Plans for "irredeemable" prefs?

[hiriskpaul]

I have been scratching my head wondering what to do about the pile of preference shares I have collected following the threat of cancellation of par by Aviva. As far as I am concerned, the risk is still there, but potentially kicked into the long grass for the Aviva/GA prefs. Regardless of anyone's thoughts on the legality or morality, the market will react badly again should another issuer say they are considering a similar capital reduction scheme along with par redemption.

I did sell a lot of the prefs we held in our ISAs after Aviva's bombshell, but filled them back up again with Aviva prefs when the Times announced that Aviva had had a visit from angry institutional shareholders. So now we are as exposed as ever. For me the biggest headaches are NWBD and LLPC/LLPD as we have substantial positions in these purchased at much lower prices and so subject to a large CGT liability if we sold. But selling and paying the CGT would definitely be a better outcome than cancellation at par. NWBD is of course issued by NatWest, 100% owned by RBS, so similar in a way to GA owned by Aviva. The prospectus for LLPC/LLPD is more modern than the others, dated 2008 when the old HBOS securities were replaced, and by my reading looks safer as the "Return of capital" part only appears under a "Rights upon Liquidation" section. How much stronger that makes them I don't know and Lloyds are the bank I have the least amount of trust in. If Lloyds think they can get away with cancellation at par then I think they are the ones most likely to give it a try. They have shown scant care over things such as reputation or customer service in the past, so I see no reason why this should concern them in future.

What do others think and what are your plans?

[swill453]

What do others think and what are your plans?

Plans are to keep taking the income, indefinitely. The reaction and quick backtracking by Aviva have given me enough confidence that nobody else is likely to put their head above the parapet.

Any further recovery in the prices would be mildly welcome but largely irrelevant.

(I hold AV.A, LLPC, RSAB and NTEA.)

Scott.

[Holts]

What do others think and what are your plans?

I am likely wrong , but to me the inclusion of various types in the all in one document of Lloyds leaves them in a weaker position should they want to try the same trick , I also wonder if the documents were produced in haste .

Have held all my prefs apart from doing some swaps to improve yield as the prices fell and actually added some BWSA and LLPC , certainly not as comfortable as before . Relying largely on the bigger common holders who challenged Aviva to also line up against Lloyds should it happen .

[GoSeigen]

I have been scratching my head wondering what to do about the pile of preference shares I have collected following the threat of cancellation of par by Aviva. As far as I am concerned, the risk is still there, but potentially kicked into the long grass for the Aviva/GA prefs. Regardless of anyone's thoughts on the legality or morality, the market will react badly again should another issuer say they are considering a similar capital reduction scheme along with par redemption.

I did sell a lot of the prefs we held in our ISAs after Aviva's bombshell, but filled them back up again with Aviva prefs when the Times announced that Aviva had had a visit from angry institutional shareholders. So now we are as exposed as ever. For me the biggest headaches are NWBD and LLPC/LLPD as we have substantial positions in these purchased at much lower prices and so subject to a large CGT liability if we sold. But selling and paying the CGT would definitely be a better outcome than cancellation at par. NWBD is of course issued by NatWest, 100% owned by RBS, so similar in a way to GA owned by Aviva. The prospectus for LLPC/LLPD is more modern than the others, dated 2008 when the old HBOS securities were replaced, and by my reading looks safer as the "Return of capital" part only appears under a "Rights upon Liquidation" section. How much stronger that makes them I don't know and Lloyds are the bank I have the least amount of trust in. If Lloyds think they can get away with cancellation at par then I think they are the ones most likely to give it a try. They have shown scant care over things such as reputation or customer service in the past, so I see no reason why this should concern them in future.

What do others think and what are your plans?

Paul, don't rely on the prospectus but go to the Articles and also don't forget the Companies Acts. Note that the LBG Articles state:

7 Reduction of capital
Subject to the provisions of the statutes, the company may by special resolution reduce its share capital or any capital redemption reserve, share premium account or other undistributable reserve in any way.

and

138 Return of capital and winding up
138.1 On a return of capital, whether in a winding up or a reduction of capital or otherwise:
[...]
138.1.2 the preference shares will be entitled to the rights attached to them on issue.


I haven't looked to see if the "rights attached " are in the prospectus and enhance the above limited rights.

GS

[OwenSwansea]

I have held onto all my Prefs, and will continue to do so for the foreseeable future, as I cannot envisage any of the other issuers having the nerve to attempt to cancel them, and I am hopeful that Mark Taber's efforts to have the redemption loophole closed will be successful.

As far as interest rates are concerned, I do not think that they will go much higher than they are now, especially if there is a possibility of a recession in 2019.

[Wozzitworthit]

Paul

I had over-bought bank and insurance prefs a couple or so years ago, and so I pruned back by about 30% by selling all insurance prefs (before Ecclesiastical made their announcement) and some LLPC and some NWBD. This leaves me Lloyds, Santander and Standard Chartered, and NatWest (RBS) in financials. I also sold some BOI as I had overbought those as well

Proceeds went to some investment trust type products, really to give me a better spread after weeding out the prefs.

I have always avoided these before - hang-up about the "ongoing charges" (!!) and having fun dabbling myself (??) so this is new territory for me

Income will be down a bit but it made me feel a bit less vulnerable

Woz

[Alaric]

I have been scratching my head wondering what to do about the pile of preference shares I have collected following the threat of cancellation of par by Aviva.

Prefs issued by Insurance Companies and Banks had a place in the hierarchy of Regulatory Capital. This was a grandfather effect which expires in 2026. That said, those rules were EU inspired, so might be set aside.

You might see something happen to retire the Prefs by 2026, which provided no more legal loopholes are discovered would take the form of either cash related to market prices or an equivalent income stream. For example they might offer to swop to a bond at a much lower coupon, but you get 160 of the bond for every 100 of the Pref. The idea being that the bond then trades at around par.

Prefs issued by non-financial Companies not subject to rules about Regulatory capital would not be affected.

[paulmiller]

Aviva/GA - The risk is now over thanks to the excellent investor campaign and the worst that can happen now is that they are replaced by something else at a fair market price.

NWBD/Santander - The issue size of the Preference shares is just over £100 million in both cases, and so much lower than Aviva, and so they are unlikely now to ever risk the public storm and the disastrous PR that Aviva had to face for the sake of saving just over £10 million in interest. Also RBS is largely owned by the Government and so they will not want to be accused in the British press of stealing income from pensioners. Prospectus may also not allow. It is also not clear that this "loophole" in the law plan would ever get past the courts. There is also EU legislation.

LLPC - A bigger issue size so more incentive for Lloyds to try to steal income from pensioners but they are still unlikely now to risk the same storm that Aviva faced. Prospectus may also not allow. It is also not clear that this "loophole" in the law plan would ever get past the courts. There is also EU legislation.

I think that the most likely outcome now is that this "loophole" in the law will eventually be closed in the UK as it was in Australia. The FCA is looking at it and the UK Parliament and Treasury Select Committee is also looking at it.

[Wizard]

We need to remember what it was that stopped Aviva. It was not certainty of losing in the courts and it was not the FCA who we now know had been told about the plan in advance. What stopped them was the group of institutional holders that also had large holdings of ordinaries and were ready to use these to defeat the plans in a shareholder vote. So if Lloyds (who I agree are the most likely to try this approach) want to go down this route they wil be spending their time making sure they have found a way to sweeten the deal enough for those institutional holder to keep them on board.

I am continuing to hold GACA, LLPD, SAN, BWRA and other non-financial prefs, but am pretty nervous. Like HiRiskPaul one of the main impediments to exiting is the significant tax bill that will reduce the capital released to replace the income stream.

Terry.

[hiriskpaul]

Thanks for all the comments. Overall I sense a little more confidence than I have that "Capital Reduction" games by other issuers will not be attempted in future. For the bank prefs I really cannot see any cast iron legal arguments that will prevent cancellation at par, although I do accept that there are certainly arguments against and any attempt to do so will stir up a similar storm of protest as directed at Aviva, which might put banks off. To my untrained eye shareholders' arguments look less sound than the arguments against the ECN par calls, and that did not end well.

I am likely wrong , but to me the inclusion of various types in the all in one document of Lloyds leaves them in a weaker position should they want to try the same trick , I also wonder if the documents were produced in haste .

Have held all my prefs apart from doing some swaps to improve yield as the prices fell and actually added some BWSA and LLPC , certainly not as comfortable as before . Relying largely on the bigger common holders who challenged Aviva to also line up against Lloyds should it happen .

I think it likely that the prospectus was produced in haste, not sure how that offers better protection though.

The problem I see with relying on big holders is that lessons from Aviva will have been learned and other prefs may not be such a big deal to shareholders anyway. Rather than an outright confrontational statement, I think it more likely that the banks would adopt something similar to the Lloyds ECN path, starting with an RNS discussing the "Uncertainties over cancellation at par" in order to drive the prices down. They would follow up with an offer to institutional holders to swap into some compliant capital security and a simultaneous low ball cash offer to retail, all with a vote in favour of a change in terms and a sweep up clause for holdouts. On the other hand it is interesting that Lloyds in particular have not already embarked on this path, especially as they have recently kicked off a £1b share buyback programme to reduce capital. Perhaps nearly losing the ECN case actually frightened Lloyds away from similar controversial actions? Or maybe they could not opt for capital reduction for some arcane reason.

Paul, don't rely on the prospectus but go to the Articles and also don't forget the Companies Acts. Note that the LBG Articles state:

7 Reduction of capital
Subject to the provisions of the statutes, the company may by special resolution reduce its share capital or any capital redemption reserve, share premium account or other undistributable reserve in any way.

and

138 Return of capital and winding up
138.1 On a return of capital, whether in a winding up or a reduction of capital or otherwise:
[...]
138.1.2 the preference shares will be entitled to the rights attached to them on issue.


I haven't looked to see if the "rights attached " are in the prospectus and enhance the above limited rights.

GS

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 .

Aviva/GA - The risk is now over thanks to the excellent investor campaign and the worst that can happen now is that they are replaced by something else at a fair market price.

NWBD/Santander - The issue size of the Preference shares is just over £100 million in both cases, and so much lower than Aviva, and so they are unlikely now to ever risk the public storm and the disastrous PR that Aviva had to face for the sake of saving just over £10 million in interest. Also RBS is largely owned by the Government and so they will not want to be accused in the British press of stealing income from pensioners. Prospectus may also not allow. It is also not clear that this "loophole" in the law plan would ever get past the courts. There is also EU legislation.

LLPC - A bigger issue size so more incentive for Lloyds to try to steal income from pensioners but they are still unlikely now to risk the same storm that Aviva faced. Prospectus may also not allow. It is also not clear that this "loophole" in the law plan would ever get past the courts. There is also EU legislation.

I think that the most likely outcome now is that this "loophole" in the law will eventually be closed in the UK as it was in Australia. The FCA is looking at it and the UK Parliament and Treasury Select Committee is also looking at it.

The NatWest and Santander UK shares are all owned by a single group level company and as you say are smaller issues in comparison to the size of the ordinary shareholder base. As such I think ordinary shareholders are going to be less concerned about cancellation of the prefs. On the other hand I agree that RBS/Santander may not want the bad publicity and the hassle of going through a statutory reduction of capital exercise just to be rid of the prefs. They still might be prepared to manipulate the price down through an "Uncertainty" RNS and a low ball LME though. It has to be said as well that Santander in particular do not have a good reputation when it comes to bondholder friendliness.

The EU directive is an interesting defence against cancellation at par and as you say, legislation may be passed to give preference shareholders a right to a class vote on capital reduction. The current situation where it is unclear what the rights are is totally crazy.

We need to remember what it was that stopped Aviva. It was not certainty of losing in the courts and it was not the FCA who we now know had been told about the plan in advance. What stopped them was the group of institutional holders that also had large holdings of ordinaries and were ready to use these to defeat the plans in a shareholder vote. So if Lloyds (who I agree are the most likely to try this approach) want to go down this route they wil be spending their time making sure they have found a way to sweeten the deal enough for those institutional holder to keep them on board.

I am continuing to hold GACA, LLPD, SAN, BWRA and other non-financial prefs, but am pretty nervous. Like HiRiskPaul one of the main impediments to exiting is the significant tax bill that will reduce the capital released to replace the income stream.

Terry.

Buying off institutional shareholders is my main concern and IMHO far more likely than Aviva's shambolic approach.

I think we will sell a few LLPC and NWBD held in my wife's name next week in order to utilize her CGT allowance. I have the highly likely prospect of par call by Barclays of BCS-D sometime next year which would use up mine, so will hold off selling for now and just hope that the risk of capital reduction or other shenanigans does not materialise.

[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 .

Like you Paul, I think shareholders would be on very shaky ground trying to assert their view in a court. For a start the prospectuses I've read incorporate the Articles. Second, the law is pretty damn clear and you can hardly argue in a court that retail investors should not be concerned with the law but be allowed to rely on a single document (the prospectus) in isolation and with a confined, narrow interpretation of that document. The reasonable man is supposed to have more intelligence than that!

Talking of which, I wonder where TheReasonableMan is? I used to enjoy his contributions...

The EU directive is an interesting defence against cancellation at par and as you say, legislation may be passed to give preference shareholders a right to a class vote on capital reduction. The current situation where it is unclear what the rights are is totally crazy.

I don't agree that UK law is out of step with these famous "EU directives", Paul. This has been put about by a certain holder who doesn't accept UK case law rulings that capital reduction cancelling a non-equity share class does not affect class rights. Similarly I don't believe there is any lack of clarity about rights except in the minds of some holders who can't believe they might have overlooked a key aspect of the shares. I'm happy to be corrected on both points though, with appropriate evidence...



GS

[GoSeigen]

BTW, I think there is still some misunderstanding and wishful thinking about Aviva. The company put out a statement about their immediate intentions which has removed any immediate threat and allayed holders' fears. However, in my opinion, the Company does not have the power to decide this issue. They can state their own intention, yes, but in the end, if the shareholders wanted to reduce capital, all they need to do is pass a special resolution and instruct the board and I don't see that anyone could stop such a capital reduction. It was never in the Company's power to do it and never will be -- it's the sole prerogative of the members.

This is why I feel Aviva was pushed around by a major shareholder. But who is to say that that shareholder is not now positioning itself quietly to allow a capital reduction to take place -- once some other issuers have taken a bit of heat out of the situation?

Pure speculation, but not impossible IMO.


GS

[Wozzitworthit]

Just been trying to get actual quotes for selling Lloyds, Santander and Standard Chartered Prefs but in all cases would have to have request put through to a dealer - so looks like a lot of people are trying to sell now the flag has been raised.

Hopefully just people trying to offload before end of tax year as I doubt if Blackrock etc use Selftrade !!!!!!

[hiriskpaul]

I agree that the risk with Aviva has not vanished completely, but has been very much diminished. It would be difficult for shareholders to force through a capital reduction plan against the wishes of the Board, especially so if Aviva reduce their surplus capital soon in some other way. For this reason I am far more comfortable holding on to our newly acquired Aviva prefs compared to the bank prefs.

ap8889, I do agree with the sentiment over Lloyds, esp. as I had my ECNs called at par and am not rushing to buy any more Lloyds paper of any sort. However, to completely sell out of Lloyds prefs would mean paying considerable CGT, so I don't want to be too hasty about i. I think upside from here is limited, but apart from any shenanigans related to this cancellation at par risk, downside risk is limited as well. Furthermore, Lloyds are currently reducing capital by up to £1B via ordinary share buy backs. Under the circumstances that does make me wonder why they have not already gone down the capital reduction/cancel at par route for LLPC/LLPD given the very high dividend rates on these. If it was such a cut and dried legal certainty that this was allowed, why have Lloyds not already done it? If I was an ordinary shareholder, without prefs, I would want to know why Lloyds are prepared to pay 9.25%/9.75% on paper that is going to be disqualified as T1 capital in a few years time, when a supposedly legal mechanism was available to redeem them at par. Many of the ECNS carried lower coupons than the LLPC/LLPD dividend rates.

[hiriskpaul]

Just been trying to get actual quotes for selling Lloyds, Santander and Standard Chartered Prefs but in all cases would have to have request put through to a dealer - so looks like a lot of people are trying to sell now the flag has been raised.

Hopefully just people trying to offload before end of tax year as I doubt if Blackrock etc use Selftrade !!!!!!

I am not sure it means there are lots of sellers. Sometimes this just happens. I just tried to get a few sell quotes at iWeb. No problems getting online quotes for AV.A up to £30k (157.62), LLPC up to £10k (152). Could not get quotes for NWBD or STAC above 1k. This would not be for the first time though. When I sold prefs a couple of weeks ago in our ISAs I had to drip feed them using a number of limit orders.

[88V8]

I just made my final CGT sales.
None of our Prefs were included, although having just now recylced some of the proceeds into top-ups, neither did I buy any more as I am very fat on Financials.
We have the usual suspects, incl the LLs, STAC, the SANs, NWBD, ELLA, the AVs, GACA; also BP.B, NTEA, RUSP, RE.B although how Irredeemable they are, offhand I have no idea. Anyway, hanging onto them all, especially as there are no obvious comparatively yieldy targets that I fancy for that much capital.

My 2018/9 ISA will all go on BBYB, which of course will evaporate in a couple of years' time.

V8

[Wozzitworthit]

Just been trying to get actual quotes for selling Lloyds, Santander and Standard Chartered Prefs but in all cases would have to have request put through to a dealer - so looks like a lot of people are trying to sell now the flag has been raised.

Hopefully just people trying to offload before end of tax year as I doubt if Blackrock etc use Selftrade !!!!!!

I am not sure it means there are lots of sellers. Sometimes this just happens. I just tried to get a few sell quotes at iWeb. No problems getting online quotes for AV.A up to £30k (157.62), LLPC up to £10k (152). Could not get quotes for NWBD or STAC above 1k. This would not be for the first time though. When I sold prefs a couple of weeks ago in our ISAs I had to drip feed them using a number of limit orders.

OK - yes , too easy to put 2 and 2 together to make 5, must admit that thinking about it. there have been quite a few times when my "test" orders have brought up the "Route to Dealer" screen. Mind you, I expect there have been a lot of small private investors selling out of these before year end, not so much volume of sales as volume of investors.

Anyway, having sold some prefs after the initial scare, I decided to gradually offload the rest over the coming months However, I have become increasingly pessimistic about the whole scenario, so decided to offload more today as Mrs Woz and I had not used up our CG allowance

Sold out remainder of LLPC/D at 152p and 166p and all our STAB at 123p

Tonight I'll do some proper sums and see if we have any allowance left to continue tomorrow.

[Wozzitworthit]

I just made my final CGT sales.
None of our Prefs were included, although having just now recylced some of the proceeds into top-ups, neither did I buy any more as I am very fat on Financials.
We have the usual suspects, incl the LLs, STAC, the SANs, NWBD, ELLA, the AVs, GACA; also BP.B, NTEA, RUSP, RE.B although how Irredeemable they are, offhand I have no idea. Anyway, hanging onto them all, especially as there are no obvious comparatively yieldy targets that I fancy for that much capital.

My 2018/9 ISA will all go on BBYB, which of course will evaporate in a couple of years' time.

V8

Now we can all sit back and worry about UK/Russian relations and the price of Palm Oil. As far as Balfour Beatty goes, I get the feeling we all have shed loads of those ! A bit more choice would be nice - all suggestions welcome

[hiriskpaul]

Sold out remainder of LLPC/D at 152p and 166p and all our STAB at 123p

Tonight I'll do some proper sums and see if we have any allowance left to continue tomorrow.

STAB and STAC I am less concerned about than the others for the simple reason that Standard Chartered have only recently raised capital through a rights issue. Under the circumstances it would be a little difficult for them to justify a capital reduction! The dividend rates are also lower, so potential loss on par cancellation is lower.

[hiriskpaul]

It had occurred to me that there was one other potential route that Lloyds might follow in order to rid themselves of LLPC/LLPD. It is associated with their right of substitution:

Subject to the Articles (including the restrictions described under ‘‘Restrictions on Dividends and
Redemption’’ above), the provisions of the Companies Acts and all other laws and regulations
applying to the Company and to prior confirmation from the FSA that it has no objection (if such
confirmation is required, in which case, the FSA may impose conditions on the redemption or
substitution), the Company may substitute the Preference Shares in whole, but not in part, with
Qualifying Non-Innovative Tier 1 Securities at any time (the date of such substitution being the
‘‘Substitution Date’’) without any requirement for consent or approval of the holders of the
Preference Shares.

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.

(my bold)
Where Qualifying Non-Innovative Tier 1 Securities are defined as:

‘‘Qualifying Non-Innovative Tier 1 Securities’’ means securities whether debt, equity or
otherwise, issued directly or indirectly by the Company that:
(a) have terms not materially less favourable to a holder of Preference Shares, as reasonably
determined by an independent investment bank appointed by the Company, than the terms of
the Preference Shares, provided that they shall (1) include a ranking at least equal to that of
the Preference Shares, (2) have the same dividend or distribution rate or rate of return and
Dividend Payment Dates from time to time applying to the Preference Shares, (3) be issued
in an amount at least equal to the total number of Preference Shares multiplied by £1,
(4) comply with the then current requirements of the FSA in relation to Non-Innovative Tier 1
Capital, and (5) preserve any existing rights under the Preference Shares to any accrued
dividend which has not been paid in respect of the period from (and including) the Dividend
Payment Date last preceding the Substitution Date to (but excluding) the Substitution Date;
and
(b) are listed on the London Stock Exchange, the Luxembourg Stock Exchange or such other
stock exchange as is a recognised stock exchange;

It is hard to see what such T1 securities could be given the new regulatory restrictions on what qualifies as T1 capital and without terms "not materially less favourable to a holder of Preference Shares". However, if they could dream up compliant T1 securities, then they could insert an explicit call/cancel at par clause, arguing that this was always an option for them with LLPC/LLPD via capital reduction. Then a few months down the line, they would cancel at par.