NAB Convertible Preference Shares

[skc]

This chart is pretty interesting. A comparison of debt/equity/hybrids pre and post GFC. Hybrids function like debt when times are good but like equity when times are bad...

That's why they are called hybrids. Equity-like downside with debt-like upside (although the original intention of "hybrids" was meant to achieve the exact opposite).

In other words... Great for the issuing company and great for screwing investors.

 

[prawn_86]

great for screwing investors.

On the primary issue yes, but can be good for investors if you are buying below face value etc (usual disclosure about risks/knowledge et al)

 

[TPI]

That's a tough argument to make considering the BBSW fell from near 8% to 3% during the GFC then went back up to ~5% and now is back down at ~3%. All that in a five year period. Stable income, I think not!

Bank dividends by comparison had a had a brief blip before resuming their upward trajectory.

+1.

I agree!

Income from hybrids are tied to the BBSW and are thus inherently NOT "stable", it goes up and down like a yo-yo, and often far more than dividends.

So buying a hybrid with a grossed-up yield of say 9%, which may be higher than what you can get on fully-franked shares at the time, may see you fall into a classic "yield trap" when the BBSW starts to go down.

I think hybrids have a valid place in a portfolio, but only with a decent margin on top of the BBSW and only at the right time in the interest rate cycle (plus the other usual caveats).

That being said, it's not easy to predict what direction and to what extent interest rates will move over a given time period, thus increasing the risks inherent in any hybrid investment.

It may even be easier to predict the future direction of share dividends than interest rates.

In most cases I think when comparing hybrids to fully-franked shares, fully-franked shares will win - but, if the money to be allocated was going to go to cash/term deposits/bonds anyway, there may be a case to put some of this allocation to hybrids, and only very selectively.

 

[TPI]

Also, when banks lend you money and give you a loan they set the interest rate they are willing to lend to you at, but in the case of hybrids, you are lending a company money but they are (at least partly) setting the interest rate you receive according to the margin they are willing to set.

So you would think they are not going to screw themselves over by setting a margin that falls too far in your favour.

 

[Wheels1974]

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.

Most of what you wrote is correct. Apart from forgetting a few CBA PERLS Hybrids hemorrhaged big time during the GFC. (2009)
Such shares as the PERLS 3 (PCAPA) Hybrids went down significantly, face value of $200 however they hit a low of $125 - Down 37.5%
The same occurred with the now matured PERLS 4 (CBAPB) where they hit a low around $140 - Down 30%

As you pointed out though, only those that needed the cash immediately, or the vast majority who worried and got scarred are the ones that lost.
If they had kept the stocks mentioned above, they would have received the face value of $200 when PERLS 4 (CBAPB) matured.

As for the PERLS 3 (PCAPA) they rose again now trading around $190 and as high as $193 last week.
I quite like these stocks when the dropped because we know how strong CBA is.
There is currently a 5% capital gain to be made from (PCAPA) still not enough for my liking but if they drop a further 5% around the $180 mark which is possible now that NAB have recently announced there latest Preference share NAB CPS II or stock code NABPB are due to float just prior to Christmas.

Are most Hybrids stable? It's fair to say SOME are, however make sure to read the prospectus carefully.

Happy Investing to ALL

 

[Bill M]

As you pointed out though, only those that needed the cash immediately, or the vast majority who worried and got scarred are the ones that lost.
If they had kept the stocks mentioned above, they would have received the face value of $200 when PERLS 4 (CBAPB) matured.

Hi Wheels1974 and welcome to the forum. I am still an investor of hybrids, convertible notes and floating rate notes. I still hold GMPPA, this was issued by the Goodman Group. Just to highlight the stress, panic and stupidity of investors I point out that at one stage GMPPA hit around $9 during the GFC. That's a whopping 91% loss if you sold.

I kept my original $100 per share parcel and watched the stock collapse. They were still paying full distributions and then it was step up time. The interest rate stepped up and it now paying 3.9% on top of the BBSW rate (around 6.5% gross). I still hold these after many many years and there was no need for all that panic. In fact I bought some at $49. Now it trades at around $100.

There is money to be made in hybrids just like any other stocks. I have traded some when they were miss-priced.

Just to get the thread back on track, there is a new offer of NAB CPS II. I won't be subscribing. They are offering 3.25% on top of the BBSW and it isn't enough for me. I prefer the NAB CPS I which is paying 3.4%, so I prefer them and they are going ex distribution at the end of this week, good luck.

 

[Bill M]

Just to get the thread back on track, there is a new offer of NAB CPS II. I won't be subscribing. They are offering 3.25% on top of the BBSW and it isn't enough for me. I prefer the NAB CPS I which is paying 3.4%, so I prefer them and they are going ex distribution at the end of this week, good luck.

NAB CPS 1 is actually paying 3.2% on top of the BBSW rate and not 3.4% as I wrote earlier, I apologise for the error.

NAB CPS 11 will be paying 3.25% on top of the BBSW so there isn't much in it. The advantage of buying this IPO is that you can buy these at face value for $100 per share and there could be a small capital gain in it.

NAB CPS 1 is trading at $100.74 right now with a distribution to come, cheers.

 

[Wheels1974]

Hi Wheels1974 and welcome to the forum. I am still an investor of hybrids, convertible notes and floating rate notes. I still hold GMPPA, this was issued by the Goodman Group. Just to highlight the stress, panic and stupidity of investors I point out that at one stage GMPPA hit around $9 during the GFC. That's a whopping 91% loss if you sold.

I kept my original $100 per share parcel and watched the stock collapse. They were still paying full distributions and then it was step up time. The interest rate stepped up and it now paying 3.9% on top of the BBSW rate (around 6.5% gross). I still hold these after many many years and there was no need for all that panic. In fact I bought some at $49. Now it trades at around $100.

There is money to be made in hybrids just like any other stocks. I have traded some when they were miss-priced.

Just to get the thread back on track, there is a new offer of NAB CPS II. I won't be subscribing. They are offering 3.25% on top of the BBSW and it isn't enough for me. I prefer the NAB CPS I which is paying 3.4%, so I prefer them and they are going ex distribution at the end of this week, good luck.

Bill,
Thanks for the reply, as I mentioned in my first post I agree with you. However I just wanted to point out that during the GFC most hybrids did drop in price like all stocks, just in case new investors read your post, thinking that they are bullet proof, they are NOT nothing is.
It's also worth mentioning all quality ordinary shares that dropped between 30% to 60% also came back just as STRONG. Those who didn't purchase the 4 big banks & the top resource stocks in 2009 would be kicking them selves, I know I am.

I was lucky as I pulled 80% of my portfolio out of the markek in 2007 when the ASX reached its highest.
However then due to the volatility in the markets I could not reinvest the large amounts that I did in the past.

I also am a investor in Hybrids however not just Hybrids, I purchased quite a few PCAPA shares when they bottomed out my average price on PCAPA is $131.33
I just purchased many ANZPA after they went ex on the 25/11/2013 and dropped $1.50 odd to reach there face value of $100 these are quality stocks, granted they are not paying the highest margins but they are a SAFE & quality stock.
Better still are the Westpac's WBCPB which will be going Ex on the 17th, I can't see these shares coming back to face value of $100 but even if they drop to $101 I will be purchasing a heap of these as they are my favorite Hybrid.

Not a fan of the new NAB either, they said in there prospectus that the margin will be between 3.25% to 3.4% on top of the 90 day BB which is just absurd, I expected a minimum of 3.6% on top of the 90 day BB and when they confirmed the margin will be only 3.25% on top of the 90 day BB I couldn't believe it.
On the flip side I thought about purchasing a few thousand of them, as all these quality hybrids slightly increase in price quite fast, im pretty sure they will be worth $102 within 2 to 6 months.

Thankfully NAB ordinary shares hit a low of $32.90 so you know what I obviously done
NAB yield almost 5.7% not to mention the capital gain aspect, shares like NAB will almost certainly reach $37 within the next 6 months, although it wouldn't surprise me if they went a little below $32 in the near future which I hope they do so I can purchase more.
I also strongly believe the ASX200 will hit 6000 within the first half of 2014 and almost certainly by the end of 2014.

Happy Investing to you ALL.

 

[Bill M]

Hi Wheels1974, just in case you may not know there is a very good thread on this forum for hybrid securities. It would be really good if you could join the discussion, your input would be great. It's gone a bit quiet over there of late, hope you can join in, link Below, cheers.


https://www.aussiestockforums.com/forums/showthread.php?t=15124