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Author: JakNife Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 7832  
Subject: Re: HBOS preference shares Date: 06/11/2008 11:14
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It seems strange that the yields on these four bonds are so different. If they each hold equal risk (same status, same issuing institution), then their premium over 'safe' gilts should also be similar. But they aren't. Does that mean that they are ranked differently in their claim over the company's assets?

The bonds are not identical. To be clear we’re talking about the four bonds highlighted in the table in posts 7143 & 7144, which are:


Stock Ticker offer Gross Yield Ongoing coupon Est yield Issue Size Interest Note
price yield to call if not called if not called on cost £m Dates

Halifax 8.75% bonds HALC 85 10.29% 10.79% No change 10.29% 100 1/3, 1/9 (call 14/9/2023 @100p)
Halifax 9.375% bonds HALP 85.5 10.96% n/a n/a 10.96% 50 1/3, 1/9
Halifax 12% bonds HALA 100 12.00% 12.00% No change 12.00% 100 1/3, 1/9 (call 30/1/2022 @ 100p)
Halifax 13.625% bonds HALB 120 11.35% n/a n/a 11.35% 75 10/6, 10/12

* est


The major differences to note are:

1. All four bonds are perpetual but HALC and HALA are both “callable”, this means that Halifax can buy them back at par value on a particular date. Some investors may take the view (which may be a reasonable view to take) that the bonds *will* be called on the particular date, in which case they are not pricing these bonds as perpetuals but rather as long-dated bonds.

2. The interest payment dates are different on HALB versus the other three issues and this should be taken into account when calculating the yield (eg accrued interest needs to be taken into account and I’m not convinced that it has been allowed for in the table above).

3. The issue sizes are different and hence there will be a small difference in liquidity between the 4 bonds. In particular though (and not shown in the table above) there is a minimum unit size for HALA, HALB and HALC – they trade in chunks of £50k, whereas HALP trades in chunks of £1k. This makes HALP more popular with retail investors.

Personally though, I don’t believe that these differences alone can account for the price discrepancies that are shown above. In particular HALA simply looks wrong relative to the others (I have no idea if this is still the case today though). The only other explanation that I can imagine is that perhaps there is a heavy seller in that particular issue versus the other ones?


They are called "Halifax Perpetual subordinated bonds". Perpetual suggests that they are like PIBS - at least in terms of how they operate - but without access to some descriptive documentation issued by Halifax exactly where they come in the pecking order is hard to say for sure. Normally I would expect them, just like any other debt, to be safe until all equity value is destroyed. But for all I know they could have been written with specific but unusual terms.


PIBS and PSNs are essentially identical instruments, the terminology is unnecessarily complicated. For the sake of completeness I’ll paraphrase comments from another thread that I’ve posted elsewhere:

PIBS are "Permanent Interest Bearing Shares", PIBS were (are) only ever issued by building societies and despite being called "shares" they are actually legally bonds. As the name implies they pay interest and so are taxed as interest (20% or 40% depending upon your marginal rate). Whether there is a withholding tax or not is something that I am not clear upon and it would be helpful if someone else could clarify?

PSNs are “Perpetual Subordinated Notes” and are also sometimes referred to as PSBs ("Perpetual Subordinated Bonds"), these are legally bonds and pay interest, hence they are taxed in the same way as with PIBS. PIBS and PSNs are identical and the only difference is that PIBS are issued by building societies whereas PSNs are issued by banks. When a building society converts to a bank then what were previously PIBS are instead “rebranded” as PSNs, which is one of the reasons why you will find people referring to the Halifax PSNs as being PIBs – before Halifax was demutualised they were referred to as “PIBS”.

PIBS and PSNs differ to Preference shares which are legally "shares" and which pay dividends and are taxed as dividends. The banking theory goes that preference shares and PSNs/PIBS are economically the same but in practice there is a small difference because PIBS/PSNs *should* get paid out before preference shares in the case of a liquidation. However, no one seriously expects that if a bank goes into liquidation that PIBS/PSNs or preference shares will ever get paid and that’s why the banking theory is that the instruments are all economically the same.

However, recent events have shown that this banking theory is wrong. In particular when Northern Rock was nationalised the ordinary shares and preference shares of Northern Rock were seized by the UK Government. The “Northern Rock Transfer Order 2008” means that the owners of the ordinary shares and the preference shares have been forced to sell their shares to the Government at a yet to be agreed price. The Order, however, does not apply to Northern Rock’s PSNs and holders of the PSNs have recently received a payment of interest, see here for more info:

http://boards.fool.co.uk/Message.asp?mid=11283976


Subordinated begs the question "To what?" but again I have assumed to all other debt but not to equity.

Yes, this is correct. The PSNs are subordinated to the unsecured creditors – ie subordinated to the retail depositors. In liquidation the order of priority of repayment (keeping things as simple as possible) is:

Secured creditors – eg mortgage holders
Unsecured creditors – normal creditors
Subordinated creditors – those who have explicitly agreed to be subordinated to other creditors
Preference shareholder
Ordinary shareholders

It is rare for a bank to have secured creditors, the “normal” creditors will include the retail depositors.

JakNife
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