RBOHA - Rabobank Prefernce Shares

Hi Guys

I am looking to build a low risk portfolio of bonds and hybrid type securities as a nest egg for an elderly relative. Among others I have been looking at RBOHA over the last week and cant quite see why they have increased 5 or 6 percent.

Is this normal with these types of securities and if so will it be too risky for Nan?

Cheers
Traderdude

IMO, perpetuals are entirely inappropriate for Nans. Stick to term deposits at the banks, or look at fixed term unsubordinated bonds issued by reputable companies. This is not advice, just my personal view. Seek professional advice from a reputable advisor - yes, there are some out there :cool:

Rabo issued a stack of debt here not so long ago. I heavily suspect the increase is a buy back funded by the proceeds. They have let them fall back to $82.00 and seem to have started buying again recently. I wouldn't be buying them for Nan. TD's are where Nan's live. And maybe some high quality bank bonds. But you will likely get better interest from the TD's.

For Rabo to be able to buy back, there is a board resolution required, stating the time period during which the buy back will occur, and the maximum amount they may buy. I have not seen this announced, so I don't believe it is them (at least directly)

I know a few people, closer to the action than me, think that they will elect to repay these in 2017, as the purpose for which they were issued becomes redundant under new rules take effect in 2013, i.e. they will no longer qualify as equity on their balance sheet. So IMO, these are being treated as 6 year bonds, not perpetuals. On that basis, its providing a good yield for a AAA rating - this might explain the shift in momentum and increased volume of late.

And for traderdude, I stick with my comments re Nan - they are still perpetuals until proven otherwise

The earlier repayment option is as a requirement of the Basel III global regulatory standard http://www.answers.com/topic/basel-iii

Rabodirect offers fair rates for Nan.

Awesome cheers everyone the info has been great

I must admit I haven't seen the IM. I just made the assumption that the NZ Branch is the one doing the buying. They were issued by Rabo Netherlands I think. And I don't know what the rules are about associated companies buying them back. I just don't know who out there would have pockets deep enough to speculate on whether these will be called in this environment. I would be surprised if Rabo didn't call them... but its not unheard of for a small foreign issuer to not call sub debt.

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Originally Posted by Xerof

For Rabo to be able to buy back, there is a board resolution required, stating the time period during which the buy back will occur, and the maximum amount they may buy. I have not seen this announced, so I don't believe it is them (at least directly)

I know a few people, closer to the action than me, think that they will elect to repay these in 2017, as the purpose for which they were issued becomes redundant under new rules take effect in 2013, i.e. they will no longer qualify as equity on their balance sheet. So IMO, these are being treated as 6 year bonds, not perpetuals. On that basis, its providing a good yield for a AAA rating - this might explain the shift in momentum and increased volume of late.

And for traderdude, I stick with my comments re Nan - they are still perpetuals until proven otherwise

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i think perpetuals are perfect for nan - why not. they arent risky and actually perform much like a rolling term deposit (usually better)

But is nan willing to hang around for years waiting for the capital value to be recouped (RBOHA's were issued at 100, now only 85)

I accept that entry at 85 is better than 100, and that 85 then becomes the benchmark for exiting, but my point is that a term deposit suffers no variance to capital price, unlike a perpetual (or any other bond for that matter)

Perpetual prefs are 'risky' - they are one step above equity

I think Rabo has indicated that they will be called at the time they turn into floaters as they no longer qualify as tier 1 Capital for banks. Their head financial guy was here recently on a non deal roadshow. Call will of course be at par

Dubdee so they will be trying to buy as many as they can at 85c then

One would think so particularily as the profit between purchase price and sale price ($1.00) goes straight to tier one capital as profit.

The issue for them is though can the replace it with other tier one capital at a sensible price. This may not be the case so RBOHA might well stay of foot without a buy back. So I am not predicting a buy back but a convergence to par over the time to first call.

So you can treat these more as a bond than a perp.

why would nan need the principal? Ultimatly nan needs contiunous income over a period of until death. Perpetuals provide that. Other assets in the portfolio can be sold or other parts of her portfolio can be used to fund large costs that can't be borne by income (medical bills, new car etc).

If I was nan I would hope the perpetuals never are called. Very hassle free.

The bigger problem for Nan might be the sub-ordination of these instruments.... Worth adding they are still highly rated. And if Rabo collapses the world has a big problem.

And there's also this "From 8 October 2017 the rate will be reset quarterly at the same margin over the 90 day bank bill rate". If they don't call them for some reason, you are going to take a big capital hit, and reduced interest.

This non-vanilla stuff is best left to investors rather than nans... and after looking at these last year, I am not convinced the interest and likely call in 2017, are compensation enough for the risk they may not call them.

Yup, "Nan's" investment from a mere two or three weeks ago has lost 5 cents of its capital value - 85.5 to 80.5 - thats more than she is going to earn over the next year in interest, before she pays any tax, so lets say she'd break even in two years after tax

lookin' good?

Two resets re-priced today and both saw interest rates fall again - IFTHA to 4.22% (from 4.99%) and ASBPB from 4.78% down to 4.0%. However, it's an unpredictable process as benchmark has been up and down over the last year and at one stage looked like they might head higher. Still, term deposits have mostly come off too, unless investing with remaining finance companies and opting to reinvest at the considerably higher risk of "no guarantee".

Re Rabobank, I'm afraid I'm going entirely from memory here, so maybe wrong, but I thought the PIIGS sovereign debt exposure was about €490m or so last I looked on assets of €6.2bn. Enough to cause some stress to equity levels if it was all written down, but would have to be pretty extreme scenario. Worst exposure though would be to private mortgage debt which was over 40% of assets - although think they would probably have a reasonable pick of "good" mortgages and avoid the worst. Obviously, enough extreme scenarios, every bank ends up nationalised and haircuts all round. But would have to hope the ECB finds a printing press before things get quite that extreme.

I don't see the harm in having a few re-sets to offset the fixed rates for those of us with below average foresight having to make decisions about where to invest. All scenarios at the moment involve making predictions as to which direction overseas leaders will jump when the train gets close enough. And there are many investors that need more than the 3% of an on-line call account to avoid eroding capital in the need for income while we wait to find out. The scenarios where RBOHA actually take a defined haircut would have to be pretty extreme, although given they don't have a maturity date, there is probably increased odds they will live up to their perpetual name for the next 10 years....the whole point is to give Nan income so she doesn't have to sell the notes for income in the meantime.

Never say never, but Rabo would be the last bank standing globally IMO - they are a pretty unusual bunch, with impeccable credit standards.

I know what everyone is saying: all Nan is concerned about is an annuity stream. My point is if she ever needed to bail out for any reason, she is currently down the dunny, in a matter of mere weeks from (virtual) entry

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Originally Posted by Xerof

I know what everyone is saying: all Nan is concerned about is an annuity stream. My point is if she ever needed to bail out for any reason, she is currently down the dunny, in a matter of mere weeks from (virtual) entry

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The difficulty is, where isn't that the case with income? It just isn't possible to get a liquid investment that you can be certain of being able to withdraw funds from without opting for a call account of some sort, and the returns just aren't there for most peoples income needs. Always going to be a balancing act between risk, return and liquidity - not to mention hidden costs and returns around inflation vs deflation.

But yes, I guess you are right in pointing out that the market value on price-traded perpetuals/resets is probably more volatile than for most yield-traded fixed rate bonds over a short period.

Well, the market keeps talking - Nans (virtual) investment keeps getting hammered in price, now down another 3.5 cents since last week.

Far more volatile than your regular fixed term bonds, most of which have barely blinked (yet).

Can't buy a trick these Perpetuals......Nan's buried......

For wonderful spin, take a read of their announcement today, where they were DOWNGRADED from AAA to AA

Quote:

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Rabobank retains its position as the world’s highest rated
privately owned bank according to Standard & Poor’s new
methodology
Rating agency Standard & Poor’s (S&P) today announced its new ratings for the top 37 global banks according to its new methodology. S&P has awarded Rabobank the highest rating of all these 37 banks: AA with a ‘stable outlook’.
Rabobank previously held a AAA rating based on the former approach used by S&P. As is the case at Moody’s, Fitch and DBRS, Rabobank remains the highest rated privately owned bank in
the world according to S&P. Rabobank views S&P’s new rating as a reconfirmation of its stability and strong creditworthiness.

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They must use the same firm as Heartland.......:ohmy::ohmy:

Personally, I'm surprised at the way the price has held up. Percieved premium for quality ?

Rabobank has given notice of its intention to redeem the RBOHA capital securities on 9 October 2017, the first business day following the "First Call Date". I assume they are pre-empting an anticipated interest rate rise at the next rate reset, but at the current rate of 2.8825% I'm more than happy to have my small holding repaid.

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Originally Posted by macduffy

Rabobank has given notice of its intention to redeem the RBOHA capital securities on 9 October 2017, the first business day following the "First Call Date". I assume they are pre-empting an anticipated interest rate rise at the next rate reset, but at the current rate of 2.8825% I'm more than happy to have my small holding repaid.

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yeh didnt quite make sense to me either macduffy.
they could buy them on market for less, and yet they chose to pay par.

So do you guys have any insight as to their intention regarding RCSHA perpetual pref. callable 2019. Current interest 8.3425%. Rate resets 5yr swap plus margin 3.75%, last reset 2014.

So the RBOH capital securities were duly repaid on 10 October. Now IFT advise that their IFT170 bonds will be repaid as scheduled on 15 November and there won't be any reinvestment offer. Don't need the money, apparently. That 8% coupon will be missed! - and more funds to redeploy!

I think you'll find the early redemption had nothing to do with interest rates, and everything to do with the bonds no longer being able to be categorised as 'Tier 1 equity' on the Balance Sheet.

Like chewing gum on the bedpost, over time they both lose flavour

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Originally Posted by kiwitrev

So do you guys have any insight as to their intention regarding RCSHA perpetual pref. callable 2019. Current interest 8.3425%. Rate resets 5yr swap plus margin 3.75%, last reset 2014.

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Chris Lee says they will be repaid June 2019.
So buying now at $107 will cause a capital loss of 7% in 20 months time, offsetting about half the 8.34%pa interest.