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Bond of the Week: 2 September 2013
Bond of the Week : 2 September 2013
Nationwide has issued a tender for 5 of their PIBs.
The rationale appears to be both to re-organise their capital in light of the new Basle III regulations under which these PIBs will count as neither core Tier 1 (equity) nor even Tier 1 capital and in addition to give investors an opportunity to get out of their positions. From an institutional perspective it can be difficult to exit a large position (for instance of £500,000 or more) without suffering a discount to an already wide bid offer spread.
All the bonds/PIBS have call features with what at the time were considered step up features (given current low gilt yields, as of today in many cases these have become step downs). The unwritten understanding at the time of issue of these bonds, as with all other similar financial subordinated bonds, was that they would be called at the first opportunity. Until the arrival of the 2008 financial calamity, finding a bond that had not been called at its call date was as difficult as locating hens’ teeth. In the brave new financial world we now inhabit there has been a slow but inexorable move to issuers calling only if it is in their financial interest to do so. However, good quality well-known issuers, a group to which Nationwide would maintain it belongs, are anxious to keep their institutional investors on-side and a tender offer fulfils this purpose. Bond owners will have been offered a chance to get out and so will be unable to complain if the bond is not subsequently called. To that effect, Nationwide states in their tender offer “Future decisions with respect to capital calls will be made in light of the then prevailing market, economic and regulatory conditions.”
The yield to call and in perpetuity (using today’s rates) of the bonds are as follows:
I do not know why the 5.769% seems to have been treated favourably over the 6.25% in terms of yield at tendered price.
Holders should consider not only whether the yield to call is high enough to warrant keeping the PIBS but also decide whether the perpetual yield (not knowing what future interest rates might be) is high enough. Bear in mind the lower the fix the lower both the future yield of the un-called bond and the higher the probability that the bonds won’t be called. You should always remember that a call is an option they, not you, have and therefore will be used if it suits them when theoretically it will not suit you.
What to do? It all depends on what you consider is an acceptable yield for holding long dated subordinated debt. You need to take a view both on interest rates and what is an acceptable return for the credit. The lower the absolute yield of any bond the more an attempt at guessing future interest rates becomes a major factor in deciding whether to hold on. I would tend to view the yield at the tender price of these bonds as low so an interest rate calculation/ guess is important. You might say to yourself if I change my mind on rate in future I can always sell my holding in the market. My thinking, however, is that it is likely that the bid price on these PIBS will be below the tender prices offered for the foreseeable future.
Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.
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