Now raising intellectual capital

What if the banks don’t make that call?

Now pay attention. Would you rather buy the Co-Operative Bank 5.55555 percent callable perpetual subordinated bonds at 78 pounds percent, or the same bank’s 13 percent perpetual at 147 pounds percent?

Before you answer, here are a few numbers: the 5.555 stock yields 7.12 percent, and 10.46 percent to the call in 2015, while the 13 stock yields 8.84 percent until hell freezes over or the Co-Op Bank goes bust.

Simple, then, isn’t it? Now here’s the catch; the 5.5555 call is at the bank’s option, and if it declines to do so, the interest rate changes to 3-month LIBOR plus 2.05 percent. At today’s rate, that would produce a yield of just 3.33 percent, an altogether less attractive prospect.

The increasingly militant approach from banks to exercising these call options has prompted Collins Stewart to look carefully at the bonds, former PIBS and preference shares where it makes markets. Some of the conclusions cast the calculations in a very different light.

Are Lloyds shares cheap? Not as cheap as this funny money

Shares in Lloyds Banking Group are worth 150 pence apiece, according to the analysts from Royal Bank of Scotland, who think the shares offer “a compelling restructuring opportunity” around today’s 95 pence.

Lloyds, say the brokers, is going to recover sufficiently to pay a nominal dividend next year, and something quite substantial in 2011, thanks to margin expansion, cost control and normalising bad debts.

from Neil Collins:

Goldman shows a preference for Lloyds Banking

Too late to save Sir Victor Blank, Goldman Sachs has decided that the prospects for Lloyds banking Group are little short of glittering. Once the current crisis is past, says Goldman, the British banks will clean up.

Anyone trying to borrow right now would say they are cleaning up already. Loans carrying a small margin over Libor are a distant memory for most commercial borrowers, and woe betide any company that breaches a covenant, no matter how technical.