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.