brom, who yesterday announced their tender for WBS 6.5% Permanent Interest Bearing Shares for the princely sum of 52% of par! What would preference shareholders think of that I wonder?

Anyway, the fundamentals of the deal seem to be broadly the same as announced in December, 51p per 100p nominal plus a 1p bung for being co-operative! Professional investors get to take part in an exchange consisting of (roughly from memory) 41p cash plus about 27p worth of a new AT1 (I think) security for each PIBS. Since this is a "complex investment" it is not promotable to retail investors under current regulations, so only the tender offer for plebs.

They have given details of what they consider a professional investor and it is basically compiance with certain definitions in European and FCA regulations. I am hoping I will be able to get registered as a professional investor for the purposes of the exchange on the basis of experience and net worth.

Does anyone anticipate I'd have difficulty with this? Has anyone tried to do the same with other LMEs?


Very interested in others' experiences and general thoughts about the LME.


GS
[EDIT: should just add that bizarrely, for anyone who can take part in the professional-only exchange, WBS is still available in reasonable size at 53p so a tasty 25%+ profit available in 1 month]

GoSeigen wrote:Aviva's preference share announcement is rightly getting a lot of attention today, but strangely nothing about West Brom, who yesterday announced their tender for WBS 6.5% Permanent Interest Bearing Shares for the princely sum of 52% of par! What would preference shareholders think of that I wonder?

If you had an institution whose irredeemable bonds were such junk that 13% was the required market return, a price of around 50p would seem about right.

Are WBS in default or near default on their PIBS? I know they got hit with mis-selling issues some while back.

https://www.theyworkforyou.com/debates/ ... -24a.400.0

and others more recent.

Alaric wrote:If you had an institution whose irredeemable bonds were such junk that 13% was the required market return, a price of around 50p would seem about right.

How did you work that out? You don't know the terms of the bonds or even if they are in default or not. I believe you simply plucked that figure out of the air.

[EDIT: Or at the minimum you are talking about a hypothetical which has nothing in common with the topic of this thread.]

GS

GoSeigen wrote:How did you work that out?

It's not difficult. If you have an undated security paying a coupon of 6.5% and there's a price of around 50p, that represents a theoretical yield of around 13%.

Alaric wrote:

GoSeigen wrote:How did you work that out?

It's not difficult. If you have an undated security paying a coupon of 6.5% and there's a price of around 50p, that represents a theoretical yield of around 13%.

The above proves you can do primary school maths but as I said:

GoSeigen wrote:[...] you are talking about a hypothetical which has nothing in common with the topic of this thread.

Has anyone any experience qualifying as a professional investor?

GS

GS - As you know I cut my WBS as soon as I heard about the tender and I haven't looked at them since. My gut feeling is they will do everything in their powers to fleece you and claim you aren't a professional investor, it seems to be the way of the world these days.

I'd been thinking about selling BOI for a while now but held off as they always felt pretty safe, I tried to get a bid this morning and only 1 mm would give me a price and that was 180! Interestingly the offer hasn't come down so I guess there's no trade in them.


Kenno

GoSeigen wrote:Anyway, the fundamentals of the deal seem to be broadly the same as announced in December, 51p per 100p nominal plus a 1p bung for being co-operative! Professional investors get to take part in an exchange consisting of (roughly from memory) 41p cash plus about 27p worth of a new AT1 (I think) security for each PIBS.

The question surely is what the new AT1 is objectively worth. It may have a nominal value of 27p, but isn't the future interest payout at the discretion of the directors and dependent on the West Prom's financial performance? If there is "free money" on offer, wouldn't the hedge funds be piling in?

Link to the December proposal
https://www.westbrom.co.uk/media/WBBS/F ... rcise.ashx

Alaric wrote:

GoSeigen wrote:Anyway, the fundamentals of the deal seem to be broadly the same as announced in December, 51p per 100p nominal plus a 1p bung for being co-operative! Professional investors get to take part in an exchange consisting of (roughly from memory) 41p cash plus about 27p worth of a new AT1 (I think) security for each PIBS.

The question surely is what the new AT1 is objectively worth. It may have a nominal value of 27p, but isn't the future interest payout at the discretion of the directors and dependent on the West Prom's financial performance? If there is "free money" on offer, wouldn't the hedge funds be piling in?

Link to the December proposal
https://www.westbrom.co.uk/media/WBBS/F ... rcise.ashx

Yes, AT1 value is definitely relevant, especially if the plan is to hold on to the securities. IME it will have 27p nominal value because that is what the market is prepared to accept, which by definition is their value, surely, assuming the market is not massively off kilter... Yes, the payments are discretionary, similar to the Nationwide CCDS??

I don't understand your "free money" comment. To me there is no such thing as free money, and I don't know why that would attract hedge funds as opposed to anyone else, like bogus asylum seekers, for example, and I don't know how I'd detect hedge funds piling in if they were! How do you know they are not? It's not a metric I'm familiar with.

GS

GoSeigen wrote: To me there is no such thing as free money

Why then are you claiming that you could buy at around 51p and obtain cash of 41p and a security of a nominal value 27p provided you could be classed as a non-retail investor?

I don't know what the security is going to be worth either at the time of issue. I doubt it would be anywhere near 27p though.

If there was an arbitrage opportunity, the selling price in the bonds market would likely have climbed above 51p.

Alaric wrote:

GoSeigen wrote: To me there is no such thing as free money

Why then are you claiming that you could buy at around 51p and obtain cash of 41p and a security of a nominal value 27p provided you could be classed as a non-retail investor?

I don't know what the security is going to be worth either at the time of issue. I doubt it would be anywhere near 27p though.

If there was an arbitrage opportunity, the selling price in the bonds market would likely have climbed above 51p.

Okay, I see what you mean now. I was taking the information in the release at face value but will have another read. Perhaps I missed something. But if the figures are correct then for actual professionals like hedge funds it would be virtually "free money" and indeed that is why I added the postscript in the OP. It was curious to me that the price hadn't moved. But let me read that notice again...

GS

GoSeigen wrote:Okay, I see what you mean now. I was taking the information in the release at face value but will have another read. Perhaps I missed something. But if the figures are correct then for actual professionals like hedge funds it would be virtually "free money" and indeed that is why I added the postscript in the OP. It was curious to me that the price hadn't moved. But let me read that notice again...

GS

Okay done that and here are some extremely rough figures (primary school maths!!)

Initial assumptions:
-Retail PIBS, Non-retail PIBS and PPDS all receive the same value in the LME.
-PIBS and PPDS have substantially the same terms now and trade around the same price. (Can anyone verify or correct this??)

Conclusion: the CCDS will trade around 37% of par and the 11% Tier 2 will trade at 200p in short order with a YTC in 15 years of under 5%. Hmm.

-Assume instead a higher payment to PPDS than PIBS with other assumptions the same and you get a silly value for Tier 2 yield.
-Assume instead retail PIBS gets less than the others and the CCDS price goes up and Tier 2 yield goes up.


I think that the primary conclusion above over-values the Tier 2. I'd therefore expect that retail is getting less than the others and they certainly get no opportunity for upside. Perhaps the difference is rather smaller than I assumed initially.

If you took my original figures in the OP, with non-retail PIBS and PPDS each getting 68p of value vs 51p for retail PIBS, then the CCDS are valued at par with close to 0 yield, and the Tier 2 Notes are valued below par, which is absurd.

Going from a different angle and looking at the mooted sample payment schedule of the CCDS, it doesn't seem wildly out of line with what one might expect from a reasonable profitability assumption for the society assuming life continued as before. So you might surmise that the idea was to assume the CCDS, PIBS and PPDS are all valued around the same price -- let's say the 52p total that retail PIBS holders will actually get. Then retail PIBS get 52p of value, non-retail PIBS get 56p and if PPDS get the same then the Tier 2 yield is 5.5%.

I don't really know what to make of this lot. To help:
-What do Fools think a realistic YTC is for the 11% Tier 2 bonds callable in 15 years?
-Do any Fools know what price the PPDS were trading at or even better, have a price history for them?
-What do Fools make of the above scenarios?
EDIT: -Does the published mount of extra capital generated for the society help with the above calcs and if so how? [For Gengulphus only LOL]


Do not rely on any of the above. DYOR.


GS

Glad I found this board as have been looking for more information on these.

Does anyone know anything about these instruments? It seems like they have now been issued. I understand the new Tier 2 is at a price of ~145 and the CCDS is ~50. My maths puts that at a yield of ~6.3% on the Tier 2 and ~7.5% on the CCDS (assuming they pay the expected amounts). This seems to be more than you get from most PIBS...but maybe this is not the right comparison? Interested to hear views as the yields seem interesting.

Thanks

mrbear wrote:Glad I found this board as have been looking for more information on these.

Does anyone know anything about these instruments? It seems like they have now been issued. I understand the new Tier 2 is at a price of ~145 and the CCDS is ~50. My maths puts that at a yield of ~6.3% on the Tier 2 and ~7.5% on the CCDS (assuming they pay the expected amounts). This seems to be more than you get from most PIBS...but maybe this is not the right comparison? Interested to hear views as the yields seem interesting.

Thanks

Are they tradeable for retail investors? Maybe check that first.

GS

GoSeigen wrote:Are they tradeable for retail investors? Maybe check that first.

The West Bromwich Building Society had a near death experience back in 2009 and suspended payments on its PIBS, so I don't imagine its credit rating is very high. But you might not be able to buy these bonds anyway.

https://www.westbrom.co.uk/media/WBBS/F ... rcise.ashx

https://www.fixedincomeinvestments.co.u ... eply/1093/

I think the Tier 2 is no problem to buy if you can stomach the 50k denomination (and high cash price!). I am discussing the CCDS with my broker but I have owned Nationwide CCDS in the past; hence why this new listed CCDS has piqued my interest. I heard that cambridge building society did a CCDS but i believe it is not available to buy in the secondary market.

Thank you for the link to the fixedincomeinvestments board. I shall do some more reading.