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Hybrid Capital - preference shares

Gilts, bonds, and interest-bearing shares
Gan020
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Re: Hybrid Capital - preference shares

#356506

Postby Gan020 » November 14th, 2020, 2:50 pm

OwenSwansea wrote: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.


I would be interested to understand if the Enterprise Inns bond holders felt the same way when they were redeeemed at par on a company takeover.

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Re: Hybrid Capital - preference shares

#356538

Postby ChrisNix » November 14th, 2020, 3:47 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.


Your argument is irredeemably flawed.

Chris

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Re: Hybrid Capital - preference shares

#356542

Postby ChrisNix » November 14th, 2020, 3:53 pm

johnhemming wrote: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.


John,

I don't think pref's are particularly complex.

But it is clear they are widely misunderstood by retail investors.

One thought is that the FCA mandate a 'one-pager' for retail investors setting out basic characteristics for the relevant instruments -- setting out calls and puts, maturities, etc. for bonds, and spelling out ability to cancel, redeem, etc. for pref's.

Companies Act applies to all UK pref's but such an approach would avoid less sophisticated investors being fooled by terms such as 'irredeemable'.

Chris

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Re: Hybrid Capital - preference shares

#356543

Postby ChrisNix » November 14th, 2020, 3:58 pm

Gan020 wrote:
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 available on other products and where we are in the interest rate cycle. That's possibly drifting off topic


In the case of Aviva the large pref holders also own maybe 20% of the ords, so have the ability between them to block a cancellation, which requires 75% of those voting to be in favour. My hunch is that the Company hadn't thought that through when it floated the cancellation kite.

Chris

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Re: Hybrid Capital - preference shares

#356547

Postby johnhemming » November 14th, 2020, 4:02 pm

ChrisNix wrote:But it is clear they are widely misunderstood by retail investors.

One thought is that the FCA mandate a 'one-pager' for retail investors setting out basic characteristics for the relevant instruments -- setting out calls and puts, maturities, etc. for bonds, and spelling out ability to cancel, redeem, etc. for pref's.

I think that suggestion is good. However, the legal position really isn't that clear.

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Re: Hybrid Capital - preference shares

#356615

Postby Wizard » November 14th, 2020, 7:57 pm

johnhemming wrote:
ChrisNix wrote:But it is clear they are widely misunderstood by retail investors.

One thought is that the FCA mandate a 'one-pager' for retail investors setting out basic characteristics for the relevant instruments -- setting out calls and puts, maturities, etc. for bonds, and spelling out ability to cancel, redeem, etc. for pref's.

I think that suggestion is good. However, the legal position really isn't that clear.

I do not immediately recall the detail, but my recollection is there was a (potential) interaction between UK and European law. One question in my mind is what has happened re that European legislation, was it transferred into UK law as part of the overarching Brexit legislation that transferred much of European law?

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Re: Hybrid Capital - preference shares

#356617

Postby johnhemming » November 14th, 2020, 8:01 pm

That in part is why I do not want to get into the detail. All of this is findable out, but for now I am happy to leave this issue in a box with Schroedinger's cat - fluffy.

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Re: Hybrid Capital - preference shares

#356618

Postby Wizard » November 14th, 2020, 8:04 pm

ChrisNix wrote:
Gan020 wrote:
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 available on other products and where we are in the interest rate cycle. That's possibly drifting off topic


In the case of Aviva the large pref holders also own maybe 20% of the ords, so have the ability between them to block a cancellation, which requires 75% of those voting to be in favour. My hunch is that the Company hadn't thought that through when it floated the cancellation kite.

Chris

That is also my recollection of what happened. What this makes clear is that the prefs are not held solely by retail investors - or to be precise the Aviva ones weren't at that time. It would be interesting to know how much of each pref is held by institutional investors. They will be much better advised than most retail investors, if institutions still hold at current prices there must be a good reason.

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Re: Hybrid Capital - preference shares

#356620

Postby GoSeigen » November 14th, 2020, 8:06 pm

OwenSwansea wrote: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.


No one has ever suggested an irredeemable share will be redeemed. That is a plain contradiction in terms.

The suggestion is that they will be subject to a reduction of capital below their market value, without the benefit of their holders having a veto -- which has happened before and will happen again. I challenge Owen to explain the sound commercial reasons why THAT will never happen again. Else he's just putting up straw men -- and nonsensical ones at that.


GS

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Re: Hybrid Capital - preference shares

#356623

Postby GoSeigen » November 14th, 2020, 8:11 pm

Gan020 wrote:
OwenSwansea wrote: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.


I would be interested to understand if the Enterprise Inns bond holders felt the same way when they were redeeemed at par on a company takeover.


Well bonds are not shares which is a huge difference, but in spite of holding Enterprise Inns bonds for a long time I don't recall this transaction. Could you post a link please.

GS

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Re: Hybrid Capital - preference shares

#356626

Postby GoSeigen » November 14th, 2020, 8:17 pm

ChrisNix wrote:
johnhemming wrote: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.


John,

I don't think pref's are particularly complex.

But it is clear they are widely misunderstood by retail investors.

One thought is that the FCA mandate a 'one-pager' for retail investors setting out basic characteristics for the relevant instruments -- setting out calls and puts, maturities, etc. for bonds, and spelling out ability to cancel, redeem, etc. for pref's.

Companies Act applies to all UK pref's but such an approach would avoid less sophisticated investors being fooled by terms such as 'irredeemable'.

Chris


Well just to humour our friends here I'll disagree with Chris for a change:

1. The people for whom such a document would be designed would simply ignore it as "irrelevant legal hair-splitting".
2. It might help in this particular case (and too late as it happens), but what about the next legal misunderstanding -- to cover all possible eventualities the one-pager would end being as long as -- hmm I don't know -- probably a company's Articles of Association, or even the Companies Act itself!!

GS

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Re: Hybrid Capital - preference shares

#356631

Postby johnhemming » November 14th, 2020, 8:27 pm

What I found interesting about TMF banking board that the collective wisdom was often better than the market.

Such securities can be complex.

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Re: Hybrid Capital - preference shares

#356656

Postby 88V8 » November 14th, 2020, 10:38 pm

johnhemming wrote:What I found interesting about TMF banking board that the collective wisdom was often better than the market.

Yes, and it's a pity that some of the posters have vanished. WS, Log, Surera, OBR of course.

Anyway.... it seems to me that the FCA regards retail investors as a nuisance. They are not going to expend any energy on our behalf.
Those of us who are still in Prefs have to accept that it's become a time-limited gamble, and at some point we should get out.

That's much less irksome now than it would have been a few years ago, as the yields available on income ITs for example are very similar, without the potential for existential capital risk and with a similar reliability of maintained income.

V8

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Re: Hybrid Capital - preference shares

#356675

Postby johnhemming » November 15th, 2020, 6:07 am

I don't know what has happened to Mark (OBR) (if anything). I was last in touch with him around the Aviva saga.

WShak is on twitter
https://twitter.com/WShak1/with_replies

I have not really been in touch with him since the BOI litigation period.

I did encourage one of the others to sign up with TLF which I think in a number of ways is better than TMF.

88V8 wrote:Anyway.... it seems to me that the FCA regards retail investors as a nuisance. They are not going to expend any energy on our behalf.
Those of us who are still in Prefs have to accept that it's become a time-limited gamble, and at some point we should get out.


I don't think that is true. It is important to understand the legal limitations of regulators. They do not act like politicians who can have an effective total jurisdiction (particularly if a back bencher).

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Re: Hybrid Capital - preference shares

#356677

Postby GoSeigen » November 15th, 2020, 7:09 am

88V8 wrote:
johnhemming wrote:What I found interesting about TMF banking board that the collective wisdom was often better than the market.

Yes, and it's a pity that some of the posters have vanished. WS, Log, Surera, OBR of course.


Well that was mainly because Mark decided to open his own "banking board" in competition with TLF, where those posters registered, and then he folded it a couple of years later. I begged him not to do so at the time given the costs of maintaining a discussion forum and the fact that both forums would be the poorer, but he was determined.

Surerera still posts here on occasion. The poster I miss most is Avidya -- who showed up a couple of times and then his posts from here appeared verbatim in another place!

GS

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Re: Hybrid Capital - preference shares

#356719

Postby ChrisNix » November 15th, 2020, 10:55 am

GoSeigen wrote:
88V8 wrote:
johnhemming wrote:What I found interesting about TMF banking board that the collective wisdom was often better than the market.

Yes, and it's a pity that some of the posters have vanished. WS, Log, Surera, OBR of course.


Well that was mainly because Mark decided to open his own "banking board" in competition with TLF, where those posters registered, and then he folded it a couple of years later. I begged him not to do so at the time given the costs of maintaining a discussion forum and the fact that both forums would be the poorer, but he was determined.

Surerera still posts here on occasion. The poster I miss most is Avidya -- who showed up a couple of times and then his posts from here appeared verbatim in another place!

GS

Avidya seemed to flash in briefly just before I joined and not seem since. Very thoughtful and informative posts, even if I disagreed with some of the conclusions.

See SatMail pushing RSA Aviva hook up.

Chris

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Re: Hybrid Capital - preference shares

#356918

Postby johnhemming » November 16th, 2020, 8:49 am

https://www.thetimes.co.uk/article/aviv ... -55nmgsm7t

Aviva is considering the unprecedented move of docking the pay of some of its non-executive directors after the preference shares row of 2018 and the company’s censure by regulators last month.

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Re: Hybrid Capital - preference shares

#356923

Postby Gan020 » November 16th, 2020, 8:59 am

GoSeigen wrote:
Gan020 wrote:
OwenSwansea wrote: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.


I would be interested to understand if the Enterprise Inns bond holders felt the same way when they were redeeemed at par on a company takeover.


Well bonds are not shares which is a huge difference, but in spite of holding Enterprise Inns bonds for a long time I don't recall this transaction. Could you post a link please.

GS



https://www.investegate.co.uk/official- ... 00018167F/

For example AK44. Take a look at the chart in Mid 2019 as the price falls from 111p to 103p in a day or so and then continues to fall over the coming weeks before being cancelled at par.

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Re: Hybrid Capital - preference shares

#356981

Postby GoSeigen » November 16th, 2020, 11:49 am

Gan020 wrote:
GoSeigen wrote:
Gan020 wrote:
I would be interested to understand if the Enterprise Inns bond holders felt the same way when they were redeeemed at par on a company takeover.


Well bonds are not shares which is a huge difference, but in spite of holding Enterprise Inns bonds for a long time I don't recall this transaction. Could you post a link please.

GS



https://www.investegate.co.uk/official- ... 00018167F/

For example AK44. Take a look at the chart in Mid 2019 as the price falls from 111p to 103p in a day or so and then continues to fall over the coming weeks before being cancelled at par.


Thanks for the info, I'd sold my bonds by then so wasn't aware, but I fear Gan020 may have misinterpreted this transaction. The bonds were actually subject to a put option by holders -- who presumably exercised that option. Why would they do so? Because new bonds issued by Stonegate to finance the EI Group deal were sold at a yield of 8.8%, which seems like very adequate compensation for the 10% or so discount to market value of the put option exercise price.

https://www.bloomberg.com/news/articles ... since-2013

So I doubt any of the original bondholders were that upset...

GS

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Re: Hybrid Capital - preference shares

#357009

Postby Gan020 » November 16th, 2020, 12:47 pm

GoSeigen wrote:
Gan020 wrote:
GoSeigen wrote:
Well bonds are not shares which is a huge difference, but in spite of holding Enterprise Inns bonds for a long time I don't recall this transaction. Could you post a link please.

GS



https://www.investegate.co.uk/official- ... 00018167F/

For example AK44. Take a look at the chart in Mid 2019 as the price falls from 111p to 103p in a day or so and then continues to fall over the coming weeks before being cancelled at par.


Thanks for the info, I'd sold my bonds by then so wasn't aware, but I fear Gan020 may have misinterpreted this transaction. The bonds were actually subject to a put option by holders -- who presumably exercised that option. Why would they do so? Because new bonds issued by Stonegate to finance the EI Group deal were sold at a yield of 8.8%, which seems like very adequate compensation for the 10% or so discount to market value of the put option exercise price.

https://www.bloomberg.com/news/articles ... since-2013

So I doubt any of the original bondholders were that upset...

GS


Thanks for this and no I was not aware of the put option and I'm pleased to learn something new as it slightly alters my views on buying bonds above par


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