Aviva and General Accident preference shares

[Alaric]

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

Equity Income funds being a case in point.

You don't need much imagination to see a market manipulating conspiracy. It's plausible that Aviva would like to pay off these shares. They could just buy them in the market or make a tender offer. But why not cast doubt on the valuations by advancing an interpretation never previously used, certainly by Aviva, that they have the power to repay them at par? This crashes the price making a market priced buy back that much cheaper.

[ChloesDad]

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


GS

Pardon ? The basis of Aviva's despicable action is doubtless the Lloyds Supreme Court ruling in 2016 against its own bondholders. And yes, they did know the timing of their redemption. It certainly didn't help them..

"Key Facts

The appellants were subsidiaries of Lloyds Banking Group and Issuers of £8.3 billion of ECNs issued in December 2009. As at the date of the judgment, some £3.3 billion of the ECNs remained outstanding, with varying maturity dates from 2019 to 2032. Interest was payable on the outstanding ECNs at an average rate of 10.33% (equating to approximately £940,000 per day).

[ChloesDad]

Aviva is an innocent party here...
GS

My goodness me. Where on earth are you coming from ? I certainly won't lower my level to be abusive to you, however what exactly is your motive in defending Aviva'a actions ? Are you acting at their behest ?

I was NOT one of the investors who bought at recent levels - therefore I don't fall into your category of being so stupid (?) as to buy at inflated levels. Indeed I bought a large tranche BELOW par nine years ago, so I would lose a capital gain at worst. However for you to defend Aviva dropping their bombshell, causing chaos in the wider preferential share market and saying they are not to blame, beggars belief.

Aviva allow their pref shares to be traded on the LSE in what I assume is supposed to be a "fair" marketplace. The title of these prefs is 'Irredeemable". In any JUST forum, irredeemable means just that. Please do not try to defend the indefensible.

[Wizard]

...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.

My bold.

Is this not in the eye of the holder, rather than for you to determine GS? I bought a number of perpetual, irredeemable preference shares for the very reason that they are perpetual because I wanted to receive the income until I no longer need it.

More generally, I accept that it would be hard for Aviva to warn that you may lose capital in the event of a capital reorganisation as presumably the preference shares were issued at par, Aviva could not be expected to anticipate where they would trade in the future. However, as they were designated irredeemable, perpetual instruments I would think it reasonable (if such a capital reorganisation was deemed a way to return capital to investors at any point in time) to warn that the anticipated perpetual income stream could be lost at any time, that is after all what was being sold to investors.

I would ask a simple question, if Aviva wanted the option to stop paying the fixed dividend on these preference shares at a time of their choosing why not simply make them redeemable with a call option at Aviva's discretion?

To me it is clear that the language with regard to preference over ordinary shareholders was about demonstrating the capital hierachy in the event the company failed. Aviva are now trying to pervert the original purpose of this language to save themselves the cost of what have now become expensive instruments.

[johnhemming]

Pardon ? The basis of Aviva's despicable action is doubtless the Lloyds Supreme Court ruling in 2016 against its own bondholders. And yes, they did know the timing of their redemption. It certainly didn't help them..

Although I think you are right that the Lloyds decision has influenced Aviva I see quite a difference between that and this case. In the case of Lloyds it did say in the prospectus that if the Bonds did not qualify as capital that they could be redeemed. The argument in the courts was whether or not they counted as capital.

The Aviva case is quite different.

[ChloesDad]

Aviva is an innocent party here.
GS

Still rolling on the floor laughing about this comment above.

Some more words of wisdom from another forum (hope this is ok to re-quote) from Mark T:

"It would be very naive to be charitable towards Aviva over this. They, and their advisers, knew very well the massive shock this would cause and they did it for a reason. They also know they have let the market believe, and price their preference shares, otherwise for many years."

And here's the dictionary definition of irredeemable for anyone interested..

"
Definition of irredeemable
1 : not redeemable: such as
a : not terminable by payment of the principal - irredeemable bond
b : inconvertible a

2 : being beyond remedy : hopeless irredeemable mistakes
"

[paulmiller]

The more I think about this situation the more it just looks like Market Manipulation by Aviva. And if Aviva have actually been trading in their own Preference shares at any time in recent days or weeks then that would also look a lot like a case of Insider Dealing.

Aviva executives were the only people in the world who knew that this “cancellation at par” was ever a possibility for their Preference shares, except in the extreme case of liquidation or bankruptcy by Aviva. Every private investor and institution and financial journalist in the UK has always believed that “Irredeemable” and “Perpetual” meant just that, exactly as it says in the Oxford English dictionary. As Mark said a few days ago, he has not spoken to any finance professionals who ever thought that this was possible.

There have been numerous articles in the personal finance pages of national newspapers such as The Telegraph and Investor’s Chronicle (Financial Times) in recent years about these Preference shares when they were trading at well above par. They were recommended as a good and reliable source of income for investors. I remember reading about them when they were about £1.25 in price and how they were a good and reliable source of a 7% permanent and perpetual income.

Why on earth would a respected UK national newspaper like The Telegraph or FT ask one of its financial journalists to write about and recommend a Preference share at well above par if it was likely to be called at par the next day for a guaranteed large loss of capital? It does not make any sense. It only makes any sense if there has been a case of Market Manipulation.

The FCA and other regulators need to get involved with Aviva very quickly and see what they are actually intending to do. Are Aviva intending to offer a fair price for these shares? GACA were trading at 180 before Aviva dropped their bombshell on the market, and so that is a fair price. Are they intending to offer par? Or are they intending to offer some price in between par and 180? I have already written to my MP, the FCA, Aviva, and various press and media about this, and every other concerned UK private investor who still cares about justice should try to do the same as soon as possible.

If at the end of the day Aviva do not want to be fair with their Preference share holders then hopefully this can be legally challenged. I am not aware if such a case as this has ever been challenged in an English court. I do not have the means by myself alone but I would hope that some large institutional holder of the shares, or some coalition or group of investors, or even some “Gina Miller” type figure, will have the determination to take Aviva to the UK Supreme Court over this if necessary. If Aviva are ever allowed to get away with “cancellation at par” then it will be a scandal, and a very dark day for the rights of private investors in this country.

[BobGe]

Whilst I don't think the points GS makes read in the most palatable way, I do feel that they are correct. This extended low interest QE environment has coloured people's thinking. It has distorted investors' views. When in reality they likely bought for yield and in doing so pushed demand for the product such that the s/p has become of (primary?) significance. It has resulted in the issuers seeing the instruments as expensive capital which they can now see a way to dispose of. In a higher (more normal?) interest rate environment considerations would perhaps be somewhat different. Similarly, tacit understandings in times past of what might be appropriate practice have, perhaps, been left behind. One is left to ponder over the way that this was announced. Have there been 'discussions' with regard to other prefs. in the market, will it be welcomed by other issuers or has it come as a surprise (maybe even unwelcome)? Those that perhaps had no thoughts of doing similar may now come under pressure from their own shareholders, or elsewhere. The squealings of retail holders in general as well as those who may see capital losses opens a door for the Fat Cat Authority to rule once more.

Aviva's stance seems quite clear and firmly mentioned at the top, mitigated only slightly in later comment. A change of heart seems unlikely and any return over par needs to be thought of as a gift. It seems that Aviva's management is no longer interested in cricket, preferring to sponsor more aggressive games.

[GoSeigen]

BobGe. you echo precisely my thoughts. If you do so in a more palatable way then i put my hands up: I make no claims about the style or sensitivity of my writing... sorry if it is not to everyone's liking. However I am a longstanding contributor to this board, enjoy the topic, and hopefully have the occasional insight to offer...


GS

[GoSeigen]

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.

I'm not saying that, no. I'm saying dated debt gives you certainty of return of capital, undated debt doesn't and that holders of the former are compensated for the uncertainty with higher coupons. I'm contrasting that orthodoxy with the common view among ”laymen” of late that lack of redemption date is a desirable quality of prefrence shares. This led those investors to misprice the securities they desired (first mistake) and ignore the risks of perpetuals (second mistake) focussing only on the perceived 'steady income for ever", also misunderstanding the meaning of the technical terms perpetual or irredeamable (third mistake).

Agree about your two issues, and this is my view:
-the legal position looks incontrovertable to me (in the general case of preference shares without entrenchment provisions as being discussed): it was always anticipated by the issuer and the purchaser as a class that the shares, being non-equity share capital, could be retired at the whim of the shareholders providing they retained priority over the residual share class. The 2006 Companies Act and case law both seem clear to me. (but IANAL)
-Regarding marketing, it is being alleged that these have been marketed on the basis of being perpetual. Well, quite apart from the fact that they are perpetual (but do the accusers understand that term of art?) I would like to see evidence that this is an aspect of their marketing in the sense implied: i.e. that the income cannot be terminated. It seems to me this is more the wishful thinking of the investors than fact but happy to consider the evidence...


GS

[scottnsilky]

I have not been able to wade through all 6 pages of this thread, so perhaps ELLA has been mentioned, sorry if I'm repeating a posting, I bought ELLA 4 days ago, and on Friday it plummeted 11%, I can't find any reason, is it just a knee jerk reaction to the other Prefs mentioned?

TIA

dp

[ChloesDad]

Despite the pontificating and pious hand-wringing from certain posters above, here is a piece from Aviva''s own website about "good governance":

"Good governance
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. "

Trust ?????? Honestly ??? What a load old old cobblers.

[johnhemming]

(but do the accusers understand that term of art?)

Where is there a definition of the term of art that varies from the general understanding of continuing for ever.

The legal question is one that will be resolved over time.

[Wozzitworthit]

I had decided that I would eventually start to reduce my holdings in my bank irredeemable preference shares, but I thought that there was scope for just a small bit more in their current pricing ( greed). I knew that eventually something would have to be done by the issuers to try and rid themselves of these, but expected something a bit further away in time and more along the lines of re-purchase offers to start with etc etc. Nobody to blame but myself
I thought I would first prune some long dated bonds I hold - so that took priority
That process didn't get very far (maybe luckily in a way) as at the end of last week, following Aviva's news, I sold all of my insurance prefs (fear), at a capital loss of about 12%.. If they hadn't used the word ing "at par" things might have been a bit different perhaps, but that's all water under the bridge now
I am now debating whether to hold on to my bank prefs or just sell the lot at an overall gain of about 14% on last Friday's closing prices.
However, if prices contnue to fall on Monday do I continue or abort and wait for either prices to creep up again or an eventual sensible offer when the banks eventually get round to eliminating these instruments
Although I have every sympathy for others and would love to join in on any class (or other) action, I feel that it might not might not be beneficial in the long run - or am I being a coward.
Over the weekend I have convinced myself to sell, to hold and then to sell - it might be to hold again later tonight !!
Not expecting any advice - I'm sure I'm not the only one in this postion - just thought I'd put my thoughts down and post them , as it does help to clarify things in one's own mind

Woz

[GoSeigen]

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.

Disagreement is good. I'm just putting the other side as there are many many posts slating Aviva.

The move is unforseen, yes. It certainly is not unprecedented. There are multiple precedents in case law where the capital reduction has been upheld against the protest of holders. See the article I linked to earlier.

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.

As you said, unforeseen. Doesn't mean the market was right.

In normal circumstances, "extremely remote" might be true. The extremely remote event has become not remote, as remote things are wont to do, because the circumstances are no longer normal: the yield curve has fallen dramatically.

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.

If you depend on the market for your news and financial advice you are setting yourself up for a fall. Sorry. History is not littered but infested with examples where the market missed something.

What you are saying here is: If the price of an asset is high, this means the market foresees no risks to the asset, therefore the asset is safe and the high price is justified.

Wrong! This is pretty much the opposite of the reality, which is that when the market price gets high, people adopt the above arguments to justify the stupid prices they are paying. They thereby ignore the fact that any risk may exist and compound the hidden risk with the high valuation. Then of course blame someone else when it goes wrong.

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.

Agreed, but the market was wrong. Lightning does not strike in the same place twice. They are looking for the same risks to show up and ignoring all the other risks.

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.

This is an abusive behaviour on the part of investors. It is they who have done something wrong; they wish to hide from their insecurity and shame and to do so accuse a victim of what they call shameful behaviour, which in fact is nothing to be ashamed of at all. [If anyone doesn't recognise what I'm saying here, it would help to read about emotional and verbal abuse and neuroses.]

What have Aviva done wrong? It is legal. It is contractual. They are the first to announce this idea but so what? Someone had to be first to announce a spherical world but did they deserve to die? What investors don't like is that it is not the way they want Aviva to behave. They want Aviva to kindly write to them first, point out their intentions, give them a chance to sell out to another sucker, and then kindly compensate that sucker for his stupidity to show they are a selfless altruistic business.

I call BS.

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 !!!!!!

It was already priced in by ord shareholders who are smarter and more astute than prefs holders.


GS

[GoSeigen]

Aviva is an innocent party here...
GS

Aviva allow their pref shares to be traded on the LSE in what I assume is supposed to be a "fair" marketplace. The title of these prefs is 'Irredeemable". In any JUST forum, irredeemable means just that. Please do not try to defend the indefensible.

1. So precisely what do you say they have done wrong and what should they have done?
2. What do you think irredeemable means? Preferably quote from case law or statute to illustrate. Are ordinary shares irredeemable? Do the ord shareholders as a class have the right to demand ord share capital be returned?

TIA

GS

[Alaric]

1. So precisely what do you say they have done wrong and what should they have done?

What they have done wrong is to attempt to interpret some small print in a manner financially rewarding to themselves. In particular it's an attempt to redefine words which have a common meaning and understanding. What they should have done was announce their intention to pay off the preference shareholders but do it at a price which reflected the income entitlements that those shareholders were giving up.

If this risk of unilateral repayment exists, the market in preference shares ceases to exist in its present form. What would happen is that whenever an issue goes above par, the issuer takes steps to cancel it and reissue at a lower coupon.

[johnhemming]

1. So precisely what do you say they have done wrong and what should they have done?

Imply that they might forcibly redeem an investment marketed as perpetual in the company at a price below the market price, just because they think they have a legal argument to do this. What they should do is offer a tender in the market at a premium. (to 180)

[GoSeigen]

...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.

My bold.

Is this not in the eye of the holder, rather than for you to determine GS? I bought a number of perpetual, irredeemable preference shares for the very reason that they are perpetual because I wanted to receive the income until I no longer need it.

I'm not determining it. I'm representing it as textbook investment orthodoxy. Whether an individual accepts it is up to them, I agree, but you could hardly blame a third party from using this fact to make judgements about the reliability of the investor's valuation of a security!

More generally, I accept that it would be hard for Aviva to warn that you may lose capital in the event of a capital reorganisation as presumably the preference shares were issued at par, Aviva could not be expected to anticipate where they would trade in the future. However, as they were designated irredeemable, perpetual instruments I would think it reasonable (if such a capital reorganisation was deemed a way to return capital to investors at any point in time) to warn that the anticipated perpetual income stream could be lost at any time, that is after all what was being sold to investors.

Why do you believe the company should repeat what is already written in law? Did the investor not know it was in law? Were they obliged to educate him?

I would ask a simple question, if Aviva wanted the option to stop paying the fixed dividend on these preference shares at a time of their choosing why not simply make them redeemable with a call option at Aviva's discretion?

Simple answer. (Surmising) They didn't want to then but do now. Or less likely they did want to but couldn't offer an acceptable coupon for investors.Or maybe it was a requirement for the capital they had to raise.

To me it is clear that the language with regard to preference over ordinary shareholders was about demonstrating the capital hierachy in the event the company failed. Aviva are now trying to pervert the original purpose of this language to save themselves the cost of what have now become expensive instruments.

Which language exactly, Wizard?

Winding up is not just about company failure. It could involve the end of the useful life of the company or of its principals. It could be about shareholders having better uses for share capital than the company. No reasonably infomed investor can be ignorant of the fact that members are entitled to return of their capital in the business. Clearly they are obliged to return the pref holders' capital first. Aviva are proposing to vote to return the pref share capital. Seems perfectly above board to me.

So how do you say it should work, and how would you rewrite the Companies Act 2006?


GS

[Romarin99]

I have no holdings in Aviva, but I really think this is does not show Aviva in a good light.
I know that this is very much down to a legal interpretation of the attributes of these ‘irredeemable’ preferences shares, and Aviva may well be within their rights. But why use a descriptive term which clearly can be misconstrued ?
Why have they not use the easily understandable term ‘redeemable’, potential investors would then immediately be aware that these instruments can be redeemed under terms laid out within the prospectus.
I know the law is quite particular on the description of products for sale, and this covered in the trades description act. In essence you cannot deliberately mislead. The legal argument being put forward is that it is a ‘return of capital’, and not ‘redemption’. In real life language terms this makes no sense.
There have been several posters who have quoted dictionary definitions of ‘redeemable’ and irredeemable’, and the English language is unambiguous as to what these terms mean.
I know it can be difficult to draft complex legal documents, but a ‘headline’ description should never be misleading.
If it turns out that irredeemable instruments can in fact be redeemed, outside of winding up. It begs the question. How can you makes sense of any prospectus ?