Saturday, October 04, 2008

Preference shares Part 1

After chatting with a few guys over at the cbox, I realized that a better instrument for the person who wanted to buy OCBC (see my post on “Brief overview of Local banks") will be the preference shares that is also offered by the three banks.

Preference shares goes by the funny stock name with many letters in it. Here’s the list of all the listed preference shares by the three local banks.

1. UOB 5.05% NCPS 100
2. DBS Bk 6% NCPS 10
3. OCBC Bk 4.2% NCPS 100
4. OCBC Bk 4.5% NCPS 100
5. OCBC Bk 5.1% NCPS 100
6. OCBC Cap 5.1% NCPS 100
7. OCBC Cap 3.93% Pref 10

In the process of finding out what those letters mean, I did some research and I emerged a little more knowledgeable on these preference shares.

1. NCPS – refers to non-convertible and/or non-cumulative preference shares.

There are quite a lot of things to illuminate here. First of all, what is a preference share? Preference share is not the same as ordinary shares, the latter being the ordinary shares that are traded on SGX. Preference shares do not carry voting rights, unlike ordinary shares. However, preference shares are ranked higher than ordinary shares. With that, I mean that in the event of liquidation of the parent company, preferred shareholders will be paid out assets before the common shareholders (those who hold ordinary shares) but after debt holders (those who hold bonds issued by the company).

Beside this, preference shares might have an option to convert them to ordinary shares at a prescribed price. This is called the ‘convertible’ option. However, for the preference shares issued by the banks, they are non-convertible and non-cumulative, hence the moniker NC.

So what’s non-cumulative?

Before explaining that, it’s important for you to know that the dividends paid out are not guaranteed. By this, I mean that the dividends payments, which are given out semi-annually, might be skipped. However, if the dividends on the preference shares are not paid up, they are not allowed to declare dividends on the ordinary shares too. Non-cumulative means that any dividends payments missed are not accumulated and paid at a future date. For contrast, cumulative preference shares mean that if the dividend is not paid, it will accumulate to be paid for future payment. Since the banks are shoring up their Tier 1 capital by issuing preference shares, they will have to be non-cumulative so as to be included in it.

2. Difference between preference shares and bonds

You might have realized that preference shares are quite similar to bonds. Some key differences exist though:

a. Bonds have a fixed maturity date, while NCPS do not have. On maturity date, the issue company of the bond will buy back the bonds at par value, which is the price that the bond is first sold off. This means that if one buys direct from the issuer and holds till maturity, there is neither capital appreciation nor losses. The dividends, or in this case called the coupon, are received by the bond holder until maturity.

For NCPS, the maturity is till perpetuity. Well, on theory anyway. Different NCPS have different terms where the issuers have the right but not the obligation to redeem the preference shares at a certain date/dates according to the terms stated out in the prospectus. For example, OCBC 5.1% NCPS 100 have the right but not the obligation to redeem the preference shares, in whole and not in part, on 20th Sept 2018 and on each dividend date after 20th Sept 2018 at a par value of SGD 100.

b. The other major difference is that bond holders will receive guaranteed coupons, whereas the dividends coming from non-cumulative preference shares are not guaranteed. As mentioned previously, as long as the ordinary shareholders are paid a dividend, the preference shares will also have to pay it. Based on track records, it’s quite a safe bet that the banks will carry on paying dividends, since they’ve been paying for the past 10 years at least.

In summary, I’ve discussed about a little about the letters that made up the stock quote for the preference shares. For example, for DBS Bk 6% NCPS 10, it means that the shares are issued by DBS bank, with a dividend yield of 6% at par value (usually $100). It is non-cumulative, non-convertible and has a lot size of 10 shares. You should be able to tell, at least from this post, what is meant by a non-cumulative and non-convertible share and the difference between a bond and a preference share.

I’ll work on the differences in yields and terms for the different preference shares in my next posting.


Jay said...

This is great stuff, thanks a lot! Currently most of these are trading below par, which is kind of ironical since people were queueing at the ATMS for these when they were launched... Life is such huh!

la papillion said...

Hi 8%,

Haha, how ironic indeed :) I remember clearly too that a lot of people are queuing to buy it at a min of 10k at a full par value of $100. Now, after a few banks went poof and AIG almost on the verge of bankruptcy, nobody wants it anymore.

I'll be doing a post on the different terms and current yield of the various pref shares issued. Stay tuned :)

Financial Journalist said...

Buyers have to be careful, beta of preference shares seem to be higher than market. Sometimes it can drop 5% - 8% in one day and wide out all the potential dividend gains.

Anonymous said...

thanks for sharing. got the link to your site from some time back and had since been a regular reader. insightful stuff!

la papillion said...

Hi brendan,

Good point there. I'm thinking about this too. However, if one intends to hold this till they redeemed it back, then it's not a problem, as the redemption is at par value of $100. From till it happens, anything goes.

la papillion said...

Hi twinhills,

Thks for visiting :) Glad to have you around :P If you're free, do join the lively chatbox, haha

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