Forthcoming offer to buy back Investec Preference Share

dkbrown

Oliver covered this issue some while ago: http://www.investorsintelligence.co.uk/2013/10/27/investec-a-base-rate-linked-preference-share-gb00b19rx541/

The preference share traded at a £4.76 bid price until yesterday, down from a recent-years' peak bid price of £5.10 at the end of last year.

Investec have just announced a new placing of its ordinary shares designed to raise money to buy out its preference shares (both this one, and a Rand-denominated issue) to boost its tier 1 capital ratio, which its preference share capital doesn't help towards towards. The proposed buy back price is £5.70. In anticipation, the bid price rose to £5.45 yesterday.

My question is: should holders of the preference share take up the offer?

The "pro" argument is that the price being offered is more than 10% above the recent years' peak, that Investec's hand is being forced by regulatory authorities, and this represents a good opportunity to cash them in.

The "anti" argument is that the preference share is a unique hedge against inflation, with a yield which is geared at a rate of 2.25x to base rate rises - so for example a rise of 5% in base rate would result in a rise of 11.25% in its yield, i.e. from just over 3% yesterday to over 14%! Such a rise in yield would provide a terrific boost to the share price too of course.

What do people think? Oliver - is this a possible topic for a Bond of the Week?

Wozzitworthit

My current view is that I will hold for all the reasons you have mentioned in the "anti" argument.
Depending on how many take up the offer they may become more difficult to sell in thefuture but that doesn't worry me - they are a small part of my portfolio, and they were bought to hold for the long term as a hedge against inflation

dkbrown

Well, I like the idea of a hedge against inflation too - that's why I bought INVR in the first place.

However, a hedge doesn't come at any price. Reason tells me that if the buyback offer is high enough, and/or the prospect of what I am hedging against (a rise in inflation/base rate) is low or distant enough, then I should probably take up the offer.

If rates went up by 0.5% tomorrow, then the gearing effect on the dividend (see Oliver's article) suggests the underlying price of the share (i.e. the market price, in the absence of the buyback offer) would rise up to or beyond £5.70, killing the proposed buyback offer.

So the issue then becomes: when will interest rates rise? Until a week ago or so (i.e. before the polls suggested Brexit might actually happen), the consensus was that a base rate rise was a long way off - perhaps in 2019 or 2020. For INVR holders, that's not jam tomorrow, or even the day after tomorrow, and it would make the buyback offer more attractive.

However the suggestion now is that if Brexit happens, the pound will fall, leading to a rise in inflation because of the effect on imported goods. That should bring forward a rate rise.

Fortunately, it seems unlikely that INVR holders will have to make a decision on the buyback offer before the result of the EU referendum is known.

ClarkeP

I won't take up the offer myself but I know other investors who will. There is another consideration beyond value and replacement. If a large amount is tendered (likely) then the liquidity in this issue will be even worse afterwards. So long as you don't mind holding it indefinitely then this should not be a problem. For those that might want access to the capital at some point in the near future, it might be prudent to sell while one can.

dkbrown

I decided to sell in the end. Looks like about 90% of holders did the same. It was the prospect of lower interest rates that decided me. If I think rates are on the up again I might try Nationwide's CEBB.