Nationwide BS CEBB PIBS

[OldBoyReturns]

Has anyone taken a look at Nationwide's CEBB PIBS lately? They had never been on my radar so I was completely unaware of the most entertaining consent solicitation to vary the terms attached to a tender offer Nationwide made back in 2021.

Nationwide needed to deal with the passing of 6 month LIBOR (the reference rate for the variable coupon in the original terms when these were issued by Cheshire BS back in 1994) and also decided to propose inserting a 2030 call option (the original terms had no call) in return for an increase in the margin. I have no idea why Nationwide didn't just go for the usual instant call option with the consent solicitation but what they have done instead has made the remaining 4.8 million PIBS in issue very entertaining.

The variable coupon is now set every 6 months using a backward looking 'Compounded Daily SONIA Rate' which its set shortly before each coupon payment date. Once that rate has been calculated the following margins are added:

i. 2.4% (the margin over 6 month LIBOR from the original terms)
ii. 1.5% (the sweetener to get the 2030 call option inserted)
iii. 0.2766% (an estimate of the difference between LIBOR and SONIA)

Giving a total margin of a juicy 4.2%. Very high for Nationwide credit and also gives decent coupon protection against interest rates plummeting.

The last coupon was paid on 31 March 2023 at a rate of 7.37275%. The next one will be set a few days before the 30 Sept payment date based on movement in the SONIA index over the preceding 6 months. I have had a go at extracting the start point and current SONIA indices from the Bank of England database and putting them into the complicated formula (which will those scarred by school maths lessons out in a cold sweat) found in the Special Conditions and come out with an estimate for the next coupon of 8.6%. The actual may be higher if the BoE hike the base rate to 5.5% next week as expected.

So potentially a useful dated floater from a good name with a surprisingly high yield. Despite the small number outstanding I have been managing to buy decent amounts online through HL within the quoted spread (101.50 - 105). Apparently the quoted price is clean but I have no idea how accrued interest is calculated in view of the fact that the backwards looking floating coupon rate is only set shortly before payment.

[Gan020]

I have no idea why Nationwide didn't just go for the usual instant call option with the consent solicitation but what they have done instead has made the remaining 4.8 million PIBS in issue very entertaining.

Apparently the quoted price is clean but I have no idea how accrued interest is calculated in view of the fact that the backwards looking floating coupon rate is only set shortly before payment.

I own these. IIRC for it is a couple of years since I reviewed the prospectus when the PIBS were re-structured there was no call option available to Nationwide. So, what they did instead is offer an exit at about 10-15% above the existing share price or the option to roll into the new product for 10 years with the sweetner. I think the issue might have been £10m from memory so about half went for each option. Somewhere along the line the consent solicitation found a way that if there were enough votes, it made the PIBS no longer permanent. Effectively the offer was generous enough to to ensure no-one would vote against and those that didn't bother to vote would be rolled into the 10 year product.

As for the accrued interest calculation on the purchase my broker did mine wrong and I was out of pocket. I wrote and asked them to put it right. They wrote back informing me Cannacord had reviewed the transaction and it was correct, which it clearly wasn't. I decided not to persue the matter as I had bought at such an amazing price I didn't want the transaction reviewed too closely.

[OldBoyReturns]

IIRC for it is a couple of years since I reviewed the prospectus when the PIBS were re-structured there was no call option available to Nationwide. So, what they did instead is offer an exit at about 10-15% above the existing share price or the option to roll into the new product for 10 years with the sweetner.

My point was why did Nationwide opt to propose inserting a 2030 call date rather than a current call date (as Bank of Ireland did recently with BOI perps)? Would have been much more straightforward and also avoided all the changes to the coupon calculation caused by the demise of LIBOR. Any way that is in the past and and am not complaining cos getting roughly base + 4% for 7 years is a very attractive rate for parking cash needed to repay mortgage charging base + 0.5% in 2030.

[OldBoyReturns]

The annual rate for the 30 Sept coupon (now paid) was set at 8.91664% a few days before the payment date using the backward looking SONIA based formula.

An interesting quirk is that the accrued I paid on purchases shortly before the record date was based on a much lower annual rate of 3.11% so I got a nice unexpected bonus in being paid 6 month's coupon at an annual rate 8.91664& a couple of weeks later.

Th price has crept up a bit since but still look decent value for Nationwide credit.

[OldBoyReturns]

Nationwide paid the interest on these on 28 March based on an annual rate of 9.36857%.

With the coupon being a variable rate based on backward looking SONIA plus a 4.1766% margin this remains my favourite floater and a very useful interest rate / inflation hedge.

[HGfool]

Hi OBR

You have a stonking deal there with your fixed rate mortgage vs CEBB position !

You bought before the October rise (any idea what caused that? You perhaps? But it has stuck!).

If I look at the numbers now, buying at today’s 115.75 quoted offer, with SONIA at 5.19% (assuming the delay effect has now dropped out), I get (approximately):

Yield on nominal: 9.37%
Running yield 8.09% on Buy price
Cap loss pa 2.10%. If redeemed Sept 2030 at par
YTM 6.00%

Which is good, but not super-compelling vs a variable-rate “cash-fund” given single-company credit risk?

Have you looked at INVR? With BoE base rate at 5.25%, and buy price of 550 (nominal 1000), I make this a running yield of 11.36% (perpetual, so no YTM, but with a 10yr investment and current spread and constant interest rates the “YTM” would drop to 10%). Clearly interest rates won’t be constant, but other base-rates assumptions give a somewhat comparable picture. Obviously INVR is a much greater credit risk.

I’d be very interested in your thoughts, and any other linkers/floaters you may be aware of. I’ve already got more INVR than I’m comfortable with, but have a need for linkers that can “balance” my holdings of conventional perpetual prefs/PIBs and thereby mitigate overall duration risk (ie balance conventional perpetual Prefs/PIBs price-risk if inflation/interest-rates soar).

Best

[Padders72]

Hi OBR

You have a stonking deal there with your fixed rate mortgage vs CEBB position !

You bought before the October rise (any idea what caused that? You perhaps? But it has stuck!).

If I look at the numbers now, buying at today’s 115.75 quoted offer, with SONIA at 5.19% (assuming the delay effect has now dropped out), I get (approximately):

Yield on nominal: 9.37%
Running yield 8.09% on Buy price
Cap loss pa 2.10%. If redeemed Sept 2030 at par
YTM 6.00%

Which is good, but not super-compelling vs a variable-rate “cash-fund” given single-company credit risk?

Have you looked at INVR? With BoE base rate at 5.25%, and buy price of 550 (nominal 1000), I make this a running yield of 11.36% (perpetual, so no YTM, but with a 10yr investment and current spread and constant interest rates the “YTM” would drop to 10%). Clearly interest rates won’t be constant, but other base-rates assumptions give a somewhat comparable picture. Obviously INVR is a much greater credit risk.

I’d be very interested in your thoughts, and any other linkers/floaters you may be aware of. I’ve already got more INVR than I’m comfortable with, but have a need for linkers that can “balance” my holdings of conventional perpetual prefs/PIBs and thereby mitigate overall duration risk (ie balance conventional perpetual Prefs/PIBs price-risk if inflation/interest-rates soar).

Best

If you search on INVR you will see that OBR has been vocal in that direction recently. Supportively I should perhaps add. I’m a believer there myself.

[HGfool]

Thanks Padders. There is some quality discussion on the various FI threads here. I was an habitué. of TMF, but never made it across to Lemonfool. Looks like that was my loss !

[OldBoyReturns]

Hi OBR

You have a stonking deal there with your fixed rate mortgage vs CEBB position !

You bought before the October rise (any idea what caused that? You perhaps? But it has stuck!).

If I look at the numbers now, buying at today’s 115.75 quoted offer, with SONIA at 5.19% (assuming the delay effect has now dropped out), I get (approximately):

Yield on nominal: 9.37%
Running yield 8.09% on Buy price
Cap loss pa 2.10%. If redeemed Sept 2030 at par
YTM 6.00%

Which is good, but not super-compelling vs a variable-rate “cash-fund” given single-company credit risk?

Have you looked at INVR? With BoE base rate at 5.25%, and buy price of 550 (nominal 1000), I make this a running yield of 11.36% (perpetual, so no YTM, but with a 10yr investment and current spread and constant interest rates the “YTM” would drop to 10%). Clearly interest rates won’t be constant, but other base-rates assumptions give a somewhat comparable picture. Obviously INVR is a much greater credit risk.

I’d be very interested in your thoughts, and any other linkers/floaters you may be aware of. I’ve already got more INVR than I’m comfortable with, but have a need for linkers that can “balance” my holdings of conventional perpetual prefs/PIBs and thereby mitigate overall duration risk (ie balance conventional perpetual Prefs/PIBs price-risk if inflation/interest-rates soar).

Best

Hi HGFool - I bought a lot of CEBB at prices from 104-110 (effectively lower due to the odd way accrued interest is calculated on this) last year which may have contributed to the repricing.

I also hold INVR which has its own thread at: viewtopic.php?f=52&t=28030

Due to the CEBB coupon being set at a much higher margin over benchmark than INVR (4.1766% compared to 1%) the CEBB coupon and price are much less geared on interest rate changes than INVR. CEBB also has a 2030 call date (when it is certain to be called) which gives me a clean exit avoiding liquidity and market spread costs. As you say, Nationwide is also much better credit than Investec.

[thebarns]

OldBoy,

Do you know if the 2030 call date is at par, I’m assuming 100, or will some sort of market value have to be calculated at that time ?

Thanks

[HGfool]

Thanks OBR.

Your mortgage and CEBB are a marriage made in heaven !

Re gearing to Bank Rate, I did some numbers on that - comparing CEBB YTM yield with INVR running yield, at yesterday's buy prices. (not intended to be a fair comparison - just looking at gearing)

As an example, the ratio of yield at 10% Bank Rate to yield at 2% Bank rate is 3.17 for CEBB (so 3.17 x more income generated at 10% BoE rate than at 2%).

The same ratio for INVR was 3.67. So it *is* more highly geared, but less than I'd thought. Don't really understand that (uness I've made an elementary spreadsheet error!).

Obviously the INVR yields are higher across the range - ranging from 1.98 times CEBB at 10% BoE bank rate to 1.71 at 2%.

Not what I was expecting intuitively. My spreadsheet doesn’t explicitly recognise that CE!BB is 6+ yr fixed term from here vs INVR perpetual, but duration risk was not what I was focused on.

[Yieldy]

Using the sonia futures to build a dividend or coupon curve up to 2030, (and then, in the case of INVR I price a perp using the divs from 2030 then on..). Then I discount all those cashflows (divs/perp/redemption, whatever) back to today to solve for market price. I get a yield of c. 9.2% for INVR and a yield of 5.3% for CEBB.

Obviously difference in duration, (although the duration of INVR is probably only about 12 years due to the high yield), but enough for me to prefer one over the other.

I also like INVR (as of late) because it's a vague hedge for Aviva and Gen Acc etc. I realise that INVR pay-off is based upon BoE rates, whereas, in theory, Aviva and Gen Acc should be priced off a 25-year gilt (matched duration), but the reality is that the retail seem to think that "rates are going up" (sell prefs, INVR catches some interest) or "rates are going down" (buy prefs, sell INVR..) and not think too much about the curve.