Portfolio performance edged up a bit mainly due to Fixed Income interest accrual. Shell equity failed to maintain its momentum (I actually sold a chunk in my Main Portfolios above GBP15), otherwise my mini Portfolio could be even closer to Breakeven Value.
In March 2021, I added a new bond purchase. It is the Lloyds 12% USD Perpetual:
A summary of the bond would be: It is not as good as I originally thought it was.
TLDR:
I first came across this bond which was briefly mentioned in one FI's bond recommendation reports. Though it was only one short paragraph, it got me intrigued and I went to find out more details. At FACE VALUE, it sounded really good. 12% coupon with a price of 112 which translated to 8% YTC using the First Call Date of 16th December 2024. Credit Rating is junk at BB+ but Lloyds Bank's financials, especially its CET1 (about 16% currently), has greatly improved over the year.
So my strategy was to buy some of it at the Current Price and if the price fell, I would add more. If the price went up, I would just continue to hold till the First Call Date and earn the calculated YTC.
Unfortunately, AFTER I MADE the initial purchases, my further research uncovered more details about this feature called REGULATORY CALL. To be fair, I am aware what a Regulatory Call meant, but the "Basel III Grandfathered Instrument" comment on the Bloomberg screen threw me off. I had interpreted that to mean this bond was Grandfathered as Bank Capital under Basel 3 till its First Call Date. I WAS WRONG. This bond is only Grandfathered under Basel 3 till 31st December 2021. Which means, Lloyds Bank has the right to call back this bond at 100 on 1st January 2022 onwards. A rough estimate should Lloyds Bank call back this bond at 100 when I bought the bond at 112 in March would result in a 3 point Net Loss (USD3k per USD100k notional).
There are a few possibilities that could happen, based on my further research:
1. Lloyds Bank calls back the bond at 100 on 1st January 2022 which is the earliest and harshest treatment they could do. (20% probability) I will lose 3 points.
2. Lloyds Bank calls back the bond at 100 on 16th June 2022, which is the next Coupon Date after Grandfathering ends. (20% probability) I will earn 3 points.
3. Lloyds Bank does a Tender Offer for the Bond around October 2021, a few months before Grandfathering ends. (40% probability) My P&L will depend on the Tender Price.
4. Lloyds Bank does nothing and continues to let loyal bond holder/supporters earn the yield until First Call Date of 16th December 2024. (20% probability) I will realise the 8% YTC.
So far, no reputable Bank has ever used the Regulatory Call clause and call back their bonds at par of 100. Reason being this would anger the bond holders, who often would be repeat buyers/supporters. Not forgetting the fact, these old style capital instruments were often issued just after the Financial Crisis of 2008 and Investors supported the Bank by Investing then. In fact, Lloyds themselves made generous Tender Offers in 2014 when Basel regulations immediately made certain Instruments ineligible as Bank Capital. Tender Price ranged from 116-140. Lloyds could have called back all those Instruments at 100, but they did not.
Other Banks who could have called Ineligible Bonds at 100, but didn't, include Credit Suisse and Credit Agricole, who made Tender Offers for their Ineligible Bonds at around 103-107.
That being said, the above analysis is to justify to myself why I should not immediately sell off my bought Lloyds bonds. I would also not be adding anymore. I will just hold what I have bought for my Mini Portfolio as well as my main portfolios, recognising the possibility that in the worst case scenario, I could lose 3 points on the bonds.
I think the most likely scenario to happen is Lloyds will do a Tender Offer before Grandfathering ends, at a Premium above Par. What price is anybody's guess. But from the current price of about 111.5, I would say the Market Maker is pricing in a chance of the Tender Offer happening above par. Otherwise, the bond price as of April 2021 should be 109 or lower (9 months remaining before Regulatory Call).
End of TLDR.
One positive of the Lloyds Bond is that it is considered a listed Preferred Security by my Bank, and hence it qualified for similar Lending Values as the Lloyds equity itself (70%). This is somewhat similar to the listed HSBC 8% and HSBC 8.l25% as well as the Aviva 8% bonds that old timers in this blog will be very familiar with. Those were my top buy calls then (Investors in those bonds all ended up getting their Principal back and earned the high 8% coupons along the way).
The current Margin Ratio is 88% which to me is reasonable to maintain a healthy yield while not running too high a risk of Margin Call. (It is actually about 81% Margin Ratio after I use the Cash to reduce the Loans).
Regards, Newbie
This blogpost is provided to you for general information only and does not constitute a recommendation, an offer or solicitation to buy or sell the investment product mentioned. It does not have any regard to your specific investment objectives, financial situation or any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of your acting based on this information.
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