Aviva's Latest Announcement - 15 March 2018

[Wozzitworthit]

Not sure if all have seen this - posted by Mark Taber on his website

https://www.aviva.com/investors/credit-investors/Additional-information-for-preference-shareholders/

[Alaric]

Not sure if all have seen this - posted by Mark Taber on his website

If they get away with it, existing safeguards for the interests of preference shareholders will have proved totally inadequate. It seems wrong that they believe they aren't required to have separate votes for each class.

Particularly in the case of the GA Prefs, where Aviva claim

10. Aviva is the sole holder of the ordinary shares in GA and would be entitled to exercise its votes on a resolution for the reduction of capital in these circumstances. Aviva has sufficient votes to approve any such resolution at a meeting of GA.

In a rating of the ethical standard of their management, they comment

13. There are other available methods to retire the preference shares by agreement with the relevant holders and with the necessary approvals from ordinary shareholders and other stakeholders, for example market purchases or tender offers.

Why then are they not using these mechanisms?

[Wozzitworthit]

i have read through twice and still not sure what 11 means - does this only refer to GA or all of the prefs

(Will try again later - have done little else today except read, ponder and do what-if scenarios about all this !!)

Woz

[PeterGray]

Why then are they not using these mechanisms?

Fairly straightforward - it's cheaper!

[Alaric]

i have read through twice and still not sure what 11 means - does this only refer to GA or all of the prefs

11. As any return of capital and cancellation of the preference shares following a reduction of capital would be in compliance with the conditions of the preference shares it would not constitute a variation or abrogation of the rights of those preference shares (and no separate approval from the preference shareholders would be required).

According to Aviva, words mean what they (Aviva) say they mean. I imagine it will be news to those who drafted and approved the conditions of the preference shares back in the 1990s that Aviva had a unilateral option to pay back those shareholders at par. It will be news as well to anyone who bought or sold the shares on the open market in the past twenty five years who might have supposed that being a permanent or perpetual income, they could only be paid back at a market price for such income flows.

[IanSmithISA]

Good morning,

I do not have any Aviva/GA preference shares or ordinary shares nor do I have preference shares in any other company, however as someone holding shares in Conviviality I am clearly sympathetic to anyone suffering from a surprise announcement.

I have been reading the threads on this subject with great interest and as someone not directly affected the Aviva actions seem to me to be quite reasonable.

I do accept that reduction in share capital approach appears to be unexpected by some but I also note the relative lack of complaints from professionals in the field, although yes I have seen some negative comments from Nationwide, Ecclesiastical and Mr. Taber.

Yet looking at AV.A and AV.B I see that very roughly between 2008 and 2014 the shares were trading at what might be considered to be a reasonable premium over £1 up to about £1.2 or two and bit 8% payments.

So to an outsider it does look as if the market was aware that by some method the shares would be cancelled, but at some point after around 2014 this risk became disregarded.

Was this was because a new group of people started to buy these shares, such as retail investors who hadn’t understood the share and had just looked at the word irredeemable and thought “Hey, I’m set for life”? Whilst the professionals had had a number of years of a good income and could see the writing on the wall.

I have seen it suggested that the fact that AGMs approved buy back at market price plus a percentage taken to mean that the current option wasn’t known to exist until recently.

I find this an unreasonable argument for two reasons;

Having the option to buy on the open market means that as few as zero or as many as are available could be purchased depending on the price. As mentioned earlier for most of the past the open market price represents a few years interest/dividend so buying back a few percent of these shares every year could be a good way of removing these shares from the market.

The recent high prices for these shares means that buying back on the open market would be a poor use of funds and it is not clear how many could be bought. Whereas a capital reduction affects all of the preference shares, it gets rid of them all in one go.

It has also been suggested that as the original prospectus doesn’t have a clause specifying a premium for a buy back based on a decreased capitalisation means that such an action was never envisaged. Again I think that this is false.

The reason for the lack of such a premium is that by the time that such a thing could happen the original owners of the preference share would have done fine anyway, and such a clause may not have been acceptable to the company. Whereas its easy for the management to have a premium clause in pay out in case of liquidation because at the point who really cares?

I know that it sounds harsh but after looking at some comments here and elsewhere it does appear that some people have bought the preference shares simply based on the word irredeemable and regarded the share as a normal share rather that some form of debt that the company would clearly want to get rid of.

The only real losers of the action would be the recent owners of the share who have paid a hefty premium on the open market and have had only a few years of income, these are not necessarily those would be contributing greatly to the next fund raising anyway.

Bye

Ian

[GoSeigen]

Not sure if all have seen this - posted by Mark Taber on his website

https://www.aviva.com/investors/credit-investors/Additional-information-for-preference-shareholders/

Thanks Wozzitworthit, for the heads-up.

That's really a very well-presented summary of the statutory and contractual grounds for Aviva's earlier announcement. It completely matches the way that Avidya and I viewed the legal issues in our earlier exchanges. Both of us thought Aviva would have some difficulty succeeding with a vote on the Aviva preference shares but that the remaining four prefs should be much easier targets. I haven't looked, but the relative market valuation of the prefs will hopefully reflect that in coming days.

Avidya has been sightly more pessimistic than I about Aviva's prospects in any legal case, but we both agree that it would be nice to see their action challenged, especially in the case of the two Aviva prefs. I believe they would succeed in such a case, but among the detail is plenty of material for a strong investor case. Because of that, I agree it's more likely that Aviva will offer a sweetener with the use of a vote to sweep up any opposition.

I aknowledge Avidya's most recent superb and pursuasive historical apologia for the widespread view that Aviva is acting cynically and in an "unprecedented" way; personally I have no professional background in the markets so don't know how the nod and a wink culture really worked; my cynical suspicion is that in the old days the issuers would look after the pros and together they would screw the small investors, who would have known nothing of what was going on. In today's internet age, we all have full access to investor documents and the law which has the great benefit of shifting anyone who can be bothered to read them somewhat closer to the professional's position of power. In fact I would go so far as to say that it could be argued that Aviva, far from being cynical and dishonest here, is being rather scrupulous in its behaviour, in NOT giving a little nod and a wink to the pros, who could then have offloaded to small investors, before marching the price of these securities down to a level where no-one would squeal too loudly at Aviva's subsequent announcement. I hope Avidya will forgive me if this is not what he meant about the good old days; it just happens to be the subtext that occurs to me when I hear the protests of the fund management crowd, who as professionals frankly should have spotted this ages ago and raised it themselves with Aviva management. [Indeed who knows, perhaps one did, recently, in private...] I am reminded of the open letter from The Childrens' Fund CEO (IIRC) to Lloyds which I believe may have prompted Lloyds' s ECN LME.

Aviva's latest offereing has laid bare its legal defence. What I am interested in, is if there are any Fools, apart from Avidya of course, who agree -- having read the company Articles and related law -- that Aviva's is a viable and basically reasonable case, albeit with strong counter arguments that might be aired in a court?

Personally I can't see any major flaw in their argument. To me the investor outcry is actually more about Aviva not behaving as expected than about misbehaviour.

GS

[Alaric]

Personally I can't see any major flaw in their argument.

The crux of their argument is that they can pursue a course of action to the financial detriment of one class of shareholders without being required to hold a separate vote. That sets some difficult precedents if unchallenged and on the face of it is against the requirements of EU law on corporate behaviour.

[Alaric]

Yet looking at AV.A and AV.B I see that very roughly between 2008 and 2014 the shares were trading at what might be considered to be a reasonable premium over £1 up to about £1.2 or two and bit 8% payments.

So to an outsider it does look as if the market was aware that by some method the shares would be cancelled, but at some point after around 2014 this risk became disregarded.

I would suspect they were being priced relative to the price of British Government undated. There was at least one with a 4% coupon which didn't drop below par because of the coupon and did not rise much above par because there was a call option. This option was eventually exercised by the then Chancellor, George Osborne.

It may also be correct that the removal of the undated Gilts increased the demand for other forms of perpetual income, driving up prices.

[GoSeigen]

I would suspect they were being priced relative to the price of British Government undated. There was at least one with a 4% coupon which didn't drop below par because of the coupon and did not rise much above par because there was a call option. This option was eventually exercised by the then Chancellor, George Osborne.

Which one, Alaric? Details or link please...

It may also be correct that the removal of the undated Gilts increased the demand for other forms of perpetual income, driving up prices.

Credit where it's due, this is actually quite a perceptive comment. Driving perp gilt yields to below 2.5% was not one of the smartest things the former Chancellor did [the smartest being his resignation of course].

GS
P.S. A perpetual gilt redeemed by use of a call option! Crucify them!

[johnhemming]

Aviva's latest offereing has laid bare its legal defence. What I am interested in, is if there are any Fools, apart from Avidya of course, who agree -- having read the company Articles and related law -- that Aviva's is a viable and basically reasonable case, albeit with strong counter arguments that might be aired in a court?

Having read the articles, the annual reports from the 1990s, the resolution that created the authority to issue the shares and various parts of UK and European law I do think there are arguments that can be aired in court.

[Alaric]

Which one, Alaric? Details or link please...

It called itself "Consolidated 4%" (CN4). I held some in an ISA as liquidity.

https://www.theguardian.com/business/20 ... s-redeemed

As Europe marks the centenary of the Great War, the Treasury said it would pay off £218m from a 4% consolidated loan next February, as part of a redemption of bonds stretching as far back as the 18th century. They also relate to the South Sea Bubble crisis of 1720, the Napoleonic and Crimean wars and the Irish potato famine.

Almost £2bn of first world war debt remains, and the government said it was looking into the practicalities of repaying it in full.

The “4% consols” were issued in 1927 by Winston Churchill, then chancellor, to refinance national war bonds originating from the first world war.

4% was a normal rate of interest in the non-inflationary 1920s.

[GoSeigen]

I would suspect they were being priced relative to the price of British Government undated. There was at least one with a 4% coupon which didn't drop below par because of the coupon and did not rise much above par because there was a call option. This option was eventually exercised by the then Chancellor, George Osborne.

Not true. 4% Consolidated (CN4, GB0002163466) traded below 50% of par in Jul 1996 (earliest date of DMO data) and traded far below par much of the time until their call in Feb 2015.


GS

[TwmSionCati]

I imagine it will be news to those who drafted and approved the conditions of the preference shares back in the 1990s that Aviva had a unilateral option to pay back those shareholders at par. It will be news as well to anyone who bought or sold the shares on the open market in the past twenty five years ...

Hmmm!

Companies Act 2006 (s.641(4)(b)(ii)), which is what Aviva is relying on, reads: “(4)... a company may ... (b) either with or without extinguishing or reducing liability on any of its shares ... (ii) repay any paid-up share capital in excess of the company's wants.”

Companies Act 1948 (s.66(i)) reads “... a company ... may, if so authorised by its articles, by special resolution reduce its share capital in any way, and in particular ... may (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up; or (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost or unrepresented by available assets; or (c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. ..."

TSC

[Alaric]

Not true. 4% Consolidated (CN4, GB0002163466) traded below 50% of par in Jul 1996 (earliest date of DMO data) and traded far below par much of the time until their call in Feb 2015.

I looked at my old contract notes and I had been able to purchase it at 80 as recently as 2009.

[GoSeigen]

Not true. 4% Consolidated (CN4, GB0002163466) traded below 50% of par in Jul 1996 (earliest date of DMO data) and traded far below par much of the time until their call in Feb 2015.

I looked at my old contract notes and I had been able to purchase it at 80 as recently as 2009.

Well, thank you for agreeing and giving this evidence that your initial statement -- that these 4% irredeemable gilts didn't fall below par because of their coupon -- was untrue, and perhaps, unlike Aviva, you'll be honorable enough to revisit that earlier statement and adjust it accordingly?

GS

[Not that anyone cares about truth as long as they don't lose money, LOL]

[Alaric]

Well, thank you for agreeing and giving this evidence that your initial statement -- that these 4% irredeemable gilts didn't fall below par because of their coupon -- was untrue,

It approached par in its final days.