Member Info for TheTrotsky

Is Alliance News ever going to get its facts right?

Having made an error in its original release yesterday, it's further compounded the erro with its correction today!

Gavster, my SIPP is with AJ Bell. The US withholding tax rate is normally 30%. However, under the UK-US Double Tax Treaty, provided you have completed a W8-BEN the withholding tax rate is reduced to 15% for US dividends paid into ISAs and/or dealing accounts and reduced to 0% for dividends paid into pension funds (including SIPPs). I would suggest that you take up the matter up with your broker because it would appear that you have completed a W8-BEN (15% tax is being deducted) but that the wrong rate is being applied to your SIPP.

@Davidspellacy, check your figures again. They're not spot on, your starting assumption is that you receive the same income in an ISA as a SIPP. You don't!

Let's say your DEC shares pay £1,000 dividend in year one and you re-invest the dividends in DEC at a gross yield of 20%.

In an SIPP, over 5 years, you'd receive the following income:

Year 0 - £1,000

Year 1 - £1,200 @ 20%

Year 2 - £1,440 @ 20%

Year 3 - £1,728 @ 20%

Year 4 - £2,074 @ 20%

Year 5 - £2,488 @ 20%

So far so good, we are agreed.

Now do the same exercise for an ISA:

Year 0 - £850 (net of 15% withholding tax)

Year 1 - £995 @ 17%

Year 2 - £1,164 @ 17%

Year 3 - £1,361 @ 17%

Year 4 - £1,593 @ 17%

Year 5 - £1,864 @ 17%

Now do you follow?

Any money left in your SIPP when you die can normally be passed to your heirs free of IHT, regardless of your age. However, if you die before the age of 75 (and haven't yet accessed your SIPP pension) any withdrawals within 2 years of your death are normally free from income tax for your heirs. If you die after the age of 75 (or accessed your SIPP pension before the age of 75) then any withdrawals by your heirs will be subject to income tax at their marginal rate of tax. It's my undertstanding that your heirs are not currently obliged to withdraw the money left in your SIPP after your death; they can instead continue to manage the investments within the tax-free wrapper (they can't make any additional contributions) and draw the money as and when suits them.

@CaneToad, thanks for the response. If I did buy the corportae debt or gilts, I'd be plan to hold them to maturity. Had a quick look on AJ Bell; the debt instrument doesn't automatically appear in the buy/sell list and only appears if you type in the ticker (so if you don't know the ticker you're a bit stuffed). Also, it's unavilable to buy online with AJ Bell. Don't know whether that's the same with HL.

If one wanted to look at and compare corporate debts and gilts and their current prices to buy/sell, where would one look? For example, if I wanted to compare and contrast trusts I'd look at trustnet. It would appear that you can add RGL1 to your LSE watchlists but again it seems a bit of a chicken and egg scenario; you can find it if you know it exists but if your don't know it exists you can't find it!

@Davidpellacy, thank you for your magnanimity ;-)

@tichtich, I'm just putting forward a suggestion (to "swapping" existing DEC shares in your ISA for DEC shares in your SIPP). On paper, if you ignore dealing costs and the spread, selling DEC shares in your ISA and re-purchasing them in your SIPP can definitely boost the overall net income of a basic rate taxpayer on retirement (assuming they withdraw all of their ISA and SIPP income each and every year for comparison purposes). However, some may consider that dealing costs and the spread could/will outweigh the benefits. The number of shares you would need to swap, the availability of a suitable replacement share (MNG in my example) and how long you then leave the dividends to re-invest before drawing income are all factors to consider but it could potentially generate £thousands of additional income each year (if you were, for example, swapping £15k of DEC shares); the saving isn't a one off (it's a saving each and every year after you start to withdraw). Personally, I was fortunate to be able to conduct my swap cost efficiently (I was able to re-purchase my shares for slightly less than I sold them for); although I would have been better off, given the subsequent share price fall, sitting on the cash for 12 months+ before re-investing ;-)

As regards buying your higher yielding shares in your ISA rather than your SIPP, I would disagree with the logic. At the end of the day, maximising the overall value of your SIPP, whether by income or capital gains, should be your overall priority (the income tax you pay on your pension does not discern between the source of the income). The only provisos I would make being whether you actually intend to draw down your SIPP and/or whether you have a finite amount of money to invest i.e. don't have enough money to utilise your maximum available annual allowances in both and have to decide whether to put cash into your ISA or your SIPP. ISAs appeal because the income is tax-free when its drawn down. However, if you plan to ultimately pass your investments to your children, then ISAs may not be as tax-efficient as SIPPs because ISAs will fall into the estate of the last surving spouse, unlike SIPPs, and therefore subject to IHT. Obviously the tax rules may change in the future but, as they currently stand, I'd say that SIPPs actually have the longer-term tax advantage (if you have one eye on inheritance).

What dislocation and structural issues in the UK market?

Okay, I get that UK-lisetd stocks are trading at a discount to their overseas peers (even after you stripped out UK investors' historically more conservative valuation methodology) but what's happened to arbitrage? Therre are still large, profitable, UK-listed, multinational companies and, in the past, such asset mis-pricing would have meant that you'd have seen funds flowing into the UK market to to take advantage of the opportunity. Some people might like to blame Brexit but the reality is that this started happening long before Brexit.

We're talking large discounts with a potential 50-100% upside; that's not to be sniffed at. Stamp duty and exchange rates might be a hurdle but they are dwarfed by the potential upside. You'd have thought that large investors and hedge funds would be jumping at the opportunity.

The sectors predominated by UK companies may be perceived as "old and stuffy" but their direct overseas peers are still afforded much higher premiums. The only really discernable difference between UK companies and their overseas peers is that UK companies have always tended to pay higher dividends and US investors, in particular, prefer share buy backs to dividends (due to the more favourable tax treatmemt in the US).

Alternatively, is the UK share market being undermined by the UK bond market? Potentially, the disruption in the UK bond markets caused by the Truss mini-budget might have resulted in long-term UK bond holders selling UK equities to meet margin calls on their leveraged UK bond holdings in the last (say) 12 months but the UK bond markets do now appear to have settled down for the most part (at least for the time being).

You just feel that the dam has to burst sooner rather than later; large investors do not simply sit on the sidelines and ignore such potentially "easy money". Greed generally wins out.

It's easy to say that ther are dislocation and structural issues in the UK market but very difficult to pinpoint exactly why and why the "valuation gap" persists.

CaneToad, I acknowlegde there is a risk but, as I said when we first saw the original RNS, it's very difficult to draw firm conclusions one way or the other about the LTV figure quoted in the Q3 update without seeing the balance sheet, P&L and cash flow. Obviously it goes without saying that having an up to date valuation of the properties would also help, albeit that some posters would disagree with the valuation methodology adopted by RGL and its surveyors.

The fact that the Glasgow property was sold for 26% more than its June valuation is a positive but a sample size of one does not really persuade one way or the other (the same could have been said if it had been sold for less than valuation but that would have been more difficult ot "sell').

Out of interest, where and how did you buy RGL's loan note? I've got a SIPP with AJ Bell and an ISA with ii and trying to buy gilts and corporate bonds is more "problematic" than buying/selling stocks and shares. It would appear that you have to ring the brokers to place the order, rather than do the transaction online.

Also, is the discount on RGL's bond in line with what you'd have expected? As I implied in my earlier post, it appears a bit "lite". Obviously there are several factors that affect the bond's price e.g. the coupon rate vs the BofE base rate (or similar), the default risk and the time remaining to maturity. I'm struggling to evaluate the latter two; one would assume that if the default risk was rising then the discount would rise and vice versa and, likewise, the discount rate would start to fall the closer the bond gets to maturity. Should one just stand back and look at the overall yield, regardless of how the market has managed to evaluate at that figure? In which event, is a yield of ~10% more than BofE base rate about par for the course for an unsecured corporate bond with circa 9 months remaining to maturity? Assuming that the bond was not discounted at issue (the accounting treatment would suggest that), then that would appear to imply that the market thought the default risk at that time was neglible whereas now it appears the market thinks the default risk is no loner negligible (if it did, one would have thought that the overall yield would have been much closer to 5.25%) despite the asset cover that you've made reference to. Thoughts?

Assuming that you invest in your ISA and SIPP on similar terms i.e. similar costs, similar risk profile, similar portfolio etc. then the general rule of thumb for ISAs vs SIPPs is that you are always better off investing in a SIPP, rather than an ISA, if you expect to be a basic rate taxpayer at retirement, because of the additional compounding effect from the tax rebate, despite the fact that any income you draw from your SIPP might potentially be taxable.

If you are currently a higher rate, or above, taxpayer and expect to be a higher rate, or above, taxpayer when you retire then the calculation is a bit more complex. On the face of it you might appear worse off (the after tax return from, say, a £1,000 being invested in a SIPP being less than £800 being invested in an ISA on similar terms). However, that would be to ignore the upfront, additional tax rebate/reduction that such taxpayers receive from their employee pension contribution (in effect their basic rate band is extended).

Also, it should be born in mind that, on death, a SIPP can now be passed onto your spouse and/or children outside of your estate (exempt from IHT) and retain its tax-free wrapper (income and gains remain tax-free until withdrawn) whereas an ISA can only be passed on to your spouse and retain its tax-free wrapper (on the death of you and your spouse, any shares held within your ISAs, excluding potentially AIM shares, become part of your estate for IHT purposes and any income and gains generated thereafter are potentially taxable on your beneficiaries, should they choose to retain your investments).

That said, it makes sense not to put all of your eggs in one basket. SIPPs and ISAs have different rules that the government can choose to change in the future; so it always makes sense to take advantage of both, where you can, to ensure that any changes have the minimum impact.

EdinLass, under the current rules shares have to be listed on a recognised stock exchange to qualify to be held in your ISA. So, if DEC de-listed from the LSE and re-listed on the NYSE, it would still meet the qualifying criteria to he held in your ISA but watch for any potential fall out if the government chooses to implement the British ISA currently being proposed by industry bodies.

Angels, the basic rate tax boost in the SIPP isn't necessarily relevant to your decision making process.

It's obviously relevant if you are trying to decide between making a contribution (employee and/or under certain conditions employer) into your SIPP or use your ISA allowance but it doesn't effect the decision making process if you are simply trying to decide how to invest existing funds already in your SIPP or ISA to maximise your overall returns i.e. assuming you have (say) £10,000 of cash available to invest in both your SIPP and your ISA, whether you would be better off buying DEC in your SIPP or your ISA.

Davidspellacy, good riposte but it doesn't take the biscuit I'm afraid (nearly but not quite). You've made a fundamental error in your calculations; you've compounded the wrong figure in your ISA. You should be compounding £850 at 17% per annum (you don't receive £1,000; you receive £850 net of the 15% withholding tax). After 5 years you'd receive £1,842 not £2,192. Well you did ask ;-)

PS. If it's any consolation, you got me to re-check my original figures and I did find a typo in my original calculations. DEC in a SIPP still wins out but the potential benefits aren't as large as I originally calculated and, if you are a higher rate taxpayer re-investing your dividends into a basket of shares returning (say) 7% then the benefit isn't really worth the bother. By my estimates, a basic rate taxpayer would be anywhere between ~£420 and ~£3,300 better off re-investing at between 7% and ~18.7% (the current DEC dividend yield at an exchange rate of $1.25) over a 10-year period and a higher rate taxpayer would be ~£1,530 better off re-investing at ~18.7% over a 10-year period. Obviously returns for shorter or longer periods would be less or more respectively.

The net loan to value "popped" as you say because of the relative decline in cash balances compared to gross borrowings as at the end of September (the former fell £5.2m more than the latter), not because of any change in valuation (they used the same valuations as at the end of June). No re-valuation was undertaken as at the end of September (this is consistent with prior years).

Should this be of concern? Potentially, without doubt. However, that said, there are several potential factors that need to be taken into cosideration: 1) The month end fell on a Saturday and its quite feasible that some, perhaps all, of RGL's normal month end rental receipts would not have been received until the following Monday (and would not have been included in the cash balance at the end of September), 2) RGL has been spending on capex throughout the year but the June valuations do not appear to have been updated for any subsequent capex (52.6% is the figure that you'd expect when you divide the net debt at the end of September by the valautions at the end of June), 3) RGL may be able to recoup some, or all, of the capex it has incurred from its tenants under their tenancy agreements (and, as such, recent recoverable capex might have been in debtors as at the end of September), and 4) The recent sale of the Glasgow property at 26% above its June valuation may lend more credence to Inglis's previous claims that RGL has always used conservative property valuations (and that it might have more headroom than the account disclosures have historically implied).

At the end of the day, LTV is just one of RGL's (albeit very important) loan covenants and its lendors do have some flexibility. Unlike the banking crash in 2008 (when lendors were looking for any excuse to curtail lending) lendors do not always seek to aggressively enforce one covenant whilst other covenants (such as interest cover and debt repayments) are still being adequately met (but they may seek to charge additional interest). Also, there seems to be this misconception that LTVs can continue to fall inexorably without any reference to the cost of replacement (cost of replacement will generally draw a line under any further LTV falls).

Personally, I also think the jury is still out on whether Covid has changed working habits. Covid may have accelerated an existing trend (WFH) but we have already started to see push back from employers (we can argue about productivity but WFH is definitely detrimental to group bonding, training and knowledge acquisition) e.g. Amazon is now suggesting that it won't promote people who WFH. Probably the greater medium/long-term concern for landlords (and also employees who thought WFH had given them the upper hand over their employers) is the introduction of AI.

Pat2014, currently ~£182b per annum is spent on the NHS. A recent breakthrough was announced in the treatment of sickle cell disease. This new one-off treatment has a list price of ~$2m per patient. Apparently, the NHS currently has 2,000 eligble patients; that amounts to $4bn! That's just the cost of the medication for treating one, fairly niche, disease.

Yes, there's mis-management in the NHS (certainly at the central administration level) and opportunities for better cost management (if we revert back to central purchasing; Maggie's NHS trust purchasing regime has resulted in increased wastage, as was made evident by COVID with centralised stocks of PPE being found to be beyond their use by date because they weren't being cycled into normal day-to-day use, and, at times, has resulted in NHS trusts trying to outbid each other for the same goods and services!) BUT you don't throw out the baby with the bath water. The NHS is faced with ever escalating costs of treatment (we now have a lot more curable/treatable diseases than we've ever had before) and an increasingly aging population which a lot of people, like yourself, never factor in to their pontifications about the NHS being inefficient.

Davidspellacy, if you can't back up your comments with the maths ("... I can’t see there being much difference ...") then you may as well not bother to comment at all and just go and "invest" your money on a spin of the roullette wheel!

CaneToad, The £50m retail bond is being carried in the accounts at cost (not its current open market value) net of issuance costs (the issuance costs were paid when the bond was first issued and are being amortised/charged to the P&L over the life of the bond in accordance with normal accounting rules), so the cost of purchasing the bond is not relevant to RGL (it's due to pay £50m when the bond matures, not ~£55m as might otherwise be implied by the current discount).

What's actually surprising is that, given the coupon (4.5%), the current BofE base rate (5.25%) and the fact that the bond is unsecured, the bond is ONLY trading at a 9.1% discount! Assuming that there are still two interest instalments remaining to be paid and that no significant change is expected in the BofE base rate over the next 9 months, then I'd have expected an unsecured bond to be currently trading at a discount of more than 16%. On the face of it, it would appear that the markets are less concerned about RGL's ability to repay the bond than you are, despite it being unsecured.

Davidspellacy, then I suggest (with respect) that you do the maths.

Assuming that you currently had ~£15k invested in each of DEC and (say) M&G in your SIPP and likewise in your ISA and "swapped" (exchanging DEC shares in your ISA for M&G shares of equivalent value and likewise exchanging M&G shares in your SIPP for DEC shares of equivalent value) then, assuming you withdraw all of your dividend income each year and 25% of the SIPP income is tax tax-free, I estimate that as a basic rate taxpayer you would be better of by ~£200 per annum and as a higher rate taxpayer you would be better off by ~£10 per annum. However, if you were to reinvest your dividends in DEC and M&G at the current yields for the next (say) 10 years before making any withdrawals then, on the same basis, I estimate as a basic rate taxpayer you would be ~£5,970 per annum better off and as a higher rate taxpayer you would be ~£4,050 per annum better off. Alternatively, if you reinvested your dividends for the next 10 years in a basket of shares yielding (say) 7% per annum then I estimate as a basic rate taxpayer you would be ~£1,050 per annum better off and as a higher rate taxpayer you would be ~£580 per annum better off.

By my calculations, the above benefits still hold true for alternative shares (to DEC) currently yielding at, or above, ~3.7%. Below this level of yield, I estimate higher rate taxapayers would be worse off if all the income was withdrawn from year 1 onwards but, if reinvested for 10 years before withdrawal, they would still be better off.

For the purposes of the above calculations, I've ignored transaction costs and assumed that DEC shares cost 75.15p per share to purchase, M&G shares cost 206.10p per share to purchase, DEC pays an annual dividend of ¢17.5 per share (at an exchange rate of $1.25) and that M&G pays an annual dividend of 19.60p per share.

Angels, because you can't reclaim the US withholding tax in your ISA, you might want to consider "swapping", to maximise your tax-free dividend income, if you happen to hold common shares in both your SIPP & ISA.

For example, I used to hold both DEC & M&G in my SIPP and ISA. So I sold my M&G shares in my SIPP and likewise sold my DEC shares in my ISA. I then re-bought a corresponding number of DEC shares in my SIPP and a corresponding number of M&G shares in my ISA (obviously this only works if the value of each holding bought and sold roughly equates). There are obviously dealing and stamp duty costs to consider but these should (hopefully) be quickly offset by your withholding tax savings. There is also the bid-offer spread to consider but see below**

Finally, from an immediate tax perspective, the "swap" makes no odds (obviously) but it will potentially change the risk profile of both investment funds, so you should consider beforehand whether you want all of your DEC shares just inside your SIPP i.e. you need to consider the impact on your SIPP should DEC, for whatever reason, reduce of cancel its dividend (or worse).

** To minimise the bid-offer spread I'd suggest swapping early/mid morning on a "slow", no news day (DEC in particular I've noticed tends to trade down from the open before starting to recover late morning before the US markets open) and selling all of the relevant holdings in your SIPP and ISA before re-purchasing (the logic being that sells are more likely to depress the share price before you repurchase). I was fortunate; I was actually able to buy back my shares, and a few more besides, for less than I sold them (and it wasn't a particularly volatile day if I recollect) within the space of less than 5 minutes.

Is this all doom and gloom? Perversely no. Buying new production actually probably increases DEC's average decline rate, as it would tend to buy in replacement wells nearer the start of their production lives rather than the end (you don't replace one dry well with another dry well). So, if DEC doesn't buy in any new wells over the next (say) 12 months then I'd expect its average decline rate to actually marginally fall (as wells mature their decline rate tends to slow; that gush to a trickle effect). From the perspective of paying down debt, this will all have been factored into their internal cash flow forecasts and, even if there are no further acquisitions, DEC still remains on target to repay its debt (IMHO).

Bottom line. I'm not sure that these quarterly results add much to our collective knowledge. The business is still operating and still paying dividends but the RNS and presentation lack key metrics to dertemine the real health of DEC. I still don't put much merit in the doommeisters' protestations but await the final results before drawing any further material conclusions.

I'm actually with AoC on this one.

The quarterly update and accompanying presentation are actually information lite. For example, did anybody notice that the net debt figure quoted in the presentation is actually the figure at the end of June, not the end of September (it's there in the notes)? This is not consitent with the 2022 presentation.

In isolation the liquidity figure is, in my view, of limited use e.g. if the company agrees a, say, $20m increase in its RCF then its liquidity increases by a corresponding $20m! I believe that the lquidity figure at the end of September 2022 was up at ~$400m because they'd agreed an increase in their RCF in advance of the Tanos acquisition. As I say, in isolation, it's fairly meaningless.

As regards the realised prices, you have to deal with the here and now. The average ($Mcfe) of $3.46 achieved in 23Q3 was, I believe, significantly above the average Henry Hub spot price for the corresponding period (so that has to be a positive). On the downside, the average ($Mcfe) of $3.65 achieved in 22Q3 was actually very significantly below the average Henry Hub spot price for the corresponding period (because of DEC's hedging policy and the spike caused by the war in Ukraine). DEC has very limited capability to affect the spot price. All DEC can do is try to maximise it's marginal revenues within the self-imposed constraints of its hedging policy. So, the comparison AoC makes is fairly meaningless (if DEC could dictate what its selling price was going to be then that would be a different matter; choosing to hedge or float is not really the same because decisions often have to taken years in advance).

I don't think anybody on here has yet really got their heads around the quoted average decline rate and the quoted production figures. Here's my pennyworth. Firstly, it's my understanding that the decline rate (from first spud to capping out) for any given well starts high and falls off over time i.e. starts with a gush and ends with a trickle. DEC has always tended to buy more mature wells (2-3 years+ from first spud) so its quoted average decline rate would always tend be lower than a competitor who operates wells from first spud. Secondly, as DEC has got larger it's had to "run faster" each year if its wanted to keep its production increasing e.g. when its daily production was, say, 100 MMcfepd it only needed to buy more than 10 MMcfepd of new production each year to increase its production and offset the average decline rate of its existing wells. At the end of 22Q3, DEC's average daily exit production rate had reached 862 MMcfepd. So, broadly speaking, DEC would have needed to buy ~86 MMcfepd in the ensuing 12 months to replace its average decline rate; it hasn't. It's only been able to replace ~30m MMcfepd and, for the foreseeable future, is unlikely to be able to acquire the new production it would require to offset the natural decline in its existing wells.

"Ebullient puppy capitalist" ;-)

Come the revolution sir my credentials will impecable ;-)

Keep imbibing ;-)