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preference shares/ pibs

Gilts, bonds, and interest-bearing shares
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preference shares/ pibs

#66242

Postby geoff1309 » July 11th, 2017, 4:52 am

Hi all, would like some advice / views on pibs have just caught a cold with clln and a couple of others in my hyp. . I'm 76 years old and looking to reduce my portfolio drastically to a safer haven (hopefully) in the years left . I shall still keep a few speculative shares for growth.but mainly preference shares will provide good income at 5-7% not worried about growth with these. Many thanks in anticipation
Regards Geoff 1309.

Moderator Message:
not a strategy. Moving to gilts/bonds. Raptor.

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Re: preference shares/ pibs

#66692

Postby hiriskpaul » July 12th, 2017, 1:40 pm

Preference shares and PIBS can be good for growth as well as income. I don't have precise figures, but I am sure I have seen a bigger total return from prefs, PIBS and high yield debt over the last 5 years than I have from my global equity portfolio. You really should try to understand the terms and conditions of prefs and PIBS before you plunge in. However, there is a relatively safe set of prefs issued by UK banks and insurance companies. Here is a list of the more liquid irredeemable UK bank prefs with no dangerous terms and conditions (in my opinion):

Bank
RBS NWBD
Lloyds LLPC, LLPD
Santander UK SAN, SANB
St. Chartered STAB, STAC

All carried on paying throughout the banking crisis, apart from LLPC/LLPD where European regulators forced a 2 year ban on payments due to the state bailout of Lloyds. You should definitely not rely on them continuing to pay should we get a repeat of the crisis though as regulations have changed and preference shares/subordinated debt is much more likely to be bailed in or haircut before any state money is put in. It is highly unlikely that the dividends on NWBD, SAN, SANB, STAB and STAC would be voluntarily suspended by the issuing banks because the terms and conditions force the issue of more preference shares to pref holders in those circumstances and stop payment of dividends on ordinary shares until the recommencement of pref payments. LLPC/LLPD do not have the compensatory terms, but non-payment still blocks dividend payments on the ordinary shares. Yields are about 5.8% for LLPC/LLPD and 6.0-6.1% for the others, after correcting for stamp duty and the embedded accrued dividend. Personally I don't consider the lower yield on LLPC to be justifiable and have been rebalancing out of them recently into slightly higher yielders. This sort of thing just happens occasionally and with a bit of luck I may be able to balance back in to LLPC/LLPD at some point.

For similarly relatively safe and simple undated insurance prefs, I would recommend Aviva (GACA, GACB, AV.A, AV.B) and RSA (RSAB), but yields are lower than those of the banks between 5.3% and 5.6%.

Most simple PIBS are harder to get hold of and trade at wider spreads than the above prefs, but can at times provide slightly higher yields. The easiest time to buy them is usually when there is some stress in the market, which is not now. Take a look at BOI (not actually a PIBS, but very similar subordinated debt that used to be a Bristol & West PIBS, currently yielding about 6.3%), SKIP (Skipton, 6.1% yield) and LBS (Leeds, 6.2% yield). I recently bought a small amount of LBS at 212 across a couple of accounts, went back for some more and the price had risen to 215. This shows how illiquid many PIBS are. BOI is often the easiest to buy and sell.

If you want to go down to smaller society's, Newcastle (NBSR, 6.3% yield) and Nottingham (NOTP, 6.1% yield) are reasonably priced, assuming you can actually get any, and the Society's are well capitalised.

The income from PIBS (and BOI) is classed as interest rather than the dividends you get with prefs, so may work out better for you to hold inside a tax shelter than the prefs.

Finally, a more complicated pref, on a lower yield that might still interest you is BBYB, issued by Balfour Beatty. At a price of 115, the running yield is actually 9.3%, but it will be redeemed in 2020 and so suffer a capital loss of 15p per share, which might itself prove useful to you. Overall yield to maturity is about 4.9%, which IMHO is exceptional for a 3 year return. BBYB is relatively safe because Balfour have a large infrastructure portfolio they could dip into should they have difficulty financing the redemption of BBYB.

It is very easy to pile on the risk with prefs, PIBS and unsubordinated debt, so I have only posted what I consider to be the safer securities here. If anything appears to have more than say a 6.5% yield at present, then there is probably a very good reason for it, so be careful!

I have positions in all the above by the way, except for RSAB, which has never traded at a price which has tempted me.

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Re: preference shares/ pibs

#66696

Postby Alaric » July 12th, 2017, 1:51 pm

hiriskpaul wrote: BBYB is relatively safe because Balfour have a large infrastructure portfolio they could dip into should they have difficulty financing the redemption of BBYB.


Same sector as Carillion though and they even contemplated a merger some years ago.

https://www.theguardian.com/business/20 ... rger-talks

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Re: preference shares/ pibs

#66719

Postby hiriskpaul » July 12th, 2017, 2:30 pm

Alaric wrote:
hiriskpaul wrote: BBYB is relatively safe because Balfour have a large infrastructure portfolio they could dip into should they have difficulty financing the redemption of BBYB.


Same sector as Carillion though and they even contemplated a merger some years ago.

https://www.theguardian.com/business/20 ... rger-talks


Sure, the ords are risky and they have a backlog of projects that they are unlikely to make much profit on, but they have a lot of cash and that £1.2B infrastructure portfolio, so as a pref holder I am reasonably confident of seeing every dividend payment and the final redemption. There is an outside chance that the convertible feature may provide some upside before redemption as well, but I am not counting on that.

I would also add that Quinn has pretty much kitchen-sinked the operation and if there was something nasty behind the cow shed I think he would have found it by now.

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Re: preference shares/ pibs

#67173

Postby geoff1309 » July 14th, 2017, 7:51 am

Many thanks for in-depth article very useful indeed
Geoff 1309

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Re: preference shares/ pibs

#67201

Postby AleisterCrowley » July 14th, 2017, 9:55 am

Interesting post highriskpaul - thanks. I have looked at prefs in the past (and have a few 'experimental' holdings) but need to revisit as I have a fairly large inactive cash pile.
What sort of effect would a base rate rise (say 25 bps) have on pref capital values?
Where's the best place to find current rates ? I have used fixedincomeinvestor.co.uk in the past

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Re: preference shares/ pibs

#67205

Postby Alaric » July 14th, 2017, 10:11 am

AleisterCrowley wrote:What sort of effect would a base rate rise (say 25 bps) have on pref capital values?


If a stock is undated, the price, ignoring accrued income effects, is just Coupon divided by yield. So an 8% coupon priced for a 4% yield would have a price of 200. If the required yield increased to 4.25%, the price would drop to 188. A 6% required yield drops the price to 133 and a 8% yield takes it back to par.

In practice prices don't go that high. An example from the site you quoted is
http://www.fixedincomeinvestor.co.uk/x/ ... oupid=3448

Aviva 8.75%
Price: 160.25
Coupon: 8.75%
Yield: 5.473

A change in the required yield of 0.25% upwards would take the price down 7 to around 153.

An additional risk which can arise with both Prefs and PIBs is that the issuer can find some small print allowing them to redeem at par.

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Re: preference shares/ pibs

#67206

Postby AleisterCrowley » July 14th, 2017, 10:21 am

An additional risk which can arise with both Prefs and PIBs is that the issuer can find some small print allowing them to redeem at par.

Worrying.... how well hidden is that sort of clause normally? Has anyone trawled the prospectuses and pulled out the 'redeem at par' into a nice simple Y/N ?

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Re: preference shares/ pibs

#67230

Postby dlp6666 » July 14th, 2017, 11:24 am

I've not looked under the bonnet of these two USD stocks but their c.7% yields look very tempting:

FFC (Flaherty & Crumrine Preferred Securities Inc Fund)
SPFF (Global X Funds SuperIncome Preferred ETF)

Any thoughts would be appreciated (I'm sure I'm missing some important 'cautionary' information!).

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Re: preference shares/ pibs

#68780

Postby hiriskpaul » July 21st, 2017, 11:15 am

AleisterCrowley wrote:Interesting post highriskpaul - thanks. I have looked at prefs in the past (and have a few 'experimental' holdings) but need to revisit as I have a fairly large inactive cash pile.
What sort of effect would a base rate rise (say 25 bps) have on pref capital values?
Where's the best place to find current rates ? I have used fixedincomeinvestor.co.uk in the past

Sorry for not replying, I had not noticed the comments on this thread.

Hard to say precisely what would happen to undated prefs/PIBS when interest rates rise. Possibly not much though. 10 years ago base rates were 5.5%, but NWBD was about 143, implying a yield of about 6.3%. So not significantly different to today. What matters much more than base rates are 1) changes in long gilt yields and 2) changes in the credit spread. The 4% 2060 gilt has a gross redemption yield of about 1.7%, implying credit spread of between 3.8% and 4.5%. Long gilt yields in 2007 were about 4.5%, implying a comparable credit spread of only 1.8% at the time. Banks and building societies are being forced to take on more capital and behave more prudently now than before the financial crisis. In addition, these sorts of prefs are being underpinned by CoCos, which supply capital ahead of a bank failure. In theory then the prefs should carry less risk than historically they have done. On the other hand 2007 was a crazy time with practically no premium being placed on risk.

On balance I am happy to hold and not too concerned about rises in base rates, but would probably substantially reduce my holdings should the credit spread above long dated gilts get below 2%.

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Re: preference shares/ pibs

#68784

Postby hiriskpaul » July 21st, 2017, 11:33 am

dlp6666 wrote:I've not looked under the bonnet of these two USD stocks but their c.7% yields look very tempting:

FFC (Flaherty & Crumrine Preferred Securities Inc Fund)
SPFF (Global X Funds SuperIncome Preferred ETF)

Any thoughts would be appreciated (I'm sure I'm missing some important 'cautionary' information!).


I don't know anything about these particular funds. iShares have a US listed preferred stock ETF (PFF) and an International one (IPFF) which may also be of interest.

Cautionary information/Things to consider:

1) What level of risk is being taken. For example is there a high proportion of "distressed" prefs in the funds?
2) What are the charges?
3) These are US listed, so you will lose 15% in dividend withholding tax. You can avoid this by holding in some SIPPs though, e.g. Hargreaves Lansdown and YouInvest.
4) If these funds do not have UK reporting status any capital gains will be subject to income tax. Irrelevant of course if held in a SIPP or ISA.
5) Many US preferred shares are dated and/or callable. If these carry a high dividend rate (many do), a capital loss may arise on redemption. So as always, consider prospects for total return, not just the running yield.

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Re: preference shares/ pibs

#68795

Postby hiriskpaul » July 21st, 2017, 11:45 am

AleisterCrowley wrote:An additional risk which can arise with both Prefs and PIBs is that the issuer can find some small print allowing them to redeem at par.

Worrying.... how well hidden is that sort of clause normally? Has anyone trawled the prospectuses and pulled out the 'redeem at par' into a nice simple Y/N ?


I have trawled through the prospectuses of the prefs/PIBS I mentioned numerous times (especially Lloyds!) and have not come across any areas that could realistically be exploited by spivvy characters who may end up running Banks/Building Societies.

Having been a victim of Lloyds reprehensible behaviour with respect to the ECNs, I am very alert to the possibility of the issuer exploiting some loophole. Anyone investing should really take the time to ensure that they know what they are investing in, but short of broad market trackers, I think that is true of other investments.

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Re: preference shares/ pibs

#68829

Postby AleisterCrowley » July 21st, 2017, 2:08 pm

hiriskpaul wrote:
AleisterCrowley wrote:Interesting post highriskpaul - thanks. I have looked at prefs in the past (and have a few 'experimental' holdings) but need to revisit as I have a fairly large inactive cash pile.
What sort of effect would a base rate rise (say 25 bps) have on pref capital values?
Where's the best place to find current rates ? I have used fixedincomeinvestor.co.uk in the past

Sorry for not replying, I had not noticed the comments on this thread.

Hard to say precisely what would happen to undated prefs/PIBS when interest rates rise. Possibly not much though. 10 years ago base rates were 5.5%, but NWBD was about 143, implying a yield of about 6.3%. So not significantly different to today. What matters much more than base rates are 1) changes in long gilt yields and 2) changes in the credit spread. The 4% 2060 gilt has a gross redemption yield of about 1.7%, implying credit spread of between 3.8% and 4.5%. Long gilt yields in 2007 were about 4.5%, implying a comparable credit spread of only 1.8% at the time. Banks and building societies are being forced to take on more capital and behave more prudently now than before the financial crisis. In addition, these sorts of prefs are being underpinned by CoCos, which supply capital ahead of a bank failure. In theory then the prefs should carry less risk than historically they have done. On the other hand 2007 was a crazy time with practically no premium being placed on risk.

On balance I am happy to hold and not too concerned about rises in base rates, but would probably substantially reduce my holdings should the credit spread above long dated gilts get below 2%.


Thanks - that makes sense , I think -....I had to look up CoCo...appears to be equivalent to an ECN?
If the issuer runs intro trouble how will the prefs be affected compared to equity. ? Presumably as the apparent risk increase the pref prices will fall to provide a greater yield over Gilts, with equities heading south as well. Probably an impossible question to answer but if Megabank plc shares drop 30% what would be the expected parallel drop in Megabank undated prefs ? From memory they are higher up the pecking order so 'safer' than equities?

I do have problems with the dual nature of prefs.

Time for me to do more research perhaps - anything to avoid 'work' !

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Re: preference shares/ pibs

#68847

Postby Alaric » July 21st, 2017, 3:13 pm

hiriskpaul wrote:Having been a victim of Lloyds reprehensible behaviour with respect to the ECNs, I am very alert to the possibility of the issuer exploiting some loophole.


That was one of the loopholes, there was something else involving PIBs previously issued by the Bristol & West Building Society when the Bank of Ireland who had taken over Bristol & West ran into difficulties. There's uncertainty around anything issued by the Co-op Bank, but I don't think that was anything more untoward than poor management.

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Re: preference shares/ pibs

#68856

Postby hiriskpaul » July 21st, 2017, 3:54 pm

AleisterCrowley wrote:
hiriskpaul wrote:
AleisterCrowley wrote:Interesting post highriskpaul - thanks. I have looked at prefs in the past (and have a few 'experimental' holdings) but need to revisit as I have a fairly large inactive cash pile.
What sort of effect would a base rate rise (say 25 bps) have on pref capital values?
Where's the best place to find current rates ? I have used fixedincomeinvestor.co.uk in the past

Sorry for not replying, I had not noticed the comments on this thread.

Hard to say precisely what would happen to undated prefs/PIBS when interest rates rise. Possibly not much though. 10 years ago base rates were 5.5%, but NWBD was about 143, implying a yield of about 6.3%. So not significantly different to today. What matters much more than base rates are 1) changes in long gilt yields and 2) changes in the credit spread. The 4% 2060 gilt has a gross redemption yield of about 1.7%, implying credit spread of between 3.8% and 4.5%. Long gilt yields in 2007 were about 4.5%, implying a comparable credit spread of only 1.8% at the time. Banks and building societies are being forced to take on more capital and behave more prudently now than before the financial crisis. In addition, these sorts of prefs are being underpinned by CoCos, which supply capital ahead of a bank failure. In theory then the prefs should carry less risk than historically they have done. On the other hand 2007 was a crazy time with practically no premium being placed on risk.

On balance I am happy to hold and not too concerned about rises in base rates, but would probably substantially reduce my holdings should the credit spread above long dated gilts get below 2%.


Thanks - that makes sense , I think -....I had to look up CoCo...appears to be equivalent to an ECN?
If the issuer runs intro trouble how will the prefs be affected compared to equity. ? Presumably as the apparent risk increase the pref prices will fall to provide a greater yield over Gilts, with equities heading south as well. Probably an impossible question to answer but if Megabank plc shares drop 30% what would be the expected parallel drop in Megabank undated prefs ? From memory they are higher up the pecking order so 'safer' than equities?

I do have problems with the dual nature of prefs.

Time for me to do more research perhaps - anything to avoid 'work' !

ECNs were a type of CoCo, essntially anything that gets converted to CET1 capital or cancelled before a bank becomes insolvent. They are good for prefs because they take the hit before a bank fails. Prefs take a hit after it fails, although the situation is not quite so clear cut as that due to the PRA's new resolution powers.

As to how much prefs are affected when the issuer gets into trouble, it really depends how much trouble. From memory, I think NWBD bottomed out around 30p in Jan 2008, or possibly even lower. On the other hand, Standard Chartered ordinary shares lost about 75% of their value between March 2013 and March 2016, but over the same period the prefs lost about 17%. In addition the prefs carried on paying throughout that period, unlike the ordinary shares. In terms of total return, pref holders were not out of pocket at all.

As long as the situation is not potentially catastrophic, as the financial crisis was for RBS, etc. then the Standard Chartered scenario is what I would expect to see. If a company is in a bad state then the typical medicine is to slash the dividend and do a rights issue, as Standard Chartered did. Both very bad for ordinary shares, but excellent news for pref and bond holders. However, if the situation is really dire and cancelling dividends/rights issue will not be sufficient to fix the problem, then the next level of fix (apart from a takeover) is some kind of deal with pref, bond and debt holders, which may be very bad news for pref and bond holders.

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Re: preference shares/ pibs

#68863

Postby hiriskpaul » July 21st, 2017, 4:15 pm

Alaric wrote:
hiriskpaul wrote:Having been a victim of Lloyds reprehensible behaviour with respect to the ECNs, I am very alert to the possibility of the issuer exploiting some loophole.


That was one of the loopholes, there was something else involving PIBs previously issued by the Bristol & West Building Society when the Bank of Ireland who had taken over Bristol & West ran into difficulties. There's uncertainty around anything issued by the Co-op Bank, but I don't think that was anything more untoward than poor management.

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.

The Co-op Bank situation was about a badly managed bank that ran short of capital due to fraud and management incompetence. There were no attempts to rip off bondholders by exploiting loopholes. Thanks to a herculean effort by Mark Taber, many retail pref and bondholders actually did very well out of that situation! I still have a substantial holding of Co-op Group bonds and Co-op Bank senior unsecured (which looks as though will be repaid in full in September).

I cannot ever recall a situation like that of the Lloyds ECNs, where a bank sets out to claim a clause in the prospectus should not be interpreted in the way it is written and sought to exploit an error which they claimed was in the contract. A contract they wrote and was approved by the FSA/Treasury and was of fundamental importance to Lloyds survival without substantially more state assistance.

Issues such as management incompetence, spivvy behaviour and outright fraud can hit many investments. Prefs and bonds are not immune to the fallout from that, but holders don't usually don't come off quite as badly as ordinary shareholders.

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Re: preference shares/ pibs

#68903

Postby UncleEbenezer » July 21st, 2017, 8:13 pm

The only prefs I hold directly are RSAB, which I picked up a little under par a few years back. They're now showing 30% capital gain, and have performed much better than the RSA ordinaries over most timescales. But they have taken a knock once or twice when the company alarmed the market, and I momentarily wondered if I really should've gone for something from Aviva instead.

Can't really glean that much from comparing RSA to RSAB, except to say that when growth is not on the table, the prefs seem more Doris-able than the ordinaries. Comparing BBYB to BBY shows a much more stark contrast, as the prefs held more-or-less steady right through the 2014 crisis when BBY suffered a kitchen-sink moment and lost half its value.

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!

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Re: preference shares/ pibs

#68906

Postby UncleEbenezer » July 21st, 2017, 8:25 pm

hiriskpaul wrote:Issues such as management incompetence, spivvy behaviour and outright fraud can hit many investments. Prefs and bonds are not immune to the fallout from that, but holders don't usually don't come off quite as badly as ordinary shareholders.

Surely the generic situation in cases like you describe is that the issuer gets into trouble, and a rescuer holds you over a barrel as they impose their own terms on a rescue.

You don't even have to be an investor to feel the fallout. Look at what QE did to (the purchasing power of) pension pots and Doris's savings: that's actually more arbitrary and despotic than the Irish government imposing its terms - for which they had to convince a court.

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Re: preference shares/ pibs

#68908

Postby Alaric » July 21st, 2017, 8:44 pm

UncleEbenezer wrote: 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!


That's something the market price is going to know about, so you get a yield commensurate with a dated bond of equivalent coupon. Markets can get it wrong, the historic example is the 3.5% War Loan dated 1952 or later. It was priced as a short until the Korean War kicked interest rates up. It didn't get redeemed until George Osborne used the reduced QE interest rates to clean up and redeem all the left over undated Government issues. That cut out one way of beating the derisory interest rates on deposits, as if you were comfortable with risk of a (considerable) rise in interest rates, you could buy undateds at around par, enjoy the coupon and speculate on redemption, as finally happened.

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Re: preference shares/ pibs

#68923

Postby hiriskpaul » July 21st, 2017, 10:58 pm

UncleEbenezer wrote:
hiriskpaul wrote:Issues such as management incompetence, spivvy behaviour and outright fraud can hit many investments. Prefs and bonds are not immune to the fallout from that, but holders don't usually don't come off quite as badly as ordinary shareholders.

Surely the generic situation in cases like you describe is that the issuer gets into trouble, and a rescuer holds you over a barrel as they impose their own terms on a rescue.

You don't even have to be an investor to feel the fallout. Look at what QE did to (the purchasing power of) pension pots and Doris's savings: that's actually more arbitrary and despotic than the Irish government imposing its terms - for which they had to convince a court.


That can happen yes, but again pref holders and bondholders usually get offered a better deal than ordinary shareholders. All classes of paper that are being changed have to vote through the rescue deal. Ordinary shareholders would usually vote for anything North of total wipeout as the alternative to the rescue deal may indeed be a total wipeout. The further up the hierarchy, the better the deal has to be, otherwise there is a risk that bondholders may decide that they may be better off with default and insolvency and vote against the rescue deal.

In the current Co-op Bank rescue, subordinated bondholders/shareholders decided not to come after senior bondholders at all, which I am very relieved about. I am sure they would have done had they thought they could get senior bondholders to agree to some kind of haircut or conversion to subordinated debt. In the Premier Oil restructuring, senior bondholders are actually being offered better terms (coupon increase by 1.5%, 1% fee payment and warrants) in order to get them to accept the proposals. This is fair as bondholders are agreeing to take on more risk.


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