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Aviva's climbdown still leaves 'prefs' in a mess

Aviva was forced to back down on plans to cancel preference shares, but the episode has exposed the vulnerability of these investments.

 
Aviva's climbdown still leaves 'prefs' in a mess
 

Aviva’s climbdown over its controversial move to cancel its preference shares has been greeted with relief by investors, but the clouds that have gathered over the wider market for these high-yielding investments may take longer to lift.

The small band of issuers of the shares, which pay high coupons but, unlike most bonds, do not have a redemption date, are under pressure to reassure investors they won’t, like Aviva, try to cancel investments that have been marketed as ‘irredeemable’.

Fund groups M&G, Invesco, BlackRock, Legal & General, Eden Tree and GAM, which played a key role in lobbying Aviva against the move, said it wanted the insurer and other preference share issuers to ‘take whatever steps necessary to modernise their articles of association in a way that would reflect both the group’s intentions going forward, and the true irredeemable nature of the instruments’.

While the broader preference share market has rallied following Aviva’s climbdown, it is yet to return to the levels at which it was trading before Aviva  delivered its threat earlier this month, a sign of investor wariness.

Despite big jumps on Friday as the threat of cancellation was removed, Aviva’s two classes of preference share are down by 12% and 10% since the insurer threatened to cancel them. Preference shares issued by Aviva’s legacy car insurance business General Accident, which were also threatened with cancellation, are down by 9%.

Preference shares from other issuers have been almost as badly hit. Since Aviva signalled its preference shares could be cancelled, Royal Sun Alliance ‘prefs’ have fallen  8%, while two issues of Santander preference shares are down by 8%. Standard Chartered preference shares are down 8% while two issues from Lloyds are down 7% and 6%.

Ecclesiastical preference shares meanwhile recovered all the ground lost in the immediate sell-off following Aviva’s announcement, after the insurer was quick off the blocks in reassuring investors it had no plans to follow Aviva’s lead and cancel them. Investors will now be hoping for similarly reassuring noises from other issuers.

Wary investors

Craig Veysey (pictured), Citywire AA-rated manager of the £197 million Sanlam Strategic Bond  fund, which features a top 10 holding in one of Santander’s preference shares, said it was understandable investors were wary.

‘You wouldn’t necessarily anticipate the market getting back to the levels it was trading at before the announcement,’ he said. ‘Investors will be a little bit more cautious.’

But he argued that the Aviva episode could eventually prove a positive for preference share investors.

‘Going forward, it could play in favour of the preference share market,’ he said.

‘No other issuer is likely to try and do what Aviva had done. With all the bad press it would seem quite foolhardy for any of the other companies to be contemplating similar actions.

‘The market and bond holders have sent out a strong message to any companies that might be considering going down the same route.’

Campaigner Mark Taber also drew positive from the strength of opposition to Aviva’s move. ‘All investors managed to work together to make a difference,’ he said. ‘There is a place for shareholders of a company, which is not behaving well, to make them think again.’

Rush to sell

Aviva’s climbdown meanwhile won’t help those who sold in the sell-off that followed the initial announcement.

Thomson Reuters data shows nearly eight million Aviva and General Accident preference shares changed hands at these low levels, as volumes spiked. There are not understood to be any plans to compensate those investors.

Questions also remain over Aviva’s communication of the plans, initially announced in just five lines carried towards the end of its main results announcement. The sell-off only began later that day, when Taber had tweeted about the move.

That meant fund managers like Chris Ainscough, manager of the £70 million Charles Stanley Monthly High Income fund, was able to sell most of his position in the shares before the drop in value.

‘It wasn’t the right way to handle it,’ said Taber. ‘That sort of thing shouldn’t happen. People should have equal access to information.’

Taber called on the Financial Conduct Authority to act to protect preference shareholders following Aviva’s action. He pointed to the example of Australia, which introduced changes to legislation to prevent the cancellation of preference shares without a vote solely of investors in those shares.

Reassurances from issuers would not be enough. ‘Talk is cheap,’ he said. ‘Any announcements could easily be forgotten in the years to come.’

Such changes to legislation would have stopped Aviva from proposing the cancellation in the first place. While the insurer had offered a vote on its plans, all investors, both ordinary and preference shareholders, were being offered a say.

In the case of the General Accident preference shares, that meant that Aviva, as the sole ordinary shareholder, had enough votes to wave through the plans. Ordinary shareholders would have meanwhile sealed the fate of the Aviva preference shares, given the more than four billion ordinary shares in issue, even though each of the 200 million preference shares would have carried four votes.

Preference shareholders may well have been able to defend their rights in a vote across all shareholders in the early days of the investments. But the expansion of the ordinary shareholder base over the years, through a series of mergers and acquisitions, eroded that power.

32 comments so far. Why not have your say?

Alastair Newman

Mar 26, 2018 at 17:40

Aviva has created an absolute mess. Market Disorder and Abuse comes to mind. As stated in your article "People should have equal access to information" and a Regulatory News release should have been published. I was one that sold out on the "crash days" of these shares. Online brokerage services to sell were blocked because of the sheer size of the fall. Listing Rules must have been breached and shareholders who acted, at the time and sold, should either have their shares reinstated at the price that they sold out, or should be compensated by Aviva. Simply changing their mind and walking away from the repurchase announcement should not be permitted. Aviva caused disinvestment decisions to be made and I for one would not have sold these shares without good cause. In this particular instance: If investors have lost out due the Aviva's incompetence and lack of clear communication the investor should not be penalised.

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gadgetmind2

Mar 26, 2018 at 17:42

Given what Lloyds did to the ECN holders, I can't see them hesitating for one second if they think it'll fly in court, and they clearly don't care one jot about their reputation so that's not a factor.

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Nicholas Blake

Mar 26, 2018 at 17:54

It is basic due diligence to establish whether or not a reduction of capital requires a class meeting of pref shareholders. If not the prefs ARE redeemable. And note well that if such pref issuer were to be acquired by way of a scheme of arrangement repayment at par would be perfectly acceptable.

Anyone advising retail investors to buy 'no-class test' prefs at big premia is negligent.

Caveat emptor.

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Razzgox

Mar 26, 2018 at 18:18

I'm probably being incredibly stupid here, but why would any company offer "irredeemable" securities/bonds with such a large coupon. As economies fluctuate and companies health vary then surely it is sensible and prudent to have some kind of flexibility of such instruments?

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Dennis Russell

Mar 26, 2018 at 18:45

Razzgox - In 1992 the coupon represented the market cost for Aviva to raise the £450,000,000 it needed.

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PaulSh

Mar 26, 2018 at 19:41

@Alastair Newman, when markets go into meltdown, "caveat venditor" largely applies. You can try haggling with your broker if you lost out because their systems were overwhelmed, but I doubt you'll get any relief from Aviva.

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Deadlucky

Mar 26, 2018 at 20:46

Aviva behaved atrociously in this instance. Their industry is insurance where their customers have to trust them. To announce that Irredeemable preference shares are to be scrapped erodes all trust in the Aviva management overnight. Investors who supported the Company at the outset when they raised needed capital were to be shafted without much thought. They are shareholders too.

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Razzgox

Mar 26, 2018 at 21:22

Dennis Russell, thank you for your reply.

I agree with your comment but that was 1992, now is 2018, and the world is in a very different place financially and economically. Granted inflation effects returns, but if the coupon is very generous, then surely companies would protect themselves by being able to redeem these instruments if they become too costly. When they were issued it might have all have been very sensible. However, anything labelled "irredeemable" sounds a very risky promise to make.

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gadgetmind2

Mar 26, 2018 at 21:42

An annuity is also risky as someone could live for a long time. Should Aviva be able to hand back what someone spent on an annuity just because the market has moved against them? They must have some annuities on their books paying way more pa than these prefs, and many holding Aviva annuities will also hold the prefs for income on their tax free lump sums.

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Chantryguy via mobile

Mar 26, 2018 at 22:16

I have no problem with Aviva seeking to cancel or otherwise retire its shares -provided it is clear about its intentions in the promotion materials. That ensures that investors know what they are buying. In this case, nobody, and I mean no one, knew that retirement at par was a possibility. Suddenly, after 25 years, Aviva got a legal opinion to give it an angle. It comes pretty close to gaming the system. Great, the company stood to save some cash by reducing its obligations to a bunch of pensioners. Even then it didn't succeed. But, really, is this how ethical companies operate? Corporate governance in the UK will have hit rock bottom if Aviva fails to compensate those who lost out because of its attempt to wriggle out of its obligations. Shameful! And I speak as an ordinary shareholder. I think whoever hatched this botched plan should do the honourable thing.

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paul crocker

Mar 27, 2018 at 10:14

So much rubbish being talked by some I wish I could have such foresight in the stockmarket & the clever knowledge of what interest rates would be in 30yrs time but then I have only got 50yrs stock market experience 8% was the going rate other wise they would not have got the stock away. Now rates 1/2% hence price goes up if rates were now 11% the price may be 50p would they redeem @100 ?The stock was marketed IREDEEMABLE full stop. Would ord.holders &

I am one like shs. redeem/cancel @ nom. val. not sure is it £1?

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Alastair Newman

Mar 27, 2018 at 10:42

Reply to PaulSch. I had a long discussion with my broker re trying to get an exit price. Market Makers (MM), apparently, were reluctant to offer prices during the high volatility period. Without MMs on the other side the broker systems were unable to offer prices. Aviva pushed the market into disrepute and caused significant price distortion. The Aviva action also caused significant impact on the Preferred stock market as a whole.

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TonyN

Mar 27, 2018 at 12:00

Razzgox, like everything else in life when you need money desperately you have to pay what the market demands. Sure, now is different from then, but at the time of issue the cost to sell a fortune in shares, bonds, whatever was a perpetual rate of whatever it was. They could have issued fixed term bonds, regular shares, prefs with a different payment pattern or clear redemption terms. All would presumably, indeed absolutely certainly, more expensive at the time, and maybe for a long time into the future. And remember, they needed the money, badly, and having it later enabled them to issue ordinary shares that at the time of the issue they could not have gotten away at a decent price.

I guarantee you, nobody, certainly no bank, building society, insurance company, would have thought back in the early 90s, coming off a decade of rates in the 10 to 15% range, that three decades later interest rates would be in the order of 1 or 2% even for long term borrowing.

So sure, they hate paying the higher rates, just as they will hate only getting 2% off some of their current long term investments when interest rates get back to 5, 10% sometime in the next 20 years.

They got the value they needed from the issue, and are now bleating about it. But that is life, and it is how finance works.

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Nicholas Blake

Mar 27, 2018 at 19:06

Sorry, but it is basic due diligence to check the small print when purchasing prefs, in particular at large premia to par. Unless there are class rights which require an issue of prefs as a class to approve any return of capital such prefs are not really irredeemable.

All bond investors know the the wording on the cover of an issue is subject to the terms in the constitutional document.

Anyone recommending such 'non-class rights' prefs to retail investors at large premia to par is acting negligently.

It should also be borne in mind that any purchaser of a pref issuer itself by way of scheme of arrangement is free to redeem such non-class right shares at par.

Caveat emptor.

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gadgetmind2

Mar 27, 2018 at 21:43

The small print for these prefs *does* specify class rights. Aviva were arguing that a complex interaction of the prospectus for the prefs, their articles of association, and the 2006 companies act (passed after issue of prefs) let them make this redemption or irredeemable prefs based on a vote of shareholders of all classes. Lots of "big boys" held these prefs - do you think they didn't do some reading? Lloyds scammed many old people out of their savings on the ECNs because there weren't lots of institutional holders - that there were such holders of the prefs may be all that saved the day. The government and FCA should hang their heads in shame that this is what made the difference.

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Nicholas Blake

Mar 27, 2018 at 22:18

When you mention the small print, do you mean the articles, which form the contract between the company and the preference shareholders?

Out of interest I had a quick look through the articles, which are on the Aviva website, and I didn't see any class rights.

The prospectus is not a governing document, although one would generally expect any purported rights mentioned therein to be picked up in the articles (changes to which require a 75% vote of shareholders).

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Owen

Mar 28, 2018 at 10:33

Nicholas, I support your Caveat Emptor principle, but to describe working out in advance that the proposed action could be done and then that it would be done as "BASIC" due diligence seems totally unrealistic to me. If that's the level people need to go to for every investment, then investments are only suitable for unemployed lawyers (need to be unemployed because they won't have the time otherwise).

But even if you were right about the narrow investor position, what were the management doing trying to enrich one set of their shareholders (and possibly their own bonus pot) at the expense of another set of their shareholders ? And abusing the skills of their lawyers to make the outcome be "NOT what it says on the tin".

The worry for both sets of shareholders now seems to me what impact this could have on Aviva's business. i'm certainly not going to buy insurance from a company whose management thinks it's fine to use their lawyers to make the outcome be "NOT what it says on the tin". And how much confidence does anyone have that there won't be large fines or costs ahead from the market disorder issue - Alastair's top note looks right on that to me.

Owen

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paul crocker

Mar 28, 2018 at 11:00

The Directors of Aviva have created a false and disorderly market in Aviva irr. pref. and also in the whole of the fixed interest market of the LSE up to the value of £1bn. AV.irr & LSE F.I market will NEVER RECOVER properly. The problem I have now is that I do not want my company to pay a massive fine, action must be taken moneywise against the greedy directors trying to enhance their already massive salary and bonus using suspicious & sneaky financial trickery paid for with shareholders money I think this is a very important issue, hope others will support this view and perhaps press this point the FCA etc. Thanks

whole F.I. market on the LSE up to the val. of £1bn. AV.irr & the whole LSE

F.I.

market will NEVER RECOVER properly. The problem I have now I do not want my co. to have to pay a massive fine, action must be taken money wise against the

greedy directors trying to enhance their already massive salary & bonus I think this is a very important issue hope others will support this view

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paul crocker

Mar 28, 2018 at 11:07

sorry for messy 1 finger typing not good at spelling etc very old, weary, tired, furious & less well off AV HOLDER. !!

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Alastair Newman

Mar 28, 2018 at 11:27

The Financial Conduct Authority (FCA): Make a complaint against an issuer page is here https://www.fca.org.uk/markets/ukla/contact/complaint-against-issuer

I have already registered my complaint with the FCA. Others may wish to do so as well. Note the FCA email address as the base of the guidance page.

The more people that highlight Aviva's lack of insight and the market disorder their ambiguous announcement created the better.

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Owen

Mar 28, 2018 at 11:38

Hi Paul. I certainly support your view that all responsible directors should go. But because the business needs top people with commercial integrity to thrive, and to show we shareholders support that what happened was wrong, rather than because of the "greed" aspect. After all, we're not going to be able to check any proposed replacement directors for their greed ratings !

Owen

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Nicholas Blake

Mar 28, 2018 at 12:01

Owen,

I am a retired professional investor. My point wasn't aimed at retail investors, rather the 'professional' advisers who ought to be aware of the significance of class rights. I take their bleating as an excuse for not having done the basic research.

Preference shareholders almost never have a right in a wind up to more than par plus accrued dividends. It is generally accepted that once these amounts are secure the directors' duty is to act in the long term interests of the ordinary shareholders. Market premia do not usually come into the considerations.

And I am certain Aviva's lawyers did no more than confirm the legal workings of the articles. I can assure you its not rocket science!

As for the directors standing down, that is ludicrous. There has been no effort to mislead the market -- the articles are as they have been for some time. In fact, it can be argued that by highlighting a term of the prefs which the general market was missing they were doing their duty to promote an informed market.

As I said above, anyone buying prefs with no fixed redemption date at substantial premia to market needs to make sure they have checked that the issue has class rights in any return of capital.

Nicholas

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Deadlucky

Mar 28, 2018 at 12:28

Nicholas,

Who appended the term "Irredeemable" to these AV.A shares. Why can one not be expected to rely on such terms?

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Nicholas Blake

Mar 28, 2018 at 13:04

No idea.

The legal position is not that they are irredeemable (which is often bandied around as shorthand), but instead that they have no FIXED redemption date.

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TonyN

Mar 28, 2018 at 13:29

Hang on. Nobody would dispute a redemption at par on a winding up.

That is not what was happening here.

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Nicholas Blake

Mar 28, 2018 at 13:49

Tony,

The position is the same legally for a winding up or a return of capital. That is broadly the case generally under the companies act.

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Dennis Russell

Mar 28, 2018 at 15:22

Nicholas Blake

I imagine that the legal position is less staraightforward than you have suggested, but will probably not be directly tested in court.

But there does seem to be a demand from the Institutions for the position to be clarified, perhaps by an amendment to the Companies Act. For instance, could a shareholder, in the event that AV.A was trading @ £0.65p, require the company to cancel @ par+dividend? If not, why not?

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Deadlucky

Mar 28, 2018 at 15:48

Nicholas

Can you explain to me the subtle difference between a 'redemption of shares', and a company deciding to 'return its capital' about 25 years later?

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Alastair Newman

Mar 28, 2018 at 15:49

Some good news released today. "The FCA examines whether Aviva shares plan broke market abuse rules".

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Nicholas Blake

Mar 28, 2018 at 16:23

Dennis,

I don't know why you imagine the legal position has to be so complicated.

The companies act permits reductions of capital on a vote of 75% of the shareholders, subject to any restrictions in the articles. The articles state that on a return of capital the prefs get a vote at a meeting of ALL shareholders. There is a 75% majority requirement, but ,as the ords swamp the prefs by number, that is no real protection.

An original subscriber in the pref issue in 2005 might be able to argue that the prospectus was misleading. However, I'd be surprised if that had legs. Subsequent investors are entirely reliant on the articles, which don't seem to me to offer any worthwhile class protection.

BTW the difference between a return of capital and a redemption is that prefs which are redeemable generally can be redeemed in line with their terms but without a meeting. A return of capital always requires a shareholders meeting.

I'll say it again, buying prefs without class rights at big premia is ill advised.

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Dennis Russell

Mar 28, 2018 at 20:26

Nicholas Blake

I assume that by 'shareholders meeting' you mean a meeting of ALL shareholders, which could reject my proposed cancellation at par of a £0.65p AV.A? I

wonder if 'unreasonable oppression of a minority' might have legs?

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Nicholas Blake

Mar 29, 2018 at 07:52

That's right, Dennis.

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