Zero Dividend Preference (ZDP) Shares

[Alaric]

I thought these were a thing of the past but ii have a retail offer (UIL Finance Limited 2028 ZDP share offer).

The underlying investments are expected to be mostly unquoted companies. A ZDP can be regarded as a form of deferred interest borrowing. The PRIIP classifies this in the middle of the risk scale, based presumably on volatility, but the risk of it all going wrong and defaulting must be higher than other investments with supposedly higher risk.

[mc2fool]

I hadn't seen that, what's the redemption yield?

It's not on it yet, but I take it you're familiar with https://www.theaic.co.uk/aic/find-compare-investment-companies/zdp-analytics ?

[Alaric]

I hadn't seen that, what's the redemption yield?

5.75% was what I think it said. The documents suggest that the return only becomes uncovered if the asset portfolio sinks to half its current value. Given the current price at around 30p of what was Woodford's IT as against a launch of 100p, that isn't so reassuring.

[GrahamPlatt]

I hadn't seen that, what's the redemption yield?

It's not on it yet, but I take it you're familiar with https://www.theaic.co.uk/aic/find-compare-investment-companies/zdp-analytics ?

I had a look and what caught my eye was the JZ Capital Partners 2022
Further “research” revealing this: https://www.morningstar.com/cefs/xlon/jzcz/risk

Is this too good to be true?

[Alaric]

Is this too good to be true?

Could this be the pertinent statistic?

Bid/Ask
290.00/380.00

[Parky]

I thought these were a thing of the past but ii have a retail offer (UIL Finance Limited 2028 ZDP share offer).

The underlying investments are expected to be mostly unquoted companies. A ZDP can be regarded as a form of deferred interest borrowing. The PRIIP classifies this in the middle of the risk scale, based presumably on volatility, but the risk of it all going wrong and defaulting must be higher than other investments with supposedly higher risk.

UIL have several ZDP shares on the market with various redemption dates. They roll them over every 2 years to maintain their level of finance. In theory they should rise in value steadily from the issue price to the redemption price, but over the last year they dropped with the UIL Ordinary share price in the "covid dip". The 2026 ZDP dropped 20% compared to the UIL ordinary share price which dropped 50% (both have now recovered), so they are risky, but not as risky as the ordinary shares.

If you look at the ZDP shares of JZ Capital Partners, the ZDP shares dropped 40% when the ordinary shares dropped by 80%.

For the capped and relatively low rewards of ZDP shares, I don't think the risks are worth it. I sold ZDP shares in UIL and JZCP when the latter started getting into trouble in 2019 and have stayed out.

[GrahamPlatt]

Is this too good to be true?

Could this be the pertinent statistic?

Bid/Ask
290.00/380.00

Not pretty, but it’s still a circa 25% gain if held to maturity on 1/10/22 isn’t it?

[everhopeful]

Having been damaged by the Aberdeen ZDP debacle I would never buy another split. But leaving aside personal sentiment the underlying portfolio is surely a high risk collection of mainly finance companies domiciled mainly in Bermuda.

[GrahamPlatt]

It’s the Sortino ratio on my Morningstar link there which piqued my interest.
Not a parameter I was familiar with, but given how it’s derived (https://en.wikipedia.org/wiki/Sortino_ratio) that suggests to me that a value of 5.83 is pretty secure no? Implies the downside risk is small... not that I know how the mentats have come to that figure.

[Gan020]

I thought these were a thing of the past but ii have a retail offer (UIL Finance Limited 2028 ZDP share offer).

The underlying investments are expected to be mostly unquoted companies. A ZDP can be regarded as a form of deferred interest borrowing. The PRIIP classifies this in the middle of the risk scale, based presumably on volatility, but the risk of it all going wrong and defaulting must be higher than other investments with supposedly higher risk.

UIL is rolling over 36% of it's 22's into 28's and the existing 22's will get preference in the offer and are allowed to over apply.

Some thoughts:
1. UTL have recently sought shareholder approval to take their largest holding from around 35% of their portfolio even higher (50% from memory I can't remember. miht be 40%). This will be in Somers.
2. Currently 80% of their holdings are in just 4 companies

UTL fells overleveraged to me and over-invested in too few investments and I fear if the markets fall 10%, UTL's porfolio will fall much more as it is invested in financial services, tech and mining. On the other hand I do like the investment in Somers which I think is a good play.

I have yet to decide as a holder of the 22's whether to take up the offer. I have a few more days to think about it and will appreciate further thoughts on this topic.

[SKYSHIP]

Alaric - ZDPs are a bit of a favourite of mine having made hay after Aberdeen screwed up the sector back in 2002. The alarums at the time in the press and even a question in the House of Commons, caused many investors to sell their Split Cap trusts (ords, caps & ZDPs) regardless of price. This of course enabled those who did their research to buy stocks at stupidly low prices, then benefit as sanity returned. Bigger gains were made in the ords, but the ZDPs were more secure and still provided great upside.

Sadly all good things come to an end; and by 2005 the party was as good as over.

Since then the available ZDPs have massively reduced; but there have still been good opportunities.

Personally I won't touch the UIL Zeros - it is an appallingly managed trust with a hopeless record.

Until very recently 2 ZDPs issued by NP Private Equity (NBPP & NBPS) provided GRYs (Gross Redemption Yields) of c5%; but I've recently sold as the GRYs reduced to nearer 4%.

I am now left with just two:

# AIFZ - less than a year to run and not really dealable

# INLZ - still great VALUE; and the best ZDP opportunity left on the Market. Can be bought for 164.5p inc S/D & comm. At that price they are on a GRY of 6.96% to redemption at 201.4p in almost exactly 3yrs time - 10/04/24. DYOR - but you'll find massive asset cover from the specialist brown site project developer and housebuilder Inland Homes.

[Dove21]

Thanks for this. In the course of my 'OR' I've been unable to unearth the coupon dates. Could you oblige pls ? Tks

Dove

[SKYSHIP]

Dove - see my final para - redemption date 10/04/2024,

NB - ZDPs are Zero Dividend Prefs - no dividends. The GRY is calculated from the gain - some call it a Maturity yield.

[Dove21]

My mistake, thanks. Price is bouncing gently as I write. Clearly, sir, you are a mover of markets ..

Dove

[SKYSHIP]

Inland Homes (INL) update clearly shows the value of their assets; so underwrites the great value in the ZDPs (INLZ) where at 165p (166p inc exps) the GRY is still 6.7%pa.

https://uk.advfn.com/stock-market/londo ... e/84819697

[WickedLester]

I thought I remembered a thread on ZDP's on here somewhere.

FWIW I bought a few INLZ today at around 121p. It could be a mistake as the wheels have comprehensively fallen off at INL, which will ultimately be responsible for redeeming the ZDP's. However, it's not entirely a blind punt, the ZDP's are due to be redeemed in 15 months time at a touch over 201p each and assuming they are then I will make a 66% gain in a little over a year.

INL itself expects to have net assets of around £90m after a disastrous year and debt of around £100m including the ZDP's (about £37m I think).

Apparently the risk is mitigated somewhat by the fact that INLZ have a first charge over some of INL's assets and cash, sufficient to cover 120% of the amount owing to the ZDP's and despite a slowing housing market and rising costs I would think nearly 4000 plots with planning permission for residential development are worth at least £100m.

INL have announced a strategic review and I think the upshot of that is going to be that the company is wound down and the assets sold, I certainly can't see the ZDP's being rolled over so I expect holders to push for redemption on the due date.

I may have misunderstood this one badly, but it's only a small investment so I can afford to see how it pans out.