It has come to my attention that some preferences are classified as debt and others are classified as equity. Case in point is RBS-H, where the prospectus clearly states that the dividend must be paid unless they are under the FSA required capital level or they don't have enough distributable profits.
Also, they cannot pay any other instrument ranking pari passu with the H, if they don't pay this class.
This is very different from most of the other (newer) preferreds where the dividend is totally discretionary for the board,and where payment can be halted on them without affecting the other preferreds.
Another benefit is that when the dividend is mandatory, such as the H, the preferred is debt, and hence it carries a different connotation. In case of a liquidation, instruments classified as debt maybe honored more than those classified as equity.
Still, H is the highest yielding of all the RBS preferreds I have tracked. Makes you wonder, how irrational and panic stricken is this current market. The devil is in the details (or in this case in the prospectuses).
Interesting. The A3 Moody's rating is considered the lowest level in the "upper medium" investment grade class. Meanwhile, S&P downgraded the preferreds to BB, which is non-investment grade, termed "speculative". It is the second highest non-investment grade rating, though (BB+ being highest "junk").
Not that the rating agencies know squat, but there appears to be a disagreement in the credit worthiness between Moody's and S&P.
The Moody's equivalent of BB would be "Ba2", which 5 notches below their current A3 rating. Usually, Moody's and S&P aren't that far apart, further underscoring the uncertainty even among the rating agencies as to the dividend outlook for the preferreds.
The final ratings of the bank's non-cumulative preference shares (A2 on review for further possible downgrade) will also need to incorporate an assessment whether they have the legal form of equity or debt. The equity instruments (which gain voting rights in certain circumstances) are likely to drop to non-investment grade, reflecting the greater risk of loss on these instruments should the issuer be nationalised.
Nationalization is not in the cards. It is not being discussed; indeed, they have already moved to a "bad bank" strategy in the UK.
It is so freckin odd. Last night I was doing some research on distributable profits, and I noted that the UK press talked about how U.S. banks have been nationalized (they have not) and the U.S. press talked about how UK banks like RBS have been nationalized (it and they have not).
Hey Guys, Excellent post by everyone. Also, let me compliment all posters here. You folks are sharpest, most informed and most cooperative board that I have ever come across.
In relation to "distributable income issue". From what I understand board can use past or present profits. That being said, can RBS's retained earning position take the GBP28b loss and still be positve. If not, IMO board can not technically declare divi on prefs From what I can determine retained earning were GBP 64b in 2007 so they can absorb loss and still be positive. Any comments?
From what I see the 2007 year end retained earnings were 21 billion pounds (page 181 of report). That means that the 2008 loss would put them into negative retained earnings. This would seriously jeopardize payment of dividends on preferreds.
I think that they will pay the next dividend, but after they formally release the 2008 results, maybe no dividends after that.