Plans for "irredeemable" prefs?

[hiriskpaul]

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

I am fully loaded up with the Balfour Beatty prefs. A yield to maturity in a little over 2 years of around 6% for a pref with a company that is now profitable and paying dividends on the ords, is sitting on net cash of over £330m on the balance sheet and has an investment portfolio of £1.2b in infrastructure assets. Oh and their pension fund is in surplus.

They need £214m to redeem the remaining amount of the 1.875% convertible this year and about £177m in 2020 to redeem the pref. Something could always blow up of course, but as far as I am concerned these are still excellent value. Would buy more, but there is always the risk of something dangerous lurking somewhere...

[Wizard]

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.

But if the right existed surely they would have to explain why it was being explicit in the new instrjment in the inevitable legal challenge. I would have thought a bit contrived and better to just press on with a capital reduction on LLPC/D.

Terry.

[hiriskpaul]

But if the right existed surely they would have to explain why it was being explicit in the new instrjment in the inevitable legal challenge. I would have thought a bit contrived and better to just press on with a capital reduction on LLPC/D.

Terry.

They could state that LLPC/LLPD was subject to cancellation at par on capital reduction. A provocative statement for sure, but as they were not going through the capital reduction process they would not have to argue or justify this statement in the High Court. It would be up to pref holders to force Lloyds into court if they wanted to challenge the assertion. Unless challenged, Lloyds could then claim that pref holders were no worse off if a right to cancel, redeem or call at par clause was inserted for the new T1 security.

Admittedly there would be a great deal of fuss kicked off in the media, writing to MPs etc. and I would certainly join in, but this would potentially be an easier route for Lloyds to go down than statutory capital reduction. It does not even require a resolution to be voted through as Lloyds have an undeniable right of substitution. However, they would still have to get it past the FCA/PRA and convince an independent bank that this was fair and pref holders were no worse off as a result of the substitution.

Just trying to think the unthinkable, as Lloyds may have people working on this! I have always thought the right of substitution to be innocuous, but now I am not so sure it could not be gamed and Lloyds history is testament that they are willing to play such games with their investors.

[Wizard]

Nothing wrong with thinking the unthinkable, in that respect we are lucky that Aviva's blunder has tipped us off to the risk. It may be that Lloyds are cursing the inept efforts of Aviva as it may make any cunning plan harder to get past investors.

Terry.

[paulmiller]

But if the right existed surely they would have to explain why it was being explicit in the new instrjment in the inevitable legal challenge. I would have thought a bit contrived and better to just press on with a capital reduction on LLPC/D.

Terry.

They could state that LLPC/LLPD was subject to cancellation at par on capital reduction. A provocative statement for sure, but as they were not going through the capital reduction process they would not have to argue or justify this statement in the High Court. It would be up to pref holders to force Lloyds into court if they wanted to challenge the assertion. Unless challenged, Lloyds could then claim that pref holders were no worse off if a right to cancel, redeem or call at par clause was inserted for the new T1 security.

Admittedly there would be a great deal of fuss kicked off in the media, writing to MPs etc. and I would certainly join in, but this would potentially be an easier route for Lloyds to go down than statutory capital reduction. It does not even require a resolution to be voted through as Lloyds have an undeniable right of substitution. However, they would still have to get it past the FCA/PRA and convince an independent bank that this was fair and pref holders were no worse off as a result of the substitution.

Just trying to think the unthinkable, as Lloyds may have people working on this! I have always thought the right of substitution to be innocuous, but now I am not so sure it could not be gamed and Lloyds history is testament that they are willing to play such games with their investors.

I think if we keep thinking about the unthinkable we can easily talk ourselves out of good income producing preference shares that were of no concern to anyone until a few weeks ago. Aviva may never have even gone ahead with the idea, and now that it has been very quickly abandoned by Aviva the most likely outcome now is that no other company will even consider the idea.

The PR damage they would suffer would far outweigh the very small saving in interest payments. What is the point in NatWest or Santander going through such damage to their brand and reputation for £10 million? The numbers with Lloyds are not very much more.

I am more concerned about US stock markets on sky high PEs over 30 falling back to half that level and the inevitable adverse effect on UK ordinary shares.

[HYPMonkey]

After this episode, my prefs strategy is bust (investing company income in prefs to wipe out corp tax) and I am GTFO.

After Co-Op and ECNs, I simply do not want to be associated with these criminals any longer.

Selling out, sleeping well and going for a John Baron IT-Based TR portfolio.

[rippleog]

The preference market has become totally illiquid....
I am not sure that anybody beyond retail investors can sell out of the market..and even then it is quite hard work. I have traded in many multitudes of £1k nominal in the past few weeks.

I cant help thinking the damage has been done..LLPC is weak because it is the largest preference issue and Lloyds probably have more market integrity than a bank like Santander, ECNs debacle notwithstanding.

[hiriskpaul]

It does seem to be hard to get sell quotes again today for STAC and NWBD, but not for AV.A where I got an online quote for 60k (156.45), or LLPC where I got a quote for 40k at 150.25. Above that they reverted to "phone the dealer".

[Wozzitworthit]

Sold all of my Santander Prefs first thing this morning SAN at 173p and SANB at 140p

All of my sales yesterday and today were with Selftrade and all routed to dealer , although if you put a price limit on that screen and tick to have the order cancelled if they can't achieve that quantity and price, you don't speak to anyone.

Works quite well, on each occasion the deal was done within about 5 minutes

[shipmate]

No idea how this is going to pan out but, rather than sell, I've added modestly to my holdings of LLPC, SAN and STAC (never held any Aviva/GA prefs).
May well end up with a bigger hit to my wallet but, with Lloyds announcing a £1 billion buyback of their ords rather than trying to use the funds to 'cancel' their prefs at par, I considered it worth the risk.
Must admit the deafening silence from any of the above mentioned companies is a little worrying - still there's a risk in any investment.

[bruncher]

hiriskpaul wrote:

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

ap8889 wrote:

...small bondholders were shabbily treated by Lloyds in the ECN case

Perhaps these instruments are no longer viable especially for small investors, as the FCA and the Supreme Court both disregarded the term Pari Passu which was in the prospectuses and is a principle that should have been upheld.

Holders of large amounts of ECN's ("institutions") were offered a favourable exchange into new instruments. Holders of small amounts of identical ECN's were treated differently.

It was revealed in the press that discussions took place between Aviva and large holders of Prefs. On this occasion the interests of institutional holders and small investors coincided, but we cannot rely on that any more than we can rely on the disgraced FCA.

[Alaric]

May well end up with a bigger hit to my wallet but, with Lloyds announcing a £1 billion buyback of their ords rather than trying to use the funds to 'cancel' their prefs at par, I considered it worth the risk.

The terms of the Prefs evidently allow capital to returned to Ords leaving Prefs holding shares in a business with a weaker capital position.

In the case of Aviva, there was wording designed to require them to pay off the Prefs in the event of a return of capital to Ords. It was that wording and some looseness of definition in what was required by Companies Acts that lead to their claim that they had awarded themselves an option to repay at par.

[GoSeigen]

Supreme Court both disregarded the term Pari Passu

Just a point of fact: I don't recall the Supreme Court considering the pari passu aspect at all -- they were not asked to by either the Lloyds or Noteholder counsel. i.e. they disregarded it in the same way that they disregarded the build up of plastic in the oceans: it was considered by all parties involved to be entirely irrelevent to the matter at hand.


GS

[GoSeigen]

May well end up with a bigger hit to my wallet but, with Lloyds announcing a £1 billion buyback of their ords rather than trying to use the funds to 'cancel' their prefs at par, I considered it worth the risk.

The terms of the Prefs evidently allow capital to returned to Ords leaving Prefs holding shares in a business with a weaker capital position.

In the case of Aviva, there was wording designed to require them to pay off the Prefs in the event of a return of capital to Ords. It was that wording and some looseness of definition in what was required by Companies Acts that lead to their claim that they had awarded themselves an option to repay at par.

The author "evidently" has no idea what he's talking about here. Those two paragraphs are made-up nonsense in just about every detail and nuance -- from the weasely "evidently" through to the fabricated "option" "award"! Please ask if you wish to understand why...


GS

[bruncher]

I don't recall the Supreme Court considering the pari passu aspect at all

it was considered by all parties involved to be entirely irrelevent to the matter at hand.

Well which is it? Did they consider it to be irrelevant, or just not consider it all?

I certainly made the useless FCA aware of the issue, and subsequently the Complaints Commissioner.

[hiriskpaul]

I don't recall the Supreme Court considering the pari passu aspect at all

it was considered by all parties involved to be entirely irrelevent to the matter at hand.

Well which is it? Did they consider it to be irrelevant, or just not consider it all?

I certainly made the useless FCA aware of the issue, and subsequently the Complaints Commissioner.

The Court(s) did not consider this aspect and were not asked to. They only considered whether Lloyds had the right to call.

The Pari passu (lack of) issue came up during the previous LME and the failure here was that of the FCA. The FCA only appeared to have 2 concerns in the LME 1) Retail investors were offered an exit; 2) Retail investors were NOT offered the capital securities available to institutions. The FCA showed no interest in whether the offer to retail investors was fair, or whether the LME documentation, which contained unintelligible gobbledygook, was suitable for retail investors.

The cop out was the usual "Seek professional advice". Supreme Court judges could not agree on what the prospectus meant, so there was little chance of your average financial adviser having much of clue or any ability to assess the risks.

I do have some hopes that the FCA might do a better job in future. Bailey seems to be much more investor friendly than his useless predecessor and he did react quickly to Aviva's assertion of their right to cancel prefs at par.

[Alaric]

Bailey seems to be much more investor friendly than his useless predecessor and he did react quickly to Aviva's assertion of their right to cancel prefs at par.

Wasn't that only because he was publicly prodded by chair of the Treasury Select Committee? There might have been private prodding as well.

The material at the fixedincomeinvestments site is quite revealing
https://www.fixedincomeinvestments.co.uk/boards/

The initial response by the FSA when the matter was raised was dismissive.

https://www.fixedincomeinvestments.co.u ... #post-2006


It later transpired that they, or someone in the organisation, had been aware of Aviva's plans, but they appear not to have anticipated the likely market response.

[hiriskpaul]

I agree that the FCA needed prodding, but once prodded they did take some action and are continuing with investigations. With the Lloyds ECNS the FCA did absolutely nothing other than their very best to bat away complaints.

Actually I don't know that is totally true. Lloyds agreed to seek a declaratory judgement, at entirely their own cost. Behind the scenes someone clearly forced Lloyds into this and that may have been the FCA.

[GoSeigen]

I don't recall the Supreme Court considering the pari passu aspect at all

it was considered by all parties involved to be entirely irrelevent to the matter at hand.

Well which is it? Did they consider it to be irrelevant, or just not consider it all?

I certainly made the useless FCA aware of the issue, and subsequently the Complaints Commissioner.

bruncher, My poor English, using the same word twice in close proximity, but you'll be surprised to learn the word "consider" has several meanings, of which two are:

1. Think carefully about something, typically before making a decision: "I don't recall the Supreme Court considering [i.e. deliberating] the pari passu aspect at all"
2. Believe, think: "it was considered [i.e. believed] by all parties involved to be entirely irrelevant".

Better?


The point: we cannot draw any conclusion from the SC's attention or lack of attention to pari passu. It was not in any way relevant.

GS

[tieresias]

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?