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Hybrid Capital - preference shares

Gilts, bonds, and interest-bearing shares
johnhemming
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Hybrid Capital - preference shares

#356143

Postby johnhemming » November 13th, 2020, 11:45 am

Following the discussion we had about preference shares I have now written to the FCA asking what their plans are when various capital instruments are disqualified later this decade (the 20s) for both Banks and Insurance companies. I will post the response here. We may not get a response that quickly.

I don't know whether Mark Taber is still active in this area, but I thought I might as well start the ball rolling from the perspective of retail investors.

GoSeigen
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Re: Hybrid Capital - preference shares

#356156

Postby GoSeigen » November 13th, 2020, 11:56 am

johnhemming wrote:Following the discussion we had about preference shares I have now written to the FCA asking what their plans are when various capital instruments are disqualified later this decade (the 20s) for both Banks and Insurance companies. I will post the response here. We may not get a response that quickly.

I don't know whether Mark Taber is still active in this area, but I thought I might as well start the ball rolling from the perspective of retail investors.


What did you suggest was the problem that the FCA are supposed to solve on behalf of retail investors?


GS

johnhemming
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Re: Hybrid Capital - preference shares

#356157

Postby johnhemming » November 13th, 2020, 11:58 am

I didn't say there was a problem I just asked what the FCA are intending to do.

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Re: Hybrid Capital - preference shares

#356159

Postby GoSeigen » November 13th, 2020, 12:00 pm

johnhemming wrote:I didn't say there was a problem I just asked what the FCA are intending to do.


Okay then why should they do anything? It's the banks that might have something to do surely?

GS

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Re: Hybrid Capital - preference shares

#356167

Postby johnhemming » November 13th, 2020, 12:07 pm

They should consider what the banks might do and what the impact could be on retail investors to ensure that it fits within the regulatory environment. It all has to start somewhere.

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Re: Hybrid Capital - preference shares

#356210

Postby Alaric » November 13th, 2020, 1:40 pm

johnhemming wrote:They should consider what the banks might do and what the impact could be on retail investors to ensure that it fits within the regulatory environment. It all has to start somewhere.


There are now forms of debt which are not considered suitable for retail investors. If the banks wanted to use these to replace Prefs, the FCA should have a view. Arguably if unilateral repayment at par is on the table, Prefs in their present form aren't suitable for retail investors either. By unilateral I mean that repayment can be imposed without the Pref holders as a class being able to veto it.

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Re: Hybrid Capital - preference shares

#356212

Postby johnhemming » November 13th, 2020, 1:50 pm

There is an additional point in that it is unfair to prevent retail investors accessing all debt instruments and it is a good idea for the FCA to have some where the conditions are not so complex that retail investors would be taking risks they don't understand.

Otherwise retail investors are essentially stuck with bank accounts.

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Re: Hybrid Capital - preference shares

#356242

Postby OwenSwansea » November 13th, 2020, 3:07 pm

It should never be necessary for any debt instrument to have conditions so complex that they are not clear. Unless, of course, the intention is to deceive.

Owen.

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Re: Hybrid Capital - preference shares

#356246

Postby dealtn » November 13th, 2020, 3:26 pm

OwenSwansea wrote:It should never be necessary for any debt instrument to have conditions so complex that they are not clear. Unless, of course, the intention is to deceive.

Owen.


Have you seen the length of the average Listing Document or prospectus?

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Re: Hybrid Capital - preference shares

#356247

Postby ChrisNix » November 13th, 2020, 3:31 pm

OwenSwansea wrote:It should never be necessary for any debt instrument to have conditions so complex that they are not clear. Unless, of course, the intention is to deceive.

Owen.


Pref’s are not debt instruments, nor really hybrid capital. They are share capital.

Think of them as a prior ranking ordinary share and you’ll understand them better.

The accountants now often treat them as debt, but that is a misnomer, as they have no rights to accelerate/enforce payment in the event of a default.

Chris

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Re: Hybrid Capital - preference shares

#356256

Postby Gan020 » November 13th, 2020, 3:56 pm

johnhemming wrote:Following the discussion we had about preference shares I have now written to the FCA asking what their plans are when various capital instruments are disqualified later this decade (the 20s) for both Banks and Insurance companies. I will post the response here. We may not get a response that quickly.

I don't know whether Mark Taber is still active in this area, but I thought I might as well start the ball rolling from the perspective of retail investors.


Firstly can I applaud your efforts to stand up for the retail investor and if there is anything I can do to help please contact me by PM.


Regrettably I don't think you will get very far. It is clear the FCA are not happy about retail investors owning complex instruments because many don't appear to understand the risk they are taking, reset dates, call dates etc. You can see the evidence for this in some of the PIBS which are imho mispriced. This is not to say some fund managers are much better as I see a few 50k and 100k denomination bonds which look wrong as well to me, but maybe that's my ignorance not theirs.

I think there is a deeper problem though. My 5% Tesco Bank retail bonds redeem next week. Clearly Tesco Bank could have rolled them into a new instrument but they chose not to because imho the FCA discourage it. Us retail investors are getting stuffed everywhere and the only way round it is as a HNW or professional investor. Even then most debt instruments are now 100k minumum. As it happens I have 100k of Tesco bank but I accumulated them over time, they are spilt across 3 accounts and I like the idea of being able to sell a few if I need to. I would never have bought one lot of 100k and for me it's too much as a minimum trade size as I like to scale in and out.

What I think would help us all is if the minimum trade size was 10k-25k, which would strike a balance. Not going to happen though imho

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Re: Hybrid Capital - preference shares

#356264

Postby OwenSwansea » November 13th, 2020, 4:17 pm

ChrisNix,

You too will understand the subject of Irredeemable Preference Shares better if you look up the definition of the word “Irredeemable” in your dictionary.

Owen.

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Re: Hybrid Capital - preference shares

#356268

Postby johnhemming » November 13th, 2020, 4:29 pm

I do understand how people see this. I also remember the time when the old TMF banking board noted that some RBS USD preference shares were classified as debt and others as equity (which ended up as a profitable trade).

All we really need to agree on is that the issue is complex.

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Re: Hybrid Capital - preference shares

#356269

Postby ChrisNix » November 13th, 2020, 4:36 pm

OwenSwansea wrote:ChrisNix,

You too will understand the subject of Irredeemable Preference Shares better if you look up the definition of the word “Irredeemable” in your dictionary.

Owen.


Owen,

I refer you to KISS pref thread.

Chris

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Re: Hybrid Capital - preference shares

#356344

Postby OwenSwansea » November 13th, 2020, 9:07 pm

If ChrisNix and his alter ego GoSeigen are to be believed, Preference Shareholders have no rights whatsoever, and can be shafted at any time by the issuer.If this is true, it is amazing that this situation has gone unnoticed by the Market for the past 30 Years
Fortunately, I still think that the word “Irredeemable” will always mean what we all know it means, and that is the knub of the issue.

Owen.

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Re: Hybrid Capital - preference shares

#356387

Postby johnhemming » November 14th, 2020, 7:12 am

If you read all the precedents it is really complicated involving uk common law precedents and eu law. I would not agree with GS about the aviva prefs, but his point is based in legal precedent and does not deserve the opprobrium. The issue of complexity and predictability is the important one.

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Re: Hybrid Capital - preference shares

#356397

Postby Wizard » November 14th, 2020, 8:33 am

OwenSwansea wrote:ChrisNix,

You too will understand the subject of Irredeemable Preference Shares better if you look up the definition of the word “Irredeemable” in your dictionary.

Owen.

I do not want to see the various prefs disappear, certainly not at par as I hold rather a lot (for me anyway) of them. But as others have said it is complex and simply returning to the common parlance meaning of a word all the time does not make it less so. In a legal document a defined term means what the document says it does, hence why it is called a defined term, it is a term with a specifically defined meaning for the purpose of that document. Therefore, if a document defines a word as having the meaning given to it in a particular law, that is the meaning it has, not what the OED defines it as.

As an example, we may have a contract that says "...OwenSwansea and Wizard (each a "LemonFool Poster" and togther the "LemonFool Posters")... The LemonFool Posters agree not to argue about the meaning of Irredemable Preference Shares...". If you do not take account the definition of the term "LemonFool Posters" you could read the document as suggesting everyone who posts on this forum has agreed not to argue about the meaning of Irredemable Preference Shares, where in fact it is just the two of us, as that is how the term LemonFool Posters is defined in our agreement.

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Re: Hybrid Capital - preference shares

#356421

Postby Gan020 » November 14th, 2020, 10:19 am

OwenSwansea wrote:If ChrisNix and his alter ego GoSeigen are to be believed, Preference Shareholders have no rights whatsoever, and can be shafted at any time by the issuer.If this is true, it is amazing that this situation has gone unnoticed by the Market for the past 30 Years
Fortunately, I still think that the word “Irredeemable” will always mean what we all know it means, and that is the knub of the issue.

Owen.


I think it's not that it's gone unnoticed by the market it's more that there are a group of people who refuse to buy these shares at much above par because of the risks and another group who say the risks either do not exist or may exist technically but common sense or an intervention from the FCA or Mark Taber or whoever means it's a technicality only. There isn't a group in the middle.


My reading for what's it's worth is that the RSAB prefs can only be cancelled at par if the shareholders (that's ord's and prefs) vote for it in sufficient numbers. The issue arises if the owners of the ords are significantly different to the prefs and there is no commonatity of purpose.
This is not unusual. No appealing to the FCA is going to work when that's what the terms of the listing particulars say. Which is why in general their are only legacy issues of this type of capital (both prefs and PIBS) left because the FCA feels they are inappropriate for PI's. Even HNW are discouraged through the 100k minimum size on new issues.

My greatest puzzle though is why anyone wants to pay 130p for these given yields availalble on other products and where we are in the interest rate cycle. That's possibly drifting off topic

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Re: Hybrid Capital - preference shares

#356428

Postby GoSeigen » November 14th, 2020, 10:39 am

OwenSwansea wrote:ChrisNix,

You too will understand the subject of Irredeemable Preference Shares better if you look up the definition of the word “Irredeemable” in your dictionary.



Well duh: Dictionaries don't show what words ought to mean — they show how the words are actually used. If you want to know what it ought to mean as an investor you need to refer to the articles of association and company law, not a dictionary.

Which is precisely what ChrisNix has done.


GS

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Re: Hybrid Capital - preference shares

#356466

Postby OwenSwansea » November 14th, 2020, 12:22 pm

All this legal hairsplitting is irrelevant. As we all know, there are sound commercial reasons why no Irredeemable Preference Shares is going to be redeemed at par.
That is all there is to it.

Owen.


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