The Lemon Fool

Hi Again Walkeia, Well regarding Woodford, the CEO Message in the 2019im Report clearly states that the WIM ordinary shares were bought back and cancelled (so benefitting the NAV) AND that the convertibles and prefs were bought back and then placed with 35 institutions.

Re Invesco/Barnet Ravens RNS of 12th December states that they have entered into a deal to purchase Invesco’s convertibles and prefs in which they state that they are considering either cancelling these or holding them in treasury. Invesco also have a lot of ordinary shares, the RNS of the 2nd Dec states that these are also to be purchased and held in treasury. How all of these purchases are to be funded and whether the convertibles/prefs might end up getting placed (as they were for WIM) was what my previous post was about.

The December 2nd RNS indicates that further details will be provided in January 2020.

That’s my understanding of it all anyway, could be wrong (as always) but I don’t think so. Not sure if it answers your question or not, but hopefully it does ?.

ATB

Pref

Hi Again Walkeia,

Typo in previous post should have read “2019 interim report”.

All of the deals outlined in their RNSs are conditional arrangements requiring (amongst other things) shareholder approval to proceed. So they are not guaranteed to happen.

ATB

Pref

My hope in these buybacks is that management have acted prudently, responsibly and in the interests of all shareholders (including pref/convertible holders) and have negotiated a price such that they either make a profit on the shares bought back and placed with other institutions, and/or have looked very carefully at any debt they might take on. Hopefully we should not have too long to wait for an answer.

I bought some more RAVC on Monday at 105.9. It is curious that at that price, the yield to maturity is greater than the running yield of RAVP. This is despite the fact that RAVC has a fixed maturity date and pays out ahead of RAVP on liquidation. It would seem that RAVP holders, of which I have a few, think that RAVP will give a better return over the period up to RAVC maturity. ie they are betting on a price rise. This is a very unusual situation and I have noted in the past that RAVC has usually traded on a lower yield than RAVP.

Who is right, RAVP holders or RAVC? I am betting on RAVC, but would be interested to hear other viewpoints on this unusual discrepancy.

Your post re RAVC v RAVP piqued my interest. Have done some digging - I am fortunate in having access to Bloomberg Market Data and analysis.

As you know RAVC redeem in 2016 at £1.35 per share. If you discount this redemption price to £1.00 and run the yield analysis you get c.6.25% YTM. That is what, for instance, HL on their website is showing as the yield (interactive investor has 6.28%), incorrectly imho. Turn it around and a market price of c. 125 would get a 6.25% yield on a £1.35 redemption.

It appears that the market has mispriced RAVC, strange though that seems, as I cannot find anything in the prospectus nor RNS market announcement changing the terms of redemption.

As a result I have bought RAVC today (switching from RAVP) - thanks for the initial prompt - we shall see if there is a catch....

So I can see the logic in buying RAVC vs RAVP - it has a slightly higher YTM and the holder would only be locked in for another six and a half years but I can't really see the benefit of switching from RAVP to RAVC.

I make the YTM on RAVP with a sell price of 133p come in at 9.02% (excluding dealing costs)
I make the YTM on RAVC with a buy price of 105.9. come in at 9.3% (excluding dealing costs) but the running yield for the next 6 1/2 years is only 6.13%

If I'm correct (no guarantee on that) then as a holder of RAVP I don't want to switch for the uplift on YTM which all comes in six and a half years time but I might well buy some RAVC when some more funds are available and if the situation stays the same.

Please do tell me where I've gone wrong.

Laughton wrote:So I can see the logic in buying RAVC vs RAVP - it has a slightly higher YTM and the holder would only be locked in for another six and a half years but I can't really see the benefit of switching from RAVP to RAVC.

I make the YTM on RAVP with a sell price of 133p come in at 9.02% (excluding dealing costs)
I make the YTM on RAVC with a buy price of 105.9. come in at 9.3% (excluding dealing costs) but the running yield for the next 6 1/2 years is only 6.13%

If I'm correct (no guarantee on that) then as a holder of RAVP I don't want to switch for the uplift on YTM which all comes in six and a half years time but I might well buy some RAVC when some more funds are available and if the situation stays the same.

Please do tell me where I've gone wrong.

For RAVP I guess you did 12/133 to get to your 9.02%. To be consistent for comparison purposes the internal rate of return I get using Excel's XIRR is 9.69% for RAVC and 9.36% for RAVP, based on your prices. For RAVP I simply laid out the next 4 dividend payments of 3p with an outgoing flow of -133 today and +133 in 1 years time. For RAVC I laid out all the dividends of 1.625p until July 26, with an additional final principal payment of 135p.

The thing is, I reckon a fair ytm for RAVC should be at least 0.5% lower than the running yield of RAVP. Purely from memory, I think that is how it used to be as well. So either RAVC should be up above 110 or RAVP should be below 123. Or RAVC a bit higher, RAVP a bit lower, etc.

I am scratching my head wondering whether I have missed something here, or whether I should ditch RAVP. I used to arbitrage between LLPC/LLPD a few years ago, but not sure it would necessarily work with these 2 as the spreads are wide (even without stamp duty) and terms are very different.

GSVsowhat wrote:Your post re RAVC v RAVP piqued my interest. Have done some digging - I am fortunate in having access to Bloomberg Market Data and analysis.

As you know RAVC redeem in 2016 at £1.35 per share. If you discount this redemption price to £1.00 and run the yield analysis you get c.6.25% YTM. That is what, for instance, HL on their website is showing as the yield (interactive investor has 6.28%), incorrectly imho. Turn it around and a market price of c. 125 would get a 6.25% yield on a £1.35 redemption.

It appears that the market has mispriced RAVC, strange though that seems, as I cannot find anything in the prospectus nor RNS market announcement changing the terms of redemption.

As a result I have bought RAVC today (switching from RAVP) - thanks for the initial prompt - we shall see if there is a catch....

Well strictly speaking, the principal amount is only 135p on redemption. Up to then it accretes at 3.5p per year, so on winding up you would not get back 135p, but for pricing purposes I used 135p.

RAVP sold this morning at 134.75, reinvested in RAVC at 105.9. Small uplift in yield, but more importantly I feel much happier having a maturity date and being paid ahead of the huge pile of RAVP, should the worst happen.

hiriskpaul - out of interest, did you do this as two separate transactions (one deal to sell and then a different deal to buy) or did you get a broker to approach the marketmaker to see if they would cut the spreads a bit to do a "swap" type deal?

Thinking about it over the weekend and I agree that a set maturity date is probably a good thing to have.

Thanks for flagging up this anomaly hiriskpaul. Have now taken the opportunity to swap my RAVP for RAVC too.

Laughton wrote:hiriskpaul - out of interest, did you do this as two separate transactions (one deal to sell and then a different deal to buy) or did you get a broker to approach the marketmaker to see if they would cut the spreads a bit to do a "swap" type deal?

Thinking about it over the weekend and I agree that a set maturity date is probably a good thing to have.

2 transactions.

Difference in pricing could be due to liquidity.

Liquidity on RAVC is much lower.

and as well as a fixed maturity date RAVC has the option for conversion into ordinary shares at 100p - pigs might fly but hey......

Given the potential longevity of ravp and the elongated period of low interest rates which seems very likely to continue , the redemption date of the ravc will keep a lid on any increase , whilst ravp are at their lower price end because of the sales by woodford and for the usual other reasons some of which equally apply to ravc in risk terms albeit they are senior to P . As the difference is so small in yield terms for those who want to maintain their current level of income the risk of the P price moving higher is perhaps not worth it .

GSVsowhat wrote:and as well as a fixed maturity date RAVC has the option for conversion into ordinary shares at 100p - pigs might fly but hey......

Current conversion rate is 1.617 (as of 7/11/18), so with the price of the ords at 50p, the conversion value is 81p. However, the share price is very volatile and I would not dismiss the possibility of the conversion option adding to value. A share price above 83.5p, a 67% rise, would put the conversion value above the final principle payment.

I should that the conversion rate will of course fall again soon due to the 2019 tender offer.

Edit: Sorry, just checked and this has already been announced! Conversion rate now 1.517.

Can someone explain why RAVC is senior to RAVP? The option to put RAVC back to the issuer in the case of a takeover is not really a seniority issue in a gone-concern scenario (bankruptcy etc) but a corporate action trigger (going concern). So is RAVP truly subordinate to RAVC in a forced wind-down of the company?

BondSquared wrote: So is RAVP truly subordinate to RAVC in a forced wind-down of the company?

Yes. Take a look at the articles for full current rights attached to the 3 types of share, in particular Sections 2.4 (pref capital) and 2.10 (convertible pref capital):

2.4

On a return of capital on a winding up or an administration order (other than a
redemption, purchase by the Company or a conversion of any of its share capital) the
holders of Preference Shares shall be entitled, in priority to other shareholders (save
for holders of (i) the Convertible Preference Shares ...

2.10

On a return of capital on a winding up or an administration order (other than a
redemption, purchase by the Company or a conversion of any of its share capital) the
holders of Convertible Preference Shares shall be entitled, in priority to other
shareholders (save for holders of Further Ranking Preference Shares as may be
created and issued pursuant to Article 2.12.2 below) ...

The convertibles also rank ahead of the prefs for dividends.

Note that some things in the Articles are out of date, such as number of shares in issue and conversion ratio as they frequently change, but the rights are current.

Unfortunately this is not an option for me. I hold RAVP in my limited company, so not in a tax wrapper. I would have tax to pay on the gain I am sitting on when I sell which would reduce number of RAVC I could then buy.