Preference shares -- keeping it simple

[tjh290633]

As I understand it, preference shares have preference over ordinary shares for the payment of dividends, so that payment of dividends/interest on them cannot be cancelled as long as dividends on ordinary shares are maintained.

They can, however, be cancelled if the state of the company finances so dictates. The concept of a stream of payment stretching to infinity is therefore erroneous.

TJH

[GoSeigen]

A swallow is a bird -that does not make every bird a swallow.

Fantastic, I think you have finally understood the issue.

A redemption is a repayment -- that does not make every repayment a redemption.



GS

[Alaric]

The concept of a stream of payment stretching to infinity is therefore erroneous.

That's how they are valued though, particularly when yields are quoted. It would be the same with PIBS and undated Corporate Bonds.

[GoSeigen]

The concept of a stream of payment stretching to infinity is therefore erroneous.

That's how they are valued though, particularly when yields are quoted. It would be the same with PIBS and undated Corporate Bonds.

Well, there in a nutshell is the difference between what an actuary (Alaric) does and what an investor (TJH) does. I think I understand the problem now.

Thank you gentlemen.

GS

[OwenSwansea]

The concept of a stream of income stretching to infinity is not erroneous, as many Irredeemable Preference Shares are also Cumulative.

Owen.

[ChrisNix]

The concept of a stream of income stretching to infinity is not erroneous, as many Irredeemable Preference Shares are also Cumulative.

Owen.

You might also like this:

https://www.youtube.com/watch?v=THbY7EL8k5w

WoO

[OwenSwansea]

The concept of a stream of income stretching to infinity is not erroneous, as many Irredeemable Preference Shares are also Cumulative.

Owen.

You might also like this:

https://www.youtube.com/watch?v=THbY7EL8k5w

WoO

Just as I thought, as usual you have no answer that makes any sense.

Owen.

[GoSeigen]

The concept of a stream of income stretching to infinity is not erroneous, as many Irredeemable Preference Shares are also Cumulative.

Owen.

You might also like this:

https://www.youtube.com/watch?v=THbY7EL8k5w

WoO

Just as I thought, as usual you have no answer that makes any sense.

Owen.

No actually that was one of my children fiddling around with my "just as smug" ChrisNix account.

Have you begun suing Lloyds for their ECN infelicity yet?


GS
Smug Monopolising Infiltrator

[stockton]

A swallow is a bird -that does not make every bird a swallow.

Fantastic, I think you have finally understood the issue.

A redemption is a repayment -- that does not make every repayment a redemption.



GS

You appear to be arguing that a repayment under s641-653 of the companies act (ie reduction of capital) cannot be a redemption because a repayment under s685-689 is a redemption.
ie A crow cannot be a bird because a swallow is a bird.

[Holts]

You might also like this:

https://www.youtube.com/watch?v=THbY7EL8k5w

WoO

Just as I thought, as usual you have no answer that makes any sense.

Owen.

No actually that was one of my children fiddling around with my "just as smug" ChrisNix account.

Have you begun suing Lloyds for their ECN infelicity yet?


GS
Smug Monopolising Infiltrator

The ECN decision often referred to as a justification was though a split decision , three-two , a loss is a loss but it was not what you would call overwhelming , there were clearly differing interpretations , just as we have here .

[Tara]

I haven't seen the HoF judgement itself so can't comment on pricing. Have you seen a reference?

There are a few posters on the other board that have said that the House of Fraser preference shares were trading well below par before the reduction of capital.

The House of Fraser preference shares had an average dividend of 6%, and interest rates at the time were about 12%, so it is reasonable to assume the House of Fraser preference shares were trading at about 50p before being cancelled at £1.

Another poster also said that House of Fraser preference shares were not irredeemable.

So it seems that House of Fraser preference shareholders were treated extremely well by the court. The preference shareholders doubled their money.

It also seems that Hunting preference shareholders were treated quite fairly by the court as they were convertible into ordinary shares, and the price of the ordinary shares had fallen by about half since the issue of the preference shares and this allowed preference shareholders to receive double the number of ordinary shares. Hunting were also in financial difficulty at the time.

On fairness grounds, both House of Fraser and Hunting seem to be have been very fair to preference shareholders.

A million miles away it would seem from what Aviva were attempting to do by cancelling their irredeemable preference shares for £1, when their irredeemable preference shares were trading at market prices well over £1.70.

It is doubtful that a court would have looked quite so kindly on such an unfair scheme.

[Alaric]

It is doubtful that a court would have looked quite so kindly on such an unfair scheme.

You might hope so. There again a judge might be swayed by some of the arguments expressed on this forum if expressed in a sufficiently legalistic manner.

That Lloyds were able to persuade a Court to allow them to pay off their Enhanced Capital Notes is a warning and also a warning of the possible duplicity of regulators.

[Tara]

It is doubtful that a court would have looked quite so kindly on such an unfair scheme.

You might hope so. There again a judge might be swayed by some of the arguments expressed on this forum if expressed in a sufficiently legalistic manner.

That Lloyds were able to persuade a Court to allow them to pay off their Enhanced Capital Notes is a warning and also a warning of the possible duplicity of regulators.

The duty would then be on the preference shareholders and those representing them to make the necessary arguments to sway the judge the other way.

Anyway it will never reach a court now after the various protests and the apology and compensation from Aviva.

[ChrisNix]

I haven't seen the HoF judgement itself so can't comment on pricing. Have you seen a reference?

There are a few posters on the other board that have said that the House of Fraser preference shares were trading well below par before the reduction of capital.

The House of Fraser preference shares had an average dividend of 6%, and interest rates at the time were about 12%, so it is reasonable to assume the House of Fraser preference shares were trading at about 50p before being cancelled at £1.

Another poster also said that House of Fraser preference shares were not irredeemable.

So it seems that House of Fraser preference shareholders were treated extremely well by the court. The preference shareholders doubled their money.

It also seems that Hunting preference shareholders were treated quite fairly by the court as they were convertible into ordinary shares, and the price of the ordinary shares had fallen by about half since the issue of the preference shares and this allowed preference shareholders to receive double the number of ordinary shares. Hunting were also in financial difficulty at the time.

On fairness grounds, both House of Fraser and Hunting seem to be have been very fair to preference shareholders.

A million miles away it would seem from what Aviva were attempting to do by cancelling their irredeemable preference shares for £1, when their irredeemable preference shares were trading at market prices well over £1.70.

It is doubtful that a court would have looked quite so kindly on such an unfair scheme.

Tara,

As I mentioned, I haven't tried to get a copy of the HoF decision. Will try this week. That said, unless the articles specified the prefs were redeemable they are irredeemable, so that is probably what they were.

As for Hunting, whilst the ord share price fell, the prefs on conversion gave holders a fixed number of shares. Thus when the ord priced slumped the conversion value slumped, and was materially below £1 when the cancellation occurred. In fact the decision didn't even get into conversion (none of the complainers lodged this as an issue).

So your theory of fairness in Hunting is wholly misguided. Indeed, the court made it clear that the key legal issue is that an issuer follow the articles, which almost always specify that the issue price is repaid in a cancellation. Further, addressing the pref holder complaint that a cancellation at below market price was unfair, the judge comprehensively rebutted this. It is plain that under UK company law the only time the market price comes into a cancellation is when the articles so specify.

The stark reality is that a court would have treated an Aviva cancellation at par as entirely as 'fair' in legal terms as the Hunting cancellation at par, and therefore completely acceptable.

Sorry to spoil a good story with the facts!

Chris

[ChrisNix]

Anyway it will never reach a court now after the various protests and the apology and compensation from Aviva.

Tara,

Because the legal position is established, such soft issues are key when an investors weighs probabilistically the non-negligble risk of a cancellation at par.

You pays yer money and you takes yer choice!

Chris

[OwenSwansea]

Irredeemable Preference Share yields are becoming quite attractive again, and the possibility of them being called at par is extremely unlikely.

Owen.

[Victor55]

I haven't read this whole topic, but noted that with regards to Lloyd's Prefernce shares. (I hold LLPD but looking to sell due to uncertainty.)

on Thursday 24 May 2018 at their 2018 Annual General Meeting (AGM) they said

[i][u][i]Resolution 25. Authority to purchase preference shares
That the Company be and is hereby generally and unconditionally
authorised for the purpose of Section 701 of the Companies Act
2006 to make market purchases (within the meaning of Section 693
of the Companies Act 2006) of the following issuances of securities:
(a) £299,987,729 9.25 per cent. non-cumulative irredeemable
preference shares;
(b) £99,999,942 9.75 per cent. non-cumulative irredeemable
preference shares;
(c) £186,190,532 6.475 per cent. non-cumulative preference
shares;
(d) £334,951,000 6.3673 per cent. non-cumulative fixed to
floating rate preference shares;
(e) US$750,000,000 6.413 per cent. non-cumulative fixed to
floating rate preference shares; and

(together, the ‘Preference Shares’), provided that:
(i) the maximum number of Preference Shares which may be
purchased is all such Preference Shares in issue;
(ii) the minimum price which may be paid for each Preference
Share is the nominal value of the relevant Preference Share;
(iii) the maximum price which may be paid for each Preference
Share is an amount equal to 140 per cent. of the liquidation
preference of the relevant Preference Share;
(iv) this authority shall expire at the conclusion of the next annual
general meeting or at the close of business on 28 June 2019,
whichever is the earlier, unless such authority is renewed
before then; and
(v) the Company may make a contract to purchase the
Preference Shares under this authority before its expiry which
would or might be executed wholly or partly after the expiry,
and may make a purchase of the Preference Shares under
that contract.

But then on 26th March 2018 2 days later..
Lloyds says it has 'no plans' to cancel irredeemable preference shares, as investments come under scrutiny following Aviva's aborted threat.

So what does this mean are they ? are they planning to re-purchase or not ?

[tjh290633]

There is a very big difference between buying in the market and cancelling shares which you do not own. Do not confuse these two operations.

TJH

[GoSeigen]

There is a very big difference between buying in the market and cancelling shares which you do not own. Do not confuse these two operations.

TJH

Note that no-one is suggesting this will happen either.

Aviva's idea was that, if the shareholders agreed, they would purchase the shares by repaying holders the principal value, then cancel them as required by law. The Companies Act forbids companies to hold their own shares except no more than 10% in treasury.

[EDIT: Note that the maximum price the company are authorised to pay for the prefs is around 140p. This all but rules out purchases of LLPC/D unless the market price falls a bit further. Presumably shareholders and the company don't see value in purchasing above that price.]

GS

[Alaric]

So what does this mean are they ? are they planning to re-purchase or not ?

Giving themselves powers to buy back shares is a routine motion which many Companies, not least Aviva, include in their formal AGM procedures whether they intend to use it or not. There is a twist on this one, that they won't buy Preference Shares above 140p.