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Preference shares -- keeping it simple

Gilts, bonds, and interest-bearing shares
AC114B
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Re: Preference shares -- keeping it simple

#354115

Postby AC114B » November 6th, 2020, 1:45 pm

Having read the terms for RSAB, it appears that preference shareholders have voting rights and that a cancellation formula is written into the terms - as twice the value of 3 1/2% War Loan (albeit these no longer exist).
Given that the acquirers will need shareholder and FCA sign off, I don’t see the likelihood of a loss, actually the contrary is more likely, as a tender offer would have to be sufficiently attractive to avoid having to pay the equivalent price of a yield of twice an undated gilt.

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Re: Preference shares -- keeping it simple

#354128

Postby ChrisNix » November 6th, 2020, 2:04 pm

AC114B wrote:Having read the terms for RSAB, it appears that preference shareholders have voting rights and that a cancellation formula is written into the terms - as twice the value of 3 1/2% War Loan (albeit these no longer exist).
Given that the acquirers will need shareholder and FCA sign off, I don’t see the likelihood of a loss, actually the contrary is more likely, as a tender offer would have to be sufficiently attractive to avoid having to pay the equivalent price of a yield of twice an undated gilt.


AC, if I may call you that, I'm afraid you need to reread the listing particulars. That provision only applies if the Company itself is wound up.

On a cancellation of the pref's in sua they get par plus accrued.

BTW no FCA signoff required. RSA considers pref's in effect to be bonds.

Sorry.

Chris

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Re: Preference shares -- keeping it simple

#354234

Postby OwenSwansea » November 6th, 2020, 8:39 pm

I do hold RSAB, which I purchased some time ago, at below par. I seem to recall that the issue is not a very large one, and I doubt if anyone would want to cause an “Aviva” moment by attempting to redeem them at par, and as it happens they went up by 1.59% today, so there!

Owen.

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Re: Preference shares -- keeping it simple

#354245

Postby OwenSwansea » November 6th, 2020, 9:44 pm

The RSAB issue only amounts to £125 Million, so to cause another major upheaval in the UK Preference Share Market for the sake of a mere £40 Million would be extremely poor public relations, even if it is legally possible to redeem the Issue at par.

Owen.

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Re: Preference shares -- keeping it simple

#354695

Postby AC114B » November 9th, 2020, 9:10 am

Thanks for your comment, Chris. I have looked again at both the articles and initial prospectus and it is interesting that the language around voting rights and cancellation is different, nevertheless, I think there is an argument that can be made both ways as to whether these can be de cancelled without a favourable vote from holders, though I suspect an acquirer’s lawyer is likely to succeed. That said in a £7.2 billion transaction, this is small fry, so may ultimately come down to who owns them.

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Re: Preference shares -- keeping it simple

#354707

Postby johnhemming » November 9th, 2020, 10:03 am

At a yield of 5.75 I don't think there is any broad perspective of a cancellation at par. They might as well just run with them.

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Re: Preference shares -- keeping it simple

#354754

Postby Alaric » November 9th, 2020, 12:18 pm

ChrisNix wrote: That provision only applies if the Company itself is wound up.



If there's a takeover and the new owners wished to restructure the capital, that might even be part of reconstruction.

If they wanted to drop the Prefs from the capital structure, a buy out offer at around market value may be more likely.

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Re: Preference shares -- keeping it simple

#354962

Postby ChrisNix » November 9th, 2020, 7:03 pm

OwenSwansea wrote:The RSAB issue only amounts to £125 Million, so to cause another major upheaval in the UK Preference Share Market for the sake of a mere £40 Million would be extremely poor public relations, even if it is legally possible to redeem the Issue at par.

Owen.


The bidders are foreign. The 'UK preference Share Market' will be of little concern to them.

Nothing is likely to occur for a period, but the acquirer's treasury will be looking at cost of funds.

Caveat emptor. NWBD are protected from such shenanigans.

Each to their own...

Chris

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Re: Preference shares -- keeping it simple

#354964

Postby ChrisNix » November 9th, 2020, 7:05 pm

Alaric wrote:
ChrisNix wrote: That provision only applies if the Company itself is wound up.



If there's a takeover and the new owners wished to restructure the capital, that might even be part of reconstruction.

If they wanted to drop the Prefs from the capital structure, a buy out offer at around market value may be more likely.


An offer at market makes no sense.

Logical either to treat as long term risk capital OR take them out at par by return of capital/cancellation.

Meanwhile, plenty of other pref's in the sea...

Chris

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Re: Preference shares -- keeping it simple

#355052

Postby GoSeigen » November 10th, 2020, 4:46 am

ChrisNix wrote:
Alaric wrote:
ChrisNix wrote: That provision only applies if the Company itself is wound up.



If there's a takeover and the new owners wished to restructure the capital, that might even be part of reconstruction.

If they wanted to drop the Prefs from the capital structure, a buy out offer at around market value may be more likely.


An offer at market makes no sense.

Logical either to treat as long term risk capital OR take them out at par by return of capital/cancellation.

Meanwhile, plenty of other pref's in the sea...

Chris


Just to put my oar in (or speak to myself as some have noted!) Chris is right to point out this risk -- and it is a risk but the probability of the event happening is moot of course.

Alaric again is looking at this from one angle only: return of capital is done not only to "drop the Prefs from the capital structure" -- it is quite natural for ordinary shareholders to want their capital back if the business is in the position to do so and has no better use for their capital. Often the return is done in the form of market purchases of shares, approved by a majority of shareholders, but it could equally (and legally) be done by a capital reduction (e.g. if the ordinary share market price is very low), in which case the preference shareholders are bound to have their capital returned first. In the vast majority of cases this capital value amounts to the paid-up issue price including premium, i.e. par value, NOT the market value of the preference shares.


GS

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Re: Preference shares -- keeping it simple

#355196

Postby ChrisNix » November 10th, 2020, 12:34 pm

GoSeigen wrote:
ChrisNix wrote:
Alaric wrote:

If there's a takeover and the new owners wished to restructure the capital, that might even be part of reconstruction.

If they wanted to drop the Prefs from the capital structure, a buy out offer at around market value may be more likely.


An offer at market makes no sense.

Logical either to treat as long term risk capital OR take them out at par by return of capital/cancellation.

Meanwhile, plenty of other pref's in the sea...

Chris


Just to put my oar in (or speak to myself as some have noted!) Chris is right to point out this risk -- and it is a risk but the probability of the event happening is moot of course.

Alaric again is looking at this from one angle only: return of capital is done not only to "drop the Prefs from the capital structure" -- it is quite natural for ordinary shareholders to want their capital back if the business is in the position to do so and has no better use for their capital. Often the return is done in the form of market purchases of shares, approved by a majority of shareholders, but it could equally (and legally) be done by a capital reduction (e.g. if the ordinary share market price is very low), in which case the preference shareholders are bound to have their capital returned first. In the vast majority of cases this capital value amounts to the paid-up issue price including premium, i.e. par value, NOT the market value of the preference shares.


GS


A return of ordinary capital and pref capital (which as you say is a prerequisite) would aid the contemporary pref market's understanding.

P.S. IMO the 'RSA' risk is more pronounced at Aviva.

Chris

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Re: Preference shares -- keeping it simple

#355211

Postby Alaric » November 10th, 2020, 1:33 pm

ChrisNix wrote:A return of ordinary capital and pref capital (which as you say is a prerequisite) would aid the contemporary pref market's understanding.


There's been a change of rules regarding what counts as regulatory capital which from 2026 (I think) means that Prefs will no longer count. The effect on financial institutions such as Banks and Insurers may be that they wish to replace them.

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Re: Preference shares -- keeping it simple

#355769

Postby 88V8 » November 12th, 2020, 9:58 am

Alaric wrote:There's been a change of rules regarding what counts as regulatory capital which from 2026 (I think) means that Prefs will no longer count. The effect on financial institutions such as Banks and Insurers may be that they wish to replace them.

And let's hope they do so in an orderly and well-trailed fashion, not an investor ambush.

V8

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Re: Preference shares -- keeping it simple

#355796

Postby SKYSHIP » November 12th, 2020, 10:56 am

Looks to me like a little too much navel-gazing and company law chit-chat.

It seems inconceivable to me that the buyers would not wish to cash-in the 7.373% prefs (RSAB) rather then continuing to pay over market odds for a small corner of debt. Also the thought that they might try to "Do an Aviva" is for the birds when you consider that regulatory approval for the overall bid is on the table for discussion.

When I bought at 126p yesterday the yield = 5.85%. A cash offer of 147.5p at a yield of 5.0% would surely be accepted by all. It would also offer a cash profit of 20.75p for buyers at 126p + exps. That = a 16.4% turn......so I'm in for a few. They have moved better since I bought, but even at 130p the figures are compelling.

NB: There is no bull position in RSAB; so if they don't bid, I'm just left holding a reasonably high-yielding cum. pref.

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Re: Preference shares -- keeping it simple

#355863

Postby OwenSwansea » November 12th, 2020, 1:55 pm

I am not greedy, and I shall be very pleased to accept a cash offer of 147.5p for my RSAB Cumulative Prefs.

By the way, can anyone recall an example of ChrisNix and GoSeigen disagreeing with each other? Only asking..............

Owen.

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Re: Preference shares -- keeping it simple

#355865

Postby OwenSwansea » November 12th, 2020, 2:06 pm

SKYSHIP,

Thou art a man of wisdom.

Owen.

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Re: Preference shares -- keeping it simple

#355869

Postby SKYSHIP » November 12th, 2020, 2:26 pm

LOL :lol:

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Re: Preference shares -- keeping it simple

#355901

Postby ChrisNix » November 12th, 2020, 3:38 pm

SKYSHIP wrote:Looks to me like a little too much navel-gazing and company law chit-chat.

It seems inconceivable to me that the buyers would not wish to cash-in the 7.373% prefs (RSAB) rather then continuing to pay over market odds for a small corner of debt. Also the thought that they might try to "Do an Aviva" is for the birds when you consider that regulatory approval for the overall bid is on the table for discussion.

When I bought at 126p yesterday the yield = 5.85%. A cash offer of 147.5p at a yield of 5.0% would surely be accepted by all. It would also offer a cash profit of 20.75p for buyers at 126p + exps. That = a 16.4% turn......so I'm in for a few. They have moved better since I bought, but even at 130p the figures are compelling.

NB: There is no bull position in RSAB; so if they don't bid, I'm just left holding a reasonably high-yielding cum. pref.


Why would new owners pay 147.5p for what they have the right to cancel at £1?

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Re: Preference shares -- keeping it simple

#355969

Postby OwenSwansea » November 12th, 2020, 7:03 pm

Any Company that attempts to redeem Irredeemable Preference Shares at par will lose all credibility. The Market would not forget such crass behaviour.
The clue lies in the word “Irredeemable”.

Owen.

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Re: Preference shares -- keeping it simple

#355970

Postby swill453 » November 12th, 2020, 7:10 pm

OwenSwansea wrote:The clue lies in the word “Irredeemable”.

I'll get the popcorn...

Scott.


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