The Lemon Fool

ignotus20 wrote:Fwiw, I'll be voting in favour of the tender because I see the economic advantages to me of doing so, but I'm not savvy (nor large) and researching alternatives is going to be a bit of an unwelcome palaver, nonetheless.

Point taken, but then for not much more risk why weren't those retail chaps buying ords or similar for >15% yields, rather than prefs at 5-6%?

[EDIT: e.g. the last 8000 BoI ords I bought cost £13,000, today those 8000 shares paid a divi of £3,000...]

GS

What % uplift over market price are they offering?

Blagdon wrote:What % uplift over market price are they offering?

What, RSAB?
About 12% plus the voting fee.

V8

Article in the Investor's Chronicle strongly advises against voting for the offer. Thinks the price should be around £1.73 and that if rejected RSA will come back with a better offer before 2026. Personally I'm holding a variety of prefs for income and have no desire to sell and perhaps open the floodgates for other companies to follow suite. Article is listed as Tender trap for RSA investors.

The Investors Chronicle article can be found here:

https://www.investorschronicle.co.uk/ne ... %20accrued.

It is an interesting piece, but a bit one-sided. There is no way you can compare a preference share with a gilt - in terms of the appropriate price comparator - unless, of course, there is a clause requiring the issuer to pay-to-redeem/ cancel at that rate. Clearly there has to be a substantial discount - given the credit and subordinated risk.

When you look at the price RSAB has been trading at over the last 10 or so years (post GFC), see: https://www.hl.co.uk/shares/shares-sear ... 8-cum-pref, it has tended to range between 115p-130p. It has to be borne in mind, however, that for much of that period gilt rates were closer to 1%. Today, long-end gilts are trading around 4.5% - offering RSAB holders a far more attractive alternative (with low coupon gilts offering substantial tax-free gains - see TG50 and TG46 which are my preferred series.) For those looking for higher yields - corporate bonds (at the senior end) are offering rates not too dissimilar to the 124p end yield of ~6.1%.

One has to respect the debt stack - clearly senior bonds are far better value than prefs - on any analysis - so by offering holders the option to cash out at rates consummate with financial senior (and even more attractive than financials subordinated) - this is a good offer and I'm confident it will be accepted by institutional holders. For those looking for decent names - I'd suggest taking at look at the 2040 Lloyds 6.5% note XS0543369184 - which is offering >5.7% and represents far better credit than RSAB (albeit the coupon won't be treated as div).

Jwdool wrote:


One has to respect the debt stack - clearly senior bonds are far better value than prefs - on any analysis - so by offering holders the option to cash out at rates consummate with financial senior (and even more attractive than financials subordinated) - this is a good offer and I'm confident it will be accepted by institutional holders. For those looking for decent names - I'd suggest taking at look at the 2040 Lloyds 6.5% note XS0543369184 - which is offering >5.7% and represents far better credit than RSAB (albeit the coupon won't be treated as div).

I think you will find the Lloyds 6.5% 2040 XS0543369184 - are yielding closer to 5.20% YTM on the offer currently. Maybe 5.70% was a typo but I would be keen to buy a decent clip there if you find me an offer!

Interesting that no-one has drawn attention to the fact that the issuer (and its sole shareholder) are proposing a Capital Reduction. That should have meant something to any holder that has read the terms of this share, especially if they are vaguely aware of the "Aviva incident"**.

I am not a holder but I have read the terms and to me they read similar to the Aviva terms, i.e. no separate authorisation by preference shareholders is required for a reduction of capital, and the entitlement of the preference shareholders is to par plus arrears of dividend.

So it seems to me that the ordinary shareholders have entirely voluntarily decided to withhold their vote at the general meeting authorising the reduction of capital -- when they presumably could carry the vote if they participated (I haven't checked the voting numbers).

What is happening then is that the preference shareholders are being offered not only the market value which is above par but also a premium to give up their shares when actually they were only entitled to par, i.e. it's a pretty generous offer. I'll have to read the full terms of the tender, but in the meantime I surmise it would be foolhardy to assume the ordinary shareholders would withhold their vote in a future proposed capital reduction.


IANAL, I may have this wrong, does anyone who has read the terms have a different interpretation?



GS

(**) @Alaric referred to this earlier in the thread, a bit inaccurately:

"[Aviva] were the ones who claimed they could pay them [certain of their preference shares] off at par almost unilaterally. They were forced to back down on this assertion."

1. There was no "almost" in what Aviva said -- they asserted without equivocation their ability (i.e. the legal right plus ability to carry the vote) to purchase them at par under a capital reduction.
2. They were not forced to back down on the assertion: their claim was endorsed by the regulator, but they were criticised for the manner in which it was presented to the market, including leading investors to believe (rightly or wrongly) that they had plans to exercise this option.

I bought my (very small) RSAB holding quite a few years ago, when the price was below par and I was buying lower-risk stuff in my ISA compared to my SIPP - in case I wanted to clear out the ISA to buy a house.

I've regarded it as something of an anomaly for years - even before covid nonsense was obviously going to devalue it - so I'll be happy to take up the tender offer!

This is what the Q&A section in the Offer Memorandum says about future options for managing the preference shares if the cancellation resolution fails (Q.13):

"If the Offeror so decides to purchase any Preference Shares pursuant to the Tender Offer, it is the current intention of the Offeror to hold such Preference Shares. No decision has been made by the Offeror or the Issuer about the future of the Preference Shares so purchased, if the Reduction of Capital is not implemented.
In addition, the Issuer and/or any of its Affiliates may continue to evaluate available options in order to manage the Issuer's capital structure including further offers or alternative mechanisms for acquiring or retiring all of the Preference Shares. However, as at the date hereof, neither the Issuer nor the Offeror has formed an intention, and no decision has been made, in respect of any future actions in relation to the Preference Shares."

To me that is a warning that all options are open, and note that the ordinary shareholder will purchase and hold all the tendered and accepted preference shares and so retain a considerable proportion of preference share voting power.

If holders are hoping for another higher priced tender they should remember that:
-these tender offers are very expensive to implement, and
-the ordinary shareholders hold all the cards.

GS

GoSeigen wrote:...If holders are hoping for another higher priced tender they should remember that:
-these tender offers are very expensive to implement, and the ordinary shareholders hold all the cards.

I only bought RSAB a few months ago.... never quite yieldy enough to be tempting vs the income alternatives... but bought in anticipation of a tender, and lo! it has come to pass.
Nice when something goes to plan.

I shall probably pile the proceeds into the Aviva issues and ELLA, hopefully rinse and repeat.

Sad that the income options will shrink, but nothing is for ever.

V8

Hawkeye_74 provides a detailed and compelling argument on x.com (formerly Twitter) to reject the tender offer.

https://x.com/hawkeye_74/status/1801168 ... eATn9esqtg

AyresomeAngel wrote:Hawkeye_74 provides a detailed and compelling argument on x.com (formerly Twitter) to reject the tender offer.

https://x.com/hawkeye_74/status/1801168 ... eATn9esqtg

I’m sorry to say but the argument is totally delusional IMHO. I only just stopped myself from laughing whilst reading it.

Well for what it's worth, I have just read Hawkeye's explanation and it is inline with how my thoughts developed over the weekend.

If investors are truly worried about a cancellation at par, I would advise those pref holders to sell today.

However I do not believe that cancellation at par is a likely outcome and continue to be a happy holder.

A Spens-clause like offer (or something close) would be more appropriate as these are valuable pieces of paper. Once gone they are gone.

Quite exciting to receive c. 15.5 pts in a one-up offer, but realistically that's what this instrument will pay over the next two years. They sit nicely in my SIPP and ISA and I prefer the certainty of their preferential cumulative income stream over and above most equities.

I will be voting NO to the resolution and not tendering my prefs. (At least that is my current intention as things stand).

simoan wrote:

AyresomeAngel wrote:Hawkeye_74 provides a detailed and compelling argument on x.com (formerly Twitter) to reject the tender offer.

https://x.com/hawkeye_74/status/1801168 ... eATn9esqtg

I’m sorry to say but the argument is totally delusional IMHO. I only just stopped myself from laughing whilst reading it.

Agree.

Hawkeye_74 doesn't understand that the agreement to receive income only survives until the capital is repaid and no longer.

He doesn't understand this because he thinks perpetual means the issuer has no right to purchase the shares. He couldn't be more mistaken. Perpetual means that the investor has no right to demand or receive repayment. He can carefully read all the terms and that is what he'll find.

He also thinks irredeemable means they cannot be purchased by the issuer. This is wrong. Irredeemable means that they were issued without any promise to repay the investor on a fixed redemption date.


The fact is that as perpetual instruments the preference shareholders may only get their money back when the company/shareholders as a class so decide and furthermore, dividends are only payable as long the issuer has opted not to repay them.

The text warrants a debunk:

-"the issuer has no rights to repurchase the security other than by negotiation". Wrong. The issuer has various options for repurchasing the shares -- one is negotiated purchase, another is capital reduction, a third is by winding up the company. It is the shareholder that has no right to sell back his shares except by negotiation.
-"the prospectus makes no mention of a regulatory par call". Irrelevant. What has a regulatory call got to do with this tender offer? It will either proceed as a purchase of shares or a reduction of capital by repayment and cancellation. The purchase/repayment is offered at a significant premium to the required par value.
-"the issuer has no right to redeem other than by an offer". Wrong. The issuer has no right to redeem at all. Redemption is only possible if the shares were issued as redeemable, i.e. with a redemption date. These prefs have no redemption language so investors cannot get their money back via redemption.
-"Preference shareholders should be offered a substantial premium to forsake the rights[...]". Their rights are to nominal value in a capital reduction. They are being offered a 22% premium to that amount.
-""flat to gilts"[...] As this is a perpetual security this would be the longest gilt in issuance." Not to any well-informed bond investor it wouldn't. The appropriate gilt is one with a similar modified duration of 16 years. The yield of those gilts is about 4.5%. No preference shareholder should EVER be satisfied with a yield on their shares equal to gilts (except in an extreme sovereign debt crisis ala Greece 2010). It follows that it's unreasonable to demand "flat to gilts". IMO a spread of 150bp is pretty good, definitely not stingy.
-"There will only be gilts as a perpetual-esque(!!) cash flow." Rubbish! No gilts are perpetual AFAIAA. They all promise repayment to the investor. Further if someone is willing to consider a perpetual investment then practically every ordinary share is perpetual. What's wrong with buying those?
-"If the tender succeeds for RSA other preference share issuers will use the same approach". Irrelevant. They would do so even if RSA didn't exist. What they do is not in any way dependent on the outcome here. And many will have to use a different approach because they don't have the ability to execute a reduction of capital.
-"There is literally no downside to voting against the offer...". OMFG. Totally does not understand. If you vote against and the cancellation motion fails YOU DO NOT GET TO SELL YOUR SHARES. This means the company still has your capital, you will have to sell in the market or not at all -- or quite possibly a reduction of capital at par might follow so you miss out entirely on the 22% premium being offered. While holding the shares you face all the usual risks of a shareholder AND those associated with a fixed dividend (inflation etc).
-"The issuer will undoubtedly seek to improve the offer..." WRONG. There is a huge amount of doubt as explained above. IMO any future repurchase will be on worse terms.

The last paragraph is not an optimistic argument, it's a cuckoo argument.

GS
EDIT: Someone please remind Paul Hawkins that preference shares are not bonds. Thank you.

According to the timetable the institutional shareholders will make their intentions know by the 20th June. That should give retail holders plenty of time to digest what the professionals think of the offer before having to make any decisions.

It’s quite possible that there is no decision to be made

In reality the FCA screwed up the whole business by promoting the opinion of an incompetent lawyer. Given the practical effect of that opinion it would be appropriate to assume that GS is correct.

GS is probably correct from a technical and legal perspective. But as Aviva discovered to their cost, it is not necessarily ethical or good commercial practice to disregard the expectations of their stakeholders.

However in respect of the current Issuers of RSAB. It might well be the case that they are less concerned about their UK public image than Aviva were.

DampSeaweed wrote:GS is probably correct from a technical and legal perspective. But as Aviva discovered to their cost, it is not necessarily ethical or good commercial practice to disregard the expectations of their stakeholders. .....

Politics rules.

DampSeaweed wrote:However in respect of the current Issuers of RSAB. It might well be the case that they are less concerned about their UK public image than Aviva were.

Have they done anything which would damage their public image? Offering to buy out the Prefs at a premium to market value would be expected nd legitimate behaviour. Some holders might want to hold out for a higher premium.

The lack of alternative undated fixed payment instruments is a more general problem which has arisen or been magnified since the Treatury called in all the undated Government bonds such as Consols and War Loan and hasn't felt inclined to offer any new ones.

I wonder what terms could be offered on an undated indexed stock. With a decent coupon it may well be attractive to retail savers, but perhaps the capital value would be too volatile as real rates of return fluctuated.

DampSeaweed wrote:GS is probably correct from a technical and legal perspective. But as Aviva discovered to their cost, it is not necessarily ethical or good commercial practice to disregard the expectations of their stakeholders.

Yes this is exactly my point. RSA owners have gone out of their way to accommodate the preference shareholders, far beyond what is required, probably because of Aviva's mishandling.

GS