CO-OP 08/49 ... good to call?

I bought some of the Co-op’s BB+ rated perpetual bonds. They were/are priced at 76.5p/shr and pay a coupon of 5.5555p/shr (7.3% yield) until December 2015. In December 2015 the Co-op can decide whether it wishes to call them at par (100p/shr). If it does then I’ll get 23.5p/shr (100p less purchase price of 76.5p) and will have accumulated three lots of 5.5555p/shr in between. That comes to 40.2p/shr, or a 52.5% (gross) return over three years.

Of course the Co-op may decide not to call in 2015 and in that event the coupon drops from 5.5555p/shr to 3-month LIBOR +205bp. Not calling is generally discouraged, but it would mean a post 2015 coupon of c. 2.69p/shr (at current LIBOR). If the bonds aren’t called and the coupon drops to 2.69p/shr, then I reckon the price of the bond drops to c. 68p; this price would equate to a 3.9% yield.  In that event the return over three years is 3x5.5555p/shr + 68p/shr – 76.5p/shr = 8.2p/shr, or a 10.7% (gross) return over three years.

All in all, to me this looks like 52.5% upside return to 10.7% upside return over three years. I expect the Co-op will call the bonds, which is why I bought.

CO-OP Bank COOPWH 08/49, price

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