Aviva's announcement

[GoSeigen]

After my and the market's initial reaction, I am now trying to understand what has actually happened. Apologies if I am incredibly slow and you have all managed to do so already.

Please could Fools help me by adding their own perspective in response to the following question:

What exactly did Aviva's announcement reveal that either was not known (broad) or could not have been known (narrow) by the market?

In answering this, please assume (even if you yourself do not believe it) the general idea that a contract may be ended even if it is described as "permanent" "perpetual" "irredeemable" or some other formula. i.e. We are accepting that this idea is NOT new to market participants. Also please do not discuss the assumption on this thread: use my previous thread "Nothing is forever" for such discussion.


Here is the text of the relevant section:

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.

https://www.aviva.com/content/dam/aviva ... t_Pack.pdf


And the question again:


What exactly did Aviva's announcement reveal that either was not known (broad) or could not have been known (narrow) by the market?

GS

[Alaric]

What exactly did Aviva's announcement reveal that either was not known (broad) or could not have been known (narrow) by the market?

That they would attempt to deny historic market practice or even their decision at the previous year's AGM by claiming that they could repay Preference Shareholders at par against or without the consent of those shareholders.

I believe it was the intent of Parliament acting under EU instructions that it should not be possible for one group of shareholders to adversely affect another group of shareholders. Whether the law as enacted does this is another matter.

I hope there's general agreement that an income stream has a value and stopping that stream requires a price that would enable said income stream to be purchased elsewhere.

[ayshfm1]

GS rightly or wrongly holders of prefs assumed that their share could be redeemed only on wind up, on tender or by a class vote.

1) Windup we all can work out what that risk looks like
2) Tender we can take view on what the best course of action might be
3) Class vote - Turkey would not vote for Xmas,

The new bit for me anyway was the ords could effectively redeem my prefs against my wishes for their own enrichment. I amd still not convinced they can, neither am I convinced that Aviva will carry that vote should they get to that point.

If I owned them (I hold LLPC, NWMB, SAN and SANB) I would be saying Molon Labe.

[Alaric]

The new bit for me anyway was the ords could effectively redeem my prefs against my wishes for their own enrichment. I am still not convinced they can, neither am I convinced that Aviva will carry that vote should they get to that point.

That's going to be the key point.

The FCA appeared disinterested in Aviva's assertion that they could do this, notwithstanding the knock on effect on the market in these types of instruments. So it's another risk, FSA inaction. Arguably following the Lloyds issue, the market collectively knew that.

There's a more general point that if Company Law permits this, then it needs reform.

[GoSeigen]

I have also solicited Aviva's view thus:

I write to you as a ordinary shareholder of Aviva Plc, noting your public announcement last week of your belief that Aviva has the ability to cancel its preference shares at par value via a capital reduction and its related intention to reduce its hybrid debt.

While I am broadly supportive of the policy of debt reduction and the use of any opportunities to do so at an advantageous price, I do note the allegations by various preference shareholders in both public
announcements and on social media and elsewhere that:

-for several years Aviva allowed their preference share securities to trade at values which are manifestly not justified by the company's understanding of their terms; and that
-Aviva had ample opportunity to signal to the market that pricing of the shares was unjustified; but
-until its announcement last week Aviva had made no attempt to address the market's likely misinterpretation of the terms and consequent mispricing of the securities; and
-Aviva had given no indication whatsoever of their intentions regarding a capital reduction which would have an obvious effect on market pricing.

While these are merely allegations at present, if proved to be correct they could result in adverse public reaction to the company, or legal action, both of which could affect the value of the company and
shareholder equity for a variety of reasons including higher capital costs, legal expenses, and negative effect of publicity on customers, potential customers and suppliers. Therefore, please could you answer the following questions:

1. Why has the company not previously warned the market that valuations are not justified by the terms of the preference shares?
2. What actions does the company intend to take to counter the impression that preference shareholders are being taken advantage of due to the previously excessively high market valuations which the company through its alleged inaction has allowed to persist?

I look forward to a prompt and direct reply to both these questions.


GS

[stockton]

The annoucement appears to imply that cancellation of shares does not involve redeeming those shares. In my understanding the shares have to be redeemed - they cannot simply be cancelled (without payment).

[johnhemming]

There is an important issue, however, in that the shares are described as irredeemable. I accept that there is a definition of "redeemable shares". I accept also the historic practice of the UK House of Lords Judicial Committee in accepting that a return of capital is not inherently outwith the contract created by the shares. However, "irredeemable" means to me that they cannot do this (without the permission of the class). They can obviously buy shares in the market and offer to buy by tender. If they went bust then that is life and the preference share contract comes to the fore.

There is the additional point that S630 of the 2006 Act is in theory based upon the Second DIrective of the EU and that has been superseded by other EU directives which would indicate under the 1972 European Communities Act that it (S630) should be interpreted to give rise to the European Law requirement of separate class votes for a capital reduction.

It is, however, misleading the market to call the shares "irredeemable" if they are not. (FSMA 2000)
I think that is the point that causes most concern.

[PeterGray]

A good letter, GS. I will be interested in any response you care to share.

In answer to your question at the top of the thread (speaking as someone who owns irredeemable prefs - but not Aviva's)

1. Clearly we all knew of the risk of winding up/bail out/capital crisis etc. (or we certainly should have done) and made our own judgements of the risk of one of those.

2. I would say that I have always accepted that my prefs were not going to be around for ever. That at some time the issuers would be in a capital position, and interest rate environment, where they wanted rid of them. However, I had always assumed that would be in form of buy backs or tenders or both. I am prepared to accept that may have been a false assumption. IF Aviva go ahead with a par return of capital without a class vote (and they have not yet said they will), and their (and your) interpretation of the prospectus is correct, and supported by the courts then I will have learned something - at my, not insignificant, cost!

3. I think it's fair to say that my view is (was?) almost universal judging by the market prices of the prefs I hold over the past few years, and the point you make to Aviva is the key one. If they think that have the right to return at par (and clearly always have had the right) why have they not made that clear? One suspects either they have some aggressive new lawyers who have been looking at how to clear out the prefs on the cheap who have realised a possible route to achieve that, or while they knew management always assumed it was something they would not be prepared to consider doing, but have now decided the relatively small saving in cash is worth the loss of reputation?

Peter

[Alaric]

In my understanding the shares have to be redeemed - they cannot simply be cancelled (without payment).

Redeeming, cancelling is playing with words. The point at issue is to whether Aviva can ignore the value of an income in excess of £ 8 per £ 100 nominal and just pay back £ 100. Investors would not be able to replicate that income so are being disadvantaged. If it was exclusively a vote of Preference shareholders, they would likely reject such a proposal. So can Aviva legally hold a vote where Ordinary shareholders can vote to make a compulsory buy out of Preference shareholders at a below value price? If Aviva can do this, why cannot any issuer of Prefs do the same?

[thebarns]

Goseigen,

That looks to be a useful and pertinent communication to Aviva by you and may help clarify matters.

[Wozzitworthit]

Goseigen

A well written and argued letter. I hope it gets the serious attention by Aviva that it deserves

Woz

[PeterGray]

I think one potential argument, that arises from the points GS makes in his letter to them, that Aviva might struggle with in court should this get there, is that either they always knew the prefs could be repayed at par - in which case they have been responsible for a false market by failing to comment as the prefs moved well above par - or they have only just realised it - which would then be an admission that was not the intention of the terms when they were drawn up. It's not a knock out, but it wouldn't help their case.

Peter

[AleisterCrowley]

Would be interested to know if any entities within the Aviva group hold/held these prefs, and if positions have changed recently (long or short)
Obviously I wouldn't expect a highly respected and honourable company such as Aviva to leave itself open to allegations of market manipulation (or worse) - but if Aviva funds were holding prefs at the 'inflated' prices it suggests that the understanding of the terms within the group didn't align with the recent announcement