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Provident Financial debt has become interesting

Gilts, bonds, and interest-bearing shares
hiriskpaul
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Provident Financial debt has become interesting

#76314

Postby hiriskpaul » August 22nd, 2017, 4:46 pm

If you have not seen it yet, PFG have shot their investors in the foot:

http://www.londonstockexchange.com/exch ... 37225.html

I hold PF17, maturing 4 October, which is down about 5%. As the expiry was so close I have made the mistake of taking my eye off the ball here. PF17 is £120m that PFG are going to have to find. Not small change, but hopefully they have had this redemption in mind for some time.

A sub-prime lender that has screwed up its debt collection even over a short period will not be pretty and no doubt management heads will be rolling, but looking on the bright side, where there is muck, there is often gold and the PFG debt has certainly turned mucky today. All senior unsecured, available in retail friendly amounts:

PF21 6.00% 27/09/21, £65m outstanding, ~73p
PFG7 7.00% 14/04/20, £25m o/s, ~80p - Described as Guaranteed, so maybe the pick of the bunch if it has guarantees over the other senior.
66WS 5.125% 09/10/23, £60m o/s, ~66p

Insitutional senior unsecured:
60HU 8.00% 23/10/19, £250m o/s, ~83p, also described as Guaranteed, so guarantees need checking

Not sure whether they have any subordinated or secured and yet to dig into details/PFG prospects properly, but that £250m due in 2 years time could be pivotal. Anyone else looking into this?

hiriskpaul
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Re: Provident Financial debt has become interesting

#76351

Postby hiriskpaul » August 22nd, 2017, 6:37 pm

Forgot to mention, the institutional 8% 2019 is 50k nominal minimum, so about £40k.

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Re: Provident Financial debt has become interesting

#76365

Postby Wozzitworthit » August 22nd, 2017, 7:34 pm


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Re: Provident Financial debt has become interesting

#76367

Postby Wozzitworthit » August 22nd, 2017, 7:43 pm


hiriskpaul
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Re: Provident Financial debt has become interesting

#76409

Postby hiriskpaul » August 22nd, 2017, 10:37 pm

Thanks Woz, I found those. Guarantees all look to be the same to me - debt is at the Group level and guaranteed by subsidiaries.

I have concluded that they should have no problem repaying PF17 in October, so there is a short term few percent to be made there unless the price bounces back tomorrow. The other debt looks a little more problematic. I really don't like the sound of the FCA/PRA crawling over Vanquis for some product they have sold. I have not looked into what "ROP" is yet (short for ropy?), but I suspect it represents very bad value for money, as poor value for money products is PFG's modus operandii. The concern here is obviously that the FCA may require customers to be paid compensation. The PRA have stopped the Group taking a dividend out of Vanquis while the FCA investigates, but they can take the cash out instead by repaying the Group loan, so I don't see short term funding being an issue, especially as they have pulled the interim dividend. Hence PF17 redemption looks safe.

According to the 2016 report, CCD customers are not necessarily bad risk, so I suspect the problem they have is a monumental operational failure rather than one involving poor credit. Attempting to replace the agents has turned out to be problematic and the way they have gone about it could well have lost them a lot of customers, but I don't necessarily see that as a being huge problem for bondholders. The customer base for this part of the business appears to be in managed decline anyway. I am amazed it still exists.

If the worst happens (major losses on CCD, expensive redress payments on ROP), the PRA will likely tell PFG/Vanquis to raise capital. Cancelling dividends will help, but if not sufficient in the timescales the PRA set, that probably means a rights issue. If shareholders refuse to step up to the plate, it may lead to a takeover, sale of Vanquis, or resolution with senior unsecured first in line after the equity to absorb losses as there is no sub debt. Plenty of other possibilities of course such as a restructuring involving schemes of arrangements for the debt and some fresh capital from a bunch of "helpful" hedge funds. On the positive side Vanquis seems to be doing really well, so provided ROP is not long enough to hang them, selling Vanquis as a going concern should easily be sufficient to repay all the debts.

hiriskpaul
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Re: Provident Financial debt has become interesting

#76518

Postby hiriskpaul » August 23rd, 2017, 12:49 pm

Picked up a small number of PF21s this morning at 74.25, but now I am being quoted 85.23. At 74.25 I got a YTM of 14.6%, but at 85.23 it is down to 10.5% so nowhere near as attractive for the level of risk. I will hold off for a while to see if the price goes back down again.

Anyone else here been buying?

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Re: Provident Financial debt has become interesting

#76625

Postby NeilOne » August 23rd, 2017, 7:32 pm

I was going to buy the 21's but left it to late as the price was up to 85. I still have the 5.125 2023 from the launch in 2015 though (unfortunately).

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Re: Provident Financial debt has become interesting

#76668

Postby LongbeardRanger » August 24th, 2017, 6:57 am

I can see the potential attraction of Provident's debt.
Can't see why anyone would touch the equity though. Obviously there has been a lot of focus on the bungled business model transition. That does seem to be totally mad and a shocking cock up by the board but to me it was not the most interesting aspect of the announcement. The most interesting aspect was what they admitted about Vanquis. They said that the FCA were investigating the ROP product and that the group had agreed in April 2016 (so, well over a year ago) to suspend new sales of ROP and to conduct a customer review.

Firstly, there is a huge question mark as to why that is only being disclosed now. Why wasn't it announced immediately (i.e. in April last year?).

Secondly, this is what they said in their 2017 interims just one short month ago:

In line with previous guidance, the annualised risk-adjusted margin has moderated from 32.4% to June 2016 to 31.4% to June 2017, reflecting a reduction in the revenue yield due to a further decline in the penetration of the Repayment Option Plan (ROP) product within the customer


I should expect penetration had declined, if the FCA had banned sales of the product! Surely this is outright misleading to investors.

Also, in the most recent announcement they acknowledge the PRA have put a block on dividends from Vanquis to the parent. I would be very interested to know when that block was put in place (unstated in the announcement but it would not surprise me if it was some time ago).

All told a very shoddy situation and it wouldn't surprise me to see litigation as a result. As well, of course, as potentially quite substantial compensation claims by customers.

This is what you might expect of a shoddy AIM listed set of scammers, not a FTSE 100 business.

Now all that said, it's not clear that any of this affects the debt, but possibly of interest nonetheless.

Rgds
Phil

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Re: Provident Financial debt has become interesting

#76681

Postby UncleEbenezer » August 24th, 2017, 8:41 am

I went as far as to check how far the debt had been knocked back: some attractive potential returns there.

But what bothers me about any debt in today's market is that I'm taking the risk for little or no reward. In the case of PFG, the reward is there, but the risk feels higher than a diversified basket of equities.

I'm not averse to a high-risk flutter on occasion. I've bought into crashed shares and rights issues in the past, and picked up some CLLN after the crash of a couple of weeks ago. What puts me off PFG specifically is that they're a hated industry, and the media and regulators may have killed off their business in an altogether more fundamental sense than mere management shortcomings.

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Re: Provident Financial debt has become interesting

#76730

Postby hiriskpaul » August 24th, 2017, 11:33 am

It is a sad fact that the likes of PFG are needed, loathsome though there activities are. The lives of their customers would be so much better if they could only manage to save a few hundred into a deposit account, then borrow/repay from that instead of from regulated and unregulated loan sharks. Budgeting is a skill that is lacking in many affluent people as well, but it is a huge issue for those who have to pay 100s of % to borrow.

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Re: Provident Financial debt has become interesting

#76735

Postby hiriskpaul » August 24th, 2017, 11:50 am

UncleEbenezer wrote:I went as far as to check how far the debt had been knocked back: some attractive potential returns there.

But what bothers me about any debt in today's market is that I'm taking the risk for little or no reward. In the case of PFG, the reward is there, but the risk feels higher than a diversified basket of equities.

I'm not averse to a high-risk flutter on occasion. I've bought into crashed shares and rights issues in the past, and picked up some CLLN after the crash of a couple of weeks ago. What puts me off PFG specifically is that they're a hated industry, and the media and regulators may have killed off their business in an altogether more fundamental sense than mere management shortcomings.

I don't really consider PFG debt as a flutter and holding a basket of equities right now is hardly risk free! I have far more invested in high yield fixed income (or was high yield when I bought it) than equities and it has served me well. The answer is to invest diversely, across multiple asset classes and sources of risk. High yield opportunities like the PFG debt come along every so often (Balfour Beatty, Tesco, Premier Oil, Enquest, the banks, Eurozone debt, ...) and most of it turns out ok, but can give a frightening ride.

hiriskpaul
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Re: Provident Financial debt has become interesting

#76755

Postby hiriskpaul » August 24th, 2017, 12:57 pm

LongbeardRanger wrote:I can see the potential attraction of Provident's debt.
Can't see why anyone would touch the equity though. Obviously there has been a lot of focus on the bungled business model transition. That does seem to be totally mad and a shocking cock up by the board but to me it was not the most interesting aspect of the announcement. The most interesting aspect was what they admitted about Vanquis. They said that the FCA were investigating the ROP product and that the group had agreed in April 2016 (so, well over a year ago) to suspend new sales of ROP and to conduct a customer review.

Firstly, there is a huge question mark as to why that is only being disclosed now. Why wasn't it announced immediately (i.e. in April last year?).

Secondly, this is what they said in their 2017 interims just one short month ago:

In line with previous guidance, the annualised risk-adjusted margin has moderated from 32.4% to June 2016 to 31.4% to June 2017, reflecting a reduction in the revenue yield due to a further decline in the penetration of the Repayment Option Plan (ROP) product within the customer


I should expect penetration had declined, if the FCA had banned sales of the product! Surely this is outright misleading to investors.

Also, in the most recent announcement they acknowledge the PRA have put a block on dividends from Vanquis to the parent. I would be very interested to know when that block was put in place (unstated in the announcement but it would not surprise me if it was some time ago).

All told a very shoddy situation and it wouldn't surprise me to see litigation as a result. As well, of course, as potentially quite substantial compensation claims by customers.

This is what you might expect of a shoddy AIM listed set of scammers, not a FTSE 100 business.

Now all that said, it's not clear that any of this affects the debt, but possibly of interest nonetheless.

Rgds
Phil

I am not in the least bit surprised at the antics of the PRA/FCA. They hold back information that really should be published and at times they leak information in a way that looks close to being market manipulation. I am sure you are absolutely right about the ROP ban being in place for a long time, but in fairness to the PRA/FCA for once it can be tricky to handle issues like this. The FCA questions stuff all the time and most of the time allows products to continue to be sold with tweaks to the conditions or possibly rapped knuckles and more controls over the selling. If they announced every investigation in advance they would cause a lot of disruption.

I hope that Vanquis were not stupid enough to create another PPI so soon after the last, but it would not surprise me if they have. The banks would have us believe they have cleaned up their act, but there are many examples of illegal and shark like behaviour from banks that have taken place after the financial crisis. I have very low expectation of the behaviour of any of our banks. Most AIM companies are likely to be far more ethical.

I agree with you about not touching the equity. That could prove worthless if a substantial capital raise is required. In the recent Co-op Bank restructuring existing equity was diluted 20 to 1. Senior unsecured escaped unscathed as there was substantial subordinated debt that could be bailed in, but with PFG that is not the case. In a similar situation, if existing equity holders were not prepared to supply the required capital through a rights issue, then a contribution would be required from senior unsecured, assuming no rescuer could be found. I am talking about a worse case scenario here. At present it does not look as though PFG needs more capital, but the situation could quickly deteriorate. The equity just looks like a mindless punt to me.

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Re: Provident Financial debt has become interesting

#76759

Postby hiriskpaul » August 24th, 2017, 1:17 pm

FredBloggs wrote:
hiriskpaul wrote:It is a sad fact that the likes of PFG are needed, loathsome though there activities are. The lives of their customers would be so much better if they could only manage to save a few hundred into a deposit account, then borrow/repay from that instead of from regulated and unregulated loan sharks. Budgeting is a skill that is lacking in many affluent people as well, but it is a huge issue for those who have to pay 100s of % to borrow.

The customers of PFG, can't, won't, and don't do any of those things. I can't describe PFG the way you do. Better to use PFG than the loan sharks and pay day lenders that those same people will turn to.

Oh I completely agree with you about the PFG being required. As you say, far better to have them than the alternative and alas you are right about the customers being incapable of managing their financial affairs more efficiently. Most customers anyway. I am sure some of them could be encouraged to save and taught how to budget, but that is hardly in PFG agents best interest is it?

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Re: Provident Financial debt has become interesting

#76766

Postby hiriskpaul » August 24th, 2017, 1:43 pm

If anyone is interested in a 2% return over the next 6 weeks, you can still get PF17 for 98. Everything else has moved up a bit more since yesterday so I will continue to wait for lower prices and/or news.

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Re: Provident Financial debt has become interesting

#76785

Postby Raptor » August 24th, 2017, 2:31 pm

hiriskpaul wrote:Oh I completely agree with you about the PFG being required. As you say, far better to have them than the alternative and alas you are right about the customers being incapable of managing their financial affairs more efficiently. Most customers anyway. I am sure some of them could be encouraged to save and taught how to budget, but that is hardly in PFG agents best interest is it?


Too true about "teaching" them the basics. One of my "career" moves was to be an underwriter in the sub-prime mortgage business, obviously on every deal we required the usual suspects, credit record check, bank statements, etc, etc. You would not be surprised the number of times going through bank statements would note outgoing payments that needed chasing up, the number of "clients" who did not have any idea on what they were paying was remarkable. Paying 2/3 phone contracts when they only had 1 phone, various payments to charities when they were barely scrapping by, massive SKY payments etc. The worse outgoings were usually credit cards, they would say they only had 1 or 2 cards on application but you found many more on bank statements. Fortunately one of our remits on those was to only agree loans if the credit card debt was wound up and the cards were cancelled. did not stop them getting new cards but did help reduce overall debt. The local branches hated us as I also often refused to allow PPI (or similar) insurance to be included, especially to the unemployed!! (I was the only underwriter that was actually trained to "sell" insurance and could therefore take a stance).

Got out before the "crash", went into a much more respected career as a "bookie".

Raptor.

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Re: Provident Financial debt has become interesting

#77100

Postby hiriskpaul » August 25th, 2017, 5:02 pm

I managed to pick up a sizable amount of PF17 late yesterday at 97.05. A tax free 3% gain over 6 weeks is fine for me and I am really surprised holders are prepared to sell PF17 at such a discount. They would only not redeem if the PRA stopped them, which is most unlikely within the next 6 weeks.

Not bought any more of the longer dated issues as the prices keep on going up. Much higher now than I am currently prepared to pay. Clearly others have a lot more confidence than me that ROP will not be an expensive disaster requiring more capital. There seemed to be a lot more available today than yesterday which probably means some institutions have started moving out ahead of a likely ratings downgrade.

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Re: Provident Financial debt has become interesting

#77764

Postby Clitheroekid » August 29th, 2017, 8:42 pm

hiriskpaul wrote:Anyone else here been buying?

Yes, and thanks for flagging this up. I saw the PF17 available at 97 and agreed with your view that a more or less guaranteed 3% return over 5 weeks was too attractive to resist, so I've bought some with cash that was just sitting earning nothing.

I've not bought this type of investment before, and was therefore a tad flummoxed by the accrued interest element, but it's been an interesting exercise, and I'm going to look at further opportunities in this area.

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Re: Provident Financial debt has become interesting

#77880

Postby GoSeigen » August 30th, 2017, 11:43 am

Clitheroekid wrote:
hiriskpaul wrote:Anyone else here been buying?

Yes, and thanks for flagging this up. I saw the PF17 available at 97 and agreed with your view that a more or less guaranteed 3% return over 5 weeks was too attractive to resist, so I've bought some with cash that was just sitting earning nothing.

I've not bought this type of investment before, and was therefore a tad flummoxed by the accrued interest element, but it's been an interesting exercise, and I'm going to look at further opportunities in this area.



Clitherokid, the accrued interest bamboozles a lot of people! It is simply a notional value calculated to make your tax reporting easier. In evaluating the vaue of the bond and potential profit when you buy, simply make sure you use the TOTAL quoted cost of the deal including commissions.

You take the accrued interest value from the contract note and use it in your tax return to reduce the income tax payable on the next coupon you received after you purchased the bond. Obviously in this case there will be nothing to do regarding disposal because the bond will be redeemed exactly on an interest payment date.


GS

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Re: Provident Financial debt has become interesting

#78008

Postby Shinyuk » August 30th, 2017, 8:30 pm

Got a corporate action message today via Youinvest stating that PF17 will be redeemed in full at the beginning of October. So it seems fine. Thanks to Hiriskpaul for pointing out the opportunity.I already held a small amount in my ISA but topped up for a larger amount in my SIPP.

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Re: Provident Financial debt has become interesting

#78470

Postby hiriskpaul » September 1st, 2017, 4:41 pm

Clitheroekid wrote:
hiriskpaul wrote:Anyone else here been buying?

Yes, and thanks for flagging this up. I saw the PF17 available at 97 and agreed with your view that a more or less guaranteed 3% return over 5 weeks was too attractive to resist, so I've bought some with cash that was just sitting earning nothing.

I've not bought this type of investment before, and was therefore a tad flummoxed by the accrued interest element, but it's been an interesting exercise, and I'm going to look at further opportunities in this area.

Yes, as GS has said, the treatment of accrued interest is perfectly normal and helps spread the income and tax fairly between you and the seller. One other aspect worth noting is that this is what the HMRC call a Qualifying Corporate Bond (QCB), which means you can ignore the capital gain you make on it for capital gains tax purposes.


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