Aviva and the current price collapse of irredeemable preference shares.

9th Mar '18 by homosap

45 comments 9684 reads

There has been a collapse in the price of AV.A from over 175p to 118p and similar falls in respect of AV.B and RSAB.L following Aviva’s shocking declaration that they intended to take steps to retire their cumulative irredeemable preference shares. It would seem that the skills of Mark Taber will be called on again to assist those seeking stable fixed dividends with minimal risk from being shafted by slick legal legerdemain on the part of another institution whose business relies on the assumption that they can be trusted.

As Mark Taber has tweeted it has not previously been doubted by professionals involved in the fixed interest market that cumulative and irredeemable ment just that and the preference share price has prior to Aviva’s announcement reflected this understanding.

Does the current pref price collapse in fact present an opportunity?

No help of course may be expected from the useless FCA.

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GBGMC0

9th Mar '18

Ssearby, I really feel for the holders here. Anyone in your situation would feel the same.

Can I ask though, there must be something somewhere in the "terms and conditions" about being able to cancel them though. Else what are they actually going to argue in court.

Merlotman

GBGMC0
Thanks for the sentiment...well you did ask so here goes
https://www.aviva.com/content/dam/aviva-corporate/documents/investors/pdfs/credit-investors/CU_Pref_Shares_Nov_1992.pdf
4(i) ..."The New Preference Shares will not be redeemable save with the approval of the holders of The New Preference Shares..."
The document then appears to contradict itself by stating in 4(iii) that the Preference shares can be redeemed on " a return of capital" but this term is not defined and is normally associated with the return of all the capital of the company
In my view 4(i) should prevail and so should the principle of permanent regulatory capital by no doubt Aviva's PR machine will be hard at work with regulators etc.

timarr

10th Mar '18

I can appreciate that investors in these preference shares are feeling pretty hard done by. As a holder I share the pain. However, our job as investors is to be realistic - it is in Aviva's wider interests to retire these instruments and holders of the ordinary stock, who have a stake in the game, should want them to do so. Turning a business issue into a moral campaign is pointless, it just gets in the way of making rational investing decisions.

The statement from Aviva is:

We noted at our 2017 full year results that we have the ability to cancel the preference shares issued by Aviva plc and GA plc, at par value (plus accrued interest, arrears and in the case of GA plc, issue premium), through a court approved reduction of capital, subject to the approval of the relevant issuer's ordinary and preference shareholders voting together.

There's a precedent for cancellation of preference shares via a House of Fraser case in which the reduction in capital was held not to constitute a variation in rights. It's a pretty clear finding, regardless of whether we like it or not.

Basically it turns out that "perpetual" and "iredeemable" are marketing constructs rather than meaningful legal terms and the price reductions we've seen this week are likely to be permanent, as in most cases the preference shares are probably only worth par value plus dividends plus hope. Even if a PR campaign can embarrass Aviva into not cancelling the prefs the likely reality that they can do so at any time is not going to go away.

There are more details on this at Mark Taber's ever excellent website: https://www.fixedincomeinvestm...

rhomboid1

Hi timarr
‘Basically it turns out that "perpetual" and "iredeemable" are marketing constructs rather than meaningful legal terms’

So lies then? If so then they are no better than con artists & the FCA should shut them down from any further bond issuance

So lies then? If so then they are no better than con artists & the FCA should shut them down from any further bond issuance

Which would jeopardise thousands of jobs, and create market turmoil which would have a far greater affect on our portfolios than what's already happened. In the end "perpetual" and "irredeemable" mean whatever the prospectus says they do, not what we think they do. It's a reminder that we always need to look at the detail rather than relying on the label.

And, of course, if our only course of action is to rely on the FCA for any real protection we might as well give up now ...

homosap

As a lawyer I am naturally inclined to agree timarr’s analysis that it is simply a matter of law as to whether Aviva can and should cancel the irredeemable/perpetual preference shares and morality is besides the point.

However, each time a company decides to exercise a right against an investor that is hidden in an ambiguous interpretation of the small print and contrary to the generally accepted and apparent position they lower trust in contracts and increase the cost of capital in the long term. The U.K. has traditionally been a good place to raise capital because the concept of “my word is my bond” has more generally prevailed than in some other countries where the cost of capital has accordingly been higher.

Even as a lawyer I am not going to want to invest where I need to instruct specialist counsel to advise me of possible risks lurking in the small print. When trust in the integrity of instiions is lowered in this way the cost of capital rises. The long term effect of the morality of anything this side of outright fraud being acceptable has ugly consequences. Quite rightly we do not laud those who make money out of ransome strips in spite of these being legal.

I have only suffered from a knock on affect on a small holding of RSAB.L I have which is not going to make any real difference to my life, but I shall certainly cancel all insurance contracts I have with Aviva if they go ahead and cancel their irredeemable prefs at par to mark my disapproval in some small way.

Of course, while capital is generally available from institutions run by those that do not have skin in the game in the Naseem Taleb sense the cost of capital is not going to be drastically affected but the long term effect will tend to lower such comparative advantage as the U.K. currently has as a decent place to invest.

Homosap

Rusty2

Yes the future of preference shares lies in the balance unless there is something to say that they will not be cancel. Good luck Aviva if you want to raise money in the future, can't see them getting much support. I was considering buying some Aviva (LON:AV.) shares, certainly won't be doing that now. Hopefully other preference shares issuers will give sort of confirmation that they will not be cancelled. If you bought recently you could be suffering a large capital loss.

Hi Homosap

As a lawyer I am naturally inclined to agree timarr’s analysis that it is simply a matter of law as to whether Aviva can and should cancel the irredeemable/perpetual preference shares and morality is besides the point.

Just to be clear - I'm not suggesting in any way that Aviva's actions are morally acceptable or that I condone them. They're not and I don't.

However, I also believe that investing is done best when it's done without emotion. It's important to separate our genuine distaste for Aviva's actions from our own judgements about what to do. I well remember the anger when LLoyds pulled a similar stunt a few years ago. Reading the TMF boards you could see the confirmation bias at work as people convinced themselves and each other that their shared moral revulsion at Lloyds' actions meant their case was unassailable.

Sadly, it wasn't, although it was a close run thing. Lloyds got their way, and have suffered no noticeable damage in terms of reputation or capital raising capacity. You only have to look at how Argentina was able to raise funds on international markets only a few years after illegally appropriating investors' funds to realise that there are bigger forces at work than the concerns of a few private investors.

We can be angry by all means, but we mustn't let that cloud our judgements.

Timarr

In the absence of an expression of outrage at Aviva’s action I had lazily assumed that you regarded their action to be morally neutral. I appreciate the point you make and sadly agree that the adverse affect on Aviva is likely to be disappointingly slight.

All too often those who been swindled by some barely legal slight of hand receive scant sympathy because those unaffected consider they would have been too smart to have beoen ciaught out. In practice I think that Aviva will have little difficulty raising further funds through some other instrument than irredeemable preference shares in the future. Memories are short among those not directly and painfully affected and the usual bias of overconfidence in ones’s own judgement will ensure future investors will believe it will not happen to them.

I do, however, believe that the steady drip drip of similar pieces of chicanery on the part of large institutions will eventually affect the rate at which money can be raised and in the long term is not good for the health of our economy.

Your general point that investment decisions are best made with a cool head is well made. I shall certainly look in detail at the RSAB.L prospectus to assess the risk of continuing to hold them. I will also in future be more inclined to take into account the increased propensity of institutions to adopt a morals free approach to running their affairs
In assessing the risks of any investment. My cancellation of my insurance with Aviva will merely be a risk free gesture that no doubt will have zero affect on them.

Homosap

11th Mar '18

I still feel for the holders here. At the very very least surely if you call something "irredeemable" but they are not , then that is actually even false advertising.

Also having in the small print "irredeemable until cancelled" , surely you shouldn't be allowed to put nonsensical stuff like that anywhere in a contract. Read it and repeat it. It's nonsense.

gus 1065

Not familiar with the particulars here, but presumably there’s also a strong case for ongoing investors being misled by the issuer and their market making agents (especially if as suggested there have been ongoing repeat issues at a material premium to par). If the price of the instrument in the secondary market was being sold at something like 180% of face value, this can only be made on the premise that the above market coupon was “perpetual”, i.e. the premium effectively being the present value of an indefinite stream of above market coupons. While the issuer call option might be buried away in the letter of the underlying contract, these instruments appear to be targeted and sold to retail investors (not least due to the small denominations of the notes) for whom their is generally a much higher duty of care who have been (mis)sold something at a false price in such a way that there’s a much bigger can of worms than simple bad faith. PPI springs to mind .... so perhaps the opportunity referred to in the original opening thread might be for some enterprising ambulance chasing lawyers.

Gus.

There's no duty of care with quoted instruments, it's caveat emptor, the fact that investors have been treating the preferred stock more like perpetual bonds than shares doesn't change that. However, I suppose that if shareholders were put in the stock by an advisor, rather than making the decision themselves, they may have a case against the intermediary.

Nor does the mere existence of a cancellation clause indicate misselling. A cancellation clause is a technical necessity to deal with normal business events including winding up a company in an orderly manner. I'd imagine that when the preference shares were issued no one ever envisaged that the cancellation clause would be used as a backdoor way of redeeming the irredeemable, rather than as a necessary action on some form of corporate event.

Based on previous experience it's unlikely that the courts will take into consideration the original expectations, and will probably base their decisions on the wording of the prospectus. Holders will probably be better off trying to block the resolution. I doubt it will stop the eventual redemption, but it might force Aviva into making a better offer.

AnonymousUser192020

12th Mar '18

Interesting comment from Ecclesiastical this morning
https://www.investegate.co.uk/ecclesiast-ins-off---ella-/rns/ecclesiastical-preference-shares/201803120910253837H/

Ecclesiastical notes Aviva's governance statement that "as one of the biggest companies in our sector, we aim to make our industry work better for everyone. That starts with us building trust with our customers, investors and shareholders by running our business honestly and transparently." Ecclesiastical trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action.

Damn right.

Still holding Ecclesiastical Insurance Office (LON:ELLA). Even aside from the RNS they're the safest preference bet in the market based on their corporate governance.

loglorry

It is interesting that investors lost the battle on the ECNs at the Supreme court largely because the courts relied more on "commercial intent" than the investors interpretation of the terms. Very simply put the courts decided that a "regulatory par call" must mean that if the regulator changed the meaning of what was capital the bank could call the ECNs. That contradicted one interpretation of the way the contract was written.

We seem to be in the reverse situation here. The law seems to suggest the irredeemable can be effectively redeemed through cancellation. However clearly that wasn't the commercial intent.

lightningtiger

This big drop in preference shares has hit all of them, and they are supposed to be classified as low risk investments according to Money Observer a while ago. So much for the regulators! I have been holding SAN for a few years & it has just gone XD ,then a small drop but a day later bang, a big drop down. Fortunately I sold about 80% earlier this year, so my portfolio has a minimal impact. I was considering buying back some more before they went XD but could not find the XD date coming up.
Out of 10 preference shares that have all been hit,ELLA is the only one starting to spring back. The other 9 are all down big time: NWBN, SAN, BWSA, GACA, RSAB, NTEA, RUSP, LLPD.
Dividenddata.com gives a list of shares about to go XD and payment dates as well as what %age of dividend paid. Top 4 XD dates 15/3/18 are 3IN,21%, MIG1,13.8%,MAV4, 11.79%, MIG5,11.38%. These are not preference shares but may be worth considering.There is one fund and 3 VCT's.
Bear in mind when the share price drops the dividend yield goes up.

otemple

Not sure how you can say RUSP is down big time, it has fallen a few pence and had been drifting down for a few weeks already.

Think the statement in the results for Raven Russia today stating that the board view prefs and ords as treated the same in terms of cancellation is very positive (these do not seem to have the clauses that have caused the concern in the banks / insurance prefs) so happy to continue to receive my 8% income tax free (unique to raven preference shares i believe) script dividend shares

Hi Ostemple, It seems you have come out better than most others from a high of around 154p high to 142.1p today..That's nearly an 8% drop in the share price, so not too bad. Not sure what the current div payment is, but I would suggest it would not be the 8% , around 12p. if it pays out 2x a year that is about 6p now. You should Know what the payment is..

I can only see from their results out today the dividend for 2017 was 4p

Peter Clery

13th Mar '18

Irredeemable has been taken by the market to mean just that. By their statement Aviva have driven down the price of the AV.A & AV.B & GACB. If they seek to buy in this stock at the reduced price, would this be benefiting from market manipulation and hence a criminal offence ? I agree that we should seek to shame Aviva into cancelling the redemption proposals ( they are only "under consideration, I think" and vote against ay resolution so to do. I have written to the Chairman and if many more people do this, it may help.

donald pond

I don't have an investment here but the common understanding has always been that any class of shares should be the sole arbiter of any change that only affects that class of shares. And if the effect of any change was to reduce the amount payable on one class of shares to the benefit of another, without the consent of that first class, I would have thought a strong case exists for claiming fraud upon the minority. But in the end, nobody wants this to end up in court and you can only hope that sense prevails.

Aviva and the current price collapse of irredeemable preference shares.

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Homosap

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