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preference shares/ pibs

Gilts, bonds, and interest-bearing shares
hiriskpaul
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Re: preference shares/ pibs

#68928

Postby hiriskpaul » July 21st, 2017, 11:46 pm

I made a claim earlier that prefs/subordinated are good for growth as well as income and I think I have made more out of prefs and subordinated debt over the last 5 years than I have from my equity portfolio. Without going through all my deals that is hard to verify, but I have been giving it some thought and I think the statement is probably accurate.

The total return for the FTSE World Index over the last 5 years was about 113% in pound terms. My equity portfolio is quite close to that index. A little underweight US shares, which would have pulled me down, but overweight small caps which should have helped. In comparison, I have calculated the total return on the 3 prefs I have held continuously over the last 5 years (NWBD, LLPC and SAN) and the TRs come out as 96% (NWBD), 127% (LLPC) and 147% (SAN). So just holding those 3 and reinvesting dividends would have beaten the FTSE World Index. In addition, my SIPP has been largely invested in prefs and sub debt for many years and the end of April 2017 statement shows it is 150% up on the statement 5 years earlier (with no contributions made). I have held US equities in the account, which have done very well, but also some lower risk investments including US Treasuries at times. Overall I cannot think where the returns have come from other than prefs/subordinated debt.

I am not for one moment suggesting that returns on prefs/sub debt will be the same over the next 5 years as over the last (I would be very happy with 50%), but neither do I expect equities to return over 100% again either. I would not be at all surprised if the return on prefs/sub debt over the next 5 years was higher than that of equities again.

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Re: preference shares/ pibs

#68942

Postby GoSeigen » July 22nd, 2017, 7:45 am

The Bank of Ireland debacle was all about the Irish Government passing laws in order to try to force losses on to bank bond holders. There was no attempt to exploit clauses in the prospectus. It was just blatant theft more of the sort that might be expected from a despotic regime rather than a supposedly developed country that upheld the rule of law.


Are you serious Paul? Should they have simply shut down their entire banking system? Or should they have left the bondholders whole and injected even more taxpayer-funded equity -- in which case how can that not be seen as theft by bondholders from the public? Incidentally the action was taken using powers derived from laws passed by the Dail, which is the democratic lawmaking body of the Irish republic, and tested before a judge who ruled in favour of the government. So in what way was it unlawful and despotic?


In seeking a culprit I have no compunction in villifying the banks, their shareholders and yes, bondholders for allowing the reckless destruction of their own business. Though as a bondholder I fought what Noonan was doing -- out of pure self-interest -- he is a hero to me for taking risky but decisive and IMO morally justified action to resolve the Irish banking crisis.

If any Irish government was to blame, it was his predecessors who unilaterally protected all Irish banking deposits and bondholders and thereby tied their own hands and prevented early resolution of the issues.

Sorry about the slightly political tone but the OP seemed to be overlooking some of the issues... surprisingly since Paul and I agree on most issues discussed hereabouts.


GS

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Re: preference shares/ pibs

#68944

Postby GoSeigen » July 22nd, 2017, 7:53 am

Someone mentioned redemption at par. A somewhat-comparable risk is reversion to a different coupon: something that is AIUI common among PIBs. If a coupon reverts from 10% to base rate + 0.5%, your income takes a hit! The trick with both these risks is to look at the maturity date on the asset in question, on a site such as fixed income investor. You know something happens (probably at the company's option) on that date, so check the prospectus for what that is, and decide if it's something you're OK with. Always assume the worst, because if the company doesn't exercise their right to reduce the burden to them of your high income, they're almost certainly in trouble!


It's a semantic error to refer to these as risks. They are features of the bonds -- positive features for holders in many circumstances. The true risk is that the investor is simply too lazy or too stupid to read the terms.


GS

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Re: preference shares/ pibs

#68956

Postby Alaric » July 22nd, 2017, 8:47 am

GoSeigen wrote: So in what way was it unlawful and despotic?


I think the problem had been that the Bristol & West had marketed their PIBs as suitable for retail investors. There was then an expectation that they would be within the scope of deposit protection. From that viewpoint it looked like a Cyprus style confiscation.

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Re: preference shares/ pibs

#68959

Postby GoSeigen » July 22nd, 2017, 8:59 am

Alaric wrote:
GoSeigen wrote: So in what way was it unlawful and despotic?


I think the problem had been that the Bristol & West had marketed their PIBs as suitable for retail investors. There was then an expectation that they would be within the scope of deposit protection. From that viewpoint it looked like a Cyprus style confiscation.


Oh nonsense,A building society markets its equity-like securities as deposit-equivalent, investors buy that nonsense, the building society demutualises realising a windfall for those investors, Years later the same bonds trade at 2x par, then when their bank crashes the GOVERNMENT is unlawful and despotic for rescuing them? Do you have any idea what the outcome for those former Bristol and West PIBS has been? They are currently trading at 210p and paying 13%pa of par!! I don't think they even skipped a coupon. How is that in any way shape or for theft or confiscation?


Sheesh.

GS

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Re: preference shares/ pibs

#68961

Postby Alaric » July 22nd, 2017, 9:14 am

GoSeigen wrote:How is that in any way shape or for theft or confiscation?


The full story is at
https://www.fixedincomeinvestments.co.u ... tailbonds/

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Re: preference shares/ pibs

#69026

Postby GoSeigen » July 22nd, 2017, 5:44 pm

Alaric wrote:
GoSeigen wrote:How is that in any way shape or for theft or confiscation?


The full story is at
https://www.fixedincomeinvestments.co.u ... tailbonds/



That's not the full story of anything. For the former B&W PIBS BOI.L, the bond you referred to, it is the story up to mid 2011 only -- the article is very clearly dated.

The full story to date was summarised pretty accurately in my earlier post. [The minister relented and the bonds were NOT bailed in, to be crystal clear.]


GS

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Re: preference shares/ pibs

#69030

Postby GoSeigen » July 22nd, 2017, 5:53 pm

Alaric wrote:
GoSeigen wrote:How is that in any way shape or for theft or confiscation?


The full story is at
https://www.fixedincomeinvestments.co.u ... tailbonds/


I don't think you read the article yourself before linking to it. The very first sentence contains this:

the Bank of Ireland 13.375% Subordinated Bonds Campaign [...] has achieved the stunning result of forcing the Bank of Ireland to terminate its coercive offer in respect of the bonds.

Note also that it refers to the Bank as the entity doing the coercion, not the government. So if you are using that as an example of theft and extortion, then it was the bank which was the culprit in that particular crime -- exactly my earlier point.


GS

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Re: preference shares/ pibs

#69038

Postby Alaric » July 22nd, 2017, 6:41 pm

GoSeigen wrote:Note also that it refers to the Bank as the entity doing the coercion, not the government.


Until the successful campaign, it was the Government of Ireland and a semi UK Government agency in the FSA who were conniving with the Bank.

The point is that it's an illustration of the potential risks with Prefs and PIBS and the lack of protection you might hope for from Regulators.

hiriskpaul
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Re: preference shares/ pibs

#69191

Postby hiriskpaul » July 23rd, 2017, 6:49 pm

GoSeigen wrote:
The Bank of Ireland debacle was all about the Irish Government passing laws in order to try to force losses on to bank bond holders. There was no attempt to exploit clauses in the prospectus. It was just blatant theft more of the sort that might be expected from a despotic regime rather than a supposedly developed country that upheld the rule of law.


Are you serious Paul? Should they have simply shut down their entire banking system? Or should they have left the bondholders whole and injected even more taxpayer-funded equity -- in which case how can that not be seen as theft by bondholders from the public? Incidentally the action was taken using powers derived from laws passed by the Dail, which is the democratic lawmaking body of the Irish republic, and tested before a judge who ruled in favour of the government. So in what way was it unlawful and despotic?


In seeking a culprit I have no compunction in villifying the banks, their shareholders and yes, bondholders for allowing the reckless destruction of their own business. Though as a bondholder I fought what Noonan was doing -- out of pure self-interest -- he is a hero to me for taking risky but decisive and IMO morally justified action to resolve the Irish banking crisis.

If any Irish government was to blame, it was his predecessors who unilaterally protected all Irish banking deposits and bondholders and thereby tied their own hands and prevented early resolution of the issues.

Sorry about the slightly political tone but the OP seemed to be overlooking some of the issues... surprisingly since Paul and I agree on most issues discussed hereabouts.


GS

Ha! Yes, I probably should rein in the rhetoric now that battle is over. However, behaviour of the government was certainly murky. You may have forgotten, but Bank of Ireland had already been recapitalized by hedge funds months before the highly coercive LME, so no extra taxpayer cash was required. The LME was all about rewarding one set of investors at the expense of others, including the hedge funds, the government and certain Irish institutions who held securities that were excluded from the LME, including lower ranking securities than the T2 13.375% PSB.

It was not unreasonable for bondholders to contribute to the bailouts, but the way this was done was far from reasonable. They should have allowed bondholders to benefit from upside should the estimated capital requirements prove greater than required. For example, they could have passed legislation to suspend coupon payments and redemptions until recovery, then restored according to the hierarchy, so ordinary and pref dividends could not be paid whilst T2 was still suspended, etc.

Maybe at some point we will find out why the BOI chose to back down over the 13.375%. Was it because they did not want the adverse publicity (rewarding hedge funds at the expense of UK pensioners, etc.) ? Or because they dare not risk losing and subsequently face action from holders of other LME'ed securities?

A strange time. I hope we don't see anything like it again.

hiriskpaul
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Re: preference shares/ pibs

#69193

Postby hiriskpaul » July 23rd, 2017, 7:08 pm

Alaric wrote:
GoSeigen wrote:Note also that it refers to the Bank as the entity doing the coercion, not the government.


Until the successful campaign, it was the Government of Ireland and a semi UK Government agency in the FSA who were conniving with the Bank.

The point is that it's an illustration of the potential risks with Prefs and PIBS and the lack of protection you might hope for from Regulators.


This and subsequent incidents indicate that holders of prefs, PIBS or corporate bonds will get no assistance whatsoever from regulators should any kind of shenanigans take place. But then, this is also true of ordinary shares.

I suspect that the only investment that regulators will step in over are UK registered OEICs/UTs. I was once compensated by a fund manager (forced by the regulator at the time) when a UT I was invested in was not run properly and the fund manager tried to hide what he was doing. For any other investments, including shares, bonds, ETFs, ITs, the only recourse are the courts. This essentially means retail investors have no protection unless they have very deep pockets or can organise a class action.

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Re: preference shares/ pibs

#92600

Postby hiriskpaul » November 2nd, 2017, 1:30 pm

There was some discussion as to what would happen to pref/PIBS prices when BOE base rates increased. Today we have the answer - for the prefs/PIBS discussed either no change or small increases. The exception is LLPC/LLPD, but that is because they went XD today. The pref/PIBS prices are all up since the start of this thread as well.

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Re: preference shares/ pibs

#92662

Postby AleisterCrowley » November 2nd, 2017, 4:26 pm

Some of my prefs only seem to update once a day

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Re: preference shares/ pibs

#92665

Postby flyer61 » November 2nd, 2017, 4:35 pm

hiriskpaul,

are there any Prefs/Pibs that you would buy at the moment?

hiriskpaul
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Re: preference shares/ pibs

#92845

Postby hiriskpaul » November 3rd, 2017, 11:06 am

flyer61 wrote:hiriskpaul,

are there any Prefs/Pibs that you would buy at the moment?

I obtained some firm quotes yesterday. Of the more liquid UK bank prefs, SAN, NWBD, LLPD and STAC were all yielding around 5.6% (after allowing for stamp duty and dividend in the price). LLPC and STAB were lower at 5.46% and 5.40% respectively, so I would avoid those for now. These yields may not seem much, but to put into perspective 20 year gilts have a gross redemption yield of only 1.8%.

Of the insurers, RSAB, GACA and ELLA were on 5.05%, 5.31% and 5.80%. Personally I would not bother with the RSA or Aviva prefs, but ELLA looks reasonable. Ecclesiastical is owned by the Church of England and mainly insures churches. Last time I looked at the accounts it seemed to be robust and conservative.

Of the undated and uncallable PIBS/PSBs some of the smaller ones are still yielding a little over 6% - NBSR 6.02%, NOTP 6.04%, LBS (6.15%), but not easy to get in any volume. I had to use minimum trade sizes to obtain online quotes. Of the larger issues, BOI is still reasonable at 5.93%. SKIP and CVBP have lower, but not unreasonable yields compared to the bank prefs at 5.83% and 5.59% respectively.

Moving up the risk scale I have been considering increasing my exposure to Raven Russia. They have 2 prefs, RUSP which is undated and RUSC which is convertible and has a maturity date of 7/7/26 at 135p. RUSC is senior to RUSP with a yield to maturity of 6.2% and RUSP has a running yield of 8.30%. Raven Russia is profitable and returning cash to ordinary shareholders via tenders. They do not seem to be unduly affected by sanctions and have plenty of cash for acquisitions. I have a small position in RUSP and RUSC, and am slightly more attracted to RUSP at present, but would probably invest in both. Woodford holds over 40% of RUSC as well as significant positions in the ords and RUSP - hopefully Raven Russia will not join his recent run of clangers! Website is here: http://www.ravenrussia.com/ and contractual details of the prefs in the Articles here: http://www.ravenrussia.com/investors/public-documents/

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Re: preference shares/ pibs

#92848

Postby hiriskpaul » November 3rd, 2017, 11:18 am

Forgot to mention - for a shorter dated pref (maturity 1/7/20), BBYB is IMHO still outstanding value. I was just quoted 116.5 for 10k nominal. That translates to a yield to maturity of 5.3%. My boots are already sufficiently stuffed though, so it is unlikely I will be buying any more.

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Re: preference shares/ pibs

#92971

Postby moorfield » November 3rd, 2017, 6:31 pm

Of those I hold only RE.B (REA Holdings) cumultive prefs, currently 8.6%, might be topped up in the new year; of the financials, SAN, STAC, AV.A, all 5.7% or under, I am unlikely to be adding to for the forseeable future.

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Re: preference shares/ pibs

#93032

Postby flyer61 » November 4th, 2017, 12:33 pm

Many thanks chaps for your comments. I will give ELLA a look. Have dipped my toe into RUSP and RE.B

I can remember buying LLPC and NWBD on double digit yields :D how things have changed....

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Re: preference shares/ pibs

#93034

Postby swill453 » November 4th, 2017, 12:36 pm

flyer61 wrote:I can remember buying LLPC and NWBD on double digit yields :D how things have changed....

Er yes, you've now got the same income and a higher capital value. What a tragedy :D

Scott.

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Re: preference shares/ pibs

#93071

Postby 88V8 » November 4th, 2017, 2:30 pm

Recent times have not seen a uniform price rise.
Lately I bought some Northern Electric Prefs, NTEA, cumulative, at around a 5.2% yield. The price little more than 6% up in the last 12 months.
This yield is nothing wonderful, but their usp is that they are not Financials, with which I am stuffed to the gunnels.

I also hold RUSP, RUSC, RE.B, BBYB, and some DNA2, plus a pretty full hand of the usual suspects.
It is fairly easy to trade through TD (II) who do not seem to regards themselves as their brother's keeper.

In the medium term I foresee a downwards price trajectory for Fixed Income. For me this is not really an issue as I seek only income and can afford to ignore red ink, but those wishing to preserve their capital should imho look elsewhere.

V8


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