The Lemon Fool

I'll make a note to revisit this to check on those prophesies Meg. Keep polishing the ball

BullDog wrote:Right here as quoted from the post you referred to -

It was nice while it lasted and there may be a time to buy them again, but for now I shall pile a bit more into GACA where I can get c7% with a pretty much guaranteed rise in SP when the BoE actually get round to rate cuts, and the possibility of a tender.

Okay, I didn't realise that applied to both uses of guaranteed. Will try to understand better next time.

GS

88V8 wrote:....

But over the next twelve months I give you four certainties:

1 The SP of GACA will rise, such that I will be able to sell for more than the 126.5p I paid today, or sell previously by tender.
2 The SP of INVR bid to bid will fall by more than the received divis of March and September.
3 Death
4 Taxes

Remind me on February 1 next year, assuming I avoid No 3

V8

It seems to me that some INVR holders here are very happy with its high dividend payment irrespective of the possible (likely ?) implications for the capital value of their investment.

Yes it may have a yield of 12-13% right now but at the current selling price of 519 (according to ADVFN trades today) anyone who bought in October 2023 at about 580 (see previous posts on this thread dated October 30th which quoted buying prices of 577 and 585) anyone who bought then has already made a paper loss of 55-60p (about 10%) on the capital value of their investment (and that in the last ~4 months). But then anyone who bought a long time ago at sub 400 (if they bought in 2021) will now be sitting on a 25% capital gain, congratulations to anyone here that did that.

Considering INVRs investment potential right now though, especially after this weeks BoE meeting on 1st Feb (where Andrew Bailey clearly stated that they expect inflation to fall back towards 2% and for the next move in interest rates to be downward) then I personally see this as a threat to both the INVR dividend payment and it’s share price. In contrast the share price of regular preference shares should rise if interest rates fall.

But I guess you take your money and you make your choice. Personally my thinking aligns pretty much with 88V8s post above. I have many investments in my portfolio that will benefit from lower rates eg REITs, Renewables and Housebuilders to name but a few.

So while nothing is guaranteed and things might move against me if inflation goes up instead of falling (in which case my investment choices will likely suffer), I am comfortable with my choices. At the very least I will be paid (quite well) to wait.

Some might see INVR as a useful hedge I suppose, but not me.

ATB

Pref

GoSeigen wrote:

BullDog wrote:Right here as quoted from the post you referred to ...

Okay, I didn't realise that applied to both uses of guaranteed. Will try to understand better next time.

It's what's sometimes referred to as a drafting infelicitation

V8

Classic anchoring effect on display in this thread IMO. The reason these shares are priced with such a high yield is that investors are petrified of deflation returning. Here's a prediction: these will never trade at the lows below 400 again. I would go so far as to say that 500 is probably the bottom. As such, a price barely above that level is a wonderful opportunity.

INVR are trading at a spread of 7.5% over gilts! Okay, that's not the 20-40% yield that you might get from distressed debt but it really isn't bad pricing. If that spread narrows by 350bp you gain 25% in the price in addition to the 12%pa income, even if gilt yields don't fall at all.

Why do investors run when prices are cheap? And why do they all flock to gilts now, when the gilt bull run is over? If they think gilts are such a good idea, they should have been buying gilts 15 years ago when everyone was still terrified of inflation. Just before their epic bull run, not after it! When the yield on gilts was over 5% and INVR were issued at 1000.

Okay so people love gilts and hate inflation hedges. That's a great bullish flag for me, if I can be paid for Foolishly hedging against inflation then I am very happy. As one of the dumb people who bought these at 400, yes, I wish I'd been bolder and bought more but I really don't think I can dream of achieving that price again. I'll be happy to add at sub-550 price levels.

In Jun/Jul 2021 WBS was in a very similar position: also inflation linked, albeit indirectly via profits, no-one wanted to buy them because deflation and bank crisis fear. Look where they are trading now. IMO bank ordinary shares will follow a similar trajectory. They are struggling now, but the underlying forces are upward.

Please bookmark this post and ridicule me when I am proved wrong


GS

I am that person that bought INVR at 590 in October !

However I also bought BP prefs at the same time.

One down 12/13%, one up 12/13%, on both I have also received the half year payouts.

They have both moved on anticipation of future interest rates, although interest rates have not actually changed in the period since I bought either of them.

I have quite a few other preferences which have similarly moved up in anticipation of future interest rate cuts.

My inclination is to modestly add to INVR.

88V8 wrote:....over the next twelve months I give you four certainties:

1 The SP of GACA will rise, such that I will be able to sell for more than the 126.5p I paid today, or sell previously by tender.
2 The SP of INVR bid to bid will fall by more than the received divis of March and September.

For the record, my selling price for INVR last Friday was 519p, so that's my starting bid point for 12 months' time.

V8

88V8 wrote:

88V8 wrote:....over the next twelve months I give you four certainties:

1 The SP of GACA will rise, such that I will be able to sell for more than the 126.5p I paid today, or sell previously by tender.
2 The SP of INVR bid to bid will fall by more than the received divis of March and September.

For the record, my selling price for INVR last Friday was 519p, so that's my starting bid point for 12 months' time.

V8

That's a very interesting prediction! Dare I ask where you are expecting the BoE base and the long term swap rate to be in 12 months time for it to come to pass?

Ordinarily the price of a floating rate pref should be less volatile with interest rate changes (and expectations thereof) than that of a fixed rate pref and an expectation of BoE base rate falling is already priced into both INVR and GACA to some extent. I think the problem the market has with INVR as a floating rate pref stems from the incredible timing of Investec in managing to get the issue away priced at just 100bps above Base just before the GFC. As a result the margin is way below what the market now demands of deeply subordinated financial sector reg cap.

As a result INVR is priced as though it has a much lower nominal value than £10 a share. Outside of the GFC and interest rates falling to near zero (both unlikely to be repeated for some time) the price has pretty much stayed in the £5-£6 range. With the price currently at the bottom end of that range Base Rate would have to fall to about 2.5% before the yield on INVR fell as far as the 7% GACA is currently priced at.

OldBoyReturns wrote:

88V8 wrote:For the record, my selling price for INVR last Friday was 519p, so that's my starting bid point for 12 months' time.

That's a very interesting prediction! Dare I ask where you are expecting the BoE base and the long term swap rate to be in 12 months time for it to come to pass?
...Base Rate would have to fall to about 2.5% before the yield on INVR fell as far as the 7% GACA is currently priced at.

Ooh, I'm not that good at making predictions, not about the future.

True, as regards the yield. But the SP already fell another 10p over the weekend, and I'm well supplied with 'investments' that have given me a good yield whilst eating my capital. At least I've escaped relatively unscathed from this one.

V8

88V8 wrote:

OldBoyReturns wrote:That's a very interesting prediction! Dare I ask where you are expecting the BoE base and the long term swap rate to be in 12 months time for it to come to pass?
...Base Rate would have to fall to about 2.5% before the yield on INVR fell as far as the 7% GACA is currently priced at.

Ooh, I'm not that good at making predictions, not about the future.

True, as regards the yield. But the SP already fell another 10p over the weekend, and I'm well supplied with 'investments' that have given me a good yield whilst eating my capital. At least I've escaped relatively unscathed from this one.

V8

Spoilsport! I was looking forward to some healthy, informed Foolish debate on where interest rates will go and when and what this means for our fixed income holdings.

I realise mine is an unfashionable and unpopular view but when it comes to capital in fixed income investing I take the view that my investment represents a fixed sum of capital provided to the business which the market will value up and down over time depending on interest rates etc. So, providing I don't buy when interest rates are too low (eg the 2021 period) the market price will fluctuate and I will have opportunities to sell at or above my entry point.

OldBoyReturns wrote:

88V8 wrote:Ooh, I'm not that good at making predictions, not about the future.

True, as regards the yield. But the SP already fell another 10p over the weekend, and I'm well supplied with 'investments' that have given me a good yield whilst eating my capital. At least I've escaped relatively unscathed from this one.

V8

Spoilsport! I was looking forward to some healthy, informed Foolish debate on where interest rates will go and when and what this means for our fixed income holdings.

I realise mine is an unfashionable and unpopular view but when it comes to capital in fixed income investing I take the view that my investment represents a fixed sum of capital provided to the business which the market will value up and down over time depending on interest rates etc. So, providing I don't buy when interest rates are too low (eg the 2021 period) the market price will fluctuate and I will have opportunities to sell at or above my entry point.

I'm not sure there's any such thing as informed debate on the future of interest rates tbh, especially when you consider they are a second order effect and always set according to something else happening in the world which is most often unforeseeable. That's not to say the subject of interest rates is not interesting in it's own right, and in particular I'd recommend the book by Edward Chancellor offering a historical perspective. Also interesting to listen to his thoughts on various podcasts more recently, in particular his discussions with Merryn Somerset Webb and Howard Marks.

As for the discussion here, why should it be one thing or the other? If you're honest enough to admit you don't know what will happen to interest rates, surely it's best to hold a mix of floating rate (e.g. INVR) and fixed rate instruments?

My guess is that interest rates will not return to the low rates we saw previously. 3.5 - 6% in the medium term. A total finger in the air punt but the situation was anomalous and for many reasons I think it was dangerous to persist with the strategy for too long. I think I picked these up for a little over 200 in 2009 in the financial crisis. I've started to add a little more but probably have all I sensibly need. As I mention before, these were 600 in Aug 2022 when interest rates were 1.75% so a capital gain is very possible with market sentiment turning. But more than happy with the income and no plans to sell.

88V8 wrote:

Seasider wrote:Someone will be along to correct me but these are called Non-Redeemable so doesn't that mean they can't be called? They could do a tender offer instead of course.

With the SP so far below par the chance of a call is zero.
If you were so minded, you could plough through the issue terms here but I think that Art 150 onwards refers, and other than capital reorganisation makes no provision for redemption.

Given that there will imv be no further rate rises, the SP must surely be on a downslide now so, far from adding, I will be considering an exit to avoid losing capital value.

Sorry these posts are old but I think something needs to be made clear. non-redeemable has a specific meaning in regard to preference shares. If you read the articles of association of the issuer carefully you will note that definitions found in the Companies Acts apply. (Actually the Acts apply anyway, whether the Articles state that or not...)

So redemption ("non-redeemable") in this context has a specific meaning: when the shares were issued the terms did not specify any redemption date. It follows that redemption has nothing to do with capital reorganisations as suggested by another poster. Non-redeemable simply means that the investor cannot look forward to return of his capital on a pre-determined date, i.e. (s)he is in it for the long term, with the only escape route being a sale in the market. The phrase implies nothing about the other two legal ways that the company can purchase its shares: via an authorised purchase in the market or via court-and-shareholder-sanctioned capital reduction.

In summary to answer Seasider's question: Non-Redeemable does NOT mean that the shares cannot be "called"** (if by that he means repurchased by the issuer by some means) -- it means that there is no redemption feature at issue of the security. A tender offer is a shareholder-authorised purchase of the shares out of distributable reserves so it would definitely be a possibility for the issuer. Redemption and capital reduction are completely distinct concepts which should not be conflated else confusion ensues!


GS
(**) The term "call" is loaded: call options generally are a feature of debt. I don't know of any examples when it comes to preference shares; I doubt a call option would be a legal feature of a share under UK company law but feel free to correct me, it's a long time since I read the relevant passages.

Investec plc has announced a tender offer priced at 99 for its 6.75% AT1 securities:

https://www.londonstockexchange.com/new ... r/16342571

These have a first call date of 5 Dec 2024 (and are callable on any interest payment date thereafter) with a reset rate (reset every 5 years) of 5 year gilt yield plus 5.749% if not called.

New Investec plc AT1 issue with a 10.5% coupon (spread 597bps over reference gilt yield). For comparison I think Lloyds AT1 is currently trading on a yield of about 8.5%.

Security INVPLN 10.5 29-Perp
Investec Plc / Banks (ZA)
Collateral Type / Payment Rank / Tier Jr Subordinated

Coupon (%) 10.5
Tier 1 Cap Ratio 14.1
Ccy GBP
Size
Ask 102.00
Sprd /+597
(vs) UKT 0.5 29
Asw /+617
YtC 10.02
YtM/P 10.37
Isin XS2774843408
Rating M/S/F -/-/-

Next Call 28/08/2029
Mty Date / Perp Perpetual
Call / Coupon/ Conversion Details Convertible - Permanent Write Down on Common Equity Tier 1 Ratio <7% / Coupon resets to GUKG5 +656.6bps if not called.
Call Year 2029
Mty Year Perpetual
Outs (mm) 350
Min Piece/Inc 200k/1k

OldBoyReturns wrote:New Investec plc AT1 issue with a 10.5% coupon (spread 597bps over reference gilt yield). For comparison I think Lloyds AT1 is currently trading on a yield of about 8.5%.

Security INVPLN 10.5 29-Perp
Investec Plc / Banks (ZA)
Collateral Type / Payment Rank / Tier Jr Subordinated

Coupon (%) 10.5
Tier 1 Cap Ratio 14.1
Ccy GBP
Size
Ask 102.00
Sprd /+597
(vs) UKT 0.5 29
Asw /+617
YtC 10.02
YtM/P 10.37
Isin XS2774843408
Rating M/S/F -/-/-

Next Call 28/08/2029
Mty Date / Perp Perpetual
Call / Coupon/ Conversion Details Convertible - Permanent Write Down on Common Equity Tier 1 Ratio <7% / Coupon resets to GUKG5 +656.6bps if not called.
Call Year 2029
Mty Year Perpetual
Outs (mm) 350
Min Piece/Inc 200k/1k

Can this be traded on ii or iWeb....I can't seem to find it based on it's ISIN.

monabri wrote:

OldBoyReturns wrote:New Investec plc AT1 issue with a 10.5% coupon...

Can this be traded on ii or iWeb....I can't seem to find it based on it's ISIN.

I haven't looked, given the clip.

V8

OldBoyReturns wrote:New Investec plc AT1 issue with a 10.5% coupon (spread 597bps over reference gilt yield). For comparison I think Lloyds AT1 is currently trading on a yield of about 8.5%.

Good point and the reason why I believe a fair value for INVR is around +150bps over UK high street bank prefs, given Investec is regarded as a significantly weaker credit by the market across all its liability instruments.

Note that while INVR has lost its regulatory capital recognition for the UK issuer (Investec Plc) a while ago, it's still counted towards the parent (Investec group) capital stock under South African rules (remains to be seen how long) - not that it changes much, given any thought of par cancellation /tender/etc is very very remote/unrealistic (a market-price driven tender is always an option if the issuer thinks they can buy back capital on the cheap).

Latest (swaps/futures) market-implied UK policy (base) rate curve (in brackets: the recent market-implied lows at year-end 2023). Goes to show how the market has repriced from an overly optimistic rate-cutting frenzy to a more orderly path.

Current: 5.25%
3mth: 5.21% (5.20%)
6mth: 4.96% (4.80%)
1y: 4.40% (3.74%)
2y: 3.84% (2.99%)
3y: 3.64% (2.85%)

But who would want to hold ANY banks AT1's after what happened to Credit Suisse ?. Especially if they have the wipe-out clause referred to in this article.

https://www.spglobal.com/marketintellig ... t-74894988

Nice yield, which is clearly the attraction I'm guessing. But only for the brave I suspect....?. Thats not me.

ATB

Pref

BondSquared wrote:Latest (swaps/futures) market-implied UK policy (base) rate curve (in brackets: the recent market-implied lows at year-end 2023). Goes to show how the market has repriced from an overly optimistic rate-cutting frenzy to a more orderly path.

Current: 5.25%
3mth: 5.21% (5.20%)
6mth: 4.96% (4.80%)
1y: 4.40% (3.74%)
2y: 3.84% (2.99%)
3y: 3.64% (2.85%)

Is there some public website from which this information can be got? I can find it for US but could not find it for UK.