Aviva and General Accident preference shares

[PeterGray]

Now if I've got this right the issue here seems to be that Aviva is saying that they will reorganise their capital, as suits them to do so, and in doing so cancel the prefs, paying them back at par.

What I'm beginning to try to get my head around is if they can do that, and the precedent proves general in application, then what is a to stop a company reorganising its capital and paying back other shareholders categories at par - which would be a mighty shock to most. You will say - they would have to get shareholders approval, which they wouldn't get for the ords without a bit of subterfuge at least. But what, for example, about companies with voting and non voting shares, or any other sort of minority non ordinary shares?

Am I missing something?

Peter

[GoSeigen]

Am I missing something?

Peter

Yes.

1. Why would they (who is they?) want to do it?
2. Could they get the necessary support?


GS

[Alaric]

I have hunted up a link to the prospectus.
https://www.aviva.com/content/dam/aviva ... es_140.pdf

page 33 "Variation of rights" appears to imply that the Preference Shareholders as a class have to vote the approval of a capital reconstruction affecting their shares.

I suppose Aviva might get 75% to vote to be repaid at par when the perpetual dividend entitlement would be valued at well above that. There again the shareholders probably wouldn't approve, so it's an empty threat provided someone holds them to the prospectus.

But the general question is this: When a Preference Share's level of indefinite fixed income is high enough that the price goes above par, what are the rights of the Company to cancel the shares and what are the rights of the shareholders to prevent this?

[GoSeigen]

I have hunted up a link to the prospectus.
https://www.aviva.com/content/dam/aviva ... es_140.pdf

page 33 "Variation of rights" appears to imply that the Preference Shareholders as a class have to vote the approval of a capital reconstruction affecting their shares.

Not correct. You have quoted the rights of ordinary shareholders.

The section concerning the preference shares is extremely clear that holders are only entitled to a return of capital comprising nominal plus premium paid on issue plus arrears of dividends. Page 6. There is no protective language here, but the Articles should be checked.


GS

[PeterGray]

1. Why would they (who is they?) want to do it?
2. Could they get the necessary support?

Well the example I gave was of a company with voting and non voting shares. Not hard to see why voting share holders might want to reorganise the capital structure to pay back the non voting stock at par. I haven't looked at the articles of any such companies, but I'd hope for any share holders in such companies that there's something in there prevent it.

Peter

[GoSeigen]

1. Why would they (who is they?) want to do it?
2. Could they get the necessary support?

Well the example I gave was of a company with voting and non voting shares. Not hard to see why voting share holders might want to reorganise the capital structure to pay back the non voting stock at par. I haven't looked at the articles of any such companies, but I'd hope for any share holders in such companies that there's something in there prevent it.

Peter

Peter, the action being mooted by Aviva only applies to non-equity shares. Most non-voting shares will be equity surely

[GoSeigen]

Poster DcPlug over on Mark's board, who otherwise is an astute bond investor IME, illustrates the IMO backward understanding of the layman:

[...] many prospectus [sic] would appear to be written and marketed in such a way that the result is deliberately leading the reader into thinking that he/ she is buying a truly irredeemable instrument.

This is back-to-front. The reader is being warned that the instrument is perpetual. Fools, please remember :

repayment date -- good
no repayment date -- bad

You cannot be "warned" that you face the risk of your capital being returned. Rather, you are correctly being warned that your capital may NEVER be returned.

This really is absolutely fundamental.


GS

[paulmiller]

It is understandable that Aviva preference share holders are very anxious about this and Aviva should try to clear this uncertainty up as soon as possible. Aviva has of course not said yet exactly what it intends to do and the market has obviously been affected by this uncertainty. There is also a very recent precedent to this when John Lewis decided to cancel their Preference shares. John Lewis did everything very fairly and paid £1 to the 5% Pref holders and paid £1.50 to the 7.5% Pref holders. So all Pref holders received a capital repayment at a yield of 5%.

Aviva has already stated that it is considering how to balance the interests of ordinary and preference shareholders, so let us see first what they actually intend to do. It is quite possible they may take a similar view to John Lewis and decide to make a fair and equitable offer to all of the different Preference share holders. They were all trading at yields near 5% before the market collapsed, for example GACA were 180 before the collapse, so it is not impossible that they will make an offer approaching this 5% yield again whenever they decide what they intend to do. They have quite a good public image up until now and so they will obvious want to maintain it. They will also know that forcing small investors and pensioners to lose a large part of their investment in their “Irredeemable” Aviva preference shares will not look very good for their PR as their whole business is about helping people save and build for a good pension.

Aviva have not even said what they intend to do yet. When they finally decide they may give holders of their “Irredeemable” shares a pleasant surprise.

[Alaric]

You cannot be "warned" that you face the risk of your capital being returned.

How much do you think you should pay on a secondary market for a "guaranteed" income stream of 8 per year?

If it's 200 to give a 4% return, do you not think a warning is appropriate if the issuer declares that the offer is over and there's a payback of only 100?

[BobGe]

You cannot be "warned" that you face the risk of your capital being returned. Rather, you are correctly being warned that your capital may NEVER be returned.

Perhaps the stress needs to be more on the 'may' rather than the 'never'.

[BobGe]

It is understandable that Aviva preference share holders are very anxious about this and Aviva should try to clear this uncertainty up as soon as possible. Aviva has of course not said yet exactly what it intends to do...

You may find this helpful. (Page 5 if in page view.)
https://seekingalpha.com/article/415474 ... transcript

[flyer61]

Of the £500 million plus earmarked for capital returns, we are working through our plans, but we are not yet ready to announce the dates or the exact mechanisms today.

To be very clear though, it is our intention to return at least £500 million of capital to shareholders this year. We intend to do this through a combination of preference and ordinary shares.

Now for the prefs, you should note that we have the ability to cancel these prefs at par with shareholder approval. These prefs carry very high coupons and will no longer count for regulatory capital from 2026.

In addition, we are in the very fortunate position with our cash and capital that we now have the ability to do something about it. So we intend to. Tom we'll take you through the detail of this in a moment.

And Tom said....

As Mark said, one of the things we're looking at is the possibility of a liability management exercise concerning one or more tranches of preferred securities issued by either our General Accident subsidiary or Aviva plc. The rating agencies don't count them as capital anymore and they likely will not count for capital for Solvency II purposes from 2026, so they no longer serve their originally intended purpose. Essentially they're now just the equivalent of very expensive senior debt with coupons that are not tax deductible.

So while we've not taken any decisions we note that these securities are subject to cancellation at par upon a capital reduction approved by ordinary and preferred shareholders voting as a single class. Now that we're in excess cash and capital positions it may make sense for the company to address these securities now or sometime prior to 2026.

So we worked through the alternatives. One of the things we're considering is how best to balance the respective interests of ordinary and preferred shareholders. Any event that should be clear that one of our priorities is deleveraging and eliminating high cost debt from our capital structure, primarily to improve ongoing cash flows and dividend capacity.

[flyer61]

Firstly thank you to GoSeigon for given me a valuable insight into what is potentially really under the bonnet of what I thought were my 'irredeemable perpetual' UK prefs.

My take, I am doing nothing. There is clearly a disorderly market at the moment. If the FCA is doing it's job it would insist on an early statement of what "One of the things we're considering is how best to balance the respective interests of ordinary and preferred shareholders" means from Aviva.

These guys are aware of what they are proposing and the potential repercussions....eg years of annual meetings where they get the 'Fred Goodwin' treatment from a small but noisy group of former pref holders. Anybody written to Merryn yet.....

Those who managed to buy Aviva/GA prefs below 110 have potentially done some smart business. There could yet be some serious bargains to be had in this typical (UK) financial industry maelstrom.

[PeterGray]

So while we've not taken any decisions we note that these securities are subject to cancellation at par upon a capital reduction approved by ordinary and preferred shareholders voting as a single class....

So we worked through the alternatives. One of the things we're considering is how best to balance the respective interests of ordinary and preferred shareholders.

That certainly seems to be leaving themselves room to making some sort of offer above par. But quite possibly using the threat of the right to cancel at to offer below previous recent market prices. No doubt the more pressure than can be brought, and the more they can be convinced that getting approval from the combined holders might be touch and go the better any likely offer is going to be for prefs holders.

Peter

[canavar]

Also worth looking at the investor slides.. slide 57 specifically addresses the Preference shares and states:-

"ability to cancel expensive preference shares through capital reduction..via a court approved reduction of capital at par plus accrued interest and arrears, subject to approval from relevant issuer's ordinary and preference shareholders voting together"

Judging by the posts here, elsewhere and the general market reaction, this was/is by no means a universally held view, whether with respect to Aviva/GA Prefs, or Preference Shares more widely. Several questions surround the meaning and interpretation of "capital reduction" and which shareholders should be considered as "relevant" with respect to "voting together" or as separate classes. Only time will tell whether they obtain the necessary vote (odds on voting together) and whether the court ultimately approves it (more doubtful). Meantime a shadow has been cast on the whole preference market which some may consider to be sharp practice or market manipulation. Everyone is entitled to their views, no doubt they have thought through all sorts of scenarios but may not have finally committed to a course of action / offer, and are somewhere between "floating a kite" and "softening up the market".

As pointed out above, they stated in the investor call that they are considering "how best to balance the respective interests of ordinary and preferred shareholders".

"Balancing interests" is not necessarily something the court or regulator will take into account, but the court of public opinion has a wider remit.

There is a plenty of stuff about sustainability, diversity, treating customers fairly, etc on AvivaPLC social media (Twitter, facebook and Instagram) for anyone wanting to share their particular perpective more widely.

[TwmSionCati]

the instrument is perpetual. Fools, please remember: repayment date — good; no repayment date — bad ... This really is absolutely fundamental.

Why on earth? Perpetual annuities; irredeemable debentures; consols; war stock?

Is your point that Fools don’t live for ever? True, but they can bequeath their instruments.

TSC

[GoSeigen]

the instrument is perpetual. Fools, please remember: repayment date — good; no repayment date — bad ... This really is absolutely fundamental.

Why on earth? Perpetual annuities; irredeemable debentures; consols; war stock?

Is your point that Fools don’t live for ever? True, but they can bequeath their instruments.

TSC

No that's not my point at all! The point is that holders of all the above perpetual securities are already compensated for the lack of certain redemption with a higher coupon.


Before yesterday did you hear them complaining on behalf of the issuer that "It's so unfair to Aviva: holders not only get a higher coupon than dated securities but they have the marvellous advantage of not knowing when or indeed if their principal will ever be returned.”? Yet that is their logic being relied on in this thread. Ridiculous!

GS

[GoSeigen]

The only people who have manipulated the market are recent buyers who have been paying excessively high prices for these shares without paying attention to the nature of their investment. There is a huge helping of denial, blame deflection and even abuse going on -- it's almost impossible for a human to accept his own foolishness.

Aviva is an innocent party here. They are simply doing what is financially prudent for their shareholders and indeed their customers: fewer expensive liabilities must make the business more viable. If that means, ”old people will lose a valuable stream of income" it was they who were stupid over- exposing themselves: issuers were not responsible for scondary market pricing for investors ignoring basic facts of investment.

Fact-- if you don't know the timing of a redemption you risk it happening when least convenient to yourself.


GS

[johnhemming]

Fact-- if you don't know the timing of a redemption you risk it happening when least convenient to yourself.

Are you saying that dated liabilities are not subject to capital reductions within the parameters of their prospectus?

I do think there are two issues here:
a) The strict legal position ... and
b) The fact that the investments were marketed on the basis of being perpetual.

[thebarns]

Goseigen,

"a huge helping of denial, blame deflection and even abuse..."

That's your personal reading of the matter.

Many will disagree.

There are numerous threads on this subject on various sites. Virtually all view this move by Aviva as unprecedented and unforeseen. The market in all preference shares had never warned nor priced in the extremely remote possibility of this interpretation of redemption/cancellation/reconstruction, however one wishes to describe it.

The House Of Fraser case was decided in 1987 and has been in the public domain for 30 years, indeed its circumstances may not be exactly replicated here.

Institional funds hold these preference shares, not just little retired investors.

Indeed you mentioned your own mother had around 5% of her portfolio in preference shares.

None of these holders, nor the market pricing, will have considered capital reduction at the whim of ordinary shareholders to be a risk.

Sure, they will all have had in the back of their mind that a bank or insurance company may have faced an existential crisis if there had been another worldwide financial meltdown. Prices of all preference shares had been increasing in recent years, despite interest rate increases on the horizon, as the perception by the market was that the worldwide environment was slightly more secure and thus the existential risk reducing.

The grievance of many is that Aviva's management is attempting in an underhand and dishonourable way to try on an interpretation of the law purely to shaft their own preference shareholders, no doubt some of whom,as am I, are also their ordinary shareholders. A narrow self inflicted attempt to damage the interests of their on preference shareholders.

And for what purpose ? Aviva's ordinary share price has barely moved in reaction to this and certainly nothing compared to the reaction of the prices of preference shares.

"Denial and blame deflection"? Tosh !!!!!!