Ex­plain­ing pref shares

Finweek English Edition - - Letters - LAWRENCE ROFF

IN YOUR RE­PORT on pref­er­ence shares (8 Fe­bru­ary), you state: “We sim­ply don’t know and no­body has come up with a sat­is­fac­tory ex­pla­na­tion” for why the mar­ket marked Absa prefs down from 63% to 70% of prime.

There’s a very sim­ple rea­son for that rerat­ing that’s ob­vi­ous to any­one who trades pref­er­ence shares rather than just writ­ing about them. That rea­son is sup­ply and de­mand. Absa is­sued R3bn prefs, thereby sat­is­fy­ing de­mand for tier one prefs. That was fol­lowed by Net­care’s large is­sue, which did the same for the sec­ond tier prefs.

That ba­sic un­der­stand­ing of mar­kets also makes sense of why the most re­cent pref is­sues have been at the high­est per­cent­ages of prime. It has noth­ing to do with credit qual­ity and ev­ery­thing to do with the over­hang of sup­ply over de­mand. This mar­ket is rel­a­tively in­sen­si­tive to credit qual­ity within the tier one (top bank) and tier two (ev­ery­thing else) bands.

By way of demon­stra­tion, Absa has the high­est credit rat­ing of tier one prefs but trades at a higher per­cent­age of prime than any of the oth­ers. In the sec­ond tier, Stein­hoff’s prefs are trad­ing at a higher yield than As­tra­pak’s.

An im­pli­ca­tion of the sup­ply/de­mand story is that there’s no such thing as a “right” price for pref­er­ence shares to trade at – ir­re­spec­tive of what level they were is­sued at. Though de­mand in­creases marginally as the per­cent­age of prime paid in­creases, sup­ply is in­creas­ing much more quickly.

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