Buying Corporate Bonds - Some Questions

fiscoking

Hello,

I was looking at corporate bonds on the H&L website as a way to diversify, and have some questions that none of the regular 'guides' seem to answer.

If you have any experience with bonds then I'd welcome any input. Just trying to understand what I'm seeing on the H&L webpage. I have asked H&L but their answers just pointed back the H&L website. Questions below.

Take the bond below, for arguments sake:

https://www.hl.co.uk/shares/shares-search-results/l/lloyds-tsb-bank-9.625-subord-bds-2023

Issued by Lloyds Bank, it matures on 6 April 2023, at which point you'll get back the issue price of 101.85p, assuming the holder were to keep it until maturity.

1. As the original issue date was 1993, this is a 'second hand' bond that was bought by someone else originally.
2. Given the Buy price of £104.00, that means it's trading higher than you could have bought it originally; issue price of 101.85p.
3. The coupon frequency is listed as 'Annually', but no date is given. I'm assuming here that the coupon payment date is on the anniversary each year (April 2023).
4. If someone were to buy this bond, how would the coupon payment be worked out, given they're buying it part way though a year? I mean, if the person/entity selling this bond sells it today, then surely they're going to miss out on the coupon payment next April (?) and they'll get nothing since last April (?)
5. The current sell price is 99.75, but if someone were to hold it until maturity then they'd get back the issue figure of 101.85p. Which is higher.
6. The coupon is listed as 9.6250%. So that's 9.6250% of the issue price (101.85p) and not the current market price.
7. The actual coupon % figure would be lower as the bond can only be bought for 104.00 and not 101.85. 
8. The % coupon rate is fixed and cannot change.

All of the above assume the bond issuer doesn't default on payment.

Some final questions...on PIBS.

https://www.hl.co.uk/shares/shares-search-results/s/skipton-building-society-12.875-pibs

The above instrument is listed under the Bonds section at H&L, but it's not a bond. It's a 'Permanent Interest Bearing Share'.

Are these like a regular bond but with no redemption date? It's just goes on indefinitely. If that's correct then it's more like a regular equity share that pays *fixed* dividends?

9. Is the coupon rate with a PIBS (12.875%) fixed or variable? I realise the Running Yield will change, based on the changing close price each day.
10. The fixed coupon/regular payment is worked out from the coupon rate (12.875%)* original PIBS issue price?
11. The listed 'Running yield: 7.923%' is the actual payment you get based on the current PIBS price?

If PIBS have no redemption date then they're much more risky compared to regular bond, as their price will be heavily influenced by interest rates. As rates go up, the PIBS price will drop and you could be stuck with a loss indefinitely - assuming you needed or wanted to invest elsewhere. With a regular bond, you have the eventual redemption date when you get back the original investment.

Has anyone figured out a way to assess the credit rating of bond issuers? I don't see this listed anywhere on the H&L web page.

Thanks.

wmb194

fiscoking said:

Hello,

I was looking at corporate bonds on the H&L website as a way to diversify, and have some questions that none of the regular 'guides' seem to answer.

If you have any experience with bonds then I'd welcome any input. Just trying to understand what I'm seeing on the H&L webpage. I have asked H&L but their answers just pointed back the H&L website. Questions below.

Take the bond below, for arguments sake:

https://www.hl.co.uk/shares/shares-search-results/l/lloyds-tsb-bank-9.625-subord-bds-2023

Issued by Lloyds Bank, it matures on 6 April 2023, at which point you'll get back the issue price of 101.85p, assuming the holder were to keep it until maturity.

1. As the original issue date was 1993, this is a 'second hand' bond that was bought by someone else originally.
2. Given the Buy price of £104.00, that means it's trading higher than you could have bought it originally; issue price of 101.85p.
3. The coupon frequency is listed as 'Annually', but no date is given. I'm assuming here that the coupon payment date is on the anniversary each year (April 2023).
4. If someone were to buy this bond, how would the coupon payment be worked out, given they're buying it part way though a year? I mean, if the person/entity selling this bond sells it today, then surely they're going to miss out on the coupon payment next April (?) and they'll get nothing since last April (?)
5. The current sell price is 99.75, but if someone were to hold it until maturity then they'd get back the issue figure of 101.85p. Which is higher.
6. The coupon is listed as 9.6250%. So that's 9.6250% of the issue price (101.85p) and not the current market price.
7. The actual coupon % figure would be lower as the bond can only be bought for 104.00 and not 101.85. 
8. The % coupon rate is fixed and cannot change.

All of the above assume the bond issuer doesn't default on payment.

Some final questions...on PIBS.

https://www.hl.co.uk/shares/shares-search-results/s/skipton-building-society-12.875-pibs

The above instrument is listed under the Bonds section at H&L, but it's not a bond. It's a 'Permanent Interest Bearing Share'.

Are these like a regular bond but with no redemption date? It's just goes on indefinitely. If that's correct then it's more like a regular equity share that pays *fixed* dividends?

9. Is the coupon rate with a PIBS (12.875%) fixed or variable? I realise the Running Yield will change, based on the changing close price each day.
10. The fixed coupon/regular payment is worked out from the coupon rate (12.875%)* original PIBS issue price?
11. The listed 'Running yield: 7.923%' is the actual payment you get based on the current PIBS price?

If PIBS have no redemption date then they're much more risky compared to regular bond, as their price will be heavily influenced by interest rates. As rates go up, the PIBS price will drop and you could be stuck with a loss indefinitely - assuming you needed or wanted to invest elsewhere. With a regular bond, you have the eventual redemption date when you get back the original investment.

Has anyone figured out a way to assess the credit rating of bond issuers? I don't see this listed anywhere on the H&L web page.

Thanks.

First you should Google bond basics and find out about yield to maturity, running yield, clean prices, dirty prices and so on. Usually bonds pay every six months and when you buy bonds that are quoted clean - probably including the Lloyds one - you'll pay the accrued interest to date when you buy and then receive the full six months' coupon at the next payment date. Pibs are rare now and it's hard to generalise as they have their own quirks e.g., some were redeemable, some had fixed rates to a certain date and then reset to a percentage + a benchmark gilt yield.

You should really find the prospectuses for these as they'll answer many of questions. In addition to the issuer's website and Google, you can sometimes find them on the LSE's website's quote pages.

fiscoking

wmb194 said;

First you should Google bond basics and find out about yield to maturity, running yield, clean prices, dirty prices and so on. Usually bonds pay every six months and when you buy bonds that are quoted clean - probably including the Lloyds one - you'll pay the accrued interest to date when you buy and then receive the full six months' coupon at the next payment date. Pibs are rare now and it's hard to generalise as they have their own quirks e.g., some were redeemable, some had fixed rates to a certain date and then reset to a percentage + a benchmark gilt yield.

You should really find the prospectuses for these as they'll answer many of questions. In addition to the issuer's website and Google, you can sometimes find them on the LSE's website's quote pages.

Hi wmb194,

Thanks for the reply.

Yes, I've been all over Investopedia for bond basics, and to the bond issuer for their prospectus. I've read the prospectus and it's doesn't answer any of my questions. It reads like it was written for an actuary. I didn't get much sense out if it, so here I am on MSE.

I went to see an IFA, but they said they couldn't comment on 3rd party websites, and then went into full blown sales mode with their own offerings. No surprise there.

The issue isn't with all the theory, but actual practice. I think I understand, but can't be sure, and marking your own homework is pointless.

Not asking for a written explanation on each question, just a yes/no, if you have the time.

If I've understood your comment on coupon payments, the price I pay for a bond 'mid-term' includes the coupon interest the seller is missing out on, but then I get the full 6 or 12 months coupon when it's eventually paid (?). Where does it say this on the H&L website, or is it just something you have to know? I don't see it in the prospectus either.

There is no indication the H&L website as to whether the price quoted is 'Clean' or 'Dirty' either. Perhaps their using different terminology.

Regards.

wmb194

HL is just an execution only stockbroker so it's not going to hold your hand. Just ask for a quote - I think with HL you can do it online - and it should show you the accrued interest that you'll be paying. 

fiscoking

wmb194 said:

HL is just an execution only stockbroker so it's not going to hold your hand. Just ask for a quote - I think with HL you can do it online - and it should show you the accrued interest that you'll be paying. 

>>HL is just an execution only stockbroker so it's not going to hold your hand.

I'm aware of that. these days it's either 'execution only', or an IFA that pushes their own offerings. There's no in between - that I know of.

>> I think with HL you can do it online - and it should show you the accrued interest that you'll be paying. 

I've just tried that and there's no interest breakdown shown when placing a deal. Screen dumps attached. 

Interestingly, I had to complete a 'complex investment' questionnaire before they'd let me deal in bonds...Passed.

fiscoking

Just tried calling the Lloyds bond division on 0345 730 1400. They wouldn't give out any information either - on their own bond - as they said it's not a current cash bond offering. They only currently offer 1 or 2 year bonds. As the bond I was wishing to discuss was issued in 1993 and was being re-sold though a 3rd party, I would have to speak with the 3rd party (in this case H&L) - who don't offer advice. So back to square one.

cwep2

fiscoking said:

Hello,

I was looking at corporate bonds on the H&L website as a way to diversify, and have some questions that none of the regular 'guides' seem to answer.

If you have any experience with bonds then I'd welcome any input. Just trying to understand what I'm seeing on the H&L webpage. I have asked H&L but their answers just pointed back the H&L website. Questions below.

Take the bond below, for arguments sake:

https://www.hl.co.uk/shares/shares-search-results/l/lloyds-tsb-bank-9.625-subord-bds-2023

Issued by Lloyds Bank, it matures on 6 April 2023, at which point you'll get back the issue price of 101.85p, assuming the holder were to keep it until maturity.

1. As the original issue date was 1993, this is a 'second hand' bond that was bought by someone else originally.
2. Given the Buy price of £104.00, that means it's trading higher than you could have bought it originally; issue price of 101.85p.
3. The coupon frequency is listed as 'Annually', but no date is given. I'm assuming here that the coupon payment date is on the anniversary each year (April 2023).
4. If someone were to buy this bond, how would the coupon payment be worked out, given they're buying it part way though a year? I mean, if the person/entity selling this bond sells it today, then surely they're going to miss out on the coupon payment next April (?) and they'll get nothing since last April (?)
5. The current sell price is 99.75, but if someone were to hold it until maturity then they'd get back the issue figure of 101.85p. Which is higher.
6. The coupon is listed as 9.6250%. So that's 9.6250% of the issue price (101.85p) and not the current market price.
7. The actual coupon % figure would be lower as the bond can only be bought for 104.00 and not 101.85. 
8. The % coupon rate is fixed and cannot change.

All of the above assume the bond issuer doesn't default on payment.

Some final questions...on PIBS.

https://www.hl.co.uk/shares/shares-search-results/s/skipton-building-society-12.875-pibs

The above instrument is listed under the Bonds section at H&L, but it's not a bond. It's a 'Permanent Interest Bearing Share'.

Are these like a regular bond but with no redemption date? It's just goes on indefinitely. If that's correct then it's more like a regular equity share that pays *fixed* dividends?

9. Is the coupon rate with a PIBS (12.875%) fixed or variable? I realise the Running Yield will change, based on the changing close price each day.
10. The fixed coupon/regular payment is worked out from the coupon rate (12.875%)* original PIBS issue price?
11. The listed 'Running yield: 7.923%' is the actual payment you get based on the current PIBS price?

If PIBS have no redemption date then they're much more risky compared to regular bond, as their price will be heavily influenced by interest rates. As rates go up, the PIBS price will drop and you could be stuck with a loss indefinitely - assuming you needed or wanted to invest elsewhere. With a regular bond, you have the eventual redemption date when you get back the original investment.

Has anyone figured out a way to assess the credit rating of bond issuers? I don't see this listed anywhere on the H&L web page.

Thanks.

Will try to answer. These are as per my understanding and do not constitute any investment advice...
Can download prospectus on HL website which gives all the detailed T+Cs, but it's 43 pages long.
1. Yes, bonds are issued once (issuance or primary market) and then can be bought or sold by anyone in the 'secondary market'.
2. Yes
3. As per the prospectus, interest is paid annually (once per year) on 6th April 'in arrears' so at the end of the year you get the 9+5/8% (9.625%) interest. You will also get this coupon on maturity 6th April 2023. So from now you will only get one cashflow on 6th April 2023 = principal + interest coupon.
4. Bonds are normally quoted as the 'clean' price, but you pay the 'dirty' price = clean price + accrued interest since last coupon on 6th April 2022. I would ask this question when you phone HL to deal as obviously over half way through the year the clean/dirty price differ by around 5p. 
5. Yes.
6. Not quite, the issue price of 101.85 is information but the prospectus says it will be redeemed at par (=100) and I am 99% sure that the interest is also based on par (=100) also, so on 6th Apr 2023 this bond will return 109.625.
7. The coupon and maturity payouts are fixed.
8. Yes

Your effective interest rate received would be worked out as 109.625/purchase price - 1, adjusted for the time left. Let's say we are exactly 50% through the year and you buy at 104 clean price. The dirty price is 104 + 0.5 * 9.625 = 108.8125 and you would get 109.625 in 6 months = approx 0.75% return in 6 months or APR of approx 1.5%.

In practice the online quotes for bonds can be quite wide (= big difference between buy/sell price) and if you were to deal this bond over the phone the 'clean' buy price would be much closer to mid than 104. For gilts in a normal market it is typically 0.5% from mid, *if* this is similar then you would be paying more like 102.50 + accrued interest.

I'm not gonna get into PIBS as I don't have direct experience of these, but most of your comments seem on the money, it's like a share with a fixed dividend, probably based on a par price of 100 again, although in this case you are buying something with a high interest rate, so it's worth much more than 100. But there is no maturity so your valuation is the PV (present value) of all the future interest payments. I would want to read the full prospectus as there may be situations when they can redeem the bond, eg lets say they can every 5 years decide to just give you 100 back and the terms mean it is in their interest to do so, then as you get closer to that date the value would go towards 100, even if the PV of coupons was 150+.

Hope this is helpful.

Delburn

I will try and answer some of the questions, but the first thing to see is that if you buy at 104, the redemption yield appears to be negative:

Invest: 104.00 + Accrued Interest 5.880 = 109.880
Proceeds: 100.00 + 9.625 = 109.625
A loss of 0.25, then you have to pay broker fees on top plus in a taxable dealing account you may have to pay tax on the income with no relief for the capital loss of 4.00.

Even if you could deal at the mid-price the yield is something like 4.7% before tax and fees.  Personally, I would not be inclined to invest in subordinated debt at that yield when you can get a similar rate on 1 year deposits with full FSCS protection.

Subordinated debt means investors sit below normal deposits, trade creditors, normal corporate bonds etc in default.  In a crisis there is the potential to be forcibly bailed-in by the Bank of England, or Government, even if this is not set out in the prospectus, i.e. converted to ordinary shares, which would likely be nearly worthless in that scenario.

The price of 104 probably indicates the market-makers do not want to trade in small retail trade size.  The LSE website shows some recent retail trades at around 103.9.  Either I have miscalculated the yield/misunderstood the accrued interest, or these retail investors have got a very bad deal.  The price chart, shows no step down at 6/4/22, which suggests it cannot be that the bond is trading on dirty prices including accrued interest.

0)  Matures at issue price of 101.85.  No it matures at 100, this is what "redeemed...at par on 6th April 2023." means in the third paragraph of the prospectus.

3)  Yes, the second paragraph of the prospectus says interest is "payable annually in arrear on 6th April in each year until maturity".  99% of corporate bonds pay interest annually, to coincide with the maturity date.  All, or virtually all, gilts (UK government bonds) pay interest 6 monthly.

4)  As per the other poster and your reply, the buyer pays the seller accrued interest on top of the quoted clean price.  The buyer then receives the full coupon at the next payment date.  Prices are always quoted as clean, that is the market convention, which you just need to know before trading in these kind of investments.  I imagine accrued interest would be shown if you pressed the button for a firm quote, although the retail trades referred to above are a little puzzling.  Accrued interest is certainly shown in HL contract notes.

6) Interest is paid on the par value of 100, not on the issue price.

7)  The coupon is always 9.625% on the par value of 100.  Coupon/Purchase Price is something different and is referred to as the running yield.  The running yield is not a very useful piece of information as it ignores the 4.00 of capital loss in just 5 months.

8) Yes, it cannot change on this bond unless Lloyds defaults.  However, there are a lot of other subordinated bonds where the coupon can be reset at intervals.  This is not always obvious from the headline name of the bond and requires a detailed reading of the prospectus.  Sometimes the prospectus for subordinated debt contain clauses when the issuer can repay early, cease paying the interest, or defer repaying the maturity amount.

fiscoking

Thank you cwep2 and Delburn for your expansive replies. Both answers have been helpful.

There's no way I'd have worked this out on my own. Many pitfalls to beware of.

I was wondering why people weren't rushing to purchase these bonds at such a high yield, and now I know.

I'm glad I asked.

Best Regards.