BP Preference Shares - BP.A and BP.B

[Wozzitworthit]

These have been dropping steadily since the end of May 2023.

The yields on both are around the 6.7% mark, and they seem to take it in turns almost for one to give slightly more than the other.

I have a small number of BP.A which I purchased in August and now with the proceeeds of AXI, a bit more due from NBMI and the , hopefully, repayment of ENQ1 and 66WS in October, I am thinking of buying more of one or both of these prefs.thus adding a bit of diversity amongst prefs already held.

The yied falls short of my target of 7% minimum for prefence shares, but being a great one for missing the boat .....

Anyone thinking of joining me .....

Woz

[88V8]

These have been dropping steadily since the end of May 2023.
The yields on both are around the 6.7% mark, and they seem to take it in turns almost for one to give slightly more than the other.
I have a small number of BP.A which I purchased in August and now with the proceeeds of AXI, a bit more due from NBMI and the , hopefully, repayment of ENQ1 and 66WS in October, I am thinking of buying more of one or both of these prefs.thus adding a bit of diversity amongst prefs already held.

The yield falls short of my target of 7% minimum for preference shares, but being a great one for missing the boat .....
Anyone thinking of joining me .....

I already hold, more so BP.A as the yield has tended to be higher when I had my buying boots on, but if LSE is correct BP.B currently yields a bit more... without working in the notional accrued....
As you say, they are a nice diversification from financials which is why I have occasionally forced myself to buy them.

It's odd that they have so resolutely fallen when others such as GACA, NWBD, have turned up since mid-summer. I can't remember when the BPs last had a front-running yield.

So thankyou for the heads-up.

I had been wondering what to do with AXI... more AV.A, GACA, NWBD, SAN, INVR with its second-string quality but unassailable yield, mmm, now another pair to dither over.

If I have a negativity it is that I expect Aviva to retire GACA/B and perhaps AV.A/B, and Natwest to have another pop at NWBD, all of which therefore promise a one-off capital uplift, but I do not expect BP to bother with a tender for their Prefs.

Decisions decisions...

V8

[hostye]

Yes I have been watching the price fall over past few months. I have done some homework too.

Until now I have always felt they were way overvalued but are now becoming more fair value. I had dipped my toe at these levels but i feel there could be a little further to drop for a couple of reasons.

1/ There has been good size on the offer for some time now, given the issue size its unusual to see clips of 100k on offer which there currently is on both. This leads me to believe there is an institutiuonal seller.

2/ Why would an insitution now sell after this price drop? Well if you look at the spread between long gilts and BP prefs then you are circa +220 bp which is about as tight as its ever traded. If these insitutions were hedged with gilts then they have a good opportunity to exit now. What may they buy instead at this yield you may ask! Then look at yields on the massive 12bn hybrid deal BP did back in 2020, the GBP tranche (BP 4.25% perp) is currently tradeing circa 89.30 cash / yielding approx 7.5% to the june 2027 call date, if not called the coupon then steps up to gilts +417bp. Thats a tempting switch if your an institutional investor.

Amother very important point to bear in mind is that this $12bn of hybrid issuance back in 2020 actually massively diluted Pref shareholders as the hybrids rank above ordinary equity but pari passu with the BP.A and BP.B prefs which total just £12-13m ! Thats seems to be a massive dilution to me!

With this in mind im looking for another 7-10 points fall in the prefs to feel they are good value.

[shaunm]

Yes I have been watching the price fall over past few months. I have done some homework too.

Then look at yields on the massive 12bn hybrid deal BP did back in 2020, the GBP tranche (BP 4.25% perp) is currently tradeing circa 89.30 cash / yielding approx 7.5% to the june 2027 call date, if not called the coupon then steps up to gilts +417bp. Thats a tempting switch if your an institutional investor.

Amother very important point to bear in mind is that this $12bn of hybrid issuance back in 2020 actually massively diluted Pref shareholders as the hybrids rank above ordinary equity but pari passu with the BP.A and BP.B prefs which total just £12-13m ! Thats seems to be a massive dilution to me!

With this in mind im looking for another 7-10 points fall in the prefs to feel they are good value.

Thank you for your post., much appreciated
Looking for another 7-10 points fall looks reasonable

Still however unsure whether the potential parlimentary election next year will provide possible investment opportunities, and whether Fixed Income (Long duration of Prefs) is a good idea as inflation has not yet been tamed within the UK. Concerned that inflation may be harder to "hit on the head", especially as State Pension went up 10% this year, and with the potential of 8% in 2024.

[88V8]

Amother very important point to bear in mind is that this $12bn of hybrid issuance back in 2020 actually massively diluted Pref shareholders as the hybrids rank above ordinary equity but pari passu with the BP.A and BP.B prefs which total just £12-13m ! Thats seems to be a massive dilution to me!

On the other hand, it's quite comforting to be parri passu with a $12bn issue

V8

[88V8]

... I'm looking for another 7-10 points fall in the prefs to feel they are good value.

Still however unsure whether the potential parliamentary election next year will provide possible investment opportunities, and whether Fixed Income (Long duration of Prefs) is a good idea as inflation has not yet been tamed within the UK. Concerned that inflation may be harder to "hit on the head", especially as State Pension went up 10% this year, and with the potential of 8% in 2024.

Predicting the exact bottom is as hard as predicting the exact top... I bought some more BP.B this morning at 133p.

Regards timing, FI prices are pretty much bumping along the bottom or slightly lifted off. As rates fall, or rather as the market looks through to the point where they will begin to fall, Prefs and likewise boats will be lifted by the tide and there will be a good opportunity of capital gain. Meanwhile one receives a predictable income.

Yes, there may be other opportunities and I'm not wholely invested in FI. But with Prefs one's crystal ball is generally clearer.

V8

[OldBoyReturns]

Predicting the exact bottom is as hard as predicting the exact top... I bought some more BP.B this morning at 133p.

I bought a chunk of BP.B last week as my first foray into BP prefs. Yield close to those of lower yield financial prefs such as NWBD. Historically BP prefs have traded on lower yields than financial prefs. So my rationale is that the price of lower yielding prefs has been squeezed relatively more than that of higher yielders as interest rates and gilt yields have risen. So if / when interest rates and gilt yields start to fall the price of BP prefs will hopefully rise relatively more than other prefs. That's my theory anyway!

[shaunm]

Predicting the exact bottom is as hard as predicting the exact top... I bought some more BP.B this morning at 133p.

Regards timing, FI prices are pretty much bumping along the bottom or slightly lifted off. As rates fall, or rather as the market looks through to the point where they will begin to fall, Prefs and likewise boats will be lifted by the tide and there will be a good opportunity of capital gain. Meanwhile one receives a predictable income.

Yes, there may be other opportunities and I'm not wholely invested in FI. But with Prefs one's crystal ball is generally clearer.

V8

I have today (this morning before the BOE decision) purchased a chunk of the BP.B at 1.32352 , which now represents a 4% of my overall portfolio
Reasons
1) I had some spare cash sitting idle
2) My Renewable Investment trust funds (good % of portfolio) have not gone well in 2023 (But at a good yield)
3) The yield of 6.8% is I feel very good - My intention to keep the holding as I am now 68 years old (as if an Annuity)
4) I liked the comment above "Prefs and likewise boats will be lifted by the tide", as I am a canoeist who had just returned from Woolacombe
Kayaking surfing the waves, an incoming tide much better, give you time to get one's spraydeck on.
5) BOE Decision today, market thought 50% chance not increasing base rate, which I thought was more likely
6) Prefs much safer then Ord shares in a bear market - money tightening still in progress
7) Interest rates have likely to have peaked
8) This follows a big investment on 5th July 23 in a 2 year Treasury stock with a yield greater than 5.3% (= 10% of portfolio)
9) The Pref share is cumulative, unlike many banking shares

ps there was a important gentleman on the the Fixed Income forum who was kayaking around the Isle of Wight, I think he was doing it in sections, did he ever make it, or was he thrown onto the rocks?

[NealMorris]

Is it not technically possible for them table a resolution at an AGM for a capital reduction, and then cancel these at par ?

I believe the loop hole is still there having been passed over by Andrew Bailey no less! and the legality of which has never been tested in a court of law, and had holders even the funds to challenge, would presumably be waved through much as in the manner Lloyds ecn's eventually were.

[Jwdool]

In 2018, the FCA wrote to CEOs to ask them to clarify the position on Prefs. Although a number of issuers have not made statements on this, e.g. NTEA/ LLPC/D (and a number have e.g. Aviva, ELLA) - it is unlikely any board would want to cause a market disruption of the type caused by Aviva in 2018. The risk is not zero, but it is more of a tail risk event than it was. I'd suggest you've be reasonably safe issuers will act cautiously.

[NealMorris]

I understand your point, but i'm just pointing that fact out because one of the reasons given for buying these "was his intention to keep the holding as if an Annuity". The risk and safety profile does not come even marginally close to that of an annuity.

[Jwdool]

Agreed. If there is any nervousness, then long dated gilts are the better bet. The T46s are the best in the series at the moment.
4.71% with zero risk (nominal not inflation linked risk of course!) https://www.londonstockexchange.com/sto ... mpany-page

[shaunm]

Agreed. If there is any nervousness, then long dated gilts are the better bet. The T46s are the best in the series at the moment.
4.71% with zero risk (nominal not inflation linked risk of course!) https://www.londonstockexchange.com/sto ... mpany-page

Thanks regarding the possibility of redemption at par.

I was holding the Aviva Pref shares at the time when they tried to "Defraud" the shareholders
I don't honestly think BP would do the same, any CEO would remember AVIVA's CEO did not last long in his post (plenty of bad publicity at the time)
I probably still got my "paper file" regarding Aviva, including writing to my local MP

Not a nervous investor, but I do review each investment for it's risk & rewards

[shaunm]

It is interesting to note that according to the 2022 annual report the number of Pref shares (A & B)
were 12.7 million, thus the dividend (say 8.5%) cost is around £1.08 million UKP
This is nothing compared to the number of Ordinary share which are around 19,097 million!

I don't think the Directors would want to "rock the ship", just because there is a minnow in the ship's hold

[hostye]

I think its actually closer to 17.5 Billion ordinary shares in circulation currently. BP plc Market cap is circa £90 bn at current share price of £5.20

[hostye]

Is it not technically possible for them table a resolution at an AGM for a capital reduction, and then cancel these at par ?

I believe the loop hole is still there having been passed over by Andrew Bailey no less! and the legality of which has never been tested in a court of law, and had holders even the funds to challenge, would presumably be waved through much as in the manner Lloyds ecn's eventually were.

If that were the case don't you think BP would have taken that opportunity a few years back when these BP prefs were trading 40-60 points above current prices??

[GoSeigen]

Is it not technically possible for them table a resolution at an AGM for a capital reduction, and then cancel these at par ?

I believe the loop hole is still there having been passed over by Andrew Bailey no less! and the legality of which has never been tested in a court of law, and had holders even the funds to challenge, would presumably be waved through much as in the manner Lloyds ecn's eventually were.

If that were the case don't you think BP would have taken that opportunity a few years back when these BP prefs were trading 40-60 points above current prices??

Rather than flailing around in the dark, how about someone looks up the actual terms of the preference shares to see if a capital reduction is possible?

Capital reduction is not a loophole, by the way, it's long established and settled company law.


Not a holder so no financial interest.


GS

[hostye]

Im not flailing around in the dark! As menitoned previously - Ive done my homework as I suspect others on here have too.

[GoSeigen]

Im not flailing around in the dark! As menitoned previously - Ive done my homework as I suspect others on here have too.

Fair enough, but you didn't share enough of it to convince any one that you'd done it! (Or perhaps, as I haven't read all your previous posts I missed it, a link would be helpful...)


GS

[GoSeigen]

Im not flailing around in the dark! As menitoned previously - Ive done my homework as I suspect others on here have too.

Fair enough, but you didn't share enough of it to convince any one that you'd done it! (Or perhaps, as I haven't read all your previous posts I missed it, a link would be helpful...)

Claiming to have done one's homework is one thing, I don't need a link to that post. The discussion though is about Capital Reduction and that is what I was referring to specifically when I made my "flailing around in the dark" comment. If one's homework had included reading the Articles of Association it would be helpful to have a reference to that rather than just a sardonic "If that were the case don't you think..." type comment.

I've said far too much already, but should add that my comment was not directed at hosteye specifically, but a was a plea for someone with a vested interest to post the actual facts for everyone's benefit.


GS