LLPF / LLPG

Of the UK bank preference shares, Lloyds fixed/floating rate preference shares appear the most interesting. These are LLPG, paying 6.3673% and LLPF paying 6.0885%.

At current prices, LLPG is yielding 23.6%, and LLPF 23%. LLPG is callable on or after 2019 at par, LLPG on or after 2015 at par. If LLPG was called at the earliest opportunity that would increase the yield to 37.6%. For LLPF the rate is 48%. If neither are called they revert to 1.3% above LIBOR - assuming LIBOR is ~5%, that means the rate will remain more-or-less unchanged.

The fact that LLPG/LLPF are callable limits the upside - they aren't going to exceed 100% of par value, but when they're trading at ~26% of par, that's not a significant limit.

If interest rates are ~5%, and the banking system recovers to the point of safety, then a yield of 8% would be reasonable. That would suggest 9.75% prefs trading at 122p - a gain of 80% from here. The 6.3% prefs would trade at 79p - a gain of 203%.

If interest rates are 0% (e.g. deflation is rampant) then a yield of 3% might be reasonable. In that case you'd see a 377% increase on the 9.75% prefs, but the 6.3% series should only trade at ~43p, because they will have reset to yield only ~1.3% - only up 65%.

Assuming the economy will recover and banks will become trustworthy again, LLPF and LLPG do seem to offer the best value, both in comparison to other prefs, and also in comparison to the ordinaries. I'll see if I can pick any up next week, and convert some (possibly all) of my bank shares into preference shares.