The Lemon Fool

Does anyone have a link to a prospectus for the above LLPE prefs? I have emailed Lloyds shareholder questions several times - without a response.

GN

I am unable to post links, but if you google 'lloyds 6.475 prospectus' the top document for me is a pdf documents on the Lloyds site which appears to be what you are looking for.

RR

Many thanks - have now downloaded

GN

Callable 15.3.24.
Can pretty much calculate the YTM, unless there is a price bounce facilitating an advantageous early exit.

V8

Yes, from that prospectus the call is optional but is pretty well bound to happen as these prefs are not any use to them any more for counting towards their ratios. YTM circa 3.4% to be set against a low level of trust for Lloyds.

G

At 3.4% not much point in continuing, unless there are tax considerations. Luckily, I switched from E to D for a yield increase last year.

The nominal spread on E is nearly 7.5%.
On C, I see 6% nominal today, but only 4% on D which is strange as it's the smallest issue. Seems it's just pot luck on the day.

I wonder if the near-par pricing of E will underpin the current prices of C and D.
After all, Lloyds can't redeem E below par, and with E yielding 6.0/6.5% for the next 3+ years, it would be quite a red flag if the yield of C and D fell below, suggesting that Lloyds might be seeking a weasel way to retire them at par.

Anyway, I hold C and D in medium size, so fingers crossed.

V8

Funny thread.

First these preference shares, like most, are irredeemable, so there is no question of a redemption. There is however a call option and as GN100 pointed out, the option is very likely to be exercised, and the market certainly has that expectation, with the strongly supported price since 2017 or before. But a call option is not the same as a fixed redemption date: the issuer is at liberty not to take the option.

At the current offered price of 109.75p there is no way these preference shares are going to yield anywhere near 6%. The yield to call is currently 3.5%. That is likely to remain roughly the same but even with yield fluctuations the duration is less than four years so the price will barely move up. There will be no price bounce from here. Far more likely is another steep fall, like in March, which could provide a buying opportunity.

Meanwhile, I'm not sure what spread is supposed to be 7.5%? Not a trading spread because these are quoted today at 107-109.75, probably even better pricing available if one shops around.

LLPE is probably an okay place to put cash which will be required in four years time but I think there will be little excitement for anyone wishing to buy at these prices. Lloyds's non-callable preference shares trade at better yields but of course are perpetual so IMO the risk is much higher.

GS

GoSeigen wrote:.... I'm not sure what spread is supposed to be 7.5%? Not a trading spread because these are quoted today at 107-109.75, probably even better pricing available if one shops around.

Well, I did say nominal spread, because I saw 102/110, but I have none to sell and didn't try to buy, so I couldn't test the water.

The way I get near 6%, is the way I might look at it as a holder, if I were selling at 102.

I wonder how many are still out there, of the initial placing.

V8

GoSeigen wrote:First these preference shares, like most, are irredeemable, so there is no question of a redemption. There is however a call option and as GN100 pointed out, the option is very likely to be exercised, and the market certainly has that expectation, with the strongly supported price since 2017 or before. But a call option is not the same as a fixed redemption date: the issuer is at liberty not to take the option.

Apologies for the above, I was writing from memory, and relying on a previous poster's reference to a "call option". Having now checked the terms for LLPE, I see LLPE are redeemable, and that the "call" being referred to was in fact the redemption clause. It is LLPD and LLPC which are irredeemable.

Sorry for any confusion.


GS

88V8 wrote:

GoSeigen wrote:.... I'm not sure what spread is supposed to be 7.5%? Not a trading spread because these are quoted today at 107-109.75, probably even better pricing available if one shops around.

Well, I did say nominal spread, because I saw 102/110, but I have none to sell and didn't try to buy, so I couldn't test the water.

The way I get near 6%, is the way I might look at it as a holder, if I were selling at 102.

Okay, I see what you meant, the usual term is "notional" or "indicative" trading spread, as in the suggested price published on various web sites. Best not to rely on those numbers, especially for illiquid securities like bonds, PIBS and preference shares. I always call or check online with my broker for actual pricing.

I wonder how many are still out there, of the initial placing.

Last I saw there were £56m remaining in issue.


GS

GoSeigen wrote:LLPE is probably an okay place to put cash which will be required in four years time but I think there will be little excitement for anyone wishing to buy at these prices. Lloyds's non-callable preference shares trade at better yields but of course are perpetual so IMO the risk is much higher.

GS

Hi GS, can you please explain why being perpetual increases risk?

I do not invest in these instruments but to me being perpetual means that there is no 'floor' to the capital price except current yields and supply and demand whereas redeemables will obviously approach the par value as the redemption date nears.

Dod

Dod101 wrote:I do not invest in these instruments but to me being perpetual means that there is no 'floor' to the capital price except current yields and supply and demand whereas redeemables will obviously approach the par value as the redemption date nears.

Dod

A bit like HYP shares then...

GrahamPlatt wrote:

Dod101 wrote:I do not invest in these instruments but to me being perpetual means that there is no 'floor' to the capital price except current yields and supply and demand whereas redeemables will obviously approach the par value as the redemption date nears.

Dod

A bit like HYP shares then...

Like most shares I guess but it will be interesting to see if GS has another angle on his comment.

Dod

I should have put an emoticon after that comment of mine, to mean a mild dig/joke. Reference to HYP in particular being the “capital doesn’t matter” mantra. But yes, they’re only as perpetual as the company backing them. There are quite a few at eye-wateringly high yields.

GrahamPlatt wrote:

GoSeigen wrote:LLPE is probably an okay place to put cash which will be required in four years time but I think there will be little excitement for anyone wishing to buy at these prices. Lloyds's non-callable preference shares trade at better yields but of course are perpetual so IMO the risk is much higher.

GS

Hi GS, can you please explain why being perpetual increases risk?

There are two main reasons and probably a bunch of others.

First, the issuer is not obliged to repay, so at some point you have to expect the shares to be worth zero. It may be in five years, or in fifty -- you don't know, but that needs to be factored in. A security with a fixed date on the other hand will not only be repaid before the bad thing can happen but also, the company needs to make some preparation for the repayment, or convince the market that it is still a good credit (i.e. it enforces a degree of financial discipline). These improve the risk profile of the date bond versus the undated.

Second, the lack of a payment date means the share always has a long duration (especially in a low yield environment due to convexity) so its price is perpetually more volatile than a bullet from the same issuer. Thus when you need to liquidate the share you are at the mercy of the market, both in terms of valuation and liquidity. Further, the longer duration means that inflation is more of a risk (though conversely deflation/disinflation is a benefit).

GS

GoSeigen wrote:
There are two main reasons and probably a bunch of others.

First, the issuer is not obliged to repay, so at some point you have to expect the shares to be worth zero. It may be in five years, or in fifty -- you don't know, but that needs to be factored in. A security with a fixed date on the other hand will not only be repaid before the bad thing can happen but also, the company needs to make some preparation for the repayment, or convince the market that it is still a good credit (i.e. it enforces a degree of financial discipline). These improve the risk profile of the date bond versus the undated.

Second, the lack of a payment date means the share always has a long duration (especially in a low yield environment due to convexity) so its price is perpetually more volatile than a bullet from the same issuer. Thus when you need to liquidate the share you are at the mercy of the market, both in terms of valuation and liquidity. Further, the longer duration means that inflation is more of a risk (though conversely deflation/disinflation is a benefit).

GS

“Is not obliged to repay”... well no, of course the principal is never repaid. But as long as the company’s a going concern, it is surely going to pay the divi (with the usual caveats within the prospectus). Many companies have ongoing dated prefs running alongside their perps, which thereby enforce the required discipline. And re the ‘long date’ - provided the company itself outlasts you - it is surely a lot better than buying a flat-rate annuity!

In my response there I’m thinking mostly about my earlier idea of buying more BOI. Though I have looked around and think SBSA mightn’t be a bad idea too.

GrahamPlatt wrote:

GoSeigen wrote:
There are two main reasons and probably a bunch of others.

First, the issuer is not obliged to repay, so at some point you have to expect the shares to be worth zero. It may be in five years, or in fifty -- you don't know, but that needs to be factored in. A security with a fixed date on the other hand will not only be repaid before the bad thing can happen but also, the company needs to make some preparation for the repayment, or convince the market that it is still a good credit (i.e. it enforces a degree of financial discipline). These improve the risk profile of the date bond versus the undated.

Second, the lack of a payment date means the share always has a long duration (especially in a low yield environment due to convexity) so its price is perpetually more volatile than a bullet from the same issuer. Thus when you need to liquidate the share you are at the mercy of the market, both in terms of valuation and liquidity. Further, the longer duration means that inflation is more of a risk (though conversely deflation/disinflation is a benefit).

GS

“Is not obliged to repay”... well no, of course the principal is never repaid. But as long as the company’s a going concern, it is surely going to pay the divi (with the usual caveats within the prospectus). Many companies have ongoing dated prefs running alongside their perps, which thereby enforce the required discipline. And re the ‘long date’ - provided the company itself outlasts you - it is surely a lot better than buying a flat-rate annuity!

Okay, proved me wrong. I'll go back and relearn my bond theory.

GS

It is obvious that you know a lot more than most about the subject - and certainly a lot more than me. I am not looking to “prove you wrong”, I’m explaining my way of thinking. Please don’t simply disengage like that.
You say “A security with a fixed date on the other hand will not only be repaid before the bad thing can happen...”
Well, the longer you’re holding the parcel the greater the cumulative chance of it blowing up, but that’s the case with all securities. Perhaps there’s something I’m just not getting here.

GrahamPlatt wrote:...I have looked around and think SBSA mightn’t be a bad idea too.

As ii have decided to pretend that they can't trade SKIP online, but can trade SBSA, you may be right.
They used to trade pretty much anything but nowadays they're becoming a bit of an old fusspot. OTOH, I see they can now trade BOI online again, after being off the menu for a few months, and they're showing me a Buy yield of nearly 7%. Well, I have enough BOI.

Funny, not so long ago we were running away from BSocs, and now, when they must be facing an avalanche of defaults and the yields are not particularly good, not outstandingly, why would we want to go back in...... hmmm.

With a fixed end date, there is a sort of floor under the price. In neutral terms the ytm will be roughly equivalent to the running yield of what the market perceives as a comparably attractive undated. If the yield is out of line the market will pile in and correct it. Only if the issuer is perceived to be potentially distressed will the dated dip below par. Example, the Coop, briefly, a few months ago.
So on the whole one can predict the price decay of a dated as the calendar runs down. BBYB for example, leaving aside the panpanic, descended in an orderly fashion right to the bell, even while the ords were all over the place and their divi canned.

Whereas with an undated the price could go anywhere, albeit not as much as the ords.

That's roughly how I think of it, insofar as I do think of it. Which isn't terribly far.

V8