Aviva and General Accident preference shares

[GoSeigen]

Do we think Aviva should have done what the city normally does, i.e. Have a quiet chat with institutional investors to gauge opinion prior to public announcement? Allowing the institutions to exit at preferential price as retail investors scramble to pick up the now strangely discounted preference shares?

Ha! That is exactly what Mark Taber implied when I talked to him about it and the way it sounded in Avidya's post up there ^. City chaps were upset at not having been brought into the loop as would have happened in the good ole days!! LOL

Totally appreciate that Aviva should not pay more than par for the shares, that would be seem 'odd', I lend you £100 and you pay me £8 a year in interest, then you decide to repay the debt and I turn round and demand £170?!

Personally, barring any further announcements, I'm going to value all these instruments as if they are going to be redeemed at par in 2026 and adjust my yield calculations accordingly.

As for reputational damage, Lloyds and the Co-op brands are as healthy as ever as far as I can see. So I'm sure whatever Aviva decides won't affect their reputation in any significant way.

Deeply depressing.

You are quite right on the principles taylor20. However, these are share securities with discretionary dividends, not debt, so your analogy to debt could be easily misconstrued unfortunately -- as one poster already has done with references to "interest" and "borrowers" and "lenders" and so on.

I think your approach to valuation is very wise, especially regards GACA/B. Why eight years' duration though? Was there any thought process behind that or was it arbirtary? If I were to guess, you took the approx 16-20 year modified duration before the announcement and said that in the course of that notional duration there is a 50-50 chance of repayment if that makes any sense. Do you think holders' chances are that good, especially with the GA prefs?

GS

[shaunm]

Just a gentle reminder that both "Preference" & "Ordinary" shares are Equity capital of the company, and by nature are "Marketable" securities.
Both type of shares provide Dividends out of profits, although Preference shares provide at a fixed coupon rate only.
Should the company suffer hardship, the Directors may stop both type of Dividends.

I would not expect such shares to have a clause indicting that the company could remove a whole share class at an arbitrary price, namely the issue price!

Common sense will prevail

[rippleog]

"If I were to guess, you took the approx 16-20 year modified duration"

modified duration convention of most preference shares is 12~14 years

[GoSeigen]

GS

2. They have given no indication that they will offer a penny less than shareholders' entitlement under their terms.

I agree with that statement. However, while I respect your views on this, and I can see substance in them, it does not seem crystal clear to me that the the legal arguments on exactly what are those terms are as cut and dried as you think. There is certainly room for a challenge. And there is certainly room for reputational damage - which could greatly outweigh the limited gains from par repayment of the prefs.

I agree in the case of AV prefs but not the GA, which like you I think are toast, especially after it turns out investors have been warned for years this could happen.

While I also certainly don't think it's "all over" or that "heads will roll" (yet anyway), the opposition that appears to be arising not simply from PI quarters is significant. If it's as clear as Aviva seem to think, and you seem to do, then what does that say about the likes of Blackrock who are invested in these and have held way over par. Either they are grossly irresponsible with their clients money, (possible I'd admit) or the contract interpretation Aviva are using is not as obvious to everyone else as you are suggesting it should be.

I agree that GACA/B appear to be in a particularly weak position, as you imply, given the Aviva control of the ords. But whatever the correct interpretation of the prospectus the AV.A/Bs do need a vote, even if it's a joint one, and that always looked tight, and it's looking tighter by the day at present.

Peter

Again, agree about the nature of the opposition, but Aviva seem absolutely certain of their position and I think they will have met the howls of protest extremely robustly, perhaps asking how they could make it a bit easier for their opponents to voluntarily come on side rather than giving any indication they will row back.

Re. the vote, don't forget that any pref votes in their favour make it VERY difficult for prefs to win. If I were Aviva, I'd do it this way:

-Offer GACA/B a small premium conditional on voting in favour, warning that they are toast anyway if they don't co-operate. This gets a significant pref vote on their side, hopefully in advance because the instos will understand the stakes.
-Offer just enough on the AV to get one or two sizeable holders on side.
-Assure shareholders of the Company's ability to pay a special dividend if they are cooperative and the capital is repaid.

This should get them through the vote, then it's up to dissenters to try their luck in court.


GS

[rippleog]

"but he then must also recognise that he has taken a leveraged bet on the hope that he can continue in perpetuity to extract the company's profit from the pockets of its residual shareholders -- and leveraged gains carry the risk of leveraged losses."

Gs you are talking crap. There is no leverage.

And ordinary equity capital is more expensive than preference equity capital. The CFO is a "fool" for not realising that.

[Alaric]

I would not expect such shares to have a clause indicting that the company could remove a whole share class at an arbitrary price, namely the issue price!

There is sometimes a clause that permits this under some circumstances as well as clauses indicating the priorities for return of capital on winding up. Lenders/holders may demand a premium on the fixed dividend rate as the price of such a repayment option. Equally those buying or selling in the secondary market after issue usually get a tip off that the security is of this form.

Hint: The words "Redeemable" or "Callable" may appear in the stock title. By contrast the word "Irredeemable" is taken to mean that no such clause exists.

Differences between Preference Shares and Bonds are of an accounting, legal and taxation form. The same issues regarding ability of the issue to be paid off at the borrower's option arise in bonds as well as does how such options are priced.

It's important in fixed income markets as to the quality of the issuer and the rights attaching to the issue. Being members of the Company in the shareholder sense can give the holders rights they wouldn't have if they held bonds of equivalent coupons. That said, if they aren't ever given rights to a separate vote, then in the case of Prefs paid by a wholly owned subsidiary, these rights have little or no value and Bonds may have offered more protection.

[shaunm]

I would not expect such shares to have a clause indicting that the company could remove a whole share class at an arbitrary price, namely the issue price!

There is sometimes a clause that permits this under some circumstances as well as clauses .

Yes I agree in certain circumstances

[GoSeigen]

Just a gentle reminder that both "Preference" & "Ordinary" shares are Equity capital of the company, and by nature are "Marketable" securities.
Both type of shares provide Dividends out of profits, although Preference shares provide at a fixed coupon rate only.
Should the company suffer hardship, the Directors may stop both type of Dividends.

I'm sorry but this is not correct by the language of the 2006 Companies Act (s548) which defines Equity Share Capital as shares having right to participate beyond a specified sum in the profits. Most(**) preference shares, including GACA/B are not Equity Share Capital. GA prefs according the Articles only have the right to a fixed dividend and fixed preferred capital return. This is important for the rights of the holders.

Your case is arguable but far from watertight for AV prefs. Even their "Spens Clause" limits return to a fixed maximum under any circumstances for the holders.

I would not expect such shares to have a clause indicting that the company could remove a whole share class at an arbitrary price, namely the issue price!

Common sense will prevail

As I have written before, the CA1985 prohibited Capital Reduction unless a clause was inserted in the Articles to allow it. Aviva articles contain such a clause -- its inclusion would have been deliberate. If you didn't expect that, well no-one can know everything! Incidentally the price is not arbitrary. It also is clearly specified in the terms in a clause dealing with Returns of Capital. A purchaser would have known about it if he'd read the contract.

Common sense will prevail, hopefully with give and take on both sides.


GS
[(**)two posters have disputed this but could offer no examples of prefs which clearly do participate ]

[GoSeigen]

Hint: The words "Redeemable" or "Callable" may appear in the stock title. By contrast the word "Irredeemable" is taken to mean that no such clause exists.

If by "no such clause exists" you mean that a clause detailing a ss159-170 redemption feature is absent, then THANK YOU. At last someone has recognised the proper meaning of this word.

GS
[EDIT: added reference to relevant section in the Companies Act 1985]

[Alaric]

I'm sorry but this is not correct by the language of the 2006 Companies Act (s548) which defines Equity Share Capital as shares having right to participate beyond a specified sum in the profits.

That's specialist definition of a phrase "Equity Share Capital". In a more loose sense, Preference Shareholders are "members" of the Company and presumably obligations to Directors to behave fairly to members applies to Preference Share holders as well. That's something the GA Directors will break if they use their powers as sole owners to cancel the GA Prefs' income entitlements.

The term "equities" is used as a general short cut where a distinction from "bonds" is needed.

[GoSeigen]

"but he then must also recognise that he has taken a leveraged bet on the hope that he can continue in perpetuity to extract the company's profit from the pockets of its residual shareholders -- and leveraged gains carry the risk of leveraged losses."

Gs you are talking crap. There is no leverage.

And ordinary equity capital is more expensive than preference equity capital. The CFO is a "fool" for not realising that.

I buy security A. Event X occurs. The price of A increases by x%
You buy security B. The same event X occurs. The price of B decreases by nx%, where n is greater than 1.

B is a more highly leveraged bet on X than A is.

A is Aviva ordinary shares.
B is Aviva preference shares.
X represents the premium paid on return of capital by ordinary shareholders to preference shareholders over and above the 100p to which they are entitled.


That is enough to fully understand my meaning. Frankly I don't care if you think I am talking crap. I shall talk as much crap as I like.

GS

[EDIT: to put it another way, every penny above 100p that pref holders steal (to use the local vernacular) from ord shareholders is part of a penny lost to a much greater number of ordinary shareholders, many of whom are struggling pensioners and disabled people. This is what Aviva is talking about when discussing balancing the interests of pref and ord shareholders.]

[Alaric]

If by "no such clause exists" you mean that a clause detailing a ss159-170 redemption feature is absent, then THANK YOU.

What I mean is that if a Bond or share has a clause which says something along the lines that at a future date, the borrower has the right to repay, then the bond or share is described as redeemable, repayable or callable and that will feature in the title. If no such general intent clause exists other than in the small print dealing with reconstruction, winding up etc. , then the bond or share is described as irredeemable, the general understanding being that the payments continue for ever or until both lender and borrower agree to terminate them. As witnessed by the recent price collapse, there's a distinct price for a borrower to pay in yield to be granted such an option.

I do not believe there was ever an intent at issue to offer Aviva/GA the right of repayment other than at market prices and if it gets to Court, would there not be witnesses involved in that and similar issues who would testify to that?

[rippleog]

" buy security A. Event X occurs. The price of A increases by x%
You buy security B. The same event X occurs. The price of B decreases by nx%, where n is greater than 1.

B is a more highly leveraged bet on X than A is.

A is Aviva ordinary shares.
B is Aviva preference shares.
X represents the premium paid on return of capital by ordinary shareholders to preference shareholders over and above the 100p to which they are entitled."

Sorry GS still talking crap.
That is not leverage you are describing.

[scrumpyjack]

I see Aviva A Pref are back over 138p today.

Clearly Mr Market does not think they are going to be forcibly repaid at 100p

[GoSeigen]

If by "no such clause exists" you mean that a clause detailing a ss159-170 redemption feature is absent, then THANK YOU.

What I mean is that if a Bond or share has a clause which says something along the lines that at a future date, the borrower has the right to repay, then the bond or share is described as redeemable, repayable or callable and that will feature in the title. If no such general intent clause exists other than in the small print dealing with reconstruction, winding up etc. , then the bond or share is described as irredeemable, the general understanding being that the payments continue for ever or until both lender and borrower agree to terminate them. [GS -- By for example, presenting a special resolution for reduction of capital subject to the requirements of the Articles and law.]

Sublimely correct and beautifully expressed Alaric though you mysteriously omit reference to the law -- which makes pretty specific requirements about what should be in that Redemption clause.

As witnessed by the recent price collapse, there's a distinct price for a borrower to pay in yield to be granted such an option.

I agree about the yield. It [the option value] was reflected in the coupon at issue. Then recently purchasers decided all they cared about was a headline yield, and that little details like reading accounts or contracts could be entirely dispensed with: they erased the value of the elevated coupon entirely by grossly overpaying for the shares.

I do not believe there was ever an intent at issue to offer Aviva/GA the right of repayment other than at market prices and if it gets to Court, would there not be witnesses involved in that and similar issues who would testify to that?

Well the intent is pretty clear in the Articles. Have you read them? Did you see the clause explicitly permitting reduction of capital? [4.05 pg 6 Alterations of Share Capital]

Obviously this is not the first time a contract has been before the court where the two humans who signed it (or many who prepared it) may not be present! There are hundreds of years of experience and protocol to handle exactly this problem and the actual individuals will not need to be called on. The intent would most likely be inferred from the contract itself, like in the Lloyds ECN case. Sir (JohnHemming) will be happy to give us a lesson about it I'm sure!

[redsturgeon]

Moderator Message:
RS: There has been too much name calling on this thread. It must stop!

[NealMorris]

I strongly disagree about GS opinion of the GA pref. AV pref holders would make a good point in court or to a regulatory body that their rights have been diluted because of the number of ordianary shares that have been created without their consultation since issue.

On the other hand, GA pref holders have a better point since their entire rights have for want of a better word, been stolen. Since Aviva own all the ordinarily stock.

In arbitration it would be pretty obvious GA holders should have a separate vote. Certainly more so than AV holders. IMO.

I agree about name calling act and on other boards. We should respect one another, this is a public place let's not forget even if many use pysdonims. Thanks.

[taylor20]

...

Personally, barring any further announcements, I'm going to value all these instruments as if they are going to be redeemed at par in 2026 and adjust my yield calculations accordingly.

...
I think your approach to valuation is very wise, especially regards GACA/B. Why eight years' duration though? Was there any thought process behind that or was it arbirtary? If I were to guess, you took the approx 16-20 year modified duration before the announcement and said that in the course of that notional duration there is a 50-50 chance of repayment if that makes any sense. Do you think holders' chances are that good, especially with the GA prefs?

No real thought beyond the fact that "they will not count as regulatory capital from 2026", which I assumed had _some_ value to Aviva. After this point they really don't serve much use at all?

It also seemed a half decent compromise to allow an orderly market in the prefs by giving fair warning they are going to be cancelled.

[ChloesDad]

Last comment -from today's Times.

Read this and learn something, GS. Maybe even humility.. ?

http://www.thetimes.co.uk/article/the-i ... -l2cbvnhgp

Chloe's dad, you would set a better example for young Chloe and her generation if you presented a reasonable, coherent argument to those with whom you disagree rather than this stream of virulent abuse. Do you think you could manage that?


GS

GS, asking you to show some humility is NOT virulent abuse. The World and his wife seem to disagree agree with you about the ethics shown by the Aviva management. I wouldn't begin to argue the legal technicalities with you as you are clearly much more knowledgeable than I am on the matter. However, I see the moderator has ticked us all off, so I shall refrain from even the mildest of personal comments. Truce ?

[GoSeigen]

Last comment -from today's Times.

Read this and learn something, GS. Maybe even humility.. ?

http://www.thetimes.co.uk/article/the-i ... -l2cbvnhgp

Chloe's dad, you would set a better example for young Chloe and her generation if you presented a reasonable, coherent argument to those with whom you disagree rather than this stream of virulent abuse. Do you think you could manage that?


GS

GS, asking you to show some humility is NOT virulent abuse. The World and his wife seem to disagree agree with you about the ethics shown by the Aviva management. I wouldn't begin to argue the legal technicalities with you as you are clearly much more knowledgeable than I am on the matter. However, I see the moderator has ticked us all off, so I shall refrain from even the mildest of personal comments. Truce ?

No truce no. Making derogatory comments about my character makes me feel like you wish to control me. That may be an attempt to silence me, or coerce me to start writing what you want to hear. But telling someone how to behave especially in the sense of labelling them negatively is abusive and I use that term advisedly because you have aimed a stream of similarly vile comments in the direction of Aviva management and others too. The effect is to make anyone sympathetic to Aviva feel similarly vilified.

You may not be aware of the effect this behaviour has on people. I have the balls to call you out on it but there are likely numerous individuals who simply feel unwelcome and shut up as a consequence. Such boorish comments risk ruining the open helpful atmosphere that we would like to engender on these forums.

This place has pretensions to serious investment discussion, not the kind of name-calling nonsense you find on LSE and the like.


GS