Aviva - industry response

[GoSeigen]

I've started a new thread for discussion of the various responses put out by the industry to Aviva's announcement. This thread is NOT for posting press commentary except as it directly relates to industry reactions. Please feel free to add links as and when other companies comment.

I'll start with the two main ones that have been referred to so far:

1. Ecclesiastical.

http://www.londonstockexchange.com/exch ... 62898.html

I have already written briefly about this previously, saying, inter alia:

Ecclesiastical's statement is cheap. It is useful as a statement of intent I suppose, but it [...] does not say: "We have studied the possibility of reducing capital, concluded that it is a realistic and profitable course of action and would be supported by the shareholders but have decided as an ethical company which cares for the interests of all its stakeholders not to do so." That would actually carry some significant information content!

2. Twenty Four Asset Management

https://twentyfouram.com/2018/03/14/avi ... uilibrium/

As bond investors we always need [...]

The first three words hint at the main point of the rest or the article: that if Aviva do something dodgy with their preference shares they could do the same with their bonds. The author does raise a faint suspicion that they are mixing up bonds with prefs -- certainly in the minds of their readers if not their own... e.g. "Aviva management clearly favours the short-term interests of shareholders at the expense of bond holders". Is this intended, or a typo, or just a logical stretch?

Meanwhile they don't in fact suggest Aviva have done anything wrong -- well, nothing worse than "merely act[ing] with regards to economic viability ", and not "maintaining that important balance between shareholders and debt investors". Those are fairly weak charges IMO!

This potential action by Aviva management clearly favours the short-term interests of shareholders at the expense of bond holders [...] Can the company be trusted in acting in investors’ interests when one of their perpetual bonds next reaches a call date?

This is curious. Are they suggesting it would somehow be unfair to bondholders to make a par call on a perpetual bond? Such a call would be written clearly into the Terms of course: this sentence on its own blows the doors off the argument that Aviva are using an "obscure clause" or "unorthodox interpretation" to force through their will: these guys would be equally upset even if the use of a call had been mooted. My guess: What the pros actually don't like is losing money and looking like fools when they do so. Fair enough I suppose.

This uncertainty will require investors to be compensated with additional spread.

Meanwhile they and others threaten to widen spreads on capital as punishment. The fact is that there is a gross excess of financial capital at the moment: that is why interest rates are so low. Companies are increasingly going to be finding ways to retire their capital which will as an inevitable consequence decrease the income of investors. Welcome to deflation, people! That's the final outcome of the slaying of inflation. Even capitalists have to reduce their income expectations. If you don't like that you shouldn't have feared and fought the inflation bogeyman so hard in the first place. Companies in the near-term are not going to worry too much about widening spreads because yields have fallen so much anyway.

I'd love to know if these bond investors had prefs in their bond funds, though I suspect they would not be allowed to.


GS