Preference shares -- keeping it simple

[GoSeigen]

Having viewed the video of Andrew Bailey's comments, my take is:

1. The FCA had received confirmation from all but one or two issuers that both Articles and Prospectuses for relevant securities had been published and AB seemed satisfied with the progress of this aspect.
2. He seemed to me fairly unconcerned that there was any pressing issue with preference shares: the Companies Act was for parliament to consider and regulatory capital issues if any (e.g. the pressure to retire prefs as capital) would not become urgent until nearer to 2026.

GS

[GoSeigen]

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."

Unfortunately Andrea Leadsom interrupted AB before he could explain why this "confusion" concerns the FCA or what exactly they consider "unfortunate" about the reaction. No doubt the FCA will come to a judgement on what caused the "confusion" during their review -- it seems one problem that they identified was that Articles of Association and Prospectuses were not published prominently by some issuers, hence their checking whether this had been done by each issuer.

Interesting that he says there are only 16 listed/regulated UK preference share issuers, which shows how small and insignificant this market is. I don't think holders should expect very much attention to be given to the issue.


GS

[ChrisNix]

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.

EF,

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

[Alaric]

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.

If that's actually the case there's a completely false market as prices assume that the income is perpetual or at worse can only be cancelled at the market value of a perpetuity.

[ChrisNix]

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.

If that's actually the case there's a completely false market as prices assume that the income is perpetual or at worse can only be cancelled at the market value of a perpetuity.

Alaric,

Isn't that precisely why the FCA wrote the letter? You can be sure that by now the FCA has clarified the legal position privately. In reality the market is making a call about the likelihood of issuers utilising those rights.

Chris

[Alaric]

In reality the market is making a call about the likelihood of issuers utilising those rights.

As a slightly different question, do you believe that when these securities were first issued, that there was intended to be any effective borrower option to repay when the price went above par? I don't believe so and if such an option has now materialised it's down to poor drafting both in the documentation and the Companies Act.

Alternatively if such a clause was intended, someone, probably the FSA/FCA was asleep at the wheel when interest rates first pushed these securities above par.

[GoSeigen]

In reality the market is making a call about the likelihood of issuers utilising those rights.

As a slightly different question, do you believe that when these securities were first issued, that there was intended to be any effective borrower option to repay when the price went above par? I don't believe so and if such an option has now materialised it's down to poor drafting both in the documentation and the Companies Act.

Alternatively if such a clause was intended, someone, probably the FSA/FCA was asleep at the wheel when interest rates first pushed these securities above par.

The price of the security is of precisely zero interest to the borrower. The only relevant numbers to the borrower are par value and share premium, gross issuance and the dividend amounts [and any other figure explicitly mentioned in the contract at issue].


You seem to be confusing par with a strike price.
There is no strike price.
There is not even an option.
The issuer has no right to call in the shares.
All the issuer can do is put a resolution to the members for a reduction of capital and hope 75% vote in favour.
Even then, the court can put a stop to it if creditors justifiably object.
The resolution can be put at any time, without any reference to market price.
The transaction is carried out at the initially contracted price, usually par + premium, without any reference to market price.
The capital reduction is at the discretion of the members NOT the issuer.


Repeating the option word over and over will not make it become true. There is no option.

There is only one circumstance giving the issuer an option and unilateral right to repay shares: inclusion of redemption terms. If the shares are irredeemable there are no redemption terms and the issuer by law MAY NOT repay them: only the members themselves can resolve to be repaid.

GS

[Alaric]

There is no option.

Aviva claimed a right to force a repayment at par of both their Preference Shares and those of General Accident. If true that's an option and a valuable one at that when interest rates rise.

The British Government's War Loan was redeemable in 1952 or later. That eventually came into the money and their repayment option was duly exercised.

[stockton]

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................
Chris

You keep on making statements like this one, but appear unable to produce any supporting evidence.

[GoSeigen]

There is no option.

Aviva claimed a right to force a repayment at par of both their Preference Shares and those of General Accident. If true that's an option and a valuable one at that when interest rates rise.

Well it's not true. They made no such claim. Alaric is attacking a straw man.

GS

[Alaric]

They made no such claim.

So what was it they were claiming that temporarily collapsed the price of Preference Shares? If you were an investor in those shares, what was your expectation following their announcement?

[GoSeigen]

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................
Chris

You keep on making statements like this one, but appear unable to produce any supporting evidence.

How the poster can say this is beyond my understanding: ChrisNix named his sources in the very extract that was quoted: "[...] the source information available [i.e. prospectuses and company articles], reading this in conjunction with the Companies Act [...]".


I think he reasonably expects others to do a bit of work for themselves... could readers please state what they discovered when they read and understood or asked their advisors about those sources?

GS

[ChrisNix]

In reality the market is making a call about the likelihood of issuers utilising those rights.

As a slightly different question, do you believe that when these securities were first issued, that there was intended to be any effective borrower option to repay when the price went above par? I don't believe so and if such an option has now materialised it's down to poor drafting both in the documentation and the Companies Act.

Alternatively if such a clause was intended, someone, probably the FSA/FCA was asleep at the wheel when interest rates first pushed these securities above par.

Alaric,

Most of these prefs were issued in the early 1990s, a time when prices were more often than not below par.

From what I can tell investors fell into three categories:

1. IIs looking for a good yield, which would persist until they were cancelled at par;

2. IIS looking for yield with a view to capital gain if rates fell. These investors would have been judging that together such like minded IIs would also own sufficient ords to have an effective veto against a return of capital/cancellation; and

3. PIs looking for yield in a fairly safe entity, but not clued up about returns of capital.

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

The documentation has not changed much over the years, nor has the CA in the last 50.

As a mentor of mine used to say, 'it was ever thus'!

Chris

[Alaric]

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.

[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.

[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.

[stockton]

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................
Chris

You keep on making statements like this one, but appear unable to produce any supporting evidence.

How the poster can say this is beyond my understanding: ChrisNix named his sources in the very extract that was quoted: "[...] the source information available [i.e. prospectuses and company articles], reading this in conjunction with the Companies Act [...]".
.......
GS

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

[PeterGray]

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. Partly, it seems to me (at least) that there remains some lack of clarity, in most cases, about whether a class vote or vote of all shareholders is required. Finally, I think many assumed, and still do, that it was something that simply wouldn't done - there was a lingering view that the city was somewhere gentlemen worked and the idea of a par return, when the prefs traded well above was something no one thought would happen - the option of a tender or offer at or near the market price would have been assumed to what could happen. And the negative publicity would simply make it something no one would consider - Aviva has shown the world has moved on, but not as far as they thought!

Peter

[Wizard]

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. Partly, it seems to me (at least) that there remains some lack of clarity, in most cases, about whether a class vote or vote of all shareholders is required. Finally, I think many assumed, and still do, that it was something that simply wouldn't done - there was a lingering view that the city was somewhere gentlemen worked and the idea of a par return, when the prefs traded well above was something no one thought would happen - the option of a tender or offer at or near the market price would have been assumed to what could happen. And the negative publicity would simply make it something no one would consider - Aviva has shown the world has moved on, but not as far as they thought!

Peter

My bold.
Except, if you read the quote from Andrew Bailey above he seems not to see that distinction as being that clear, or at least he sees it as reasonable that investors did not see a clear distinction.

Terry.

[Alaric]

Except, if you read the quote from Andrew Bailey above he seems not to see that distinction as being that clear, or at least he sees it as reasonable that investors did not see a clear distinction.

Irredeemable is a financial word, but perhaps enters common usage by its use to describe government borrowings. These borrowings didn't have a termination date but were nevertheless repaid by the UK Government when the price hit par. When commercial issuers didn't follow suit, it would have been assumed that above par Prefs would work the same way as PIBS. In other words the income was for ever or until the issuer went bust or offered a market related termination.