Preference shares -- keeping it simple

[ChrisNix]

To ensure this is implemented going forward requires the FCA to mandate 'spoon feeding' levels of disclosure, quite difficult when a document is many pages long.

They already do. For example they have investment trusts point out that if you invest 10000 after stamp duty and Broker commissions and earn 5%, there's the revelation that it would be worth 10500 after one year. If you earn 10%, it's worth 11000.

As regards undated securities of various types, what you want to know when buying above par is that there isn't a borrower option to pay off the security other than with regard to market price. Prior to the Aviva directors listening to smart lawyers and merchant bankers that was the accepted position. Those securities which could be repaid had the magic word "callable" somewhere prominent. There's a variant on that theme where the coupon can be rebased.

Alaric,

You seem to be disagreeing on one hand and agreeing on the other!

I'm afraid you're misinformed on the 'irredeemable' prefs at least. The standard position is that there is a right for issuers to reduce the prefs' capital and cancel them, although there are a few exceptions.

The 'accepted position' at best boils down to the case that once upon a time (90s and before) the big pref investors also holding sufficient ords (25% plus) to block any such capital reduction. Somewhere along the line their ord positions were reduced and they forgot that the prefs in general have no class rights in a capital reduction. So more a myth.

I think the FCA is going to make all UK listed pref issuers spell out the position on reductions of capital, so at least after that the market will be informed.

Chris

[Alaric]

The standard position is that there is a right for issuers to reduce the prefs' capital and cancel them, although there are a few exceptions.

The key point though is whether they have the right to do this at par. It makes a rather large difference to how they are priced. It not just prefs, it's any undated security.

[ChrisNix]

The standard position is that there is a right for issuers to reduce the prefs' capital and cancel them, although there are a few exceptions.

The key point though is whether they have the right to do this at par. It makes a rather large difference to how they are priced. It not just prefs, it's any undated security.

Alaric,

Apologies for shorthand: standard UK listed pref position is that issue price paid in solvent return of capital. Sole exception I've seen (and I've looked at the 20 largest issues) is BP, which gets market price plus a premium. NWBD would have to get price approved by 75% of holders voting.

It sure does make a difference in my book, although no significant divergence in yields at the mo?

Chris

[Alaric]

Apologies for shorthand: standard UK listed pref position is that issue price paid in solvent return of capital.

That was the question the FCA asked of all issuers. Very few if any have replied, but the price of Prefs indicates that the market doesn't believe that issuers have this embedded option. It's vitally important that if you purchase a flow of future income at 140 to 180, that the provider of that income does NOT have the unilateral power to cancel it in exchange for 100 the very next day. The protection might take various forms, in the case of Aviva Pref Shares, at the very least there had to be a vote of all shareholders and allegedly enough Ordinary shareholders dissented that Aviva withdrew the proposal.

[ChrisNix]

Apologies for shorthand: standard UK listed pref position is that issue price paid in solvent return of capital.

That was the question the FCA asked of all issuers. Very few if any have replied, but the price of Prefs indicates that the market doesn't believe that issuers have this embedded option. It's vitally important that if you purchase a flow of future income at 140 to 180, that the provider of that income does NOT have the unilateral power to cancel it in exchange for 100 the very next day. The protection might take various forms, in the case of Aviva Pref Shares, at the very least there had to be a vote of all shareholders and allegedly enough Ordinary shareholders dissented that Aviva withdrew the proposal.

Alaric,

The standard legal position is that cancellation at par requires a 75% vote of all members (prefs and ords voting together) and court sanction - which is a formality if the articles have been complied with. The market may not believe this is an embedded option, but the fact is that the prefs have no ability to block such. It seems the market is hoping for a deus ex machina, but another explanation is that in many cases the prize may not be worth the candle for an issuer.

Nonetheless, I'd expect most prefs in due course to settle closer to 120% following the FCA required clarifications.

Chris

[johnhemming]

but the fact is that the prefs have no ability to block such.

This a disputed assertion. EU law still applies. There is no sense going around again on this, however.

What is interesting in terms of issued debt, however, is the question of valuation in the balance sheet. Even if a class vote is required one would assume that prefs would be valued at par. One thing I found interesting in the 2008-12 period was that the banks made a profit out of the fact that their subordinated debt lost market value. I am not sure that this marking to market of your own debt is a good mechanism although in theory it is possible with sufficient spare capital to buy in the debt at a discount.

[Alaric]

I am not sure that this marking to market of your own debt is a good mechanism although in theory it is possible with sufficient spare capital to buy in the debt at a discount.

That was an accounting trick from the 1970s when it may be recalled interest rates went through the roof. You have a loan, debenture or preference share which stands well below par at market value by virtue of having a lower coupon than the current market rate. Accounting conventions however require the Company to express it as a par liability. So if the price is say 60, offer 65 to holders or just buy at 60. Net effect is that the Company makes a paper profit by removing a liability of 100 at a cost of 65.

[johnhemming]

I don't necessarily have a problem when the debt, ordinary shares are bought in below book value. However, I think it is a bit misleading to account for it before it has happened. (and even if it doesn't or couldn't happen)

[ChrisNix]

johnhemming wrote:
I have studied particularly the prospectus of the GA 8 7/8% prefs into which I have now invested.

I cannot see how Aviva can avoid having a class vote of the prefs if they propose to abrogate the rights of the pref shares.

abrogate def:"repeal or do away with (a law, right, or formal agreement)."

SS6 of S630 of the Companies Act 2006 also leads to a similar conclusion. It was passed after the HL decision about House of Fraser.



The problem John is that exercising the preference shareholders right to prior payment is not considered by the courts a variation or abrogation of the rights.



Re Hunting Plc [2005] 2 BCLC 211

On an application by the company for confirmation by the court of a resolution to reduce its issued share capital by the cancellation of convertible preference shares, preference shareholders argued that the scheme of reduction was unfair to them. Held: The reduction was approved. A company is entitled to reduce its capital by cancelling preference shares to replace the preference share capital with cheaper capital. The reduction was not unfair to the preference shareholders because they knew when they acquired their shares they were assuming the risk of being paid off in full.


There is ample case law regarding this. Would you mind commenting on this case and maybe look at the others in chapter 7.3 "Legal Nature of a Share", Unlocking Company Law, Susan McLaughlin 2015 Routledge.

https://books.google.co.uk/books?id=Ihf ... T997vKjYcq

Search for "Hunting Plc" at above link.


GS

GS,

Had a few minutes just now and checked a hunch. As I had thought, your above post was one which I found very informative when looking (elsewhere) for a refresher on capital returns.

Ta.

Chris

[GoSeigen]

GS,

Had a few minutes just now and checked a hunch. As I had thought, your above post was one which I found very informative when looking (elsewhere) for a refresher on capital returns.

Ta.

Chris

Thanks Chris, glad it was of use to someone. The chapter in the textbook was exceptionally well written I thought.

GS

[ChrisNix]

GS,

Had a few minutes just now and checked a hunch. As I had thought, your above post was one which I found very informative when looking (elsewhere) for a refresher on capital returns.

Ta.

Chris

Thanks Chris, glad it was of use to someone. The chapter in the textbook was exceptionally well written I thought.

GS

GS,

I agree the textbook was very clearly set out.

Somewhat surprised that my recollection of the company law workings was still quite reasonable! I'm no lawyer but my former mentor used to insist that we read the CA for ourselves before even thinking about lawyers.

Advice which I highly commend!

See you were burning the midnight oil -- last minute tidying up before trip?

Chris

[ElectronicFur]

Mark Taber and others repeatedly refer to the "muddle" surrounding preference shares and the methods by which they can be repaid, a muddle which is much of their own making.

It would appear the FCA does not agree with you. From Andrew Bailey at yesterday's Treasury Committee meeting:

"The underlying thing that concerns us, is that there was quite reasonable confusion amongst investors because if you use the word irredeemable and then say, ah, but I've found a way to cancel my capital, you know, it's not surprising that investors say, what?, you're doing what? And I think we saw the reaction and I think it was unfortunate."

They also briefly touch upon potential changes to the rules on regularly capital and amendment of the companies act. You can see it here:

https://parliamentlive.tv/Event/Index/0 ... layer-tabs

Relevant section to preference shares starts at 15:59:50

What's very odd is that he claims that 14 or 15 of the 16 recipients of the Dear CEO Preference Share Letter have done as asked. When they clearly have done no such thing...

[PeterGray]

What's very odd is that he claims that 14 or 15 of the 16 recipients of the Dear CEO Preference Share Letter have done as asked. When they clearly have done no such thing...

I'm not sure why you say that? We don't know if they have responded, or what they said. That doesn't mean they haven't responded to the FCA. It would be surprising if the FCA released the replies one by one - or in fact at all. They will presumably consider them, decide on a course of action, if any, and at5 some point make a statement.

[BobGe]

I'm not sure why you say that? We don't know if they have responded, or what they said.

Have a listen to the couple of minutes of video and see what you make of it (assuming you haven't already).

[Wizard]

What I heard him say was that they had asked issuers to provide clarity by publishing the Articles and Prospectus for pref issuances, he then said 14 or 15 had done that. He did not seem to recall having asked for clear FAQs or simikar, which I think was i the letter. Sadly nobody on the committee picked up on that.

Terry.

[ElectronicFur]

What's very odd is that he claims that 14 or 15 of the 16 recipients of the Dear CEO Preference Share Letter have done as asked. When they clearly have done no such thing...

I'm not sure why you say that? We don't know if they have responded, or what they said. That doesn't mean they haven't responded to the FCA. It would be surprising if the FCA released the replies one by one - or in fact at all. They will presumably consider them, decide on a course of action, if any, and at5 some point make a statement.

Because she asks specifically about the response from companies to his Dear CEO Preference Shares letter about providing clarity. Now his answer makes it sound like 14 or 15 of the 16 recipients have done as asked, but I think on purpose he rephrases her question to restrict his answer only to the publishing of the Articles and Prospectus. And that is only a small subset of what the letter asked.

The letter is here https://www.fca.org.uk/publication/corr ... shares.pdf

I you read it you will see that none of the companies have done as asked...

[GoSeigen]

I you read it you will see that none of the companies have done as asked...

Which is what in your opinion?

Here are the actual words used in the various parts encouraging some sort of action:

1. Listed companies will need to consider...
2. ...inside information must be announced...
3. ...you may wish to ensure...
4. I would urge you to ensure...and also to consider....

The only ones I can see are mandatory are the second, about disclosure of inside information and the first, about considering things.

So what are we aware they (who?) have not done, which they were required to do by the letter?


GS

[Wizard]

I you read it you will see that none of the companies have done as asked...

Which is what in your opinion?

Here are the actual words used in the various parts encouraging some sort of action:

1. Listed companies will need to consider...
2. ...inside information must be announced...
3. ...you may wish to ensure...
4. I would urge you to ensure...and also to consider....

The only ones I can see are mandatory are the second, about disclosure of inside information and the first, about considering things.

So what are we aware they (who?) have not done, which they were required to do by the letter?


GS

Lovely piece of selective quoting. Except of course the publication of the prospectus and articles are in a list which starts off with the "...you may wish to ensure..." introduction. So if publishing those items was in Andrew Bailey's words what was asked for, how can you say that the "Q&A or similar publication" needed to ensure such information is "clear and comprehensible" was any less asked for?

I would also be interested in your views on compliance with the following paragraph from the letter:

"I would urge you to ensure that these details are available for your company’s shares and also to consider, in conjunction with your advisers if necessary, whether there is a risk that the prevailing market price of any of your company’s shares or other signals from investors suggest that there is a lack of understanding over the terms and conditions of those shares and/or your company’s intention regarding them."

As nobody has published anything to say they think there is a mispricing in the market presumably this means either, the CEOs have decided the FCA urging them to do something does not mean they have to do it, or, having considered it they do not think the instruments are over priced and tgerefore they are obliged to say nothing. Given your view on the availability of a capital reduction at par I find it hard to see how you can reconcile the latter.

Terry.

[ElectronicFur]

So what are we aware they (who?) have not done, which they were required to do by the letter?

The letter specifically states the aim is to "ensure investors have access to the information that they require in order to properly assess the risks and rewards attaching to such shares."

The letter asks for them to provide that information, and makes relevant suggestions. They have not done as the letter asks, exactly as I stated, as no information has been provided, and the majority of the suggestions have not been followed.

Whether what the letter asks is mandatory or not is another matter.

The aim of the letter is quite clear and I think we can all agree that no information has been provided to improve clarity.

[GoSeigen]

So what are we aware they (who?) have not done, which they were required to do by the letter?

The letter specifically states the aim is to "ensure investors have access to the information that they require in order to properly assess the risks and rewards attaching to such shares."

The letter asks for them to provide that information, and makes relevant suggestions. They have not done as the letter asks, exactly as I stated, as no information has been provided, and the majority of the suggestions have not been followed.

Whether what the letter asks is mandatory or not is another matter.

The aim of the letter is quite clear and I think we can all agree that no information has been provided to improve clarity.

It's still not clear to me who "they" are. One issuer? All of them? Is there a specific one people are bothered about?


It is wrong to claim that the letter specifically states the aim is to "ensure ..." etc. The word aim is not used. What the letter says is that the FCA is reviewing part of the fixed-income market (we may guess they mean preference shares) and that the FCA wants to ensure investors have access etc. I see nothing there creating an obligation for issuers: no specific action is required; no deadline is given and no reply required. I think we should wait for the outcome of the FCA's review. Then they might ask for some actions.


Further the letter does not ask for issuers to follow the list of suggestions, but presents it to them as optional behaviour: "you may wish to ...". Perhaps some issuers don't wish to. Perhaps they have checked and already comply with the list. Perhaps some have followed the suggestions without fanfare.

In any case most issuers I've looked at publish all the information required to understand the rights attaching to their prefs. It seems to me that some investors just don't want to do the work to understand them, or to believe those who have done the work and do understand them.


We don't all " agree that no information has been provided to improve clarity": I myself disagree. How could we know that no new information has been provided without asking each issuer and getting a clear reply? If someone has done this then say so, but otherwise it's practically impossible to assert a negative like that ("no information has been provided"). We may assume or guess that it is so. But to claim that "we all agree" as some sort of justification for a position does not cut it in this instance.


As I said, which specific issuer(s) do posters have concerns about? Name names, and state what information is thought to be missing.

GS