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The Royal Bank of Scotland Group plc Message Board

  • robbhyland robbhyland Sep 30, 2009 11:02 AM Flag

    Deferral Risk?

    I have been following the developments over the past few days & weeks starting with the Fitch Downgrade and the more recent news and commentary from EU & RBS. To be honest, my crystal ball is still very foggy and it is not clear to me what the final outcome is.

    First, I would like to thank the board members for providing great data, links and analysis on this topic. In additional to the long time board faithful, the many new members have really provided solid insight and analysis. All said…… I am still very uncertain about the outcome. But let me try to put into perspective where we are and what I am seeing.

    It is very obvious the “risk” of dividend deferral is getting much more publicity of late. Regardless if the risk is more or less, it is more widespread known and discussed and many people are trading on it. I’ve noted the higher than average volumes and the even the antidotal comments from long time holders on this board that they have been lightening up on their positions. In confession I have also lightened up on my holdings and waiting for a new entry point. With these relatively low volume securities, selling (or buying) sentiment tends to move the price and volatility is self-fulfilling.

    To put things into perspective, as a group, RBS ADR Preference share are now trading in the 15% dividend yield range. This is 6-7% higher yield than the current financial preferred universe. This is the approximate range we were trading in the May/June timeframe, but the yield spread with the other preferreds has widened for RBS somewhat from the 3-4% range back in May/June. Also to frame the current pricing, we are somewhat above the severe drop off that occurred last month when the Fitch downgrade was first published.

    From my perspective, there are many unanswered questions as many have posted here (too many to list) and it is not clear to me what the outcome will be. The question we must each ask ourselves is the additional yield worth the risk of deferral? If deferral does occur, what is the downside risk? I still believe there is a huge upside potential, but am I willing to wait for the long term payoff? If I did sell, what alternative opportunity is there to deploy the profits?

    In the past, I have always seen these issues sell-off too much and subsequently recover. I have always been willing to hold on and/or make temporary trades in and out to profit on the volatility, but always with the belief that there is long term value. For all the faithful holders we will collect our dividends today. I have always felt comfortable that the dividends will be paid and have publicly stated my confidence to b e in the 90% range. But to be honest, with all this recent talk, I am not as sure as I was in the past. If I had to estimate today, I would put my certainty of the Q4 dividend to be in the 75% range today. So would I buy a 15% yield with a 75% probability or an 8.5% yield with a 90% certainty?

    What I am doing is maintaining my core holding of series H &F (those acquired for $5 or less) and I have moved out of all my other RBS holding over the past week. I am planning on letting the market do its usual thing of overreacting and I will reenter when either the yield spread provides a positive entry point after the selling is overdone or when there is more clarity on the dividend deferral probability.

    Again, I want to thank the board members for their continued input, data, and analysis. Good luck to all

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    • gotta tell ya rob.. i been buyin a bucket load of rbsprt,, aand also have been adding rbsprt too...sometimes i feel like a texas hold em player....

    • Yes, I still beleive there is a 75% or greater chance that the December dividends will be paid according to terms.

      However, this lowered expectation is more based on "distributal profits" concern than EU political mandates.

      It should be VERY telling when we get an earnings update. I'm interested in earnings of operations more than any non-cash adjustements for asset write-off or losses.

      It's nice to have a couple decent up days to bring confidence back into the market.

      My only regret is my limit buy orders were set to low and they never hit before the price correction.

      I still have them out there as GTC just incase some investors/traders get scared and dumps a bunch of market sell orders.

      That's how I got lucky back in Feb to pick some up in the $3 range.

    • I should have lightened up over the past couple days but I did not think we would see a re-emergence of this risk for a while.

      I honestly do now know what to think, but I can tell you that this experience has not been good. Foolishly I liquidated some positions to jump onto the preferred bandwagon and unfortunately they have not paid off. Of course I was also looking for long term cash flow, but the appeal of preferreds trading well below par was also enticing.

      I am surprised RBS has allowed this clowd of uncertainty to continue if they are really adamant that the dividends will continue to be paid. To me that is the strongest signal showing a lack of confidence.

      I am hoping tomorrow will give us a little bounce but who knows at this point.

      • 1 Reply to oasisbu
      • Sold half of my RBS preferred positions yesterday and replaced part with some ABN-PE today..thought I made a good buy earlier at $9.86. After a short pop however, there was a constant erosion to the lows of $9.43 with no bounce, very disappointing.

        I am in Robby's camp, very tricky here...but lets hope there is more rhetoric than action on dividend deferrals. Robby, by the way, the SFI preferreds have been acting well even though the common is weak.

    • I sold my last 3500 shares earlier today. After reading the addition to the prospectus for the APS issued yesterday the EU will have to approve the issuance of debt. It appears that Neelie will have her pound of flesh of the present owners of debt.
      Thank you all for your informative posts.
      It has been a great ride.

    • im standing put.. if a defer so be it.. i think hester will some how save the co.. there will be pain as he says, but i think he will get the job done...

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