Aviva and General Accident preference shares

[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 !

You're not listening. What you did not fully understand is the fundamental nature of the asset you were buying. It was equity, not debt. Just like ordinary shares they were always repayable at the whim of the company owners. That is in statute, not contract. Preference shares almost always have limited voting rights but have preferential right of repayment -- it's right there in the name!

Here's a quote from the first thing Google came up with when I searched:

On one side, they carry a preferential right over the ordinary shares to receive dividend at a fixed rate and on the other, they carry an equity risk of not being secured, except to the preferential right of repayment in case of winding-up of the company.

This is a expressed here as a right not a risk!! The market pricing has turned everyone's logic upside down.

It reminds me of the Lloyds ECN thing, where holders repeatedly referred to being called as unattractive, where previously that had been seen as an extremely positive feature -- all depends on the price said holder paid for his bond!

GS

[thebarns]

I agree with chunks of what you say Goseigen, but not all.

It is not at all akin to drinking and driving.

I do not drink and drive and never have. The law of that is very clear. Maybe your example would be more appropriate to speeding in a 20mph zone !

I can be a happy and unhappy capitalist when taking profits and losses on Otdinary shares as I know the broad rules well enough.

Turning irredeemable into redeeemable, or a reconstruction akin to that, smacks of changing the law on that day with retrospective consequences.

I am sure you and others did not get out of rising preference share prices because you thought the definition of redeemable would be shown to be flimsy. You quite rightly got out of preference shares for other reasons, perceiving valuations to be high on earnings and yields available from other investments.

The reason these have tanked is solely down to the attack on irredeemable and associated fallout across other preference shares.

Ps I bought irredeemable preference shares not redeemable preference shares !!!!

Perhaps Google can provide you with a definition of redeemable ? And I hope they have updated it for events of yesterday and today.
It is not because of anything else.

Your bones may have told you an unknown known black swan was about to surface, but that was pure chance or investor skill as some may think.

An extra special present for your mother this Sunday to lessen her pain at her preference share paper losses ?

[PeterGray]

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.

Worth pointing out that this was a mistake, and has been corrected, for example at fixedincominvestments - the clause pointed to did not relate to the current preference shares that Avivia are talking about "reorganising".

Peter

[swill453]

Worth following the thread on fixedincomeinvestments as posted earlier. Mark Taber (Oldboyreturns on Motley Fool) has posted:

Aviva’s ‘reduction in capital’ bombshell has caused a disorderly market not just in their own preference shares. So there is a lot at stake here for a lot of people. I cannot find anyone who had heard a clue from Aviva that they thought they could do this until yesterday. Leaving the legal position (which will be looked at) aside Aviva’s behaviour here is very aggressive and investor unfriendly and there should be a concerted pushback by all cohorts of investors to encourage them to moderate their behaviour.

I am looking at which way(s) to go with this but, if you are interested, let me know and encourage others (other forums, Twitter etc.) to do so as well. I am doing a bit of Tweeting on the subject:

https://twitter.com/MarkTaber_FII

and got it covered in today’s Times –

https://www.thetimes.co.uk/article/smal ... -jgmtzxpl3

https://www.fixedincomeinvestments.co.u ... #post-1877

Scott.

[Kenno]

GoSeigen - So on the basis that Prefs were always dangerous, do you have any views on BOI?

Thanks

Kenno

[johnhemming]

I think what Aviva are trying to do is to get court approval for a reduction in capital which is then agreed by shareholders. It would be helpful if someone could give a link to the prospectus so I can look at that.

This to me is something completely different to what Lloyds did with the ECNs. (and it does potentially have a carry through).

[Alaric]

This to me is something completely different to what Lloyds did with the ECNs. (and it does potentially have a carry through).

It rather depends on what price they offer for buying out the Prefs. If they try to force it through at par, it's exactly the same behaviour as Lloyds, essentially reneging on an income promise without compensation.

For something that's essentially a retail offering, it's setting a bad precedent in overturning many years of market practice, namely that redemption and repayment options are clearly signalled so that market makers can set a fair price.

[AleisterCrowley]

Would they/could they;
-use the announcement to drive prices down and upset the market, regardless of chance of actually redeeming at par
-buy back enough to give them 75% of the pref share class vote (possibly with help from friendly institutional investors)
-vote to redeem the remaining 25% at par
??

[swill453]

Would they/could they;
-use the announcement to drive prices down and upset the market, regardless of chance of actually redeeming at par
-buy back enough to give them 75% of the pref share class vote (possibly with help from friendly institutional investors)
-vote to redeem the remaining 25% at par
??

If that's the only way they could do it, why would anyone sell? After all, if they're not "redeemed" (I know, wrong word) then they're still going to pay out forever...

eg AV.A has yield of over 7% at current price

They must be more confident that they can make this happen other than by buying the shares.

Scott.

[swill453]

Very sneaky. Mark Taber has captured the fact that Aviva's web site 2 days ago listed the prefs as "perpetual", but now it doesn't.

https://twitter.com/MarkTaber_FII/statu ... 2529411072

Scott.

[AleisterCrowley]

If that's the only way they could do it, why would anyone sell?
Because they fear AV will be able to redeem at par, and don't want to take the risk. Clearly that happened yesterday, driving the price down

[GoSeigen]

GoSeigen - So on the basis that Prefs were always dangerous, do you have any views on BOI?

Kenno, "always dangerous" is not a particularly nuanced expression, but with that reservation...

BOI of course is debt and not equity, so its holders' rights are that much stronger than for preference shares. Also, my gut feeling is that debt was attacked a few years ago and BOI survived so may be okay from that point of view. On the other hand, if you were a shareholder in a business that had had a near-death experience, was now recovering but had eye-watering coupons on its debt, would you not expect the directors to use whatever means possible to bring down the cost of debt servicing? The business's capitalisation itself looks secure to me (in fact I am buying the shares) and that is a plus for the bonds. In the end it comes down to valuation. BOI is already trading far above par. In return you get around 5.8% yield. That is barely 3% more than a 10-year US treasury. For me, that means I've been reducing BOI and buying treasuries. When pain comes for BOI I don't know what form it will take or when. But I will be unfazed hopefully.

It's important for an investor, when valuations are high and risk premia low, to reduce their exposure to risk to a level where significant falls will not be painful. Think about the asset falling 30%. Will you be upset? I have a holding of Carpetright shares. They have fallen a lot more than 30%. I'm not particularly bothered: that's because I think they are cheap and I am building my holding. Lower prices are good if the share is already cheap.

Sorry if that's a bit hand-waving but it's how I play it.

GS

[tractorian]

I wonder how many other customers Aviva lost today.

[GoSeigen]

I am sure you and others did not get out of rising preference share prices because you thought the definition of redeemable would be shown to be flimsy. You quite rightly got out of preference shares for other reasons, perceiving valuations to be high on earnings and yields available from other investments.

This is very true. If valuations were not so high, the possibility of receiving par would not be so painful; furthermore, the risk of this happening would be lower because the issuer might not have access to such cheap alternative capital. IOW, it's not the risk that is the problem but the fact that the valuation amplifies or indeed triggers the risk.


I've already written about "redemption" and irredeemables -- that's a red herring as far as I can see.

Clearly these are early days and the story will evolve; I agree with some that the market may be softened up for a tender with the threat of capital reoganisation; also some companies will be slow to get their ducks in order and others will have capital structures unamenable to this sort of restructuring so there may well be good opportunities in coming days.

I've sold only a few of my mother's NWBD today as there is the possibility of prices firming again.


GS

[GoSeigen]

... so that market makers can set a fair price.

ROFL. What a quaint concept. It is NOT the job of market makers to set a fair price!!!!


GS

[Alaric]

Would they/could they;
-use the announcement to drive prices down and upset the market, regardless of chance of actually redeeming at par
-buy back enough to give them 75% of the pref share class vote (possibly with help from friendly institutional investors)
-vote to redeem the remaining 25% at par

You might hope the FCA would come for them on the grounds of market manipulation. But the FCA like its predecessors has always been strong on worthless disclosures, the effective ban on purchasing US based ETF being only the most recent, rather than much genuine retail investor protection.

[Kenno]

GoSeigen - Many thanks for your detailed answer, it was pretty much what I was thinking. By some miracle I sold my GACA and SAN last month, the only prefs I've got are RUSP which are a slightly different story, although plenty of slightly different risk.

Kenno

(Surerera)

( Had to change my name as I bought a new hard drive and lost my old login details!)

[swill453]

I've already written about "redemption" and irredeemables -- that's a red herring as far as I can see.

What about "perpetual"?

Scott.

[GoSeigen]

GoSeigen - Many thanks for your detailed answer, it was pretty much what I was thinking. By some miracle I sold my GACA and SAN last month, the only prefs I've got are RUSP which are a slightly different story, although plenty of slightly different risk.

Kenno

Not a miracle Kenno, you have as good a nose for investment as anyone I have come across. Hope I wasn't teaching grandma to suck eggs...

Have never held RUSP but IIRC they are not a bank/insurer, maybe have less access to cheap capital and maybe their prefs are already sensibly valued? Do you have any thoughts on WBS? Please reply on the WBS thread on this board.


GS

[gbjbaanb]

From FTAlphaville:
https://ftalphaville.ft.com/marketslive/2018-03-09/

At the Aviva plc level (£200m preference shares at par value) there are many Ordinary shareholders (4bn shares outstanding) who may vote on any management proposal to cancel the preference shares. The outcome of such a vote, however, is less straightforward as this will depend on a) the number of Ordinary and preference shareholders present at the EGM and, 2) a vote exceeding any predetermined threshold (we understand 75%). Also, preference shareholders at Aviva plc have a ‘four votes per share’ weighting vs a ‘one share one vote’ for Ordinary shares. Assuming 100% of Ordinary and Preference shareholders attend, the vote weighting is 83.3% Ordinary shareholders and 16.6% Preference shareholders. The question is how many Ordinary shareholders will decide to turn up and vote. We estimate that 60% of Ordinary shareholders would need to vote in favour of a resolution to cancel the Preference shares for this resolution to pass.