GACA - An Aviva Pref yielding 7.85% at 113p

[SKYSHIP]

There has recently been some institutional/pension fund selling of the Aviva prefs – but most especially the General Accident 8.875% Irredeemable pref - GACA.

Churning around last week in the 112p-113.5p range. At 113p, Friday's closing offer price, the flat yield is now an anomalously generous 7.85%; doubly generous in that there is more than 4p of accrued dividend as they go XD 4.4375p c1st December.

With the 10yr gilt below 3.3% and other fixed interest stocks seemingly turning the corner, GACA looks to be an anomaly worth buying into.

There is also the outside chance that Aviva will decide to make a generous Tender offer to rid themselves of this expensive debt. Prefs rank as equity, so the dividends cannot be offset against corporation tax; unlike the interest on a bond.

Many just view GACA as an income stock. I view that income as useful; however I think of it more as the equity it is. Consider this. A return to a 6.5% yield, the level we saw in late May (c6months ago) would mean an sp of 136.5p. That would mean a 20.8% capital gain. Add in the imminent 4.4375p dividend and the gain is just under 25%.

All quite possible IMO.

[Laughton]

I'm with you, Skyship.

Noticed these last week and bought some on Friday @ 112.90p and later another chunk @ 112.53p to make it up to a full allocation. Happy to continue holding at that yield even if Aviva don't decide to make a tender offer.

[simoan]

Many just view GACA as an income stock. I view that income as useful; however I think of it more as the equity it is. Consider this. A return to a 6.5% yield, the level we saw in late May (c6months ago) would mean an sp of 136.5p. That would mean a 20.8% capital gain. Add in the imminent 4.4375p dividend and the gain is just under 25%.

All quite possible IMO.

I am not an income investor either and this is exactly my own reason for buying i.e. good chance of capital uplift and a nearly 8% yield whilst waiting. There seems to be a lot worse places to have some money parked currently. Even if it only reverts to the yield of LLPC or similar you are looking at a ~10% gain.

All the best, Si

[Alaric]

There is also the outside chance that Aviva will decide to make a generous Tender offer to rid themselves of this expensive debt. Prefs rank as equity, so the dividends cannot be offset against corporation tax; unlike the interest on a bond.

In addition to that, I believe there's a forthcoming implementation of rules which will mean Prefs will no longer count as Solvency capital.

[BullDog]

Thank you for the heads up on this one. Looks a rather decent opportunity. I have taken some profits off BRWM and SMDS and bought some GACA.

[scrumpyjack]

Maybethe sellers think Aviva might try to repay at par via a capital reduction plan which is not the same as being irredeemable. Got their fingers burnt last time they tried it, I know!

[JohnEdwards]

Maybethe sellers think Aviva might try to repay at par via a capital reduction plan which is not the same as being irredeemable. Got their fingers burnt last time they tried it, I know!

At least if this were to happen, the cost of the downside is more limited now owing to the lower prices since rates have risen!

[Alaric]

At least if this were to happen, the cost of the downside is more limited now owing to the lower prices since rates have risen!

One might wonder if they are ready to roll with a repayment exercise should the price hit par and stay below it.

[JuanDB]

If redemption risk is a concern why not opt for GACB rather than GACA? GACB is currently trading on a 7.72% yield and 104p so much closer to par.

[88V8]

If redemption risk is a concern why not opt for GACB rather than GACA? GACB is currently trading on a 7.72% yield and 104p so much closer to par.

Not really a concern, at any rate not much of a concern or perhaps an example of how the perfume of the premium overpowers the pong of the risk.

Advantage of GACA is the imminent X-date and the fact that it's carrying so much accrued vs GACB which is ex 3 months later.

V8

[Laughton]

If redemption risk is a concern why not opt for GACB rather than GACA? GACB is currently trading on a 7.72% yield and 104p so much closer to par.

Assuming you're happy with the current yiled, which I am, why would you accept an offer at par should the price drop so that yield rises by over 1%.

They didn't like the reputational damage caused when they tried to redeem last time and I, for one, think they've learned their lesson. But I could be wrong - that's part of the reason the yield is what it is.

[GoSeigen]

Very tedious I know but unfortunately the facts about Aviva need to be cleared up yet again.

1. GACA and GACB cannot be redeemed. They have literally no redemption terms so any redemption is out of the question. Yes I know people use the word "redeem" to mean "buy back" but as was discovered a few years back, this is very misleading in the context of a preference share which is clearly and transparently irredeemable.

2. Aviva did not attempt to redeem them. Quite apart from the fact that they have no right to redeem them, they merely put out information clarifying to the market what they believed to be their rights under their terms. The market itself (rightly or wrongly) interpreted that to mean they intended to take action imminently.

3. The right that Aviva claimed was not redemption. It was a capital reduction at par, which although similar in economic effect for shareholders, is an entirely different legal procedure requiring approval of shareholders and the High Court. This means that for the company it is not the same economically at all: there are significant costs of the related general meeting and the legal procedures and they require the support of their shareholders.

Put all together, realistically the risk of a capital reduction at par for shareholders at current prices is only a few percent of loss. The bigger problem long term is that these shares will always be priced as if there is a call option at par. The capital upside is therefore rather limited, more so than for other preference shares, NWBD for example, or the various PIBS out there whose capital growth is only limited by the zero-bound and credit spreads.

GS

[hostye]

Good Info Skyship. Thanks

When you say they GACA will have limited capital upside it worth pointing out that they hit 160 during the summer in 2021. That was after Aviva canceled any plans they may have had for a capital reduction.

I dont see them attempting it again given the regulator stepped in and they had to compensate holders of the prefs.
Aviva did state they may reconsider towards 2026 but would take into account "fair market value" at the time

I think Aviva will likely be in the market discretely buying back their prefs at some point (if not already)

[GoSeigen]

Good Info Skyship. Thanks

When you say they GACA will have limited capital upside it worth pointing out that they hit 160 during the summer in 2021. That was after Aviva canceled any plans they may have had for a capital reduction.

I dont see them attempting it again given the regulator stepped in and they had to compensate holders of the prefs.
Aviva did state they may reconsider towards 2026 but would take into account "fair market value" at the time

I think Aviva will likely be in the market discretely buying back their prefs at some point (if not already)

It's illegal for a company to buy its shares without the approval of shareholders. Has there been a resolution passed authorising purchase of the preference shares?


I agree that capital reduction is far from certain. Nice time to do it though, if you were minded to...

GS
EDIT: Preference shareholders should remember that following their complaints about possibly having their capital returned to them, the company has taken the alternative path of distributing funds to the ordinary shareholders only, bypassing the preference shareholders. This makes the capital position of the preference shares less secure, and preference shareholders should bear in mind the possibility that they could get even less than 100p back AND suffer value-eroding inflation in the meantime. Not saying it will happen, just pointing out the obvious possibilities.

[hostye]

Aviva obtained permission to purchase at the AGM in May 2022. I can't post the link in here unfortunately

This only relates to the AV.A and AV.B. not sure if they have already have approval for GACA and GACB but would think they will seek it at some point if not

[Tara]

As a result Aviva has listened. Aviva announces that it has decided to take no action to cancel its preference shares. Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards. If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time.

This was the statement from Aviva in 2018.

So what is Aviva likely to replace GACA with before 2026? Is it likely to be something with the same risk or lower risk? Is the yield likely to be the same as the current yield for GACA or less?

[SKYSHIP]

A lot of over-complexity posted above.

1. Aviva will NOT do anything to disadvantage the pref shareholders. That lesson learnt and painfully obvious - to most at least

2. The prefs will trade with reference to interest rates and track pretty much the other company prefs we all know well

3. The statement below by Goseigen is demonstrably incorrect - witness the Aviva pref prices over the past 2yrs. Take GACA. In the Summer of last year they traded at 162p on a yield of 5.5% - a 62% premium to par. As inflation falls and as interest rates moderate, GACA will climb back in line with others. Clearly at 114p and still cum dividend, they are anomalously good value.

"The bigger problem long term is that these shares will always be priced as if there is a call option at par. The capital upside is therefore rather limited, more so than for other preference shares, NWBD for example, or the various PIBS out there whose capital growth is only limited by the zero-bound and credit spreads."

[88V8]

A lot of over-complexity posted above.
Aviva will NOT do anything to disadvantage the pref shareholders. That lesson learnt and painfully obvious - to most at least

Tend to agree and I bought two big chunks at <113p so I hope you're right, or perhaps I should say I hope we're right.

V8

[BullDog]

A lot of over-complexity posted above.
Aviva will NOT do anything to disadvantage the pref shareholders. That lesson learnt and painfully obvious - to most at least

Tend to agree and I bought two big chunks at <113p so I hope you're right, or perhaps I should say I hope we're right.

V8

Me too!

[Tara]

A lot of over-complexity posted above.

1. Aviva will NOT do anything to disadvantage the pref shareholders. That lesson learnt and painfully obvious - to most at least

2. The prefs will trade with reference to interest rates and track pretty much the other company prefs we all know well

3. The statement below by Goseigen is demonstrably incorrect - witness the Aviva pref prices over the past 2yrs. Take GACA. In the Summer of last year they traded at 162p on a yield of 5.5% - a 62% premium to par. As inflation falls and as interest rates moderate, GACA will climb back in line with others. Clearly at 114p and still cum dividend, they are anomalously good value.

"The bigger problem long term is that these shares will always be priced as if there is a call option at par. The capital upside is therefore rather limited, more so than for other preference shares, NWBD for example, or the various PIBS out there whose capital growth is only limited by the zero-bound and credit spreads."

All well and good, but does anyone have any idea what GACA are going to be replaced with in less than four years?

Something with the same risk or less risk? Something with the same yield or less yield? What if they are replaced with something yielding 5% and so current holders are faced with a potential loss of income of 30% or 40%?

Without knowing much more about this it is difficult to know exactly how good a buy GACA are at the present price.