Bank prefs

[daveh]

I wasn't sure whether to stick this in the AV. prefs thread, but decided to start a separate thread. I own LLPC which was trading at 178 prior to Aviva's results and is now being quoted at 148ish. But looking at http://www.londonstockexchange.com/exch ... 3GBGBXSSX3 the last trade I can see was at 170p done off book for 6500 on 12Feb and there have been no trades since. So does that mean no one is rushing to sell at 148ish and if so where is the 148 price coming from. I haven't tried to either buy more or sell from my online broker account (yet). Why so little buying and selling in these prefs (from the link the amount of trades has dropped to close to zero per month since the middle of last year (there was a spike in November).

[daveh]

The info for some of the other bank prefs (LLPD and SAN) are similar little or not trades since middle of last year and I just checked GACA which was similar except there has been an upspike in trading from January - inside info?

[GoSeigen]

The info for some of the other bank prefs (LLPD and SAN) are similar little or not trades since middle of last year and I just checked GACA which was similar except there has been an upspike in trading from January - inside info?

daveh

The LSE webpage had an update recently based on some sort of regulatory change and since then I think the trades posted have been even less informative than they were before. I really don't know what's going on but would place absolutely no reliance on any trade data posted there. I can tell you that I traded a small number of NWBC Friday at around 146p.

GS

[daveh]

I've looked at HSDL's website and research centre. They are quoting LLPC as 140.5-141.5, but wouldn't let me deal automatically - I would have needed to place a negotiated deal (when I bought after the financial crisis just after the dividend was resumed I had no problems buying via an RSP quote). The research centre also says there has been no recent trades for LLPC. I also compared with AV.A one of the Aviva prefs that may be "redeemed" and they have a lot of recent trades and significant volume. So it looks like there has been little or no trades in the non Aviva prefs I've checked and lots of trades in the affected Aviva prefs.

[Kenno]

A lot of Prefs are traded on the interbank market and won't show as trades on the LSE website.


Kenno

[ayshfm1]

I bought 10K of LLPC at £1.35 on Monday, price was between £130-£1.40 at the time.

Time will tell if it was a bad move.

[hiriskpaul]

Although I do not have any Aviva prefs, the Aviva announcement has had a detrimental affect on UK pref prices. For that reason I have been busy trying to assess how big a risk there is for cancellation at par, as Aviva claim to be able to do. Unfortunately, IMHO there is a risk for most prefs I hold. For example, most state something such as "On a return of capital on a winding up or otherwise...". It is this "otherwise" that may hand an opportunity to issuers to cancel at par, even though I consider the original intention of the "otherwise" was "or similar", i.e. on some form of liquidation and not just because a firm wants to reduce capital. This affects SAN/SANB, NWBD, STAB/STAC and BBYB (redeemable in 2020). In the case of the LLoyds prefs LLPC/LLPD, the clause comes under the heading "Rights upon Liquidation", which I think strengthens the case against Lloyds being able to try this particular scam, but I would not put it past Lloyds to give it a try. The only prefs I hold that seem rock solid on this "cancel at par" event are the Raven Russia prefs RUSP and RUSC. In this case the terms spell out a much more solid "On a return of capital on a winding up or an administration order..".

On the Aviva situation, I think there are a few things of note that feeds into the risk assessment.

In 2018, we have signalled our intention to reduce hybrid debt by £900 million. We are targeting more than
£500 million in additional capital returns, incorporating liability management and returns to shareholders.
In this regard, we have the ability to cancel preference shares at par value through a reduction of capital,
subject to shareholder vote and court approval. The preference shares carry high coupons that are not tax-deductible
and they will not count as regulatory capital from 2026. As we evaluate the alternatives, one of
the things we are considering is how to balance the interests of ordinary and preferred shareholders

"Balance the interests of ordinary and preferred shareholders" is a curious phrase. With current market conditions and state of Aviva it cannot possibly be in the interests of pref holders to have any of their prefs cancelled and capital returned. This can only be about boosting ordinary shareholder returns at the expense of pref holders. So "balancing" means taking from Peter (pref holders) to pay Paul (ordinary share holders). However, the word "interests" is more likely being used here in the financial sense, meaning "having a stake in", rather than the meaning "benefit". So what they are really saying is "balance the future stakes of ordinary and preferred shareholders". With the comment that the prefs will no longer count as regulatory capital from 2026, I would not be at all surprised if Aviva decided that the appropriate balance of "interests" meant no preference shares at all. If Aviva wanted to reduce the number of prefs, they have the undisputed ability to buy in the open market and cancel, or tender for them. Clearly though it is to the benefit of ordinary shareholders if they can cancel at par.

"We have the ability to cancel preference shares at par value through a reduction of capital". We only have Aviva's word for it that they can do this. I don't think it is at all certain that Aviva have this ability. The only way to know is to have this tested in court and there is no way that Aviva would want to go to court to find out in case the answer comes back as no, or yes provided the affected pref holders voted in favour. So I think a more likely next step is for Aviva to make an offer to buy back the prefs, with the threat of cancel of par mentioned as a risk factor should pref holders not take up the offer. An LME at a price that was not aggressively low, linked to a carefully worded vote to alter the terms to allow redemption at par for holdouts, would likely be successful IMHO. In this case, Aviva would stay out of court and the legality of their claim could not be determined. Unfortunately this would do nothing to lift the uncertainty affecting the other UK prefs. Another outcome might be that Aviva are so sure of their legal advice that they go ahead and cancel at par. That could very well lead to court action, which Aviva may win or lose. If they win, it would likely be bad news for the other UK pref prices, but depends on the precise reasons for the win. If Aviva lose, pref prices could rally, but again it depends on the precise court verdict.

Whatever happens, I think a cloud will hover over UK pref prices for some time.

As a result of my investigations and current pref prices I chose to take an axe to our pref positions today. In our SIPPs we only have RUSP, RUSC, ELLA and BBYB. Eccesiastical have come out with an RNS criticising Aviva and saying they have no plans to do this, the terms of RUSP/RUSC seem safe to me and BBYB is trading about 11-12% over par and matures in 2020, so I have left these positions alone. In our ISAs, we have (had) ELLA, BBYB, SAN, LLPC, LLPD, NWBD and STAC. I have sold most of these today apart from ELLA and BBYB. A few LLPC and STAC are still in my wife's ISA where the orders did not get filled. I will probably leave these for now. Outside tax shelters we hold BBYB, NWBD, LLPC, LLPD and STAC. I did not sell any of these, partly because I did not want to take the CGT hit this financial year, but also as I am comfortable with our current exposure, having cleared out our ISAs.

My reasons for selling were 1) exposure to the class was now more than I was comfortable with given downside risk and 2) the prices I could obtain were not at all unreasonable considering the yields and the new cancel at par risk. Had they all been trading below 120 I would have held the lot, but they all trading only about 15% below recent peaks - an all time high.

Probably worth mentioning that as far as I can tell, PIBS and PSBs, such as BOI all seem safe. However, I am going to check again. If anyone thinks there is some kind of cancellation risk, please post your reasons!

[swill453]

Is there not also a possibility that Aviva "kick it down the park"? ie they announce that they won't do anything now, but reserve the right to do so on future.

Prices across the board will stay depressed, but since they haven't taken any action then nothing can be tested.

Then after a suitable period they may buy in the open market, or tender at the (then) prevailing market price.

Scott.

[hiriskpaul]

Absolutely Scott, another reason why this could run on.

[hiriskpaul]

I bought 10K of LLPC at £1.35 on Monday, price was between £130-£1.40 at the time.

Time will tell if it was a bad move.

Good price - I sold at an average of 147.8 today.

Edit - and none of the deals I did today are listed at the LSE!

[everhopeful]

Despite hiriskpaul's assessment of RUSP they have fallen over the last 48hours. Maybe a good time to top up?

[Wozzitworthit]

With the current worsening rift between the UK and Russia I personally wouldn't buy anymore at the moment.

There may well be better opportunities in the coming weeks

Woz

[88V8]

Selling out of the Avuiva prefs is not something I would contemplate. Indeed I have added and may add more. The more we hold the more voting power we have.
Yesterday I bought some GACA. I have also added to ELLA.
Do hold RUSP and RUSC but have enough.

V8

[hiriskpaul]

Tend to agree with Woz. RUSP/RUSC look safe to me from an Aviva style scam, but the risk with these is in the name. With Russia, risk of expropriation in some form needs to factored in, along with a higher risk from criminal activity. Having said that, results released a couple of days ago look great.

RUSC is lower risk than RUSP as it is dated (maturity 7/7/26 at 135) and is senior to RUSP. I was just quoted a price of 135.20 for RUSP, which works out at a running yield of 8.9%. RUSC at 122 has a yield to maturity of only 6.4%. I do hold some of each, but am not rushing to buy more at current prices.

RUSC by the way is no longer available at some brokers, in particular iWeb/HSDL. They appear to be frightened by the convertible feature, even though this can only be to the benefit of holders. RUSC carries less risk than RUSP and far less than the ords, yet is considered too risky or complicated by some brokers!

[hiriskpaul]

Selling out of the Avuiva prefs is not something I would contemplate. Indeed I have added and may add more. The more we hold the more voting power we have.
Yesterday I bought some GACA. I have also added to ELLA.
Do hold RUSP and RUSC but have enough.

V8

Yes I need to have a more detailed look at how the Aviva situation has developed. I note that OBR is on the case, which must be of some concern to Aviva due to his track record of being such an effective trouble maker. There must be some seriously pissed off institutional holders as well that may be willing to put up a fight, although they may end up being bought off with a better offer than retail. Barring other events, worse case scenario is about a 20% fall, less dividends that are accruing at around 7%. I have almost talked myself into taking a punt!

[Holts]

I see Mark Taber has unearthed some interesting information and fired off a note to Horta

In obtaining sanction for the scheme from the court and the preference shareholders concerned Lloyds Banking Group made representations that the rights attached to the new Lloyds Banking Group preference shares have rights which are in substance the same as those of the HBOS plc preference shares for which they were substituted. You will also be aware that the rights, as set out in the terms (8b iv) and articles (10.1), of the HBOS preference shares stated:

The special rights attached to the HBOS Preference Shares will be deemed to be varied or abrogated if any resolution is passed for the reduction of capital paid up on the HBOS Preference Shares.(

[colin]

The special rights attached to the HBOS Preference Shares will be deemed to be varied or abrogated if any resolution is passed for the reduction of capital paid up on the HBOS Preference Shares.(

What does that mean?

[swill453]

The special rights attached to the HBOS Preference Shares will be deemed to be varied or abrogated if any resolution is passed for the reduction of capital paid up on the HBOS Preference Shares.(

What does that mean?

During the Aviva debacle, reference was made to court decisions that ruled that a cancellation of preference shares didn't mean that their rights were varied or abrogated. This implying a class vote was unnecessary.

The HBOS term above means that a class vote would be necessary in those circumstances.

Scott.

[colin]

a class vote would be necessary in those circumstances.

So by that you mean preference shareholders alone would have to vote in the majority for the prefs in question to be cancelled?

[swill453]

a class vote would be necessary in those circumstances.

So by that you mean preference shareholders alone would have to vote in the majority for the prefs in question to be cancelled?

Yes. And turkeys probably wouldn't vote for christmas, unless it was worth it.

Scott.