Aviva and General Accident preference shares

[88V8]

Not even a firm online price to buy the Aviva 8.75%. I put the order through at Market. We shall see*.
There are also buying opportunities in the Natw4st 9s, ELLA, even Santander. Read-across may also infect other prefs such as BP.B, NTEA, RE.B and generate opportunities there. But if issuers see this as a means of ridding themselves of pesky historic debt, those opportunities may turn out to be of the pumpkin variety.

The site I generally use to monitor prices is not giving meaningful results atm.
https://www.shareprice.co.uk/NYSE:SAN/B ... NTANDER-SA

All a bit of a mess.
After this I don't think we'll ever be able to trust a bank or other insto again.

What to do now for reliable income..... perhaps there are options in more horourable countries. North Korea?

V8

* went through at 115p.

[GoSeigen]

Having thought yesterday was bad, now today I see all my preference shares have tanked !!!!

Do I have the words to correctly convey and express what I think about this ?

I know exactly what I'd like to do to the lot of them.

As usual there's a lot of knee-jerk outrage, with some familiar authors! I think investors need to just take a deep breath and remember what they are doing here.

Preference shares are hybrid securities. This means they have elements of both debt and of equity. Part of their debt nature means that they have a specific nominal value which is the value of debt that was advanced to the issuer, and that in general they have a fixed coupon aka dividend. Part of their equity nature is that investors have no right to demand repayment -- this is what the term perpetual refers to contrary to the aparent belief of some posters here. Ordinary shares are also perpetual: shareholders may not demand their shares be repaid by the issuer, but if the issuer decides to retire the share capital then it may repay the shareholders. In this case they are entitled only to the remaining equity in the business. If their shares are trading at a premium to equity value, then tough cookies!

It's really not that different with preference shares, only preference shareholders are not entitled to the remaining equity in the company, rather they are entitled to be paid before the ordinary shareholders at the nominal value of their shares.

Preference shareholders have been revelling in the capital appreciation of their shares even though that resulted in their trading far above par. If you bought them above par, well, you should have realised the risk you were taking. And if you had asked on these boards posters like me would have, and did, point out the risk of preference shares.

Just a slight parallel -- the situation with the War bond in the early 1930s, which was trading above par, and when the UK government exercised its right under the terms to redeem at par. Some people are still bitter about that 85 years later, referring to it as a default! Investors never learn...


GS
Whose pensioner mother had 5% exposure to prefs on his recommendation, now considerably less!

[SunnySonny1]

I have small holdings in the General Accident & Aviva Preference shares. Judging by the statement put out, the company appears to make a small distinction between the prefs issued by the two companies, in that the GA pref shares redeemed would include a premium. The following was from GA RNS

'In this regard, Aviva also noted the ability to cancel the preference shares at par value (plus accrued interest, arrears and in the case of the preference shares issued by General Accident plc, issue premium)

Any view will be greatly appreciated

[taylor20]

Part of their equity nature is that investors have no right to demand repayment -- this is what the term perpetual refers to contrary to the aparent belief of some posters here. Ordinary shares are also perpetual: shareholders may not demand their shares be repaid by the issuer, but if the issuer decides to retire the share capital then it may repay the shareholders...

...It's really not that different with preference shares, only preference shareholders are not entitled to the remaining equity in the company, rather they are entitled to be paid before the ordinary shareholders at the nominal value of their shares.

The thing is to the retail investor there appear to be Callable Preference Shares with an explicit call date, and then there are 'Irredeemable' Preference Shares with no call date, which usually have clauses like this one:

The New Preference Shares will not be redeemable, save with the approval of the holders of the New Preference Shares to a variation of the rights attached to such shares.

Suggesting the 'power' to redeem is only at the consent of the holder not the issuer.

I appreciate that due to the recent fall the issuer may become the majority holder within a few short months and then they can do what they want...

[GoSeigen]

if the issuer decides to retire the share capital then it may repay the shareholders.

The above is not exactly clear. Of course it is the shareholders of the issuer themselves who actually vote on this decision...and perhaps in normal circumstances they would decline to do so if the shares were at a premium in the market, but that's beside the point.

My point was, investors get carried away, drive values to silly levels not realising the risks they are taking, and then blame someone else when it goes wrong.


GS

[thebarns]

Goseigen,

I understand the points you make.

However the aspect that probably does infuriate a number I suspect, not just me, is that they were not buying preference shares for any cute capital appreciation, indeed probably many bought well above par, but they were buying a steady income in return for minimal capital up and downside, the valuation mainly being driven by long term interest rates.

The risk of capital downside lay with interest rate movements and the very existence of a particular company, the latter being fairly remote.

The very fact many of these were called irredeemable is the point at issue.

On a pure laymanny interpretation, not many would read irredeemable as meaning can be bought back in some fancy capital reconstruction that could be forced through as determined by ordinary shareholders.

I see on another forum, someone has pointed out that there is a section in some prospectuses that the preference shareholders must receive the greater of par or the average of 6 months price pre the buyback. Hence, the cynic would assume the carefully worded statement by Aviva has been out out to drive the price down for the next 6 months before they act.

Fair play in the big bad world of financial capitalism, but probably most of the losers are retirees/pensioners who bought for the steady irredeemable income and no other reason.

[GoSeigen]

The thing is to the retail investor there appear to be Callable Preference Shares with an explicit call date, and then there are 'Irredeemable' Preference Shares with no call date, which usually have clauses like this one:

The New Preference Shares will not be redeemable, save with the approval of the holders of the New Preference Shares to a variation of the rights attached to such shares.

Suggesting the 'power' to redeem is only at the consent of the holder not the issuer.

I appreciate that due to the recent fall the issuer may become the majority holder within a few short months and then they can do what they want...

People are using the word "redeem" here. I don't think Aviva have proposed a redemption have they (i.e. claiming a right under the terms)? It is a capital reorganisation. Can you point to where they have proposed a redemption?


GS

[Alaric]

I appreciate that due to the recent fall the issuer may become the majority holder within a few short months and then they can do what they want...

In an orderly market, an issuer wishing to redeem preference shares that were priced as and believed to be irredeemable would have to buy them in at market prices.

The FCA claim a responsibility to maintain market confidence etc. , but will they take any action? I suspect not on past precedent.

Presumably for anyone wanting to take the gamble that the small print cannot be used to enforce payback at or near par, the income stream is now available for a more attractive price.

It is a capital reorganisation. Can you point to where they have proposed a redemption?

Current holders will end up with cash where they previously had shares. It may not be legally termed a redemption, but the effect is identical. Investors may have assumed the term "irredeemable" had its usual connotations. If the term doesn't exclude the possibility of a capital reorganisation having the same effect, risk warnings would be appropriate.

[thebarns]

Redeem or reorganisation ?

That may be a point to a lawyer.

But to a layman retail investor it is just playing with legal technicalities.

The reorganisation achieves the end goal of buying back shares at par which is what a redemption would have done.

Irredeemable to a layperson means just that.

It does not mean, watch out though, if we call it a capital reorganisation we can achieve something akin to redemption without legally calling it that !

[GoSeigen]

Goseigen,

I understand the points you make.

However the aspect that probably does infuriate a number I suspect, not just me, is that they were not buying preference shares for any cute capital appreciation, indeed probably many bought well above par, but they were buying a steady income in return for minimal capital up and downside, the valuation mainly being driven by long term interest rates.

Then they were buying the wrong thing at the wrong price weren't they? They should have been buying government bonds or dated senior debt or the like.

In return for minimal capital downside is a joke. These had a modified duration of 20 years in many cases. That means a shift in yield of just 1% moves the price 20%.

The risk of capital downside lay with interest rate movements and the very existence of a particular company, the latter being fairly remote.

Investments are and should always be compared to each other. They do not exist in isolation. If bank or insurance company common trades at a PE of 10 but the preference shares yield 5% then something has to give. The shares might rise but equally the prefs may fall, especially if trading at a premium and the shareholders believe them no longer to be useful capital!

The very fact many of these were called irredeemable is the point at issue.

On a pure laymanny interpretation, not many would read irredeemable as meaning can be bought back in some fancy capital reconstruction that could be forced through as determined by ordinary shareholders.

Laymen should get more understanding then! Why shouldn't the shareholders do what is in their interest? I have been selling down my sub and hybrid bank securities and buying the equity and have posted to that effect. I as a shareholder will very much vote in favour of this sort of action if it benefits me as a shareholder.

If they are oblivious to the risk side of the equation, then why have these laymen not been buying equity? If they haven't perhaps this can be a wake-up call and push them in that direction.

I see on another forum, someone has pointed out that there is a section in some prospectuses that the preference shareholders must receive the greater of par or the average of 6 months price pre the buyback. Hence, the cynic would assume the carefully worded statement by Aviva has been out out to drive the price down for the next 6 months before they act.

Fair play in the big bad world of financial capitalism, but probably most of the losers are retirees/pensioners who bought for the steady irredeemable income and no other reason.

The losers will be losers only because the market set a premium on their securities. [Yes, in part justified by the coupons attaching due to the time they were issued -- that's a different discussion.] That is not the fault of the issuers.

GS

[GoSeigen]

Redeem or reorganisation ?

That may be a point to a lawyer.

But to a layman retail investor it is just playing with legal technicalities.

Rubbish. It's either legal or illegal. If it's allowed by statute then it's legal. Laymen retail investors should go and read the law.

The reorganisation achieves the end goal of buying back shares at par which is what a redemption would have done.

Irredeemable to a layperson means just that.

It does not mean, watch out though, if we call it a capital reorganisation we can achieve something akin to redemption without legally calling it that !

I wasn't commenting on the effect. The effect -- receipt by some investors of less than they assumed their securities were worth is the same, I agree. The blame, though, does not lie with the issuer for doing something underhand or illegal. It lies with the investor who paid too much and didn't know what he was doing.

The regulator has been trying to restrict access to securities like these. How many people here were cheering those moves? Virtually none. Everyone was saying how we are big boys and can look after ourselves. But just look at the whimpering going on now...


GS

[GoSeigen]

It is a capital reorganisation. Can you point to where they have proposed a redemption?

Current holders will end up with cash where they previously had shares. It may not be legally termed a redemption, but the effect is identical. Investors may have assumed the term "irredeemable" had its usual connotations. If the term doesn't exclude the possibility of a capital reorganisation having the same effect, risk warnings would be appropriate.

I guess that's a "no" then. So let's stop these uninformed comments about no right to redeem and talk about what might actually happen.

GS

[thebarns]

Goseigen,

All valid points properly made in the dog eat dog world.

However none of them deal with the interpretation of irredeemable point. Ok, I see you have answered it in the next post, so fair enough. Although I do not agree that an ordinary layman investor is supposed to be an expert in the nuances of corporate law, that is patent nonsense. A retail investor should not expect to read the word irredeemable, then years later find out that actually, corporate law under certain circumstances, allows something pretty similar to happen, even if it appears not to be legally called a redemption.

This point was lost on virtually all and not considered a risk given the steady and prolonged increase in all preference share prices.

The price collapse is sudden and solely related to someone who decided to go after the preference debt previously called irredeemable. I suspect virtually no one has ever considered or flagged irredeemable meaning something else other than irredeemable as a risk over the years. It is as if the word is a downright lie.

About the only preference share holding up is RUSP, the one with the company investing in Russian properties. Apparently in that instance, irredeemable does mean irredeemable and no fancy capital reconstruction wording can get round it.

The irony of preference shares in a company investing in Russian property holding up while all else tumble as the City of London lawyers and bankers attempt to make hay against retail investors, for what are in some cases, not huge amounts of debt to the individual companies involved.

[swill453]

If it's all so obvious that there was a risk of Aviva being able to give us back £1 for each share on a whim, why did lots of cleverer people than me think they were worth £1.70+ up until the day before yesterday?

Scott.

[GoSeigen]

Goseigen,

All valid points properly made in the dog eat dog world.

However none of them deal with the interpretation of irredeemable point. Ok, I see you have answered it in the next post, so fair enough. Although I do not agree that an ordinary layman investor is supposed to be an expert in the nuances of corporate law, that is patent nonsense. A retail investor should not expect to read the word irredeemable, then years later find out that actually, corporate law under certain circumstances, allows something pretty similar to happen, even if it appears not to be legally called a redemption.

This point was lost on virtually all and not considered a risk given the steady and prolonged increase in all preference share prices.

The price collapse is sudden and solely related to someone who decided to go after the preference debt previously called irredeemable. I suspect virtually no one has ever considered or flagged irredeemable meaning something else other than irredeemable as a risk over the years. It is as if the word is a downright lie.

About the only preference share holding up is RUSP, the one with the company investing in Russian properties. Apparently in that instance, irredeemable does mean irredeemable and no fancy capital reconstruction wording can get round it.

The irony of preference shares in a company investing in Russian property holding up while all else tumble as the City of London lawyers and bankers attempt to make hay against retail investors, for what are in some cases, not huge amounts of debt to the individual companies involved.

thebarns,

I can sense you are feeling pain, hence lashing out. Fair enough. Been there, done that. I'm perhaps premature in urging introspection. But maybe come back in a couple of weeks and reread the thread? Simple point: as investors we cannot afford to blame others for our misfortunes. We are brilliant when making a profit but victims whan losing. That is a faulty psychology which means that the same victims crop up with their complaints over and over again.

Selling an asset when it is performing well is always difficult. Indeed, that's a good sign that it's the right thing to do. When you're selling you don't know quite why you are but it feels odd and so it probably is correct. That is exactly how I felt in recent months reducing my exposure to this stuff: "Why the hell am I doing this? There doesn't seem to be much wrong except the prices are rather high." When values are toppy there is always danger. You do not need to find the exact cause. In fact if it were obvious the price would not have been where it was. Mostly idiots buy near the top, and these things are usually only obvious to experts. The aim of a good investor is to move out of the layer of idiots -- but not to become an expert with exceptional knowledge and forsight: rather to inhabit a layer above the idiots whee you have that canny ability to sell when the price is high despite one's own misgivings.

So I agree, the exact manner that over-valuation was exposed was not widely known in advance -- but it didn't need to be. We must use these occasions to self-learn and hone our ability to sell when the market is genial (yesterday).

GS

[swill453]

Is it clear whether this can go through on a vote by ordinary shareholders plus pref shareholders, or just by pref shareholders?

If the latter then why would we? Be like turkeys voting for christmas.

Unless there was some incentive offered - which would have to fairly close to the price they were at before this started, since by definition a perpetual payment of 8+ pence per pound is worth something in the order of £1.70.

Scott.

[AleisterCrowley]

thebarns,

Simple point: as investors we cannot afford to blame others for our misfortunes.
I think we can if they've been dishonest/duplicitous. I don't 'mind' losing on a share if risks are known (failure to win contact, competition, legal decisons, exploding oil rig etc etc)
What hacks me off is losing because of dodgy accounting, dishonesty, sharp practice.


Selling an asset when it is performing well is always difficult. Indeed, that's a good sign that it's the right thing to do. When you're selling you don't know quite why you are but it feels odd and so it probably is correct. Except when it isnt That is exactly how I felt in recent months reducing my exposure to this stuff: "Why the hell am I doing this? There doesn't seem to be much wrong except the prices are rather high." When values are toppy there is always danger. You do not need to find the exact cause. In fact if it were obvious the price would not have been where it was. Mostly idiots buy near the top, and these things are usually only obvious to experts. The aim of a good investor is to move out of the layer of idiots -- but not to become an expert with exceptional knowledge and forsight: rather to inhabit a layer above the idiots whee you have that canny ability to sell when the price is high despite one's own misgivings.

So I agree, the exact manner that over-valuation was exposed was not widely known in advance -- but it didn't need to be. Were they overvalued at the market price? We must use these occasions to self-learn and hone our ability to sell when the market is genial (yesterday).
Crystal ball time then ?

GS

[thebarns]

Scott,

It appears that a reconstruction may allow ordinary shareholders to participate, but only going on what I have picked up on various threads - I am merely a laymanny retail investor trying to provide a retirement income !

Goseigen,

Yes, I am indeed frustrated and lashing out.

I can take the likes of Carillion collapsing and had only myself to blame for that.

Irredeemable preference shares appeared on the face of it to be something completely different - indeed I may be very wrong.

I fully understood the risks of dealing in ordinary shares.

I did not fully understand irredeemable could in certain circumstances be to all intents and purposes, be ignored - that was my biggest mistake and learning point !

[GoSeigen]

Is it clear whether this can go through on a vote by ordinary shareholders plus pref shareholders, or just by pref shareholders?

If the latter then why would we? Be like turkeys voting for christmas.

Scott.

I'm speaking more from instinct than study here, but it must be the former. The shareholders could after all achieve the same by voting to wind up the company and starting a new one with the same assets but a different capital structure. It would be a more expensive process, but that's the point of company law relating to capital restructuring: to make it more efficient so that the capital can be made to work better.

I love how everyone is a happy capitalist when getting richer but attacks the very foundations of corporate law when they make an unanticipated loss. These investors would accuse a policeman of being sneaky and duplicitous for booking them, because although the statutory smallprint states drinking and driving are against the law they had not explicitly agreed with the policeman that they could be breathalised at that particular time and place!

GS

[GreenArrow]

Hi, this topic was covered on FT Alphaville Markets Live chat today. Including comments from Peel Hunt

ftalphaville dot ft dot com

rgds