Aviva and General Accident preference shares

[GoSeigen]

ChloesDad

The following is what I have written about Aviva's ethics. How did you intend to make me feel when you told me that the whole world and his wife disagree with me?

viewtopic.php?p=124767#p124767



GS
P.S. Please note: the "allegations" by preference shareholders that I referred to in this letter have since turned out to be completely false.
viewtopic.php?f=52&t=10757

[Alaric]

I agree about the yield. It [the option value] was reflected in the coupon at issue.

I think you have to provide evidence to support that statement and I don't mean hair splitting over interpretations of the various Companies Acts. Rather I mean something in relatively plain English not capable of being misinterpreted. If repayment is subject to a vote of the Preference Shareholders or all shareholders provided that Prefs have a blocking majority, that doesn't count.

Where I am coming from is that the intent of both parties was that the borrowing/fund raising was in perpetuity. If Aviva now have a valid claim that they can repay at a discount to market value against the wishes of the holders of these securities that's only come about either because of deficiencies in the original wording, subsequent dilution of the voting rights of Preference Shareholders or unintended consequences of more recent Companies Acts.

[GoSeigen]

I agree about the yield. It [the option value] was reflected in the coupon at issue.

I think you have to provide evidence to support that statement and I don't mean hair splitting over interpretations of the various Companies Acts.

Very easy -- it's pretty self-evident. Both shareholders and directors of the Company were involved in negotiating the terms. Shareholders approved the terms when they paid consideration for the prefs. They accepted a high enough coupon to compensate them for their risks and pursuade them to part with their cash rather than take other safer investments. If they could get a safer investment for the same coupon they'd have done that: clearly they were not stupid or naive.

[EDIT: Addressing later points]
You yourself argued one or two posts ago that even irredeemables are not perpetual. If the shareholders had got their money back at par the day after their issue they would have been perfectly satisfied and not kicked up the slightest fuss (apart maybe from a little wasted time).

GS

[johnhemming]

They accepted a high enough coupon to compensate them for their risks and pursuade them to part with their cash rather than take other safer investments. If they could get a safer investment for the same coupon they'd have done that: clearly they were not stupid or naive.

Here is a link to the Bank of England official bank rate history
http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp

Tue, 22 Sep 1992 8.8750
Tue, 05 May 1992 9.8750

The GA 8 7/8 were issued on September 2nd.

The bank rate then was 9 7/8.

Clearly the assessment was that these were more secure investments than the Bank of England as the Bank of England's rate was higher.

[Alaric]

Very easy -- it's pretty self-evident. Both shareholders and directors of the Company were involved in negotiating the terms. Shareholders approved the terms when they paid consideration for the prefs.

I think it goes beyond that. The original offer wasn't a "take it or leave it" offer as you seem to imply. Rather it was a placing, where the potential buyers and those underwriting the offer would have been consulted as to what terms and conditions they wanted to see before they would agree the coupon.

Borrower options to repay at any time are somewhat rare in the fixed income market as it makes a nonsense of the whole point of the market if you don't have reasonable security and assurance of the future income regardless of the movement in interest rates.

Indeed a contract where the borrower gains (as against a bank loan) if interest rates rise (as the coupon is fixed) and gains if interest rates fall (as they refinance at a lower interest rate) is not one that's likely to be terribly popular with lenders.

[Alaric]

The bank rate then was 9 7/8.

Clearly the assessment was that these were more secure investments than the Bank of England as the Bank of England's rate was higher.

What was the yield on irredeemables or the longest dated Gilt? That was early 1990s when short term interest rates were high, something that could be attributed to the need to pay for German reunification. Wasn't the UK also trying to shadow the DM at the time?

Usually yield curves slope upwards, but was the early 1990s a period of one of the exceptions?

[swill453]

New article in The Times, including:

Mr Wilson, finance chief Thomas Stoddard and their ingenious advisers reckon they can dodge round the semantics to save £38 million in annual interest.

How come? Well, having trawled through the Companies Act, case law and Aviva’s articles of association, they’ve decided irredeemable doesn’t mean the prefs can’t simply be cancelled. And who thought a prospectus should contain all relevant information? In fact, Aviva didn’t even have the decency to announce its plan, squirrelling it away in the results with the warning “we have the ability to cancel preference shares at par value”. The outcry has been entirely predictable.

https://www.thetimes.co.uk/article/the- ... -l2cbvnhgp (this might need a subscription, not sure how to get a link to the "free" version)

Scott.

[johnhemming]

What was the yield on irredeemables or the longest dated Gilt?

I agree with you entirely. There is I think only one person posting on this board who believes that the rate of 8 7/8 was out of kilter with the market in 1992.

This is the best historic chart source I have found(you need to click max)
https://tradingeconomics.com/united-kin ... bond-yield

It gives something around 8-9% in 1992.

[paulmiller]

GS - I know that you like to play "devil's advocate" but are you not reading all of the recent articles by financial journalists in the Times, FT, Guardian? And all of the letters and comments from readers? Did you see that several Institutions had protested and visited the Chairman of Aviva? Did you see the letter from the Treasury Select Committee to the FCA? Every single person who has written and commented on this situation thinks that what Aviva has suggested that they can do is completely wrong and unethical.

So even if Aviva still believed that they could still "get away with it", why on earth would they still want to do it now? The bad publicity for Aviva has lasted for many days now and the damage to their good name and their brand and reputation has already far exceeded the annual interest saving of £38 million on the Preference shares. I don't think that anyone in the UK apart from yourself actually thinks that this is going ahead now. And even if it ever did go ahead, there is a very good chance that it would lose in the courts. A judge would very likely say that the original intention of the Prospectus was that these shares should never be redeemed or cancelled outside of insolvency etc. Again what on earth would be the point? Does Aviva really need all this for £38 million?

The longer this goes on, the longer the bad publicity for Aviva goes on and the damage to their good name. Aviva are most likely now just wondering how to limit all of the damage before it starts to seriously affect their reputation and share price.

Their plan to cancel the Preference shares for £1 is over.

[Alaric]

It gives something around 8-9% in 1992.

I looked up War Loan

https://www.bondvigilantes.com/blog/201 ... 1917-2015/

At a price of 40 the yield would have been around 8.75% and at 50, 7%.

War Loan had been callable since 1952, but with a 3.5% coupon, interest rates would have had to fall quite a bit before the option was "in the money". A similar security with a coupon of 8 or 9% issued at par would have been "in the money" for payback rather earlier in the history of the last 26 years had such an option existed.

[GoSeigen]

GS - I know that you like to play "devil's advocate" but are you not reading all of the recent articles by financial journalists in the Times, FT, Guardian?

I think on these boards we exist in a little echo chamber. I'm not reading any of the media comment, no. They struggle with financial matters at the best of times, but right now it's worse because they are being fed a certain line.


Did you read this post?

viewtopic.php?f=52&t=10757

What are your thoughts on that?


GS
EDIT: P.S. On this Aviva issue, there is no devil's advocate. I had no position at all in Aviva securities when the story broke, and everything I write is from the perspective of a disinterested observer. I just happen to be somewhat familiar with this type of security and the relevant legal niceties. So my views are absolutely 100% my current assessment of the situation.

[Alaric]

I just happen to be somewhat familiar with this type of security and the relevant legal niceties.

Where do you stand on the investment niceties of such securities? For example the point of issuing a fixed interest security is that the interest is fixed. The borrower is protected against an interest rate rise but critically only against an interest rate fall if there is an embedded option to repay. Such options would not have been intended and if they appear to exist it's only by poor drafting or by later interpretations not originally made either by the original lenders, the original borrowers, the wider secondary market or the regulators charged with keeping order or for that matter legislation or capital events taking away the Pref holders veto on such an action.

[OwenSwansea]

Wilson and Stoddard must now consider their positions, they have made a dreadful error of judgement.

[GoSeigen]

People are treating this "call option" discussion much too simplisticly. It was never a vanilla call option. Here are at least some of the wrinkles:

-The issuer never had any automatic right to call. That's how redemption works, but this is a different beast.
-Likewise the holders never had any automatic right to put.
-As a reduction of the capital of the company it was only available if 75% of all members were in favour. For a long time any capital reduction was a co-operative endeavour.
-The preference shares were a form of regulatory capital, so if they were repaid, a new regulatory capital would have to replace them, so what was the point?
-The company's funding costs have fallen recently. Previously it might have looked more prudent to hang on to them.
-There was not always a large excess of capital. The preference shares are there to protect the company's lenders and the court would not allow a capital reduction if there was not enough to support the borrowing.

These are just the factors I can think of off the top of my head. Very strong contrast with a vanilla call where the board can simply decide one day to exercise the call.

Basically the ability to actually pull off a capital reduction has evolved gradually over the past few years, as each of the above "blocking points" has dropped away. Investors became so used to the idea that capital reduction was practically not possible that eventually it did not even occur to them that theoretically it was allowed. So actually pricing the prefs as perpetual made perfect sense early on and only recently has the "perpetual nature disappeared."

The "call" was not always there. It's subtle and something few appreciate I fear.


GS

[Alaric]

-As a reduction of the capital of the company it was only available if 75% of all members were in favour. For a long time any capital reduction was a co-operative endeavour.

But why a single vote? As by any stretch of the imagination paying £ 100 to discharge a liability of £ 8 for ever is not in the interests of the Pref holders even if the Ordinary holders might benefit from marginally higher profits.

The company's funding costs have fallen recently.

Apparently their credit status as trustworthy borrowers has recently been marked down. Not surprising really.

[stockton]

I just happen to be somewhat familiar with this type of security and the relevant legal niceties. So my views are absolutely 100% my current assessment of the situation.

Given that you appear to understand Avivas position, could you perhaps draft your version of the statement that Aviva should put out to persuade others of the correctness of their position.

At the moment there appears to be a straightforward dispute as to whether a return of the total nominal value of a preference share as capital can be achieved without "redeeming" that share.

[beeswax]

I have followed this thread with interest pardon the pun and seems like the old LLOYS Prefs all over again..

People complaining when they may be losing money and then getting the financial press and MP's involved and the FCA who have already said its nowt to do with them. ie sour grapes and they want 8% in perpetuity to be as good and risk free as having your money in a bank account that pays just 0.1% if you are lucky. And so why don't tens of millions of pensioners forget the bank and building society and transfer most of their cash to a Pref in for example Aviva when even 3% would be more than acceptable? Because they have little knowledge of them and when the term 'share' is used, they run for the hills etc.

GS is absolutely correct to say that Aviva have no control over this share price once it has been offered and accepted by the buyer and my simple take is when they say it's irredeemable it could mean that once you have bought it, you cannot sell it 'back' to the issuer only to those who trade in them ie the market and put the other side of the coin that IF the market price was 'below' par and the company offered to buy it back at par, you would all jump at the chance. In fact get killed in the rush. Its perverse to expect 8% when rates have been so low for a decade now and no public company should allow that to go on indefinitely as been pointed out that is not fair on the ord shareholders ie the actual owners of the company. Its a dereliction of duty for Aviva not to address it and tell the market.

I think I read as part of the Lloyds Judgement it was suggested that these are complex instruments and private investors should seek professional advice before buying them.

GS has made his case based on company law while some are calling him names because they don't have the same knowledge as him and the plain fact is that the company sold these at one pound and are willing to buy them back at one pound despite all the owners being quids in over the years from interest payments. In fact a bloody good deal if you ask me...

I do have some of Aviva ords in case anyone asks but that should not prevent anyone from contributing to this thread imo at least..

I suspect that some offer above par will be made and it's just plain ridiculous to expect any Director to have to resign when their prime duty is to look after the needs of the shareholders first..The fact that big Institutions are involved with both sets of equity should enable a fair compromise to be reached possibly midrange from par to the price when it was announced?

They cannot allow it to continue as it is...

[Alaric]

when their prime duty is to look after the needs of the shareholders first.

Pref holders are shareholders as well. It remains that Aviva are proposing a compulsory purchase for 100 of an income stream of £ 8 plus per year. That's a good deal for Aviva and a bad deal for the Pref holders.

[ChloesDad]

This story is reverberating around the world. Another great article highlighting the broken trust in Aviva..

https://www.interest.co.nz/bonds/92718/ ... y-them-out

[Alaric]

Another great article highlighting the broken trust in Aviva..

The Australian and New Zealand financial systems still have strong resemblances to the UK's.

Future issues, particularly in stressful times, may need to pay higher interest payments to satisfy investors that perceived trickery or legal contortions will not be used to deny them future payments when business conditions improve.