Preference shares -- keeping it simple

[stockton]

All I was saying was that compared to less risky assets the dividend offered was better so what was wrong with the bargain? Remember: getting your principal back (e.g. through capital reduction of paid up share capital) is good .............

[Inspect] an interest rate graph for the past 30 years. It might then be clear what a crap investment preference shares would have been had they operated as you suggest they and the issuers should.
Repayment of capital and re-investment every few years because interest rates have declined would have resulted in the holders becoming very short of money.

Moderator Message:
modded to remove emotional stuff, dspp

[GoSeigen]

So the simple answer to stockton's question is that prefs had higher dividend rates than deposit interest, higher dividend rates than dated government debt, higher dividend rates than dated corporate debt and higher dividend rates than undated corporate debt. No mystery: they earned a higher return to compensate for their greater risk.

There's an even greater risk if the issuer can cancel the income because "they want to", without the holders having effective power of veto. That was what Aviva claimed they had the power to do.

Sadly, again, this is nonsensical.

First, the income from most shares is dividends which are entirely at the discretion of the board, no matter what happens with capital reductions. So it has always been the case that directors can terminate share income at will.

Second, we see here again the claim that issuers can reduce capital when they want to without holders having power of veto. They cannot. They have to present a special resolution to members so it is they, not the issuer, who have the discretion. Aviva might have been implying that they had support of the shareholders, but even that confidence seems to have been misplaced.

Perhaps Alaric could explain why he keeps repeating this -- assuming he does so in good faith?


GS

[Alaric]

Second, we see here again the claim that issuers can reduce capital when they want to without holders having power of veto. They cannot. They have to present a special resolution to members so it is they, not the issuer, who have the discretion

Which members would these be? If there isn't a right to a separate vote of the class of shareholders affected, effectively the issuer can conditionally renege on the dividend income, assuming the affected shareholders can be out voted. In Aviva's case, it transpired that Preference Shareholders were also Ordinary Shareholders thus potentially denying Aviva support for a motion to short change Pref holders.

[ChrisNix]

Second, we see here again the claim that issuers can reduce capital when they want to without holders having power of veto. They cannot. They have to present a special resolution to members so it is they, not the issuer, who have the discretion

Which members would these be? If there isn't a right to a separate vote of the class of shareholders affected, effectively the issuer can conditionally renege on the dividend income, assuming the affected shareholders can be out voted. In Aviva's case, it transpired that Preference Shareholders were also Ordinary Shareholders thus potentially denying Aviva support for a motion to short change Pref holders.

Alaric,

It is becoming increasingly apparent that you believe a pref purchase allows a buyer unilaterally to impose conditions on the issuer, irrespective of the documented legal terms of the pref.

The renegation of such a one sided bargain can exist only in the mind.

Chris

[NeilW]

-then less secure is dated government securities where cash will be repaid with a high degree of certainty on a set date with certain interest payments;

There are two categories there, not one.

- government securities denominated in a currency the government owns and/or controls - where the redemption is certain since it is simply switching a dated, interest paying bond for an undated non-interest paying bearer bond (aka cash). The government unissues one, and issues the other - much like paying off the War loan with new term Gilts.

- government securities denominated in a currency the government does not own and/or control - where redemption may happen if the government has earned enough foreign currency to redeem the debt. This applies to all Eurozone countries (except arguably Germany given the de facto control/influence they have over the ECB), and those weighed down with dollarised debt.

[Alaric]

It is becoming increasingly apparent that you believe a pref purchase allows a buyer unilaterally to impose conditions on the issuer, irrespective of the documented legal terms of the pref.

Where is the buyer imposing terms on the issuer, other than to expect that if an issue pays a fixed income amount for ever, that such an income will continue and can be terminated only with either the financial collapse of the issuer or by mutual agreement?

It's rather more as to whether the issuer has the right to unilaterally impose conditions on the buyer, such as cancellation at a price of 100, an income stream that's worth 150 or more.

[ChrisNix]

Where is the buyer imposing terms on the issuer, other than to expect that if an issue pays a fixed income amount for ever, that such an income will continue and can be terminated only with either the financial collapse of the issuer or by mutual agreement?

It's rather more as to whether the issuer has the right to unilaterally impose conditions on the buyer, such as cancellation at a price of 100, an income stream that's worth 150 or more.

Alaric,

The buyer imposed term is "other than to expect that if an issue pays a fixed income amount for ever". The legal documentation does not and never has said that the issue pays a fixed income for ever!

The terms of the vast majority of such prefs specify that income is paid until the capital is returned via a court sanctioned scheme or via a liquidation.

The court would never sanction a scheme where the issuer was unilaterally imposing new terms on the buyer.

Chris

[Alaric]

The buyer imposed term is "other than to expect that if an issue pays a fixed income amount for ever". The legal documentation does not and never has said that the issue pays a fixed income for ever!

It's general understanding that the term irredeemable should mean "for ever" unless agreed by both parties or specifically drawn attention to. That's why the FCA felt obliged to attempt to clarify matters. Preference Shares are a a whole degree riskier than they otherwise would be if the issuer has an embedded cancellation option to be exploited when the price goes well above par. That's why I don't think such an unlimited option was ever intended in the circumstances of willing issuer, willing lender. There are or have been issues with such explicit options. These are spelt out in the terms, something unnecessary if such a condition was standard.

[ChrisNix]

The buyer imposed term is "other than to expect that if an issue pays a fixed income amount for ever". The legal documentation does not and never has said that the issue pays a fixed income for ever!

It's general understanding that the term irredeemable should mean "for ever" unless agreed by both parties or specifically drawn attention to. That's why the FCA felt obliged to attempt to clarify matters. Preference Shares are a a whole degree riskier than they otherwise would be if the issuer has an embedded cancellation option to be exploited when the price goes well above par. That's why I don't think such an unlimited option was ever intended in the circumstances of willing issuer, willing lender. There are or have been issues with such explicit options. These are spelt out in the terms, something unnecessary if such a condition was standard.

Alaric,

It's more accurate to say it's a general misunderstanding that in the world of UK prefs the term irredeemable [should] mean for ever.

How the CA works, in extreme brevity, is as follows:

1. Any share capital (ord or pref) can be reduced;
2. The is a general prohibition against limited liability companies buying back/repurchasing their share capital (ord or pref);
3. There are a number of exemptions. One of these is a redemption compliant with Part 18 Chapter 3: Prefs which have authorisation for such redemptions are known as redeemable prefs;
4. Prefs which cannot be redeemed pursuant to Chapter 18 Part 3 are colloquially known as irredeemable. However, they are only irredeemable in respect of that mechanism. They are not perpetual, permanent, everlasting or eternal;
5. In particular, such prefs can have their capital returned via a capital reduction compliant with Part 17 Chapter 10 of the CA.

In situations where original investors wanted to have the ability to block such capital reduction they had either (i) to buy prefs in an issuer whose preexisting articles already required sanction at a separate meeting of the prefs or (ii) to require a change in the articles as a condition of their subscription.

Any competent corporate lawyer can confirm this to you.

Chris

[johnhemming]

That is not an agreed position.

[GoSeigen]

issuer can cancel the income because "they want to",

Perhaps Alaric could explain why he keeps repeating this -- assuming he does so in good faith?

No answer -- guess my assumption was wrong.

GS

[Alaric]

No answer -- guess my assumption was wrong.

I don't know what you assumption was, but mine is that giving issuers an unrestricted option to pay off preference shares at par when the market value of the income is radically different, assuming it to be infinite would destroy the market in Pref shares as it currently exists. That's what happened when Aviva first produced their rabbit. It's my contention that IF such an option exists, it was unintentional and a product of no one asking the right "what if" questions at the time of first issue. The "what if" questions being these. What happens when interest rates fall sufficiently that the market price rises to at least 10% or 20% above par? Do we (the Company/Ordinary shareholders) have the right to force repayment at par and reborrow at a lower cost? The second question being, how much extra in coupon are lenders going to demand to give us this option?

There are a number of Prefs out there where the issuer does have a right to pay off the lenders, but these quote formulae based on reference Gilts.

[Wizard]

Alaric,

It's more accurate to say it's a general misunderstanding that in the world of UK prefs the term irredeemable [should] mean for ever.

How the CA works, in extreme brevity, is as follows:

1. Any share capital (ord or pref) can be reduced;
2. The is a general prohibition against limited liability companies buying back/repurchasing their share capital (ord or pref);
3. There are a number of exemptions. One of these is a redemption compliant with Part 18 Chapter 3: Prefs which have authorisation for such redemptions are known as redeemable prefs;
4. Prefs which cannot be redeemed pursuant to Chapter 18 Part 3 are colloquially known as irredeemable. However, they are only irredeemable in respect of that mechanism. They are not perpetual, permanent, everlasting or eternal;
5. In particular, such prefs can have their capital returned via a capital reduction compliant with Part 17 Chapter 10 of the CA.

In situations where original investors wanted to have the ability to block such capital reduction they had either (i) to buy prefs in an issuer whose preexisting articles already required sanction at a separate meeting of the prefs or (ii) to require a change in the articles as a condition of their subscription.

Any competent corporate lawyer can confirm this to you.

Chris

My highlight.

In which case Chris, can you please explain the following statement from the Santander FAQ on their preference shares which remains o their website?

 
What is the maturity date?

Each series of preference shares is perpetual. Santander UK plc does not have any rights to redeem the preference shares, but it does have the authority by way of shareholders' resolution to repurchase them provided that the Financial Services Authority agrees to this at the time of repurchase.

My bold.

Terry.

[stockton]

It's more accurate to say it's a general misunderstanding that in the world of UK prefs the term irredeemable [should] mean for ever.Chris

Is it possible to have a general misunderstanding of a word that should be interpreted as having its " natural and ordinary " meaning ?

[ChrisNix]

My highlight.

In which case Chris, can you please explain the following statement from the Santander FAQ on their preference shares which remains o their website?

 
What is the maturity date?

Each series of preference shares is perpetual. Santander UK plc does not have any rights to redeem the preference shares, but it does have the authority by way of shareholders' resolution to repurchase them provided that the Financial Services Authority agrees to this at the time of repurchase.

My bold.

Terry.

Terry,

In the world of banking regulatory capital, perpetual means having no fixed date for repayment. But sloppy by the SAN IR department.

Chris

[ChrisNix]

It's more accurate to say it's a general misunderstanding that in the world of UK prefs the term irredeemable [should] mean for ever.Chris

Is it possible to have a general misunderstanding of a word that should be interpreted as having its " natural and ordinary " meaning ?

Stockton,

Under the rules of legal construction, one first interprets based on the legal definitions (in this case Chapter 3 redemption) and only if no conclusion can be reached moves on to "natural and ordinary" meaning.

So the answer to your question is "yes".

Chris

[stockton]

Under the rules of legal construction, one first interprets based on the legal definitions (in this case Chapter 3 redemption) and only if no conclusion can be reached moves on to "natural and ordinary" meaning.

So the answer to your question is "yes".

Chris

But chapter 3 (presumably the one headed "Redeemable shares" in the Companies Act) does not define redemption and obviously only refers to redeemable shares.

[Wizard]

My highlight.

In which case Chris, can you please explain the following statement from the Santander FAQ on their preference shares which remains o their website?

 
What is the maturity date?

Each series of preference shares is perpetual. Santander UK plc does not have any rights to redeem the preference shares, but it does have the authority by way of shareholders' resolution to repurchase them provided that the Financial Services Authority agrees to this at the time of repurchase.

My bold.

Terry.

Terry,

In the world of banking regulatory capital, perpetual means having no fixed date for repayment. But sloppy by the SAN IR department.

Chris

I find it rather hard to believe that this is just sloppy wording given the uproar which followed the Aviva announcement. Even less so as I know some of the people in the Santander legal team and rate them very highly, I would give you very good odds that this has been thoroughly reviewed in light of recent events.

Terry,

[Alaric]

Each series of preference shares is perpetual. Santander UK plc does not have any rights to redeem the preference shares, but it does have the authority by way of shareholders' resolution to repurchase them provided that the Financial Services Authority agrees to this at the time of repurchase.

I imagine that means what you would expect it to mean in the context of an orderly market. Sandander can pay off preference shares but only at a market related price. That's assuming the FCA as replacement body for the FSA wouldn't be complicit in an attempt to pay them off at par.

[ChrisNix]

Under the rules of legal construction, one first interprets based on the legal definitions (in this case Chapter 3 redemption) and only if no conclusion can be reached moves on to "natural and ordinary" meaning.

So the answer to your question is "yes".

Chris

But chapter 3 (presumably the one headed "Redeemable shares" in the Companies Act) does not define redemption and obviously only refers to redeemable shares.

Stockton,

Did you miss 685 Terms and manner of redemption?

If you can't see what they're taking about it would be worthwhile speaking to a corporate lawyer.

Chris