Aviva and General Accident preference shares

[Darwin]

Well have taken the plunge and bought GACA at 120P. Time will tell whether Aviva will play with a straight bat or stick to underarm bowling. GoSeigon I hear you, BUT the UK financial system and it's main proponents were significantly bailed out by the UK taxpayer. Aviva's statement came out of the blue when they could have made things a lot clearer a lot sooner. To me it smacked of arrogance. We expect better.

..

I'd take issue with the claim that Aviva was 'bailed out by the UK taxpayer'. Certainly it was hit by the financial crisis but unlike the banks, it had financial capital sufficient to weather the downturn unaided.

In fact Aviva may well have a point WRT the devaluation of Preference Share capital from its own perspective since I have read that the regulators have deemed this capital will be outwith the solvency test being imposed under Basel II from 2026.

If that is correct then in reality it is the regulation of the industry that is to blame for the plunge in the value of these liabilities.

As for the wording of the prospectus, I think anyone preparing to put serious money into the deal would have got advice about what 4(i) actually meant, i.e. irredeemable by who. At the time of issue the yield was such that it seems unlikely to have needed the incentive that the the deal was everlasting 4(iii) suggests it was only irredeemable by the holder.

[bruncher]

The “common sense” view would be that these Aviva prefs (and many other comparable issues) have been trading for over 25 years, usually well over par, without anyone ever raising the possibility that they could be forcibly repaid at par. It’s not just investors (both institutional and private) who have not been aware of the legal argument Aviva is now making

If it can happen with these shares, why not with ordinary shares? Why not buy those back at their nominal value? There are many shares of 25 pence nominal that are trading at £5, £10, or more.

[gadgetmind]

Does anyone know which Aviva pension funds were/are holders of their prefs? I'd love quite how they'd defend steering their investors into these just to them do the dirty on them!

[Alaric]

In fact Aviva may well have a point WRT the devaluation of Preference Share capital from its own perspective since I have read that the regulators have deemed this capital will be outwith the solvency test being imposed under Basel II from 2026.

Apparently according to the original prospectus, the proceeds of the preference Share issues were to be used to finance expansion rather than solvency.

There are no particular objections to Aviva retiring this capital, but they should be doing it at a fair price as evidenced by the resolution they had passed at the 2017 AGM that authorised them to buy back at up to 105% of the market price. That was a market price that treated the income as perpetual give or take a bit of risk.

I imagine the majority of those who hold these shares do so because of the need for a lifetime income. That's either individuals directly or indirectly through institutions like insurance companies and pension funds needing to cash flow match annuities and pensions in payment. These would need to reinvest any proceeds from Aviva in another investment offering similar cash flows.

[Alaric]

If it can happen with these shares, why not with ordinary shares? Why not buy those back at their nominal value? There are many shares of 25 pence nominal that are trading at £5, £10, or more.

The sticking point is that it needs a shareholder resolution to do so. You also have the problem as to what to do with the orphan assets that would be left behind. But something like this happens when a Company makes a distribution and treats it as a return of capital. A new share class is created and then cancelled for cash or loan notes.

Rolls Royce do this

https://www.rolls-royce.com/investors/s ... are-issues

[GoSeigen]

The “common sense” view would be that these Aviva prefs (and many other comparable issues) have been trading for over 25 years, usually well over par, without anyone ever raising the possibility that they could be forcibly repaid at par. It’s not just investors (both institutional and private) who have not been aware of the legal argument Aviva is now making

If it can happen with these shares, why not with ordinary shares? Why not buy those back at their nominal value? There are many shares of 25 pence nominal that are trading at £5, £10, or more.

Great question bruncher. What's the answer? What sort of resolution would be presented and which Terms would it be based on? Unlike you I've never heard of ordinary shares which could be called at nominal value: in every case I know ordinary shareholders have a claim on the entire residual net assets of the company. But interested in how you think this would work. And when it had been done, who would get the resulting profit??!!!

GS

[stockton]

Rolls Royce do this

https://www.rolls-royce.com/investors/s ... are-issues

and use the term "redemption" in the way that one might expect.

[Alaric]

An interesting observation from a Bond fund manager that Aviva might face higher borrowing costs in future.

http://citywire.co.uk/money/avivas-pref ... e/a1101495

The reason being that risk margins over gilts are subjective and a management that attempts to short change holders using fine print is a greater risk than one with higher standards of conduct.

[PeterGray]

If that is correct then in reality it is the regulation of the industry that is to blame for the plunge in the value of these liabilities.

No! The plunge in value is due to Aviva trying to cancel the prefs cheaply in a way that the market clearly never conceived as remotely likely.

Aviva has various options for retiring the prefs - the normal approach would to buy back through the market or to tender. There might be some grumbles but no one could really complain if their prefs were bought back or retired in some way at the market price. The issue here is that they are proposing to use a reading of the prospectus that I'd be fairly certain was never considered by them when they issued the prefs to buy them back cheaply. It may turn out they have a legal right to do so, and they can get away with it, but if they do the "blame " lies firmly with them, not with the regulators.

Of course, some might suspect is that the only reason they might get away with it is the regulators poor track record in protecting investors. If that turns out to be the case some blame might attach to the regulators, but not in the way you suggest!

Peter

[Kr1ck]

Does anyone know which Aviva pension funds were/are holders of their prefs? I'd love quite how they'd defend steering their investors into these just to them do the dirty on them!

This is a good point because the investment would have be be risk rated. Given what they are now claiming was common knowledge (that they were always redeemable at par) it would be pretty rum to not have classified them as the highest risk instrument. I'll bet anything that if they did have them in their funds they weren't correctly risk rated.

I have an IFA friend so I'll ask him if he knows how to find the underlying investments but if anyone else knows please post.

[ChloesDad]

Talk about putting your size 12's further down your mouth..

https://www.aviva.com/investors/credit- ... reholders/

It seems that they are now trying to set AV pref holders against the GA pref holders. AV pref holders have a 4 to 1 voting right over ords. GA has a 1 to 1 voting right - and Aviva say they would lose the vote. What a total shambles from Aviva. Are these really a top financial institution ?

[Alaric]

GA has a 1 to 1 voting right - and Aviva say they would lose the vote.

What they seem to be saying is that as Aviva took over GA then the ordinary shares in GA are controlled by Aviva . That's saying that the Preference Shareholders in GA effectively lost all their rights when the takeover/merger took place.

If true that's another risk factor.

The FCA do at least seem to have woken up to the can of worms that's been opened in connection with the small but long established market in undated corporate fixed income securities. Initially they dismissed it as nothing to do with them.

[ChloesDad]

More panning for Aviva in this morning's Telegraph. Surely the time must be near to Wilson and Stoddard getting the axe for their gross miscalculation..?

https://www.telegraph.co.uk/investing/s ... investors/

https://www.telegraph.co.uk/investing/s ... ion-widget

[Darwin]

GA has a 1 to 1 voting right - and Aviva say they would lose the vote.

What they seem to be saying is that as Aviva took over GA then the ordinary shares in GA are controlled by Aviva . That's saying that the Preference Shareholders in GA effectively lost all their rights when the takeover/merger took place.

If true that's another risk factor.

The FCA do at least seem to have woken up to the can of worms that's been opened in connection with the small but long established market in undated corporate fixed income securities. Initially they dismissed it as nothing to do with them.

Aviva did not take over General Accident. There was no company called Aviva when GA Life existed. General Accident took over Provident Mutual and then merged with Commercial Union to become CGU; CGU was then taken over by former mutual, Norwich Union and the outfit became briefly known as CGNU. It was renamed 'Aviva' in 2002. The current 'General Accident' brand is just that: a brand owned by Aviva and created in 2013.

I worked for GA in 1992 and was involved in the massive, convoluted and ambitious series of changes that led to the creation of Aviva (five into one). In 2005 my job was outsourced and I took redundancy. One of the biggest tasks was dealing with 'legacy' issues, hangovers from each separate company in the form of old products which had to be maintained and of course issues like these Preference Shares which may have met their original purpose and need to be dealt with like dead wood. In the case of legacy policies with few remaining holders, the maintenance overhead would be assessed against the cost of paying the policy holders to relinquish their undeniable rights. No doubt Aviva will attempt the same thing WRT Preference Shares; why should they not?

Whilst I have much sympathy for people who hold these and depend on the income, if the small print legally states they don't last forever then they don't. It was unfortunate that back in 1992 financial agreements hadn't been put through the 'plain English' campaign in which, to be fair, Aviva played an active role this century - re-writing documents, a huge (and expensive) task. Nevertheless, if trained fund managers have failed to read the small print then they are incompetent.

[AleisterCrowley]

...

Whilst I have much sympathy for people who hold these and depend on the income, if the small print legally states they don't last forever then they don't. It was unfortunate that back in 1992 financial agreements hadn't been put through the 'plain English' campaign in which, to be fair, Aviva played an active role this century - re-writing documents, a huge (and expensive) task. Nevertheless, if trained fund managers have failed to read the small print then they are incompetent.

I don't think the small print states that they 'don't last forever', other than outlining usual methods of redemption (winding up, class vote)
The arguments around precise meaning are ongoing in this another threads

They were(and are) available to retail investors, who based their purchase decision on the financial agreement carried on Aviva's site and elsewhere.

Nevertheless, if trained fund managers have failed to read the small print then they are incompetent
Clearly their interpretation of the contract aligned with the retail investor interpretation, and I'm sure they (fund managers) did read the small print, as they would have to do a risk assessment. This would include managers within the Aviva group, so I would expect any misinterpretation to be pointed out to them

It's pretty clear that the understanding of perpetual/irredeemable prefs was pretty much universal until Aviva top brass decided otherwise. But this is ground that has been covered elsewhere.

[GoSeigen]

The arguments around precise meaning are ongoing in this another threads

I don't think they are actually. There are plenty of people people voicing their opinions. Many have said the legal details don't matter to them, the issue is Aviva's behaviour (OldBoyReturns being a notable example). Never mind the City's vaunted Rule of Law, eh?

There is no actual argument, in which one person makes a point, another differs and it is worked on until it's resolved. Have you seen anyone even once say "Yes, you're right, you have a point?" To discuss properly we need to respect and use precise language; however the starting point for many is that special terms like "redemption" and "capital return" and "winding up" and "call options" are all in effect the same thing and they refuse to give associated words their proper meaning. The most egregious claim is that there is no distinction between a redemption and a capital repayment -- in complete disregard of the law and written terms! How can one argue in those circumstances?

One or two people have made a coherent argument based on the law and Articles: Avidya is one of them. But ultimately is anyone really discussing this in a logical manner? It's mostly sound and fury, signifying nothing...


GS

[paulmiller]

GS - Have you had any reply yet from your recent letter to Aviva?

I understand that you take the Aviva side of the argument, but presumably you also have some sympathy with the rest of us on here and on the other board or you would not have written to Aviva to express your concerns about all of this.

[AleisterCrowley]

The arguments around precise meaning are ongoing in this another [and other]threads

I don't think they are actually. There are plenty of people people voicing their opinions. Many have said the legal details don't matter to them, the issue is Aviva's behaviour (OldBoyReturns being a notable example). Never mind the City's vaunted Rule of Law, eh?

There is no actual argument, in which one person makes a point, another differs and it is worked on until it's resolved. Have you seen anyone even once say "Yes, you're right, you have a point?" To discuss properly we need to respect and use precise language; however the starting point for many is that special terms like "redemption" and "capital return" and "winding up" and "call options" are all in effect the same thing and they refuse to give associated words their proper meaning. The most egregious claim is that there is no distinction between a redemption and a capital repayment -- in complete disregard of the law and written terms! How can one argue in those circumstances?

One or two people have made a coherent argument based on the law and Articles: Avidya is one of them. But ultimately is anyone really discussing this in a logical manner? It's mostly sound and fury, signifying nothing...


GS

There are plenty of people people voicing their opinion
Is there any other sort of post in this case, including your own? They are backed to a greater or lesser extent with links to legal definitions, documents etc, but the fact that no conclusions have been arrived at suggests there is no objective 'truth' and the outcome will be based on the weighing up of multiple arguments.

[GoSeigen]

GS - Have you had any reply yet from your recent letter to Aviva?

I understand that you take the Aviva side of the argument, but presumably you also have some sympathy with the rest of us on here and on the other board or you would not have written to Aviva to express your concerns about all of this.

Paul, no reply yet, but I have sent you a PM.


GS

[Alaric]

The most egregious claim is that there is no distinction between a redemption and a capital repayment -- in complete disregard of the law and written terms!

How does a redemption of 100 in n periods time differ from a capital repayment of 100 in n periods time? Both have identical present value even if the legalese is different.

At some time over the last year, or even since the last AGM, Aviva's lawyers or advisers have come up with the interpretation that they can short change preference shareholders, not least by the device of having them out-voted by ordinary shareholders. It's by no means unusual for Preference Shares to be retired, but the long standing market practice has been that they do so at a price which enables the holders to repurchase the income they will no longer receive.