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The Royal Bank of Scotland Group plc Message Board

  • electra_atreides electra_atreides Sep 17, 2009 8:17 AM Flag

    RBS preferreds - from the other side of the Pond

    From another board:

    "As has been discussed, there are different series in the American dollar prefs, with three of them (RBS-F, RBS-H and RBS-L) having slightly more protection than the others because they are viewed as debt so coupons are mandatory if there are distributable reserves. EC pressure or board discretion should not enter the equation. Here, I believe it is therefore best to go for the F, H or L series over any of the others because this extra level of protection must have value. Of these, I personally favour the lower priced L series (assuming yields are equal) because of the greater upside in a future debt for equity swap.

    Those who are ultra cautious have gone for Natwest sterling preference shares (NWBD), which offer a 9% yield on par but are currently priced at 74.5p. The reason that these are attractive to investors is because the dividend payment is mandatory so long as there are distributable reserves and Natwest (a subsidiary of RBS) has massive distributable reserves. Furthermore, it has been highly profitable throughout the crisis so the chances of coupon deferral look extremely low from a capital adequacy perspective. It is rock solid, whatever the ratings agencies think – I don’t believe they can have read the prospectus. In the almost impossible event that the dividend is missed, it must still be paid in further preference shares in lieu of cash. I don’t believe Collins Stewart, who recently announced dividend deferral concerns, can have read the prospectus.

    There is one more option, however, that has been briefly mentioned on these boards but attracted very little attention. I have recently been heavily buying the dollar preference shares in Natwest (NW-C) at up to $13.10, which currently pay a dividend of $1.94 over four quarters, or a yield of about 15%. Remarkably, that is currently higher than the yield available on the later American dollar prefs in RBS, despite the protection on the dividend being so much greater. Historically, this has traded broadly in line with its sterling equivalent, NWBD, but it seems to have fallen out of step in the last couple of weeks. For those of a nervous disposition, they are an outstanding buy. If they get back to trading in line with NWBD they should be at $18.5. The only material difference is that, in the absence of distributable reserves within Natwest, there is no obligation on the bank to give more preference shares in lieu of cash as dividend payment. However, given the massive distributable reserves, this is really a non-issue and shouldn’t have a material effect on the price. Either NWBD has to come down or NW-C must go up, assuming the exchange rates stays constant.

    The Natwest interims announced recently are a thing of great beauty, showing pre-tax profit of £241m (down from £1.448b last year), even after huge impairment charges of £1.7b . I’m assuming that nationalisation would affect the Natwest preference shares but I’m far from sure about that since the company is in such good shape. Natwest debt holders shouldn’t really give a monkey’s about their parent since Natwest is a separate legal entity in it’s own right, and clearly a very profitable one.

    There is £13.2b of shareholders equity on the balance sheet so, given that the bank is still heavily profitable, Natwest looks bulletproof. A dividend yield in of almost 14% on NW-C prefs is quite remarkable.


    In summary, if I had to own just one security of those mentioned above, it would be the RBS Argons. My ‘widows and orphans’ pick would be NW-C, trading on the NYSE and after that, the L series. Fortunately, I’m not restricted and I have all three in size."

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    • Aargh, put last post in wrong spot. So again,

      jack, my post was not directed at you. Your post was accurate, referencing the pfd. It was the post by taintedfud that referenced interest that I was responding to. I guess I should have said "taintedfud, ..."


    • And the debate rages on re: the advantage of F, H, and L series shares over other series. Despite the language everyone quotes, "In addition, such non-payment shall not prevent or restrict (a) the declaration and payment of dividends on any other series of dollar preference shares or on any of our noncumulative
      preference shares expressed to rank pari passu with our dollar preference shares..."

      The reality is these prospectuses have so much contradictory language that I think the language cannot be parsed. These things are going to be treated equally, so all those paying a premium for series F,H and L are simply... paying a premium.

      Read the language below (I've reread it multiple times and arrive at the same interpretation) and let me know where I am misreading.

      Good luck to all.

      From the same non-cumulative prospectus, series R, comes the following language, which seems to state that cumulative pref shares excepted, all parri pasu non-cum shares will recieve the same pro-rata dividend:

      "If dividends are to be paid but our distributable proÑts are, in the opinion of the board of directors, insuÇcient to enable payment in full of dividends on any series of dollar preference shares on any dividend payment date and also the payment in full of all other dividends stated to be payable on such date on any
      other non-cumulative preference shares and any other share capital (other than the cumulative preference shares) expressed to rank pari passu therewith as regards participation in proÑts, after payment in full, or
      the setting aside of a sum to cover the payment in full, of all dividends stated to be payable on or before such date on any cumulative preference share, then the board of directors shall (subject always to subclauses (i) and (ii) of the preceding paragraph) declare and pay dividends to the extent of the available
      distributable proÑts on a pro rata basis so that (subject as aforesaid) the amount of dividends declared per share on the Series R preference shares and the dividends stated to be payable on such date on any other non-cumulative preference shares and any other share capital (other than the cumulative preference shares) expressed to rank pari passu therewith will bear to each other the same ratio that accrued
      dividends per share on the Series R preference shares and other non-cumulative preference shares and any other share capital (other than the cumulative preference shares) bear to each other.

      • 2 Replies to rexobXIP
      • Parsing legal document language can be invaluable, although it is difficult and may require knowledge of case law. Simply having a comma (or not having one) can cause the same sentence to mean two totally different things.

        I suspect there is a slight advantage to certain pfds, but one that is irrelevant in practice. The Ls for example, started out as a different security and were exchanged. The prospectus states that on the exchange pfds, dividends are required to be declared unless (paraphrased) 1) it would breach of the capital adequacy requirements, or 2) there would be insufficient distributable profits to cover all pfd divs. Required.

        A glance at the M prospectus says divs are discretionary and are up to the sole and absolute discretion of the board. A lot different than required.

        Clearly those two pfds are different, but it is meaningless. They will all be treated similarly unless push comes to shove, in which case, things will be really bad for all concerned.

        Regarding NatWest, interesting info. IF push comes to shove, I am not sure the authorities will honor the separate capital structures - the US has certainly demonstrated that in the economic crisis. Likewise, assets get upstreamed and downstreamed to subsidiaries for various reasons. While we would think no such moves would occur to the detriment of NatWest creditors, are there any assurances? Perhaps the regulators are a limit to that activity, perhaps not.

      • One, I would agree that parsing the language is most difficult. And IMO the EC cannot do it any better than I.

        That said, any burden sharing (punishment) borne by the preferreds is very likely to be part of negotiations. And, since the RBS annual is very clear in distinguishing the F, H, and L's as a debt obligation, that will make some difference.

        I believe the Westminster's are an obligation under Westminister profits, which is why these are listed separately in the account notes as under westminster. However, it is the governing Board that must declare all dividends.

        The ABN's??? Hmmmm???

        From the EC's perspective, the EC may not give a tinker's damn about any legal separation and may try to toss them together (say, a burden sharing amount of 30 percent of the total of par of all preferreds. Then maybe they let RBS sort it out. Hypothetically of course. And if you think I kidding about EC cavalierness, they are in danger of upsetting the ING bailout that appears to be reasonable to me and was progressing o.k., and it may well wind up in court. ING now cannot rid its ABN component, cause the buyer backed out and this is certainly going to lower the market value of it. The EC appears to be playing hardball, but like a fastballer with no control.


    • rstendel Sep 17, 2009 1:56 PM Flag

      In the exchange of bonds recently done by RBS, it seemed like NatWest was mix in it at random in large amounts. Is NatWest really separate from RBS in any meaningful way?

    • Last paragraph, indicates that the number one pick by the author would be the RBS Argons. RBS Argons?

      Was the intent to state the ABN AMNO's?

      Also, the NW-PC's have stepped well up in price, the dropped for a bit but now are above the RBS's. I think the uncertainty of the status of the ABN's is holding them a bit.

      cheers to all,


    • Excellent post, thank you; have maintained for some time the NW-PC is much safer bet than RBS, yield is usually equal to or higher than RBS as well although it is currently a bit less, 80bp less than RBS-T

    • The URL link does not work - could you repost this? Thanks.

    • The URL link does not work - could you repost this? Thanks.

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