Plans for "irredeemable" prefs?

[Alaric]

So, my question is: are prefs now as safe as they were?

Probably not. It may hinge on whether a shareholder vote on return of capital means that if there's more than one class of shareholder, that they vote independently with both or all classes needing to give approval, or whether if it's in the financial interest of one class to return capital but not the other, that the majority class can override the interests of the minority.

[GoSeigen]

I'm considering moving part of my Fixed Income pot from some general bond funds into the portfolio I call "Prefs & Debt", mainly because it gives a better income. I'm pleased someone more knowlegable than me opened this thread and other knowledgable people have contributed. So, my question is: are prefs now as safe as they were?

Tieresias,

Personally, I'd put it the other way round: are preference shares still as unsafe as they were?

Nothing has actually changed about either the terms of preference shares or the soundness of the businesses underlying them. Two things have changed: preference shares are marginally less dear, which of course improves risk; also everyone is now alert to the possibility that some shares might become target of a capital reduction resolution put to their shareholders. For those shares in businesses with excess capital and/or excess to cheaper funding you might be tempted to think the date of a capital return has been brought forward. That is a mistake IMO. The possibility was always there and would always have become apparent as soon as the first company announced an intention to do this -- which it now has.

On balance I would say that these shares, being a bit cheaper than before Aviva's announcement, are slightly safer -- but the question is wherether the price has fallen enough in each case to justify an investment.


GS

[lennich]

I'm not sure a lower share price makes them safer. If they're called in you won't lose so much if you bought at a lower price but 'safer' to me means that they're less likely to be called in and I don't see that the price greatly affects that. I would have thought that the fixed dividend is the thing that would be on the minds of companies considering getting rid of them. If interest rates rose substantially then they'd be safer but I can't see that happening in the next few years.

[GoSeigen]

I'm not sure a lower share price makes them safer.

I am. I'd rather lose 50p than 70p per share. Any day.

GS

[ursaminortaur]

I'm not sure a lower share price makes them safer.

I am. I'd rather lose 50p than 70p per share. Any day.

GS

Would it really make that much difference or would you just buy more with your money but still spend the same amount ?
During the financial crisis when pref shares were so low they were consider to be junk I wouldn't have thought that the low price indicated they were safe rather the opposite. As then the price fall may be caused by a misperception of the real risk and you might be able to make a good profit by buying at the lower price but the price fall itself is surely an indication of the perceived risk having increased.
To my mind the lower price just shifts the risk-reward balance - they are riskier but if things go well then the reward is greater.

[colin]

to my mind the lower price just shifts the risk-reward balance - they are riskier but if things go well then the reward is greater.

Yes, risk is generally seen as being comprised of two elements, the consequences of a bad outcome and the probability that the bad outcome will occur, while the recent price falls have reduced the consequences of prefs being redeemed at par that is because the market for these securities has estimated the probability of redemption to have increased.
My guess would be that the risk of redemption has decreased due to the reaction of politicians and fund managers.

[ursaminortaur]

to my mind the lower price just shifts the risk-reward balance - they are riskier but if things go well then the reward is greater.

Yes, risk is generally seen as being comprised of two elements, the consequences of a bad outcome and the probability that the bad outcome will occur, while the recent price falls have reduced the consequences of prefs being redeemed at par that is because the market for these securities has estimated the probability of redemption to have increased.
My guess would be that the risk of redemption has decreased due to the reaction of politicians and fund managers.

Yes in an ideal world with a perfect market the fall in price would compensate exactly for the increased likelihood of redemption so that for a new purchaser of a fixed number of prefs the overall risk was maintained at the same level as previously when the price was higher but there was no threat of imminent redemption. Though of course for someone who still held after purchasing earlier at a higher price the overall risk would have increased.
As I said before though a lot of buyers would probably have just taken advantage of the lower price to purchase more of the prefs with a fixed sum rather than purchased a fixed number irrespective of the price, and hence increased their potential loss in comparison (and therefore their overall risk level).

[GoSeigen]

Been through all the Articles and Acts, which is why I am nervous! The Lloyds prefs are interesting as the prospectus describes the rights on return of capital (£1 per share + unpaid dividends + accrued) only under the heading "Rights on Liquidation", implying that this is the only route available to reduce preference share capital, other than the usual market purchase or special resolution to change the terms. i.e. there is no "Rights on Reduction of Capital" or any similar catch-all section. No doubt Lloyds would argue this was an obvious infelicity .

Paul, I don't think I came back to you properly on this.

I've now had a thorough look at LLPC/D prospectuses and agree with your nervousness. Unfortunately I think the wording "on a return of capital [...] whether or not on a winding up (but other than redemption and purchase[...])" can only be referring to reduction of capital. It's unfortunate that the word "return" is used rather than "reduction", I agree. This seems to be a "manifest error" though, something we are familiar with!! I have noticed other "manifest errors" in the same terms; clearly they were drafted in a hurry in the crazy days of late 2008 and there was quite a bit of copying and pasting involved. If it were to come to a fight, I think a "return of capital" vs "reduction of capital" battle would be difficult for holders to win. Perhaps a good lawyer could find something else to exploit...

The next problem is that the FCA has now instructed issuers to clarify the situation and I can't see Lloyds doing other than to confirm that the terms allow repayment of the shares at par under a capital reduction. If this were to happen, and assuming the voting numbers look okay for such a resolution (I haven't checked), one would expect the price of LLPC/D would adjust pretty sharply. They still trade at toppy prices so I don't see any harm in overweight holders reducing if they come to the same conclusion.


All IMO of course but happy to back any of it up with quotes etc.


GS

[Wizard]

Been through all the Articles and Acts, which is why I am nervous! The Lloyds prefs are interesting as the prospectus describes the rights on return of capital (£1 per share + unpaid dividends + accrued) only under the heading "Rights on Liquidation", implying that this is the only route available to reduce preference share capital, other than the usual market purchase or special resolution to change the terms. i.e. there is no "Rights on Reduction of Capital" or any similar catch-all section. No doubt Lloyds would argue this was an obvious infelicity .

Paul, I don't think I came back to you properly on this.

I've now had a thorough look at LLPC/D prospectuses and agree with your nervousness. Unfortunately I think the wording "on a return of capital [...] whether or not on a winding up (but other than redemption and purchase[...])" can only be referring to reduction of capital. It's unfortunate that the word "return" is used rather than "reduction", I agree. This seems to be a "manifest error" though, something we are familiar with!! I have noticed other "manifest errors" in the same terms; clearly they were drafted in a hurry in the crazy days of late 2008 and there was quite a bit of copying and pasting involved. If it were to come to a fight, I think a "return of capital" vs "reduction of capital" battle would be difficult for holders to win. Perhaps a good lawyer could find something else to exploit...

My bold.

I can see why reading this as a "manifesr error" is supportive of your position, but beyond that what basis do you have for saying this is the case?

The next problem is that the FCA has now instructed issuers to clarify the situation and I can't see Lloyds doing other than to confirm that the terms allow repayment of the shares at par under a capital reduction. If this were to happen, and assuming the voting numbers look okay for such a resolution (I haven't checked), one would expect the price of LLPC/D would adjust pretty sharply. They still trade at toppy prices so I don't see any harm in overweight holders reducing if they come to the same conclusion.


All IMO of course but happy to back any of it up with quotes etc.


GS

My bold.

Triggering a massive tax bill would be definite and significant "harm" for me and I suspect others. Of course paying the tax is better than receiving par, but it is a case of balancing a potential bad outcome with a certain bad outcome.

Terry.

[GoSeigen]

Been through all the Articles and Acts, which is why I am nervous! The Lloyds prefs are interesting as the prospectus describes the rights on return of capital (£1 per share + unpaid dividends + accrued) only under the heading "Rights on Liquidation", implying that this is the only route available to reduce preference share capital, other than the usual market purchase or special resolution to change the terms. i.e. there is no "Rights on Reduction of Capital" or any similar catch-all section. No doubt Lloyds would argue this was an obvious infelicity .

Paul, I don't think I came back to you properly on this.

I've now had a thorough look at LLPC/D prospectuses and agree with your nervousness. Unfortunately I think the wording "on a return of capital [...] whether or not on a winding up (but other than redemption and purchase[...])" can only be referring to reduction of capital. It's unfortunate that the word "return" is used rather than "reduction", I agree. This seems to be a "manifest error" though, something we are familiar with!! I have noticed other "manifest errors" in the same terms; clearly they were drafted in a hurry in the crazy days of late 2008 and there was quite a bit of copying and pasting involved. If it were to come to a fight, I think a "return of capital" vs "reduction of capital" battle would be difficult for holders to win. Perhaps a good lawyer could find something else to exploit...

My bold.

I can see why reading this as a "manifesr error" is supportive of your position, but beyond that what basis do you have for saying this is the case?

What is the alternative interpretation? In particular what did they mean by "return of capital" if it wasn't a simple error, and how do we know?

The next problem is that the FCA has now instructed issuers to clarify the situation and I can't see Lloyds doing other than to confirm that the terms allow repayment of the shares at par under a capital reduction. If this were to happen, and assuming the voting numbers look okay for such a resolution (I haven't checked), one would expect the price of LLPC/D would adjust pretty sharply. They still trade at toppy prices so I don't see any harm in overweight holders reducing if they come to the same conclusion.


All IMO of course but happy to back any of it up with quotes etc.


GS

My bold.

Triggering a massive tax bill would be definite and significant "harm" for me and I suspect others. Of course paying the tax is better than receiving par, but it is a case of balancing a potential bad outcome with a certain bad outcome.

Hmm that would be annoying -- I had all my shares in ISAs.


GS

[Wizard]

Paul, I don't think I came back to you properly on this.

I've now had a thorough look at LLPC/D prospectuses and agree with your nervousness. Unfortunately I think the wording "on a return of capital [...] whether or not on a winding up (but other than redemption and purchase[...])" can only be referring to reduction of capital. It's unfortunate that the word "return" is used rather than "reduction", I agree. This seems to be a "manifest error" though, something we are familiar with!! I have noticed other "manifest errors" in the same terms; clearly they were drafted in a hurry in the crazy days of late 2008 and there was quite a bit of copying and pasting involved. If it were to come to a fight, I think a "return of capital" vs "reduction of capital" battle would be difficult for holders to win. Perhaps a good lawyer could find something else to exploit...

My bold.

I can see why reading this as a "manifesr error" is supportive of your position, but beyond that what basis do you have for saying this is the case?

What is the alternative interpretation? In particular what did they mean by "return of capital" if it wasn't a simple error, and how do we know?

The next problem is that the FCA has now instructed issuers to clarify the situation and I can't see Lloyds doing other than to confirm that the terms allow repayment of the shares at par under a capital reduction. If this were to happen, and assuming the voting numbers look okay for such a resolution (I haven't checked), one would expect the price of LLPC/D would adjust pretty sharply. They still trade at toppy prices so I don't see any harm in overweight holders reducing if they come to the same conclusion.


All IMO of course but happy to back any of it up with quotes etc.


GS

My bold.

Triggering a massive tax bill would be definite and significant "harm" for me and I suspect others. Of course paying the tax is better than receiving par, but it is a case of balancing a potential bad outcome with a certain bad outcome.

Hmm that would be annoying -- I had all my shares in ISAs.


GS

To me at least "reduction" is a term a business may use as part of its ongoing existence, they have surplus capital so they reduce it. On the other hand, to me, "return" fits better when the business is coming to an end, we are not operating going forward so we will return your capital. This then fits very well with tge fact that "return" is used in the context described above of a liquidation.

Anyway, I presume the immediate risk is over now, so we can stop balancing angels on the heads of pins by analysing what is meant precisely by every word.

Terry.

[GoSeigen]

To me at least "reduction" is a term a business may use as part of its ongoing existence, they have surplus capital so they reduce it. On the other hand, to me, "return" fits better when the business is coming to an end, we are not operating going forward so we will return your capital. This then fits very well with tge fact that "return" is used in the context described above of a liquidation.

Anyway, I presume the immediate risk is over now, so we can stop balancing angels on the heads of pins by analysing what is meant precisely by every word.

Terry.

Terry, can you offer any evidence which might be accepted by a court in support of the above opinion? For "reduction", there is no "to me..."
about it: it is defined in the statutes. "return of capital" is not defined, but a court would require sound backing for your belief about its meaning.


If you're bored of the discussion you don't have to read or write about it. I certainly don't expect you to reply to this or any other message I write on the subject.

Best of luck with your pref investments.


GS

[johnhemming]

A reduction of capital per se is nothing to do with the shareholders. It does not require a return of capital as it is a reduction of issued capital. It would normally be followed by some form of return of capital.

[Alaric]

It would normally be followed by some form of return of capital.

You get several components of "shareholder funds".

Typically these include issued share capital, share premium account and retained earnings. Sometimes it's necessary to shuffle these around to make a return to shareholders. Reduction in capital can mean reduction of issued share capital in this context. Paying off Prefs is likely to mean removing share capital.

[Wizard]

To me at least "reduction" is a term a business may use as part of its ongoing existence, they have surplus capital so they reduce it. On the other hand, to me, "return" fits better when the business is coming to an end, we are not operating going forward so we will return your capital. This then fits very well with tge fact that "return" is used in the context described above of a liquidation.

Anyway, I presume the immediate risk is over now, so we can stop balancing angels on the heads of pins by analysing what is meant precisely by every word.

Terry.

Terry, can you offer any evidence which might be accepted by a court in support of the above opinion? For "reduction", there is no "to me..."
about it: it is defined in the statutes. "return of capital" is not defined, but a court would require sound backing for your belief about its meaning.


If you're bored of the discussion you don't have to read or write about it. I certainly don't expect you to reply to this or any other message I write on the subject.

Best of luck with your pref investments.


GS

No, GS I can't, that is why I said "to me". But I would be very interested to read the evidence you have for your interpretaion.

It is not that I am bored of the discussion, just that the recent Lloyds staement make it less immediately important.

Terry.

EDIT: I have just read back up the thread and see I have asked for your evidence for your point initial, to which you just responded by asking me a question. A very good tactic for avoiding my question, so please this time answer the question and don't just try to avoid it. What evidence do you have for this being a "manifest error"?

[GoSeigen]

EDIT: I have just read back up the thread and see I have asked for your evidence for your point initial, to which you just responded by asking me a question. A very good tactic for avoiding my question, so please this time answer the question and don't just try to avoid it. What evidence do you have for this being a "manifest error"?

Terry, do you understand the meaning of manifest?

GS
EDIT: An example by way of illustration: I pick up a bag of crisps with price label 99p and pay by credit card. When I get my credit card bill, I see I have been charged £99. I would say this is a manifest error by the till operator. I don't think I need to "prove" that I did not agree to actually pay £99 for the crisps.

[GoSeigen]

EDIT: I have just read back up the thread and see I have asked for your evidence for your point initial, to which you just responded by asking me a question. A very good tactic for avoiding my question, so please this time answer the question and don't just try to avoid it. What evidence do you have for this being a "manifest error"?

I'm bemused by your questioning of this. It was originally little more a throwaway comment, with a wry nod to the ECN case -- these being Lloyds prefs. I attach no major significance to Lloyds using "return of capital" vs "reduction of capital". I simply think the latter form may have been more clearly defined.

That's why I asked about your interest in the phrase. It seems to be important to you, whereas I find little of interest in it...


GS

[Wizard]

EDIT: I have just read back up the thread and see I have asked for your evidence for your point initial, to which you just responded by asking me a question. A very good tactic for avoiding my question, so please this time answer the question and don't just try to avoid it. What evidence do you have for this being a "manifest error"?

Terry, do you understand the meaning of manifest?

GS
EDIT: An example by way of illustration: I pick up a bag of crisps with price label 99p and pay by credit card. When I get my credit card bill, I see I have been charged £99. I would say this is a manifest error by the till operator. I don't think I need to "prove" that I did not agree to actually pay £99 for the crisps.

What utter twaddle. I know the meaning of manifest, it means clear or obvious, you can attach the word to anything in an effort to avoid having to justify your position, but it does not make it so. So my question remains, what evidence do you have to support your statement that the wording in the prospectus is a "manifest error"? As I have asked twice and you have twice failed to provide any I conclude you have none and it is merely your opinion. Of course you are entitled to an opinion, but just because it is your opinion does not make it a fact.

Terry.

[Wizard]

EDIT: I have just read back up the thread and see I have asked for your evidence for your point initial, to which you just responded by asking me a question. A very good tactic for avoiding my question, so please this time answer the question and don't just try to avoid it. What evidence do you have for this being a "manifest error"?

I'm bemused by your questioning of this. It was originally little more a throwaway comment, with a wry nod to the ECN case -- these being Lloyds prefs. I attach no major significance to Lloyds using "return of capital" vs "reduction of capital". I simply think the latter form may have been more clearly defined.

That's why I asked about your interest in the phrase. It seems to be important to you, whereas I find little of interest in it...


GS

In which case why did you single the point out from a previous posters comment? Indeed you offered to back up your assertions, which is what I asked for and which you now will not do.

...I've now had a thorough look at LLPC/D prospectuses and agree with your nervousness. Unfortunately I think the wording "on a return of capital [...] whether or not on a winding up (but other than redemption and purchase[...])" can only be referring to reduction of capital. It's unfortunate that the word "return" is used rather than "reduction", I agree. This seems to be a "manifest error" though, something we are familiar with!! I have noticed other "manifest errors" in the same terms; clearly they were drafted in a hurry in the crazy days of late 2008 and there was quite a bit of copying and pasting involved. If it were to come to a fight, I think a "return of capital" vs "reduction of capital" battle would be difficult for holders to win. Perhaps a good lawyer could find something else to exploit...

All IMO of course but happy to back any of it up with quotes etc.

My bold.

While you are providing the promised back up on the "manifest error" statement can you also provide the basis for your conclusion that holders would find it difficult to win a "return of capital" vs "reduction of capital"battle. Relevant case law precedents would be fine.
Terry.

[GoSeigen]

In which case why did you single the point out from a previous posters comment? Indeed you offered to back up your assertions, which is what I asked for and which you now will not do.

...I've now had a thorough look at LLPC/D prospectuses and agree with your nervousness. Unfortunately I think the wording "on a return of capital [...] whether or not on a winding up (but other than redemption and purchase[...])" can only be referring to reduction of capital. It's unfortunate that the word "return" is used rather than "reduction", I agree. This seems to be a "manifest error" though, something we are familiar with!! I have noticed other "manifest errors" in the same terms; clearly they were drafted in a hurry in the crazy days of late 2008 and there was quite a bit of copying and pasting involved. If it were to come to a fight, I think a "return of capital" vs "reduction of capital" battle would be difficult for holders to win. Perhaps a good lawyer could find something else to exploit...

All IMO of course but happy to back any of it up with quotes etc.

My bold.

While you are providing the promised back up on the "manifest error" statement can you also provide the basis for your conclusion that holders would find it difficult to win a "return of capital" vs "reduction of capital"battle. Relevant case law precedents would be fine.
Terry.

Let's go right back to my original post which you've accurately quoted above.

My point was that I believe return of capital was a reference to reduction of capital in the context. This seems obvious to me as I can find no alternative explanation. Your suggestion that return of capital referred to winding up only doesn't fly because of the wording right there saying "whether or not on a winding up".


The "manifest error" thing was a joke, okay? [Used double !!, too subtle perhaps a smiley was needed?] Paul and I were both at the High Court when those words were uttered in the Lloyds case; I think he understood my tongue-in-cheek reference even if no-one else did. Hate to have to explain it but I suggested the wording "return of capital" might be an angle of attack for holders then jokingly!! suggested Lloyds might plead manifest error. That doesn't mean I myself think it is a manifest error just that Lloyds might successfully argue it as such. And my backing for that was other manifest errors nearby in the same document. For which I could supply quotes.

You want quotes defending the manifest error thing: here's another "manifest error" from the LLPC prospectus:

Upon such substitution, the Preference Shares shall be exchanged for, or redeemed by, the relevant Qualifying Non-Innovative Tier 1 Securities or the proceeds of redemption of the Preference Shares shall be mandatorily applied to the subscription or purchase of the Qualifying Non-Innovative Tier 1 Securities so issued.

Now LLPC are irredeemable so plainly redemption is inapplicable here. However IMO it was included because the same clause is copied and pasted verbatim for each of the prefs described in the document whether redeemable or not. If someone were to query the presence of the word "redeem" in this clause in court I believe the judge would say the word obviously arrived there by mistake as part of the copy and past operation and did NOT imply that LLPC have redemption terms.

I probably spotted other errors but that was almost ten days ago. If you'd asked there and then I may have humoured you but I frankly can't be bothered now. It's pretty easy for you to do yourself if it matters that much.


GS