NAB Convertible Preference Shares

[MrBurns]

Anyone going for it ?

http://privatewealth.nab.com.au/nab...ralia_bank_convertible_preference_share_offer

 

[prawn_86]

Lots of details about various hybrids can be found in the Hybrid Securities thread also if anyone is interested:
https://www.aussiestockforums.com/forums/showthread.php?t=15124

 

[MrBurns]

Lots of details about various hybrids can be found in the Hybrid Securities thread also if anyone is interested:
https://www.aussiestockforums.com/forums/showthread.php?t=15124

Sorry wasn't sure where to put that.

 

[prawn_86]

Sorry wasn't sure where to put that.

No worries, i'll leave this thread active for those that specifically want to talk about this offer as it is a offer from one of the bigger companies in Australia

 

[McLovin]

I think Ben Graham nailed it in the Intelligent Investor when it comes to prefs...

Certain general observations should be made here on the subject of preferred stocks. Really good preferred stocks can and do exist, but they are good in spite of their investment form, which is an inherently bad one. The typical preferred shareholder is dependent for his safety on the ability and desire of the company to pay dividends on its common stock. Once the common dividends are omitted, or even in danger, his own position becomes precarious, for the directors are under no obligation to continue paying him unless they also pay on the common. On the other hand, the typical preferred stock carries no share in the company’s profits beyond the fixed dividend rate. Thus the preferred holder lacks both the legal claim of the bondholder (or creditor) and the profit possibilities of a common shareholder (or partner).

These weaknesses in the legal position of preferred stocks tend to come to the fore recurrently in periods of depression. Only a small percentage of all preferred issues are so strongly entrenched as to maintain an unquestioned investment status through all vicissitudes.

Experience teaches that the time to buy preferred stocks is when their price is unduly depressed by temporary adversity. (At such times they may be well suited to the aggressive investor but too unconventional for the defensive investor.)

(bolding mine)

The salient point to takeaway (IMHO) is that people buy prefs/hybrids etc because of the percieved safety above the common equity but in the event of something like the GFC, the pref holder will find him/herself in the exact same position as the common equity.

 

[MrBurns]

I think Ben Graham nailed it in the Intelligent Investor when it comes to prefs...
(bolding mine)
The salient point to takeaway (IMHO) is that people buy prefs/hybrids etc because of the percieved safety above the common equity but in the event of something like the GFC, the pref holder will find him/herself in the exact same position as the common equity.

I just see it as a vehicle to put some money into that will return more than a TD, spread it around if you like.

I'm not so concerned with the safety angle though we could be headed for troubled times.....but who knows

 

[McLovin]

I just see it as a vehicle to put some money into that will return more than a TD, spread it around if you like.

I'm not so concerned with the safety angle though we could be headed for troubled times.....but who knows

No worries Burnsie, just adding my .

There's probably a reason why the debt offerings go to the instos but these sort of debt return/equity risk things end up being sold primarily retail.

 

[MrBurns]

No worries Burnsie, just adding my .

There's probably a reason why the debt offerings go to the instos but these sort of debt return/equity risk things end up being sold primarily retail.

I'm not very schooled in all things investment, only real estate, so I try to keep it simple

 

[Bill M]

Mr Burns I invest in these kind of securities.

During the GFC banks shares lost about 50% of their share price. CBA hit $25 at one stage. On the other hand their PERLS hybrids only went down slightly, nothing like the ordinary stocks. So in my opinion they are more stable with the share price than ordinary shares.

During the GFC all of these issues were tested, they came under pressure simply because people needed the money and they panicked. This caused the price to fall below face value (usually $100 or $200). If you needed to sell at this time you would have lost capital. If you didn't need to sell then you could sit tight and collect the dividends, this is what I did. I lost nothing by holding my portfolio of hybrids, convertible preference shares and floating rate notes.

As with all of these offers you need to read the PDS. The NAB CPS is one step above (in security) fully paid ordinary shares as far as a wind up of the company is concerned if it ever happened. These offers are only as good as the parent company, do you think NAB would ever go broke? If you do then you could lose some or all of your capital if such an event happens.

I do not think NAB will go broke. It is a sound AA rated company and I am a shareholder. I will be subscribing to the offer simply for the dividend and because if another GFC type of event comes along it won't lose share price anything like the banks did during that time. In short, they are not guaranteed but to me it is worth the investment, I want that income and I am willing to take minor risk to get it.

Just remember this, there are some issues out there right now that have spreads of only .75% (SBKHB) and 1.25% (NABHA) above the 90 day BBSW rate. These securities have been around for many years. The people who bought those are now suffering 28 to 38% capital losses now. The reason being is that these new offers are coming out with spreads of 3 to 4% above the BBSW and people want that. If spreads were to get even higher, say 5% then these NAB CPS could drop below face value also. I personally don't think spreads will get much higher, I could be wrong though.

Plenty to think about, let us know what you will do.

 

[MrBurns]

Plenty to think about, let us know what you will do.

Many thanks for your insights Bill ........not sure what to do, but this is attractive from the security side.

 

[So_Cynical]

I think Ben Graham nailed it in the Intelligent Investor when it comes to prefs...

Don't want to side track this thread, BUT would like to mention that i listened to the Intelligent Investor (Audio Book) last week and came away with the feeling that the author was what i would call a super conservative, concentrating on capital preservation and low yield.

And who the hell uses words like vicissitudes.

Nothing wrong with a few Aussie Bank Hybrids in a balanced portfolio.... wouldn't put the house on them though.

 

[sydboy007]

The major banks hybrids are reasonable investments.

Just have to be careful of the clauses.

I cannot believe anyone bought the Crown Hybrids. The company could stop paying interest yet still pay dividends. Sorry, but if you can afford to pay dividends then you should have been able to afford to pay all you other obligations before.

The only thing that annoys me with these and the new Westpac CPS is they have franking credits. I'd prefer the full yield each quarter so I have more money to reinvest

 

[sptrawler]

If dividends and or interest rates rise, do the returns rise equally on the preference shares?
Or are they tied to a fixed base with regard to rate of return?

 

[Bill M]

If dividends and or interest rates rise, do the returns rise equally on the preference shares?
Or are they tied to a fixed base with regard to rate of return?

Most of them are pegged to the 90 day or 180 day BBSW rate. Generally speaking, if the RBA raises rates then the BBSW rises also. So if rates rise so will your income.

Today's 90 day BBSW is around 2.9% + NAB CPS spread say 3.2% = 6.1% gross income.

If rates say climbed up to 5% then it will look something like this.

90 BBSW 5% + NAB CPS spread 3.2% = 8.2% gross income.

The opposite can happen if the BBSW rate goes down.

 

[Bill M]

The only thing that annoys me with these and the new Westpac CPS is they have franking credits. I'd prefer the full yield each quarter so I have more money to reinvest

Yes, a lot of people say this and I agree. I'd rather the money up front too, but in this case we can use the franking credits at tax time against our other income and hopefully get some back too.

 

[sptrawler]

Most of them are pegged to the 90 day or 180 day BBSW rate. Generally speaking, if the RBA raises rates then the BBSW rises also. So if rates rise so will your income.

Today's 90 day BBSW is around 2.9% + NAB CPS spread say 3.2% = 6.1% gross income.

If rates say climbed up to 5% then it will look something like this.

90 BBSW 5% + NAB CPS spread 3.2% = 8.2% gross income.

The opposite can happen if the BBSW rate goes down.

Thanks for that Bill.

How is it better than just buying NAB shares, with 5% div + franking.
It seems that the return from the preference shares would be less than the ordinary shares, is it that they will be less volatile, that makes them attractive?

 

[Bill M]

Thanks for that Bill.

How is it better than just buying NAB shares, with 5% div + franking.
It seems that the return from the preference shares would be less than the ordinary shares, is it that they will be less volatile, that makes them attractive?

Yes, that is exactly it. If Europe collapses overnight and we see markets plummeting then no amount of NAB dividends will save the common stock collapsing, just like it did during the GFC.

Lets use 2 real examples. During the GFC ANZ collapsed from $31+ to only $11. That's a massive 60 to 70% capital loss. On the other hand a similar stock to the new NAB CPS offer "ANZPA" only went from $106 down to $96.80 at it's worse. (slightly different times)

During that blow off flash crash when the all ords hit 3,900 back around July 2011 the CBAPA (a similar product) only went down 10% from it's highs. The normal CBA stock went down around 30% from it's highs.

The less volatility coupled with the bank buying them back for face value at some time in the future makes them that little more safer than ordinary stock.

Everything is a risk, it's up to you how you want to play it, cheers.

 

[McLovin]

Don't want to side track this thread, BUT would like to mention that i listened to the Intelligent Investor (Audio Book) last week and came away with the feeling that the author was what i would call a super conservative, concentrating on capital preservation and low yield.

There's plenty about Ben Graham that is pretty dated. If you read the II or Security Analysis. But there are some themes that still ring true, IMO, today. His discussion around prefs resonates with me.

I understand some people, like Bill, buy them knowing the risks, but I've heard so many talking heads on TV discussing prefs as though they contained a gauranteed income stream like a bond, which they don't. Banks like RBS and Citi never missed a bond payment but they sure as hell stopped paying on their prefs. It's just something to keep in mind.

 

[sydboy007]

Be aware that the bank CPS and Hybrids fared fairly well durign the GFC

Others like the multiplex sites, Macqaurie perpetuals and Australand Trust all fell dramatically. Still they all continued to pay their quarterly distributions and some people were able to buy the MXUPA for $18 which now sits around $85 and MBLHB was down to mid $30s and sits around the $69 mark now.

Oh the pains of 20:20 vision

The recent NAB and WBC offers are providing 3.5% to 4% real yields which in a SMSF is a pretty good compound return. Most balanced fund attempt to provide that over the longer term, so to get that with a lot lower risk and volatility is a big +++++ in my book

 

[Bill M]

Seems to be plenty of money around.

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NATIONAL AUSTRALIA BANK INCREASES CONVERTIBLE PREFERENCE SHARE OFFER TO $1.4 BILLION AND SETS THE MARGIN AT 3.20%

National Australia Bank (NAB) today announced that, following the successful completion of the Bookbuild,[1] it will increase the size of its offer of NAB Convertible Preference Shares (NAB CPS) from $750 million to at least $1.4 billion.

Link: http://announce.ft.com/Detail/?DocKey=1323-11495037-30EQQ8BTLM4GCB9R3VES51427G
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