LLPC - Doh!

http://investegate.co.uk/Article.aspx?id=200911230700028997C

Says it all really. Missed out on ECA by one place, and ECN by 5. LLPD made ECA, which is frustrating - I deliberately went for LLPC because it was higher placed in the ECN list.

Enhanced Capital Notes - final decision

OK, the last time I posted I was choosing between taking ECN or ECA for LLPF. I've made my choice, and I've.... sold LLPF at £686.50 and bought a similar amount of LLPC at 71.5p, then chosen ECA followed by ECN.

My reasoning is:

• LLPF might have qualified for ECA, in which case I would only have got £13.50 per share more than the current bid price.
• LLPF might not, in which case I would get Enhanced Capital Notes with a yield of about 14%, with the downside of conversion.

On the other hand with LLPC the possibilities are:

• It qualifies for ECA at 94p, in which case I take a quick 30% profit.
• It qualifies for ECNs with a yield of about 16.5% - if these equalize to the LLPF yield then that's a quick profit of 15%.
• It doesn't qualify for either, in which case I'm left with a yield of 10.1%, after accounting for 2 years of skipped dividends. But I'm not exposed to conversion downside. And there is the potential upside that if LLPC did not participate in the tender Lloyds may take pity and make a later offer - you can certainly imagine a lot of disgruntled retail holders.

I'm satisfied with this position and I've registered my choice of Option 4: ECA then ECN.

Enhanced Capital Notes

My broker has confirmed that I can hold Enhanced Capital Notes in my sharedealing account, so I have the full range of options as my disposal.

Contrary to my earlier post, I'm now considering taking the cash option, with ECNs as my second choice, and investing the cash in NWBD. The current yield on NWBD is 11%, with the potential upside that they may trade significantly higher than their current 80p. The prospective yield of the ECNs (vs the cash alternative of £700) to maturity is 14%, and there is the potential downside that they may be converted.

I suppose the ECNs could approach par well in advance of the maturity date, so I'm not really comparing like with like...

Hmm. I have a week to decide. I think I'm definitely going to apply for both exchanges, I'm just not sure in which order.

NWBD

NWBD dipped just below 80p today, and I bought a chunk at 79.5p. The terms and conditions provide for the dividend being passed at the directors' discretion, but provided there are sufficient reserves it will be paid in new NWDB shares instead, at a ratio of 4/3 - fine by me.

RBS might tender for NWBD, or might not. I don't mind taking a quick profit, or holding for the long run. RBS might continue paying the dividend in cash, or decide to pay in new NWBD shares. The economic result is much the same.

NWBD now forms just over 5% of my portfolio. By comparison LLPF is 8.1%.

Lloyds tender offer

Slightly drunken update:

Today Lloyds unveiled their long-anticipated offer for holders of preference shares. There were hundreds of pages to wade through, but the essentials as far as I can see were:

• I can exchange my LLPF for cash or the equivalent in ordinary shares at a price of £700. That's vs a face value of £1000, a current price of £600 and a purchase price of £280.
• Institutional holders can exchange for "Enhanced Capital Notes", i.e. contingent capital notes, but since I don't have access to the clearing system these are unavailable to me.
• There is a limit of £1.5bn that will be paid in cash/shares. LLPF is 6th out of 52 in the hierarchy of who gets to share.
• If I don't take up the offer I lose 2 years of dividends and the likelihood is that LLPF will not be called in 2015 (from the RNS announcing the exchange offer: "It is the current intention of the Company that any decision to exercise capital calls in any Existing Securities that remain outstanding following the Affected Period and which belong to a class or series of Applicable Securities, will be made on an economic basis. ").

LLPF continue to trade at around £620. If I was an institution I have to say I'd be snapping up the Enhanced Capital Notes (ECNs). The downside is clearly a conversion to equity at an unfavourable time, but frankly I can't see another major bank capital crisis in the next 10 years (until the series 1 ECNs mature - others mature later).

So I think my choices are:

• Accept the tender at £700. They may or may not accept - but I have a good chance, being ahead of most of the securities being tendered for.
• Keep LLPF, suck up the 2 years missed dividends and keep fingers crossed for a call at par in 2015.
• Sell in the open market - where my slightly vain hope is that the institutions recognise the value of the ECNs and bid up the LLPF share price.

I think I'll keep my fingers crossed that the tender at £700 is accepted. A 150% profit in ~6 months is not to be sneezed at.

Update 7/11/09:

To make a decision I need to value LLPF vs ECN vs £700.

My assumptions are:

• LLPF will skip 2 years of dividends, then will pay 6.0884% until 2015, then will pay LIBOR+1.131%. It will not be called. LIBOR will be approximately 5%, and therefore this security will effectively pay ~6.1% perpetually after a two-year hiatus.
• The ECNs will not convert into common equity in the 10 year period that they are outstanding. They will pay 7.5884% for 10 years and then be redeemed at par.
• I will use a discount rate of 10%. NWBD is currently available with a yield of ~11% and is close to risk free.

As discounted cash flow analysis values the ECNs at ~£810, LLPF at ~£500. So my choices in order of preference are:

• Accept the offer of ECNs. It's not yet clear whether I can hold these with my current broker.
• Accept the offer of cash / shares to the equivalent of £700.
• Sell in the market at ~£640.
• Keep LLPF at a value of £500.