Member Info for jerry004

MHR

No one is likely to offer them the cash.

Well this has been fascinating this morning, and has led me to the realisation that USS has played a blinder in the way this is set up (though not to the particular detriment to regular shareholders).

During QE long duration debt was returning very little and was at high risk of getting massively written down at the end of QE as interest rates rose. So they set up the Prefs with a 4.75% yield (good at the time, poor now; those bonds will be worth less now at fair).

However the equity itself is also a long duration bond proxy and thus the NAV would drop as rates rise too (don't we all know it). USS had this set up so that 18 years on, they'd be able to use the Prefs at their original valuation to buy equity at its reduced (higher interest rate environment) NAV. The Prefs sit on their books at par. If they convert to B shares these will sit on their books at the same par. However they won't only convert to B shares as they will want some voting rights so as to have a say in the company, so they will take a chunk of A shares too to give them this.

I now actually think they will do this (assuming the company is in good shape by then), as that par value of the Prefs is only substantiated if they do convert, whereas a B shares held on the books at NAV are supported by the NAV.

As for the concern about dilution. Well from a control point of view the B shares take care of that, and from an economic point of view what we are really talking about is disruption of the gearing ratio. As shareholders USS would want that optimed to the 40-45% gearing same as other shareholder would. This could easily be returned to through more borrowing to either buy back shares (of either class) or invest in the assets.

I suspect their decision to convert would be included by interstvrayecexpections at the time, the higher the rates the more likely they would convert (providing the company remains solid). Shareholders would lose the benefit of that cheap debt, but at some level of interest rates USS would want to make the switch. The NESF board and shareholders don't get a say in it (unless I suppose if they offer USS a new deal as Timbob suggested.

I think maybe B shares tend to be traded privately between institutions that know the value of them, so the price doesn't bounce around in response to panicked private investors. Maybe?

Timbob,

Besides, if the company does have enough money floating about to redeem the Prefs at par prior to 2036 (which I think you are indicating would be good, though I disagree), I'd suggest it would be much better spent buying buying back shares at a discount, and then let USS create new shares paid for at NAV.

Should the shares be trading at a premium to NAV by 2036, obviously that strategy would not be relevant, however the board would likely be issuing new shares at a premium anyway.

Jerry

Timbob,

Yes they could do that if they do wish (though they could have bought NESF shares at the outset if that is what they wanted).

However it's worth noting that USS have some odd constraints regarding their valuations against their liabilities. If they own an asset then they can only assume it will grow in value at a modest rate (between 0.6 and 1.8 above gilts) in order to calculate it future ability to meet its liabilities.

So IMO they would favour holding onto an asset accounted for at par,with a known return, than one that would trade at a discount, even if it had a higher return potential. Else at the next triennial valuation they might need to ask the employers and employers to pay in more to cover a hypothetical future accounting liability.

It's daft but thanks to Revert Maxwell, these the rules.

They are not always about maximising long term returns, they are often about matching assets with liabilities on paper.

https://www.uss.co.uk/about-us/valuation-and-funding/our-valuations?hl=en-GB

Timbob,

Thanks for the calcs on the debt.

Just one though of mine on your comments. The pref shares never have to be payed off whilst the company is a going concern under its current ownership structure.

So if the company retaind enough of it's profits/ recycled enough of its assets to pivot to a profitable repowered solar plus battery business then it just keeps going with those Prefs in place.

USS might look at the fair value of those Prefs at some point and decide to convert if they end up with shares worth more than that, but it's just as plausible that they would keep them on their books at par forever.

ToD,

NAV is based off discounted cash flow projections c.25 years into the future. You appear to be mentally deducting something that has already been deducted.

Prefs are a huge advantage for current shareholders., IMO. Non amortising perpetual cheap debt. If you calculate the NAV with debt at fair value it's probably well over 90p IMO.

But hey, differing opinions make a market, and we've all got to sleep at night.

Scheduled end of ROCs is in the NAV, but sure there is a fair bit of uncertainty in future cash flow modelling.

Timbob,

I get what you mean about the divi dilution if the pref shares do convert, but IMO that switch from debt to equity would affect more than just more shares hoovering up the divi.

Whilst it would not directly inject new cash, the cash the company has to spend on buybacks, NAV improvements etc. is ultimately determined by its headroom under its gearing ratio target. Thus they could immediately borrow and/or use cash flow to buy back shares (right back up to the target that they are currently having to work their way back down to, in theory) and/or enhance their growth pipeline in the way they've been desperate to for ages (but the cost of debt would be higher of course).

Regarding the BSIF discount. Is it plausible that we've now had our NAV written down to match what BSIF actually sold at, rather than their published NAV? If so maybe NAV doesn't need to be thought of as needing much more discounting (maybe I'm being optimistic). However I do suspect that the Prefs means this won't get bought out. It's more valuable as a going concern (though who knows if the market will ever recognise this).

53.5p is my break even price (but that includes a year's worth of divis to bring down my purchase price average). BSIF and FSFL have, however, put me well in the black on solar as a whole, but I only started buying infra a little over a year ago.

MHR

1) The preference shares never mature, unless NESF decides they want to pay USS face value for rhem

2) All debt is valued on the accounts at par, not fair. i.e. as if they had to be paid off tomorrow. My impression is that this is normal because if the assets get sold off at market value the debt has to get redeemed at par. The company is thus worth more as a going concern than in liquidation, but this is not reflected in the NAV

Let's be very clear, there is no scheduled redemption date for the preference shares. There is no obligation for nesf to give USS the face value of those shares, ever (unless the company is sold or actions are taken to breach the covenants - a passive breach of the gearing covenant does not count).

In 2036 USS can chose to exchange the Prefs for shares should they chose to. Basically they use the 1gbp face value of the bond to buy shares at NAV. I doubt they would do this, but 10 years is a long way off. They might do it as whilst the accounting value of their bonds may be 1gbp the fair value may be half that.

One doesn't get diluted from an economic viewpoint if shares are issued at NAV. Should it happen, NESF could return to its prior leverage ratios buy borrowing more, buying back shares, or investing in more stuff. However there would be a hidden loss of that cheap debt that wouldn't show up in the standard NAV.

There is nothing 'under wraps' about the preference shares. The terms attached to them are readily discoverable.

It would be good if NESF could also publish an NAV with debt at fair though (as many investment trusts do). With debt marked at par value of the long duration assets get written down as interest rates rise but the value of the debt remains priced as if it has to be paid off tomorrow (which would of course be the case for Prefs in the event of a sale).

I suppose they cannot really do that as the duration of the Prefs are unknowable, but one can make one's own calculations.

Sure, USS are going to use their Prefs to buy shares at 76p when we can buy them at 46p. Never going to happen.

NAV written down to the equivalent of what BSIF actually sold for.

...Is one interpretation of this I suppose.

Well yes of course, that is where I hold mine, but 1) it takes time to accumulate large amounts in these vehicles and 2) one tends to buy these kind of things when you actually want the income as a way to withdraw the money. They are not necessarily the right investment for someone in their wealth accumulation phase.

Paul,

75p is 90% of 83.5, which is what I estimate the NESF NAV may be now, assuming a modest increase in power price forecasts in line with what other trusts have recently reported.

103.5 in my post was a typo as I had had that number in my head as an original optimistic target for BSIF having bought 100K GBP of it in January at 69p, and collected c.4.5p in dividends before selling out yesterday at >91p. Perhaps I should have been more explicit in my correction though I had assumed it was clear enough.

There was a lot going on yesterday with these trusts, I do apologise for my typographical error which I have already corrected and am now doing so again.

Unfortunately my initial entry point for nesf was not as well timed as my BSIF one (nor my FSFL one which I bought before the prices went up last year and sold out after prices had risen), so my break even price for nesf is still 53.5 (taking divis into account). Doubling down here at 48p has left me overweight so I'll likely trim and rebalance if the price rises, but I do intend to hold it long term as I think these can do a good job for me.

Again, I profoundly apologise to the community for the typographical error in the NAV, which was very obviously incorrect. I had already made the calculation of 90% of 83.5 as 75p and then just wrote the first number for the NAV wrong.

It will be interesting to know what the actual calculated NAV comes out as. It's a shame they have to write down the NAVs because the UK CPS is being removed but cannot account for the fact that future linking UK ETS to the EU ETS will almost certainly more than replace it. I'm interested to know if the community has a view on that.

Jerry.

If there is only one bidder at this price and the shareholders have insisted on a sale, they don't exactly have much of a negotiating position do they?

But sure the shareholders could vote to turn it down.

I'm never surprised that the boards don't own huge chunks of these trusts as for most working age people dividend income is not a tax efficient way of taking profits.

Oops, sorry, meant 83.5.

103.5 was was I had optimistically been hoping to sell bsif at.

Personally I estimate NAV at around 103.5, which makes 90% of it 75p.

However we'll know soon enough so no point speculating. I'd rather the market recognised the value and we could keep holding it.

The problem is with the long term shareholders who were prepared to keep selling at a 35% discount to NAV. I was happy to have bought a decent chunk off them, but if UK investors are going to keep selling stuff cheap then others will capitalise on this.