Zeros set for resurgence as issuance picks up

This year could see a resurgence in the use of zero dividend preference shares (zeros or ZDPs), according to Peter Hewitt, manager of the F&C Progressive Growth fund.

On 27 April Aberforth Geared Income Trust announced the success of its placing of zeros and geared ordinary shares, which raised £75m split between 45 million £1 ordinary shares and 30 million £1 zeros. Hewitt said: "This is the first new conventional split-capital trust launch in 10 years. The 30 million zeros that have been issued were substantially oversubscribed, which shows the level of demand."

Hewitt has invested in the zeros through F&C Progressive Growth, though in common with most subscribers to the new trust he received fewer shares than he had applied for.

"The success of the Aberforth launch clears the way for more new issuance of ZDPs. There were five new issues in the second half of 2009 and we have just had a sixth, so don't be surprised if we see a few more," said Hewitt.   Speaking at a briefing on 5 May, Hewitt explained that zeros have a particular attraction for investors who wish to mitigate the effects of the new 50% income tax band. Under current legislation there is a 32 percentage point differential between the highest tax on income and the tax on capital gains, which is charged at a flat rate of 18%. Zeros pay no income during their life and the return at maturity is classed (and taxed) as a capital gain.

F&C Progressive Growth invests almost entirely in traditional (that is, not ‘synthetic') zeros, making it unusual among what is in any case a very small peer group. Hewitt invested in all five of the new zero issues in the second half of 2009, four of which came from private equity vehicles, for whom Hewitt says a zero is an attractive alternative to hard-to-access bank borrowing. 

Hewitt said: "The surprise in the medium term could be new issuance as the debt arithmetic strongly favours zeros in an environment where banks are not keen to lend and price the cost of their borrowing accordingly. However, the feeling from the market is that after the spate of zero issues in late 2009, it does not want to see any more private equity ZDP issues for a while. The Aberforth launch signals a welcome return to more ‘mainstream' issuance of zeros and, while it is not a given, there is every chance we will see more issuance in the coming months."