Preference shares -- keeping it simple

[stockton]

I think it's pretty clear, Stockton, that redemption and return of capital are distinct. I don't see much mileage in revisiting that yet again.

I think it's also pretty clear that investors (IIs and PIs) have by and large assumed that "irredemable" prefs would not be cancelled at par in case of a return of capital if they traded above. Partly, that is, as Chris has said, because they were mostly issued in a high interest rate environment and the possibility of today's low interest rates and trading well above par had not been considered. ...................
Peter

You appear to be assuming that people in previous centuries were idiots. There were indeed a lot of people who implicitly assumed that the year 2000 would not arrive, but there were many others who were well aware of the possibility.
As has been suggested before, preference shares were usually issued so that they would trade at, or slightly above par, so, in general the possibilty of them trading above par was always entirely obvious.

Investors believed that irredeemable preference shares would not be cancelled at par because that is what the word irredeemable means. There is no other sensible meaning which can be ascribed to the word.

And I have seen nothing to persuade me that redemption and return of capital are entirely distinct.

[ChrisNix]

The ability for issuers to return capital to UK prefs has been an inherent part of them for at least 70 years.

The point is as to whether they can do so unilaterally, both not at market price and against the wishes of the holders. If it was so, then the FSA or FCA should have stepped in once the issues went over par to prevent a false market developing.

Alaric,

The vast majority of the pref issuers have always been able to cancel at par with the sanction of 75% of all members and the court - i.e. not unilaterally. That said, the sanction of holders in such prefs is not required.

It is odd to me that the prefs ever went to such premia, but then again many small UK listed stocks are massively overvalued. What would you have had the FSA/FCA do?

Chris

[ChrisNix]

I think if one takes the Bailey response into account when reading the letter the obvious conclusion is that the FCA wanted to ensure that the fundamental information, being the articles, and, to the extent relevant, the listing documents, were readily available online.

The Q & A request seems to me to be along the lines of 'if you want to be really helpful a Q &A would be great'. That is nice to have.

As GS has observed, with the the source information available, reading this in conjunction with the Companies Act, added to some Googling, will rapidly reveal the fact that almost all of the 16 issues can be cancelled at par without specific consent of the prefs as a class.

I imagine the issuers have said to the FCA that they have better things to do that pay for a free lesson on the workings of the CA. And better to say nothing regarding intentions that to expose the issuer to all the righteous indignance if they decline to confirm that they will never use their powers.

I wonder if the FCA itself would consider publishing guidance on the legal workings. That would be uncontentious but would confirm what many investors have probably guessed, leading to a much more informed market.

Chris

My bold.

Chris

How do you reach your conclusion in the bold text above? The request for the Q&A is in a list which also includes the Prospectus and Articles. There is nothing in there that says the request for the Q&A is of any other nature, it is part of the same request. Just because that is how you view it does not make it so. If you have had specific guidance on this from Andrew Bailey or somebody else at the FCA that would be of great interest.

Terry.

Terry,

The letter suggests rather than mandates that all the information be disclosed. The most serious point is to flag that once an issuer has contemplated cancellation at par to not announce same is likely to be considered market abuse.

If you watch AB's response to the committee he has plainly identified the articles and prospectuses as the key information they were seeking. The lack of concern on Q & A's is palpable.

Chris

[ChrisNix]

I think if one takes the Bailey response into account when reading the letter the obvious conclusion is that the FCA wanted to ensure that the fundamental information, being the articles, and, to the extent relevant, the listing documents, were readily available online.

The Q & A request seems to me to be along the lines of 'if you want to be really helpful a Q &A would be great'. That is nice to have.

As GS has observed, with the the source information available, reading this in conjunction with the Companies Act, added to some Googling, will rapidly reveal the fact that almost all of the 16 issues can be cancelled at par without specific consent of the prefs as a class.

I imagine the issuers have said to the FCA that they have better things to do that pay for a free lesson on the workings of the CA. And better to say nothing regarding intentions that to expose the issuer to all the righteous indignance if they decline to confirm that they will never use their powers.

I wonder if the FCA itself would consider publishing guidance on the legal workings. That would be uncontentious but would confirm what many investors have probably guessed, leading to a much more informed market.

Chris

My bold.

Chris

In which case, given thet statement in bold, why do you think Bailey said:

"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."

As far as I can see Bailey accepted that the confusion was reasonable, yet apparently in your view all investors should have been clear on this given the availability of the CA, prospectus and articles. So I guess you think Bailey was wrong to make his statement about confusion. The confusion, as per the quote, is because of the inclusion of the word "irredeemable" (I do not think we need to rerun the debate about this word). Clearly Bailey said that including that word in the instrument documentation created scope for misunderstanding.

Terry.

Terry,

I expect AB knows that the relevant prefs are both irredeemable and cancellable. If one works through the Companies Act it is not difficult to discern that these are two distinct legal mechanisms.

It is, however, confusing to investors who are not familiar with the CA and thus make the mistake of construing irredeemable by reference to its ordinary non-CA meaning. The market prices make it plain that there are many investors who do not understand the relevant Companies Act workings, in other words the market is poorly informed.

That would appear to be what the FCA wishes to rectify.

Chris

[ChrisNix]

I think it's pretty clear, Stockton, that redemption and return of capital are distinct. I don't see much mileage in revisiting that yet again.

I think it's also pretty clear that investors (IIs and PIs) have by and large assumed that "irredemable" prefs would not be cancelled at par in case of a return of capital if they traded above. Partly, that is, as Chris has said, because they were mostly issued in a high interest rate environment and the possibility of today's low interest rates and trading well above par had not been considered. ...................
Peter

You appear to be assuming that people in previous centuries were idiots. There were indeed a lot of people who implicitly assumed that the year 2000 would not arrive, but there were many others who were well aware of the possibility.
As has been suggested before, preference shares were usually issued so that they would trade at, or slightly above par, so, in general the possibilty of them trading above par was always entirely obvious.

Investors believed that irredeemable preference shares would not be cancelled at par because that is what the word irredeemable means. There is no other sensible meaning which can be ascribed to the word.

And I have seen nothing to persuade me that redemption and return of capital are entirely distinct.

There's none so blind as those who will not see?

[Alaric]

The market prices make it plain that there are many investors who do not understand the relevant Companies Act workings, in other words the market is poorly informed.

Which if the "small print" in the Companies Act is relevant, it has been ever since the prices went above par.

But how should the market operate? Should issuers have the right to attempt to cancel Preference Shares at par once they stand above par? If they have that right, was it intended when the securities were first issued, or is it a question of poor drafting?

No-one queried the right of the British Government to pay off its undated ("irredeemable") securities, but then it did so when the issues were trading at around par.

[Wizard]

I think if one takes the Bailey response into account when reading the letter the obvious conclusion is that the FCA wanted to ensure that the fundamental information, being the articles, and, to the extent relevant, the listing documents, were readily available online.

The Q & A request seems to me to be along the lines of 'if you want to be really helpful a Q &A would be great'. That is nice to have.

As GS has observed, with the the source information available, reading this in conjunction with the Companies Act, added to some Googling, will rapidly reveal the fact that almost all of the 16 issues can be cancelled at par without specific consent of the prefs as a class.

I imagine the issuers have said to the FCA that they have better things to do that pay for a free lesson on the workings of the CA. And better to say nothing regarding intentions that to expose the issuer to all the righteous indignance if they decline to confirm that they will never use their powers.

I wonder if the FCA itself would consider publishing guidance on the legal workings. That would be uncontentious but would confirm what many investors have probably guessed, leading to a much more informed market.

Chris

My bold.

Chris

In which case, given thet statement in bold, why do you think Bailey said:

"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."

As far as I can see Bailey accepted that the confusion was reasonable, yet apparently in your view all investors should have been clear on this given the availability of the CA, prospectus and articles. So I guess you think Bailey was wrong to make his statement about confusion. The confusion, as per the quote, is because of the inclusion of the word "irredeemable" (I do not think we need to rerun the debate about this word). Clearly Bailey said that including that word in the instrument documentation created scope for misunderstanding.

Terry.

Terry,

I expect AB knows that the relevant prefs are both irredeemable and cancellable. If one works through the Companies Act it is not difficult to discern that these are two distinct legal mechanisms.

It is, however, confusing to investors who are not familiar with the CA and thus make the mistake of construing irredeemable by reference to its ordinary non-CA meaning. The market prices make it plain that there are many investors who do not understand the relevant Companies Act workings, in other words the market is poorly informed.

That would appear to be what the FCA wishes to rectify.

Chris

Chris

I disagree. If it was as you say then I would not expect Bailey to describe the confusion as reasonable, nor to say it is not surprising that investors do not react well to a capital reduction of an instrument described as irredeemable.

If the FCA wished to rectify a poorly informed market then clear Q&As saying something like "...for the avoidance of doubt, the use of the term irredeemable does not preclude a capital reduction at par..." would be the way to do it, not the publication of the prospectus and articles which make no mention of the CA / capital reduction. I think quite the opposite is the case and the FCA wants to maintain a degree of opacity.

Terry.

[Wizard]

I think if one takes the Bailey response into account when reading the letter the obvious conclusion is that the FCA wanted to ensure that the fundamental information, being the articles, and, to the extent relevant, the listing documents, were readily available online.

The Q & A request seems to me to be along the lines of 'if you want to be really helpful a Q &A would be great'. That is nice to have.

As GS has observed, with the the source information available, reading this in conjunction with the Companies Act, added to some Googling, will rapidly reveal the fact that almost all of the 16 issues can be cancelled at par without specific consent of the prefs as a class.

I imagine the issuers have said to the FCA that they have better things to do that pay for a free lesson on the workings of the CA. And better to say nothing regarding intentions that to expose the issuer to all the righteous indignance if they decline to confirm that they will never use their powers.

I wonder if the FCA itself would consider publishing guidance on the legal workings. That would be uncontentious but would confirm what many investors have probably guessed, leading to a much more informed market.

Chris

My bold.

Chris

How do you reach your conclusion in the bold text above? The request for the Q&A is in a list which also includes the Prospectus and Articles. There is nothing in there that says the request for the Q&A is of any other nature, it is part of the same request. Just because that is how you view it does not make it so. If you have had specific guidance on this from Andrew Bailey or somebody else at the FCA that would be of great interest.

Terry.

Terry,

The letter suggests rather than mandates that all the information be disclosed. The most serious point is to flag that once an issuer has contemplated cancellation at par to not announce same is likely to be considered market abuse.

If you watch AB's response to the committee he has plainly identified the articles and prospectuses as the key information they were seeking. The lack of concern on Q & A's is palpable.

Chris

Chris

Again I do not think your conclusion is as factual as you assert. Bailey does not say the prospectus and articles have beed identified as the key information, he just says that is what has been published by most issuers. We have already established that the market confusion is not due to a misunderstanding of these documents but rather a lack of understanding of the importance of the CA which is not mentioned in either of the published items. It is equally as plausible that Bailey focusses on the prospectus and articles because he does not want to admit the issuers are ignoring his request for Q&As and he is embarrassed by his own impotence. There are other possible reasons for his focus on the two documents mentioned, but to try and decide what Bailey's reason for doing would be speculation on my part as much as it is on yours.

Terry.

[GoSeigen]

As I have previously pointed out, one can read the various documents which CN cited and come to exactly the opposite conclusion. And at least I can explain the logic of that conclusion.
viewtopic.php?f=52&t=11253&p=135506#p135506

And my response has not changed:

viewtopic.php?p=135543#p135543


GS

[ChrisNix]

The market prices make it plain that there are many investors who do not understand the relevant Companies Act workings, in other words the market is poorly informed.

Which if the "small print" in the Companies Act is relevant, it has been ever since the prices went above par.

But how should the market operate? Should issuers have the right to attempt to cancel Preference Shares at par once they stand above par? If they have that right, was it intended when the securities were first issued, or is it a question of poor drafting?

No-one queried the right of the British Government to pay off its undated ("irredeemable") securities, but then it did so when the issues were trading at around par.

Alaric,

Perhaps it might help if I quote from the most recent (2005) hearing on these issues:

"If one therefore removes that objection, the objection to the scheme of reduction is simply a general objection that it would be in some way unfair to the preference shareholders. The problem which has arisen in this case is by no means unprecedented. Preference shareholders are useful to a company at a time of high interest rates because they are obliged to retain their capital in the company at a fixed rate of return prescribed under the terms of the offer, regardless of changes in interest rates in the market. When, however (as in the present case) interest rates are low and capital is therefore available at a more commercial rate of interest, it is not uncommon for the company to decide in its own commercial interests to replace the capital provided by the preference shareholders for capital that is obtainable commercially on the market at a cheaper rate."

The ability to be able to cancel at "par" is no accident. It is a bargain which both sides freely enter into. I should add that at the time when most of these prefs were issued corporate bonds were few and far between, and thus if one wanted a reliable income for a few years the main alternative to prefs was gilts.

Chris

[ChrisNix]

My bold.

Chris

In which case, given thet statement in bold, why do you think Bailey said:

"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."

As far as I can see Bailey accepted that the confusion was reasonable, yet apparently in your view all investors should have been clear on this given the availability of the CA, prospectus and articles. So I guess you think Bailey was wrong to make his statement about confusion. The confusion, as per the quote, is because of the inclusion of the word "irredeemable" (I do not think we need to rerun the debate about this word). Clearly Bailey said that including that word in the instrument documentation created scope for misunderstanding.

Terry.

Terry,

I expect AB knows that the relevant prefs are both irredeemable and cancellable. If one works through the Companies Act it is not difficult to discern that these are two distinct legal mechanisms.

It is, however, confusing to investors who are not familiar with the CA and thus make the mistake of construing irredeemable by reference to its ordinary non-CA meaning. The market prices make it plain that there are many investors who do not understand the relevant Companies Act workings, in other words the market is poorly informed.

That would appear to be what the FCA wishes to rectify.

Chris

Chris

I disagree. If it was as you say then I would not expect Bailey to describe the confusion as reasonable, nor to say it is not surprising that investors do not react well to a capital reduction of an instrument described as irredeemable.

If the FCA wished to rectify a poorly informed market then clear Q&As saying something like "...for the avoidance of doubt, the use of the term irredeemable does not preclude a capital reduction at par..." would be the way to do it, not the publication of the prospectus and articles which make no mention of the CA / capital reduction. I think quite the opposite is the case and the FCA wants to maintain a degree of opacity.

Terry.

Terry,

Given the prefs are held by a large number of relatively unsophisticated investors who decline to seek advice on their investment why would you expect AB to be surprised that many do not understand the workings of the CA?

Chris

[ChrisNix]

Deleted

[ChrisNix]

The Q & A request seems to me to be along the lines of 'if you want to be really helpful a Q &A would be great'. That is nice to have.

Terry,

The letter suggests rather than mandates that all the information be disclosed. The most serious point is to flag that once an issuer has contemplated cancellation at par to not announce same is likely to be considered market abuse.

If you watch AB's response to the committee he has plainly identified the articles and prospectuses as the key information they were seeking. The lack of concern on Q & A's is palpable.

Chris

Chris

Again I do not think your conclusion is as factual as you assert. Bailey does not say the prospectus and articles have beed identified as the key information, he just says that is what has been published by most issuers. We have already established that the market confusion is not due to a misunderstanding of these documents but rather a lack of understanding of the importance of the CA which is not mentioned in either of the published items. It is equally as plausible that Bailey focusses on the prospectus and articles because he does not want to admit the issuers are ignoring his request for Q&As and he is embarrassed by his own impotence. There are other possible reasons for his focus on the two documents mentioned, but to try and decide what Bailey's reason for doing would be speculation on my part as much as it is on yours.

Terry.

Terry,

I did not assert the conclusion was "factual". Hence the words, "seems to me"? [emphasis added]

Chris

[GoSeigen]

Investors believed that irredeemable preference shares would not be cancelled at par because that is what the word irredeemable means. There is no other sensible meaning which can be ascribed to the word.

And I have seen nothing to persuade me that redemption and return of capital are entirely distinct.

T=What are your thoughts on what Raven Russia recently did with their preference shares?


GS

[tjh290633]

No-one queried the right of the British Government to pay off its undated ("irredeemable") securities, but then it did so when the issues were trading at around par.

To be pedantic, War Loan did have a date, but it was qualified by "or after". There was nothing to stop the Government buying them back in the market below par

TJH

[GoSeigen]

If the FCA wished to rectify a poorly informed market then clear Q&As saying something like "...for the avoidance of doubt, the use of the term irredeemable does not preclude a capital reduction at par..." would be the way to do it, not the publication of the prospectus and articles which make no mention of the CA / capital reduction. I think quite the opposite is the case and the FCA wants to maintain a degree of opacity.

This assertion in bold is simply not true. Every instance of Articles of Association I have looked at incorporates/refers directly to the Companies Act**. Not that they need to... the Companies Act is superior to the Articles and applies whether they mention it or not: a company may not break the Companies Acts with impunity as any competent company secretary or director should know very well.



GS
[**The original assertion can be shown to be true by presenting a single example of Articles which do not mention the Companies Act, which should be pretty easy.]

[GoSeigen]

I think it's pretty clear, Stockton, that redemption and return of capital are distinct. I don't see much mileage in revisiting that yet again.
Peter

Unless this is a typo, I think PeterGray and Stockton are going to be arguing about something that is not fundamental.

The real point of contention is that "redemption" and "reduction of capital" are distinct processes. The Companies Acts are pretty clear that they are.

Return of Capital is a more fuzzy term not used in the Companies Act but used in some Articles seemingly as an equivalent to Reduction of Capital. If we are going to discuss the exact meaning of return of capital, I think specific Articles of Association should be linked to and quoted in the discussion, otherwise there will be no clarity on what people are talking about.

GS

[GoSeigen]

I think it's pretty clear, Stockton, that redemption and return of capital are distinct. I don't see much mileage in revisiting that yet again.

I think it's also pretty clear that investors (IIs and PIs) have by and large assumed that "irredemable" prefs would not be cancelled at par in case of a return of capital if they traded above. Partly, that is, as Chris has said, because they were mostly issued in a high interest rate environment and the possibility of today's low interest rates and trading well above par had not been considered. ...................
Peter

You appear to be assuming that people in previous centuries were idiots. There were indeed a lot of people who implicitly assumed that the year 2000 would not arrive, but there were many others who were well aware of the possibility.

This is a strange argument and I don't really get the point.

As has been suggested before, preference shares were usually issued so that they would trade at, or slightly above par, so, in general the possibilty of them trading above par was always entirely obvious.

This is true. And likewise for trading below par.

Investors believed that irredeemable preference shares would not be cancelled at par because that is what the word irredeemable means. There is no other sensible meaning which can be ascribed to the word.

This is untrue, as could be ascertained by reading and understanding the OP or consulting a company lawyer.

And I have seen nothing to persuade me that redemption and return of capital are entirely distinct.

One is entitled to draw this conclusion but it has no bearing on the truth of the matter. If investors rely on it they may lose capital invested at a premium in these securities.


GS

[GoSeigen]

We have already established that the market confusion is not due to a misunderstanding of these documents but rather a lack of understanding of the importance of the CA which is not mentioned in either of the published items.
Terry.

This is the second time this claim has been made. If indeed investors believe the Companies Acts are not relevant to Articles of Association then no wonder they are confused. It is simple lack of education.

However I am not convinced the assertion itself is true and it should be easily verifiable. Please could someone link to Articles which do NOT refer to the Companies Act, as I have not seen any yet.**

TIA.


GS
[**As I said in an earlier post this is still not a strong point, because the Companies Act applies whether mentioned or not. Just because my car's manual does not mention the Road Traffic Regulation Act 1984 it does not mean the Act is irrelevant to how fast I may drive the car. Investors who don't know about the CA2006 are simply uninformed and need to educate themselves if their investment depends upon it in any significant way.]

[GoSeigen]

No-one queried the right of the British Government to pay off its undated ("irredeemable") securities, but then it did so when the issues were trading at around par.

To be pedantic, War Loan did have a date, but it was qualified by "or after". There was nothing to stop the Government buying them back in the market below par

TJH

True but irrelevant. Buying in the market involves the acquiescence of the seller. In the case being discussed, the government exercised their right under the contract to repay the bonds at par at their express discretion.

There was no requirement to wait for the market price to rise to par. George Osborne only did so in order to avoid the appearance of handing a bung to holders. However in announcing his intention in advance he practically guaranteed that the market price would rise to par anyway.

It was a pretty shabby way to handle public finances IMO, but highly beneficial to me as a holder! This is only my opinion. Others might hold that perpetual lending to the UK government should justifiably be at a lower rate than 2.5%!


GS