Friday 26 April 2013

Portfolio Sale: Standard Chartered 8.103% Step-up Perpetual Preferred Security (LSE:ESC6)


What's this? An income investor selling something that yields over 7%. Has he lost the plot?

Well, maybe - but there is a thread of logic to this. And maybe a note of caution about the potential complexity of fixed-income investment.

The Standard Chartered 8.103% Step-up Perpetual Preferred Security ('corporate bond' to you and me) may be called 'perpetual' - but you need to be careful how this is defined: sometimes 'perpetual' is not what it seems.

The 'catch' (if that is what it is) is buried in the prospectus. The security "...will bear interest from (and including) 11 May, 2006 to (but excluding) 11 May, 2016 at a rate of 8.103 per cent. per annum, payable annually in arrear on 11 May in each year starting on 11 May, 2007. Thereafter, the Preferred Securities will bear interest at a rate, reset every five years, of 4.275 per cent. per annum above the gross redemption yield on a specified United Kingdom government security..."

They are also 'callable' at this date and every 5-year anniversary, when the rate would be revalued. A bit more searching produces the following supplementary information:

"The Coupon Rate in respect of each Reset Period shall be the aggregate of 4.275 per cent. per annum and the Five Year Benchmark Gilt-Rate..."
So that's clear then.

And the 5-year benchmark gilt rate? Currently 0.68%. Assuming this stays the same until 2016, that would give a yield of under 5%. But by 2016 it will probably be higher, as we can expect that QE will have morphed into QT (Quantitative Tightening), with the Bank of England trying to unwind the investments it has made in gilts, reducing the prices and increasing the yields. Even with that, it is unlikely that a yield of over 7% will be seen again.

Still with me?

I sort-of-knew this when I bought these, although I was more fixated on the juicy yield. But now it comes down to a more balanced judgement:
  • QE has plumped up the price
  • there is uncertainty about the future yield but this could be around 5+%
  • I am currently showing a slight gain over the purchase price (this security is bought and sold 'dirty' - i.e. together with the accrued interest)
  • If it is called, at par, the yield-to-call is not brilliant 

Now, I am an amateur DIY Income Investor: this is stretching my powers of analysis to the limits. I am increasingly concerned about how to deal with the large price appreciation in the fixed-income part of my portfolio. As my last purchase showed, I think that Small Cap high-yield dividend shares may be a better area for investment until QE finally unwinds.

When the logic of an investment gets too complicated it usually means it is time to reconsider. This has provided a great yield over the last couple of years but now is time to sell and try something different.

 [Sale price: £1.0935, plus accrued interest]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Mmm. I did just the same a couple of weeks back for exactly the same reasoning. After all, 'you never make a loss when you make a profit'.


  2. Interesting, but is it swings and roundabouts? If you sell now and can only re-invest in another bond at, say, 5%, you are losing 3% per annum for the next three years. So -9%. But the price is, probably, up roughly 9% now. So you make +9% now, lose 9% over 3 years, and either way end up with a bond at roughly 5%.

    Any sense in this?

  3. Standard Chartered 8.103% Step-up Perpetual Preferred Security (LSE:ESC6)
    Is there any way to find out if they are going to call this bond in May? Thanks.