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Preference shares -- keeping it simple

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

#355972

Postby OwenSwansea » November 12th, 2020, 7:21 pm

The word “Irredeemable” only has one meaning, and I think we all know what that is..................

Owen.

Alaric
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Re: Preference shares -- keeping it simple

#355977

Postby Alaric » November 12th, 2020, 7:50 pm

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


At least two reasons. One being that depending on the small print they may have to get the repayment approved by shareholders, the second is that the FCA would say "no" in the interests of orderly markets.

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Re: Preference shares -- keeping it simple

#356053

Postby ChrisNix » November 13th, 2020, 7:50 am

OwenSwansea wrote:The word “Irredeemable” only has one meaning, and I think we all know what that is..................

Owen.


In UK law a redeemable pref is one which under its terms is redeemable out of retained earnings or a new issue of share capital without a court hearing.

An irredeemable pref is one which has no terms for redemption without a court hearing.

ALL UK shares may have their capital returned (and thereby be cancelled) via an EGM of the company and court hearing to confirm.

Of course the street slang may be different.

Chris

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Re: Preference shares -- keeping it simple

#356055

Postby ChrisNix » November 13th, 2020, 7:57 am

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


At least two reasons. One being that depending on the small print they may have to get the repayment approved by shareholders, the second is that the FCA would say "no" in the interests of orderly markets.


Alaric,

All returns of pref capital require an EGM of the members of the company. A few, e.g. NWBD, require a separate class meeting.

As made clear in Aviva instance, on the basis the terms of the pref are governed by the articles (with occasional references to issue documents), which are publicly available, the FCA's concern is that statements regarding cancellation of prefs are accurate, and if one is envisaged, make it clear whether there is a firm intention or, if it is an option being considered, make plain the process for reaching a final decision.

So new owners can determine to make an offer conditional on an EGM of members and the FCA will not intervene unless their is some OTHER malfeasance.

Chris

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Re: Preference shares -- keeping it simple

#356065

Postby swill453 » November 13th, 2020, 8:29 am

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

At least two reasons. One being that depending on the small print they may have to get the repayment approved by shareholders, the second is that the FCA would say "no" in the interests of orderly markets.

Note that the recent censure of Aviva by the FCA wasn't because they intended to cancel their prefs at par. It was because they gave the impression that they could and would, but then didn't. Aviva "failed to consider properly its obligations under the rules to take reasonable care to ensure the announcement was not misleading".

https://www.fca.org.uk/news/press-relea ... les-breach

What would have happened if they'd carried out the cancelation is unclear.

Scott.

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Re: Preference shares -- keeping it simple

#356076

Postby ChrisNix » November 13th, 2020, 8:55 am

swill453 wrote:
Alaric wrote:
ChrisNix wrote:Why would new owners pay 147.5p for what they have the right to cancel at £1?

At least two reasons. One being that depending on the small print they may have to get the repayment approved by shareholders, the second is that the FCA would say "no" in the interests of orderly markets.

Note that the recent censure of Aviva by the FCA wasn't because they intended to cancel their prefs at par. It was because they gave the impression that they could and would, but then didn't. Aviva "failed to consider properly its obligations under the rules to take reasonable care to ensure the announcement was not misleading".

https://www.fca.org.uk/news/press-relea ... les-breach

What would have happened if they'd carried out the cancelation is unclear.

Scott.


Well said, Scott.

Note that FCA didn’t dispute the right to cancel at par.

Chris

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Re: Preference shares -- keeping it simple

#356129

Postby Alaric » November 13th, 2020, 11:12 am

ChrisNix wrote:All returns of pref capital require an EGM of the members of the company. A few, e.g. NWBD, require a separate class meeting.


The FCA's attitude, quite rightly in my view, is that you cannot have an orderly market in Preference Shares if the benefits from them become a gamble on management action. So one moment, the Prefs appear to offer a perpetual income of say 10 per 100 nominal and the next a repayment of 100.

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Re: Preference shares -- keeping it simple

#356158

Postby GoSeigen » November 13th, 2020, 11:59 am

Alaric wrote:
ChrisNix wrote:All returns of pref capital require an EGM of the members of the company. A few, e.g. NWBD, require a separate class meeting.


The FCA's attitude, quite rightly in my view, is that you cannot have an orderly market in Preference Shares if the benefits from them become a gamble on management action. So one moment, the Prefs appear to offer a perpetual income of say 10 per 100 nominal and the next a repayment of 100.


Oh nonsense.

GS

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Re: Preference shares -- keeping it simple

#356187

Postby johnhemming » November 13th, 2020, 12:39 pm

I think the issue is clarity. The USD NWG preference shares (if they still exist) are callable at the bank's option (which they may have done by now I have not checked) at par that stopped the price going much over USD25 nominal.

The argument about Aviva is one about the clarity of the terms. Which argument we have had here which obviously means they are not that clear.

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Re: Preference shares -- keeping it simple

#356202

Postby ChrisNix » November 13th, 2020, 1:21 pm

johnhemming wrote:I think the issue is clarity. The USD NWG preference shares (if they still exist) are callable at the bank's option (which they may have done by now I have not checked) at par that stopped the price going much over USD25 nominal.

The argument about Aviva is one about the clarity of the terms. Which argument we have had here which obviously means they are not that clear.


John,

I'm not sure there's a dispute about clarity, per se.

More that many investors are not familiar with the fact that, under UK law, issued capital can be cancelled without any 'cancellation right'/'call' being specified in their terms. Pref's fall into that category.

Ignorance is no defence, I'm afraid.

Chris

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Re: Preference shares -- keeping it simple

#356213

Postby johnhemming » November 13th, 2020, 1:52 pm

ChrisNix wrote:I'm not sure there's a dispute about clarity, per se.

There is a dispute about clarity as I disagree with you. However, I am not going to go there - apart from stating that I disagree with you which confirms that there is a dispute.

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Re: Preference shares -- keeping it simple

#356229

Postby GoSeigen » November 13th, 2020, 2:44 pm

johnhemming wrote:I think the issue is clarity. The USD NWG preference shares (if they still exist) are callable at the bank's option (which they may have done by now I have not checked) at par that stopped the price going much over USD25 nominal.

The argument about Aviva is one about the clarity of the terms. Which argument we have had here which obviously means they are not that clear.


It's not so much to do with the terms as the law. Alaric as always completely misrepresents the situation. He says it is management doing what they wish. It absolutely is not. The law gives the shareholders the right to decide to reduce capital if they so wish; they may NOT do so until they have first paid the preference shareholders. Alaric holds the bizarre position that if he values the preference shares above par then he should no longer be entitled to return of his capital if his fellow shareholders want their capital returned. He is thereby putting himself and his fellow preference shareholders in the position where they might refuse return of their capital, then find all the capital had been returned to the ordinary shareholders and the company can no longer operate and there is no capital left for themselves. Either that, or he is saying no company may reduce its capital when any of its preference shares trade above par which as I said earlier is arrant nonsense.

The fundamental problem here I think is shareholders forgetting they are shareholders and all that entails. They seem to think they are some protected form of senior creditor whose capital is utterly secure and therefore whose interest payments will continue in perpetuity. (Alaric's words). Well, some news for him: the usual situation with a shareholder is that they will NOT get their capital back. So when they have a chance at return of their capital that is a welcome bonus, not a terrible violation of their rights. The trick is not to be an idiot and value your shares beyond what is a sensible price.

GS

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Re: Preference shares -- keeping it simple

#356248

Postby Gan020 » November 13th, 2020, 3:36 pm

It is the nature risk analysis. Most of the popluation underestimate risk and overestimate opportunties.

In the case of shares, bonds and everything else to do with the stock market it is apparent to me that 95% of investors do not read a set of company accounts, let along read every word of the bond or pref share prospectus. We know this because of the large number of questions that get asked.

In the case of the RSAB prefs, downloading the listing pariculars from RSA's website gives us some insight into this because you do not get a clean pristine document from the day it was published. What you get instead is interesting because someone has used a computer generated day-glo highlighter on it in 4 places.

I will not touch RSAB unless it goes much closer to par, mainly because if I want a 5.5% yield I can get that with much lower risk to my capital.

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Re: Preference shares -- keeping it simple

#356250

Postby OwenSwansea » November 13th, 2020, 3:42 pm

GoSeigen

Your fundamental problem is that you think you can use legal and linguistic gymnastics to defend any irrational position related to the subject of Irredeemable Preference Shares. I am surprised that you do not also argue that the Cumulative variety are also a mirage. If you can reverse the meaning of the word “Irredeemable” any nonsense is possible.

Owen.

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Re: Preference shares -- keeping it simple

#356255

Postby Alaric » November 13th, 2020, 3:55 pm

GoSeigen wrote:Either that, or he is saying no company may reduce its capital when any of its preference shares trade above par which as I said earlier is arrant nonsense.


The very simple point is that if a Company wishes to reduce its capital, it should make the Preference holders an offer based on the value of the Income they would forego by having their shares terminated. That would have been the accepted practice until some deviously minded lawyers or accountants attempted to persuade Aviva otherwise.

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Re: Preference shares -- keeping it simple

#356280

Postby dealtn » November 13th, 2020, 5:00 pm

Alaric wrote:
GoSeigen wrote:Either that, or he is saying no company may reduce its capital when any of its preference shares trade above par which as I said earlier is arrant nonsense.


The very simple point is that if a Company wishes to reduce its capital, it should make the Preference holders an offer based on the value of the Income they would forego by having their shares terminated. That would have been the accepted practice until some deviously minded lawyers or accountants attempted to persuade Aviva otherwise.


Isn't it rather ... the very simple point is that if a Company wishes to reduce its capital, it should make the Preference holders an offer based on the terms in the prospectus the (original) investors agreed to?

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Re: Preference shares -- keeping it simple

#356282

Postby AleisterCrowley » November 13th, 2020, 5:03 pm

Gan020 wrote:It is the nature risk analysis. Most of the popluation underestimate risk and overestimate opportunties.

In the case of shares, bonds and everything else to do with the stock market it is apparent to me that 95% of investors do not read a set of company accounts, let along read every word of the bond or pref share prospectus. We know this because of the large number of questions that get asked.

In the case of the RSAB prefs, downloading the listing pariculars from RSA's website gives us some insight into this because you do not get a clean pristine document from the day it was published. What you get instead is interesting because someone has used a computer generated day-glo highlighter on it in 4 places.

I will not touch RSAB unless it goes much closer to par, mainly because if I want a 5.5% yield I can get that with much lower risk to my capital.



The RSAB particulars state that pref holders have a right to vote at any EGM affecting them
It's not clear (to me) if that vote is limited to pref holders or pooled with holders of ordinary shares. In the latter case I guess the ordinary share holders may vote to redeem the prefs at par if it benefits them

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Re: Preference shares -- keeping it simple

#356290

Postby Alaric » November 13th, 2020, 5:28 pm

dealtn wrote:Isn't it rather ... the very simple point is that if a Company wishes to reduce its capital, it should make the Preference holders an offer based on the terms in the prospectus the (original) investors agreed to?


If you want an orderly market it isn't, if the Pref holders can be outvoted by the Ordinary holders to pay them off to their financial disadvantage.

That does seem to be the way the FCA see it.

But perhaps Prefs with coupons in the 10% range are best retired if coupons on new borrowings would be in the 3% to 6% range. If market prices of Prefs are around par, issues regarding compulsory pay off become academic and such a pay back may even be in the interests of the Pref holders.

The Government agency that manages Gilts paid off all the high coupon stuff years ago. That even included the notionally Irredeemables.

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Re: Preference shares -- keeping it simple

#356300

Postby dealtn » November 13th, 2020, 5:57 pm

Alaric wrote:The Government agency that manages Gilts paid off all the high coupon stuff years ago. That even included the notionally Irredeemables.


Well if by paid off you include "matured", then sort of. Only a few issues were "redeemed", and those were all done in consultation with the GEMMs and primary market investors. I was one of them!

I think most would consider 8% 2021 and 6% 2028 as high coupon, especially these days. I would also consider some of the Index Linked Bonds to be High Coupon in a negative real yield world too, but that's a whole other story.

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Re: Preference shares -- keeping it simple

#356302

Postby ChrisNix » November 13th, 2020, 6:04 pm

Alaric wrote:
GoSeigen wrote:Either that, or he is saying no company may reduce its capital when any of its preference shares trade above par which as I said earlier is arrant nonsense.


The very simple point is that if a Company wishes to reduce its capital, it should make the Preference holders an offer based on the value of the Income they would forego by having their shares terminated. That would have been the accepted practice until some deviously minded lawyers or accountants attempted to persuade Aviva otherwise.


This is right in some ways, but not for the reasons you might think. In the early 90s prefs would sometimes be cancelled by paying a BELOW PAR price to yield an acceptable exit yield. That was because cancellation otherwise had to be AT par.

In other words par is a ceiling rather than a floor.

You may prefer a Company to offer more than it has to, but the fiduciary duty of directors is to do what's best for the Company, i.e. cancel at the cheapest price.

Simple, really.

Chris


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