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Preference shares -- keeping it simple

Gilts, bonds, and interest-bearing shares
ChrisNix
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Re: Preference shares -- keeping it simple

#152709

Postby ChrisNix » July 16th, 2018, 5:12 pm

Alaric wrote:
ChrisNix wrote: Compliance with law and the terms of an instrument is not coercion in the eyes of most people, and certainly not in those of the courts.


It's coercion in my eyes. There's a stream of payments which stretches out to infinity. If the payor wants an option to be able to cancel that stream at a time of their notice and pay below market price, they should pay for being granted the option. For example by paying a higher coupon than on a superficially similar instrument such as PIBS which don't have such coercive rights.



Alaric,

Have now managed to get the meat of the HofF decision.

The interesting thing is that, notwithstanding being paid a good premium to the market price (i.e the issue price), the pref holders were, in essence, contending that they could as a class simply determine not to relinquish them at any price (a form of infinite payment stream argument?).

The court gave this no truck.

Quoting precedent it was noted:

"In Re Chatterley-Whitfield Collieries Ltd. the court were considering the rights of preference shareholders to whom it was proposed to return the whole capital paid up on their shares. In that case it was stressed that reducing the capital of a company by returning to the preference shareholders the whole capital paid up on their shares is completely consistent with the preference shareholders' contractual rights. There is no question of a company which has once issued preference shares being bound either to keep them forever or to arrange its affairs so that it is always left with a certain amount of preference capital.".

Chris (IT)

Alaric
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Re: Preference shares -- keeping it simple

#152736

Postby Alaric » July 16th, 2018, 7:05 pm

ChrisNix wrote:There is no question of a company which has once issued preference shares being bound either to keep them forever or to arrange its affairs so that it is always left with a certain amount of preference capital.".


I doubt that is disputed. What is disputed is the use of that clause to renegade on the liability for future payments. So pay off the Preference Shares by all means, but do it at a price consistent with how such a stream of payments is valued by the market. I understand there isn't any small print which enables coercive payback of PIBS, so a Preference issue can be valued or priced by reference to a PIBS issue of comparable default risk.

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Re: Preference shares -- keeping it simple

#152840

Postby ChrisNix » July 17th, 2018, 10:25 am

Alaric wrote:
ChrisNix wrote:There is no question of a company which has once issued preference shares being bound either to keep them forever or to arrange its affairs so that it is always left with a certain amount of preference capital.".


I doubt that is disputed. What is disputed is the use of that clause to renegade on the liability for future payments. So pay off the Preference Shares by all means, but do it at a price consistent with how such a stream of payments is valued by the market. I understand there isn't any small print which enables coercive payback of PIBS, so a Preference issue can be valued or priced by reference to a PIBS issue of comparable default risk.


Alaric,

The price for such a transaction helpfully is almost always agreed when the prefs are issued. Subsequent purchasers take on that deal.

The agreed price is set out in the articles. By far and away the most common is the issue price - capital gain is not expected. In the HoF case one pref was entitled to repayment of the issue price. The other got the greater of a market related price and the issue price, which was higher in that instance.

In a rational market the pref price will only justify a sizable premium to par if on an objective analysis there is no significant economic benefit to the issuer from cancelling.

A deal's a deal, or do you disagree?

Chris

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Re: Preference shares -- keeping it simple

#152899

Postby Alaric » July 17th, 2018, 1:30 pm

ChrisNix wrote:A deal's a deal, or do you disagree?


A bond with an embedded option to repay should the market price move above par is different to one where no such option exists. Or do you disagree?

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Re: Preference shares -- keeping it simple

#152922

Postby ChrisNix » July 17th, 2018, 3:16 pm

Alaric wrote:
A bond with an embedded option to repay should the market price move above par is different to one where no such option exists. Or do you disagree?


Alaric,

A (typical) pref with an embedded option (conditional right under the articles) to repay (at par) should the market price move above par (or for any other reason), such as LLPD, IS MOST CERTAINLY different to (an exceptional) one where no such option exists (e.g. where the repayment is subject to pref holder sanction), such as NWBD.

We are in agreement!

Chris

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Re: Preference shares -- keeping it simple

#152944

Postby Alaric » July 17th, 2018, 4:28 pm

ChrisNix wrote:A (typical) pref with an embedded option (conditional right under the articles) to repay (at par) should the market price move above par (or for any other reason), such as LLPD, IS MOST CERTAINLY different to (an exceptional) one where no such option exists (e.g. where the repayment is subject to pref holder sanction), such as NWBD.


The question then comes as to whether granting the option was intentional at the time of issue, or arises or appears to arise as a result of poor drafting and for that matter disregard of an apparently relevant EU Directive requiring class votes.

It's certainly a case of poor communication, that until Aviva, the potential existence of these options was unknown, not least to the FCA.

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Re: Preference shares -- keeping it simple

#152961

Postby ChrisNix » July 17th, 2018, 5:21 pm

Alaric wrote:
ChrisNix wrote:A (typical) pref with an embedded option (conditional right under the articles) to repay (at par) should the market price move above par (or for any other reason), such as LLPD, IS MOST CERTAINLY different to (an exceptional) one where no such option exists (e.g. where the repayment is subject to pref holder sanction), such as NWBD.


The question then comes as to whether granting the option was intentional at the time of issue, or arises or appears to arise as a result of poor drafting and for that matter disregard of an apparently relevant EU Directive requiring class votes.

It's certainly a case of poor communication, that until Aviva, the potential existence of these options was unknown, not least to the FCA.


Alaric,

Such 'options' have been standard in UK listed prefs for the last 70 years. Under the various companies acts a company had to specify in the articles if the 'option' was NOT to apply (c.f. NWBD). There seems no evidence that original subscribers were bothered.

It is a widespread ignorance of the companies act which, if anything, is to blame. The FCA has only just realised the issue.

Chris

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Re: Preference shares -- keeping it simple

#152975

Postby Alaric » July 17th, 2018, 6:04 pm

ChrisNix wrote:Such 'options' have been standard in UK listed prefs for the last 70 years.


What's the market practice been though? Other than the occasional dispute, were not Pref issues paid off at market value? In other words, they were treated as if there was a separate class vote, even if poor drafting meant that it was possible to interpret the conditions as an option against the holders.

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Re: Preference shares -- keeping it simple

#152998

Postby ChrisNix » July 17th, 2018, 7:01 pm

Alaric,

So now we're ditching the embedded option theory and trying to hitch our wagons to a nebulous market practice approach.

That's multifaceted and I have the theatre so my response will have to be another day...

Chris

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Re: Preference shares -- keeping it simple

#153005

Postby Alaric » July 17th, 2018, 7:20 pm

ChrisNix wrote:So now we're ditching the embedded option theory and trying to hitch our wagons to a nebulous market practice approach.


What you have to explain is why it was that these issues weren't called as soon as they went over par. Perhaps it was because it's only poor drafting that gave rise to the alleged options in the first place.

Why though would a market tolerate such an uneven bond when alternatives such as PIBS were both undated and not capable of compulsory repayment at par?

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Re: Preference shares -- keeping it simple

#153070

Postby dspp » July 18th, 2018, 6:56 am

Moderator Message:
Please stay on topic folks. I have deleted at least one post and am scanning others, but am in a hurry so may miss some uncivilities. regards, dspp

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Re: Preference shares -- keeping it simple

#153124

Postby OwenSwansea » July 18th, 2018, 11:40 am

Forget about Irredeemable Preference Share being called at par. It is not going to happen.

We should turn our attention to the possibility of higher interest rates/inflation, and even that may not be the problem we think it is. Yields on US 10Yr Treasuries are struggling to reach 3%, yields on UK 10Yr Gilts are 1.3%, whereas the yield on LLPC for example is now 6.4% net of basic rate tax, giving a gross return of 8% [ ignoring the effect of the pesky dividend tax ].

Also, we should not ignore the possibility of a recession in 2019/2020, in which case interest rates could even go down again!

I am happy to hold onto all my Irredeemable Prefs, and reinvest the dividends.

Owen.

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Re: Preference shares -- keeping it simple

#153140

Postby ChrisNix » July 18th, 2018, 12:49 pm

Alaric wrote:
ChrisNix wrote:Such 'options' have been standard in UK listed prefs for the last 70 years.


What's the market practice been though? Other than the occasional dispute, were not Pref issues paid off at market value? In other words, they were treated as if there was a separate class vote, even if poor drafting meant that it was possible to interpret the conditions as an option against the holders.


Alaric,

Market practice can mean different things to different people.

If one jumps back to the 90s not many prefs sold at premia. If they were selling at a discount companies seldom cancelled them. An obvious exception was when a company wanted to make a capital return to ordinary shareholders, so had to pay the prefs off first. As I recall, in those days the ABI had a guideline that its members should only vote (in particular their ords) for a cancellation if it generated an acceptable exit yield. The irony is that in those days it led to prefs being cancelled at a discount when the holders could have held out for par!!

If a pref sold at a premium there was a cost of capital argument for cancelling at par, but much less so at market. In those circumstances, best practice was to cancel on an exit yield basis. However, in practice this only was relevant if an issuer had a large body of ordinary shareholders which also had significant pref holdings. In a circumstance where ABI members had less than, say, 15% of the issuer a board quite rightly could determine to act in the best interests of a company, and to cancel at par. Hunting plc was one such issuer, in 2004. The ABI protested, of course, believing its guidelines to be sacrosanct, but without its members having an "ord veto" such posturing was impotent.

Bear in mind arithmetical cost of capital was not the only consideration at play. If an issuer did not have a good balance sheet the pref capital may have been an important source of equity, a replacement for which may not have been readily available or cheap. In such a case the pref 'saving' was illusory. As a result, cancellations of prefs selling at premia were not common (I am only aware of two between 1991 and 2005).

In summary, whilst the ABI policy was clear, market practice very much depended on the particular circumstances.

Chris

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Re: Preference shares -- keeping it simple

#156611

Postby genou » August 1st, 2018, 5:26 pm

OwenSwansea wrote:Forget about Irredeemable Preference Share being called at par. It is not going to happen.
Owen.


As no-one else has posted it - I point you to note 14 of Lloyds results issued today,

The Group has six series of preference shares outstanding in the market, two of which are irredeemable. The Group has no plans to use a capital reduction to cancel the irredeemable preference shares.

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Re: Preference shares -- keeping it simple

#156674

Postby ChrisNix » August 2nd, 2018, 8:57 am

genou wrote:
OwenSwansea wrote:Forget about Irredeemable Preference Share being called at par. It is not going to happen.
Owen.


As no-one else has posted it - I point you to note 14 of Lloyds results issued today,

The Group has six series of preference shares outstanding in the market, two of which are irredeemable. The Group has no plans to use a capital reduction to cancel the irredeemable preference shares.


Thanks, Genou.

That rules out anything in the next twelve months.

Chris

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Re: Preference shares -- keeping it simple

#219320

Postby PinkDalek » May 3rd, 2019, 4:02 pm

ChrisNix wrote:
genou wrote:
OwenSwansea wrote:Forget about Irredeemable Preference Share being called at par. It is not going to happen.
Owen.


As no-one else has posted it - I point you to note 14 of Lloyds results issued today,

The Group has six series of preference shares outstanding in the market, two of which are irredeemable. The Group has no plans to use a capital reduction to cancel the irredeemable preference shares.


Thanks, Genou.

That rules out anything in the next twelve months.

Chris


As mentioned elsewhere on TLF today:

https://www.londonstockexchange.com/exc ... 62778.html

Released 12:14 03-May-2019

NOTICE OF REDEMPTION OF 6.3673% PREFERENCE SHARES ISSUED BY LLOYDS BANKING GROUP PLC

Lloyds Banking Group plc gives notice that, on 17 June 2019, it will exercise the contractual right to redeem all of its outstanding 6.3673% preference shares (ISIN: XS0408826427) at par.


Those would appear to be the LLOYDS BANKING GROUP PLC 6.3673% NON-CUM FXD/FLTG RTE PREF SHS (the capitals are from the London Stock Exchange).

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Re: Preference shares -- keeping it simple

#219374

Postby daveh » May 3rd, 2019, 7:36 pm

As posted elsewhere they are not iredeemable, the prospectus says they have the right to redeem at par on 17th June 2019 or subsequently on pay dates.

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Re: Preference shares -- keeping it simple

#219489

Postby PinkDalek » May 4th, 2019, 12:02 pm

daveh wrote:As posted elsewhere they are not iredeemable, ...


Yes, sorry, I wasn't attempting to indicate otherwise. Merely noting from dealtn's post elsewhere and following up the prior mention.

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Re: Preference shares -- keeping it simple

#353994

Postby ChrisNix » November 6th, 2020, 9:13 am

OwenSwansea wrote:Forget about Irredeemable Preference Share being called at par. It is not going to happen.

We should turn our attention to the possibility of higher interest rates/inflation, and even that may not be the problem we think it is. Yields on US 10Yr Treasuries are struggling to reach 3%, yields on UK 10Yr Gilts are 1.3%, whereas the yield on LLPC for example is now 6.4% net of basic rate tax, giving a gross return of 8% [ ignoring the effect of the pesky dividend tax ].

Also, we should not ignore the possibility of a recession in 2019/2020, in which case interest rates could even go down again!

I am happy to hold onto all my Irredeemable Prefs, and reinvest the dividends.

Owen.


Do you hold RSAB? If parent taken out, then, in the absence of a commitment to the contrary, in due course the acquirer is free to call an EGM of the pref's and cancel them. Will be interesting to see what, if anything, Board does to elicit any protection for pref's.

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Re: Preference shares -- keeping it simple

#354021

Postby 88V8 » November 6th, 2020, 10:08 am

ChrisNix wrote:Do you hold RSAB? If parent taken out, then, in the absence of a commitment to the contrary, in due course the acquirer is free to call an EGM of the pref's and cancel them. Will be interesting to see what, if anything, Board does to elicit any protection for pref's.

No hold, pricewise these have never been quite made the cut for me.
No price reaction this morning. 132p. I would expect to see a fall.

V8


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