Mark Taber is a researcher, blogger, analyst and campaigner on preference shares who is actively involved in helping institutions and retail investors get organised to push back at Aviva’s recent plan to cancel its preference shares at par.
Aviva has since abolished the idea, but Taber is worried about the knock-on effect and the lack of clear message from the regulator to other issuers of preference shares about its stance on the matter.
Taber, who has met with the FCA, Aviva and investor groups in the past week, says: “It is up to the regulator to sort this out, not individual companies and advisers to restore market stability.
“The regulator needs to do something, and quickly, because it only takes another issuer to come out with some aggressive noises and it is all going to start again.”
Aviva’s preference shares plummeted from 174.5p on 7 March to 121p on 9 March after it announced on 8 March it was looking to cancel its preference shares at par. The wider preference share market sunk as much as 30% and currently sits around 15% lower than before the bombshell was dropped.
Taber is worried about the damage this has cause to the market, the potential for issuers to not honour legacy prospectuses and what constitutes regulatory and share capital in the eyes of the regulator.
What are preference shares?
Preference shares aren’t very common with only 386 firms having them listed on the London Stock Exchange compared with about 2,000 that have shares listed on the LSE’s main or Aim market.
Because of their hybrid status between an equity and fixed income they are not held in many funds. But they are appealing for income because they have a fixed dividend and rank above ordinary shares in the pecking order if a company goes bust.
One disadvantage is preference shares have no vote on company issues and like a bond do not offer exposure to a company’s trading fortunes, meaning more protection in bad times but less upside when a company flourishes.
Why all the fuss?
When they were issued in 1992, Taber claims the Aviva prospectus described preference shares as irredeemable which means they could not be bought back at the par price of £1.
However, the insurer’s proposal on 8 March was to do precisely that and cancel them to save money on the dividend payment of 8-9% which is expensive in a world of low interest rates and low bond yields.
As Russ Mould, investment director at AJ Bell, says: “This would upset holders who would lose the juicy income on offer, but also potentially suffer capital loss too as the preference shares trade well above their par value, as the premium yields make them attractive to income seekers.”
Chelsea Financial Services managing director Darius McDermott, says Aviva’s proposal was “very controversial” because it was not in the spirit of the original shares.
He adds: “Moreover, because of the fall in interest rates the shares were trading at 170 pence before the announcement so to redeem at par, 100 pence, would result in a huge loss for holders of the shares.
“It was also particularly controversial because 100k retail shareholders hold preference shares. This also had a knock-on effect across other preference shares as well.”
Capital controversy
But for Taber, the contentious point is Aviva’s claim that its preference shares were issued as ‘regulatory capital’ rather than ‘share capital’.
Under Solvency II regulation, financial firms like banks and insurers are required to hold regulatory capital on their balance sheets as a buffer against a market downturn. From 2026 however, preference shares will not be seen as a form of regulatory capital which is presumably why Aviva looked at cancelling its shares at par before then.
Taber says the preference shares are legally part of a company’s share capital, as iterated in the firm’s original prospectus, and should be regarded the same as ordinary shares.
“There was nothing in [Aviva’s] prospectus in 1992 that says they were regulatory capital all it said is ‘we want to issue these to fund the expansion of our insurance business’. They issued ordinary shares at the same time.
“Imagine if a clever lawyer had come up with a scheme to cancel ordinary shares at par,” he adds. “Well, you have GSK shares trading at £25 and the par value is 25p. What would happen? You would have economic meltdown.
“You cannot stable functioning safe markets where the fundamental rights of the shares trading on them are not clear and transparent.”
Taber adds: “Suddenly the issuer is trying to muddle this with regulatory capital, it has nothing to do with regulatory capital, it is part of a company’s share capital.”
He has written to an email response to FCA chief executive Andrew Bailey’s recent letter to the Treasury outlining these concerns.
Call to arms
But while Taber believes the regulator needs to do more, he also urges other issuers of preference shares to come out and publicly commit to not cancelling their shares at par.
He says: “No one else, apart from Ecclesiastical Insurance, has come out and said that they would not try and extinguish the rights of their preference shareholders at par without having a separate vote.
“At the moment it is completely unfair because big investors are talking to shareholders in private but the market does not know that because no one is saying anything in public. You have a complete asymmetry information in the market.”
Ecclesiastical Insurance issued a punchy public statement in the wake of Aviva’s initial announcement, in which it said: “Ecclesiastical notes Aviva’s governance statement that ‘as one of the biggest companies in our sector, we aim to make our industry work better for everyone. That starts with us building trust with our customers, investors and shareholders by running our business honestly and transparently.’ Ecclesiastical trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action.”
It added that it has no plans to cancel its own 8.625% preference shares at par value through a reduction of capital.
Who holds preference shares?
A group of asset managers comprising M&G Prudential, Invesco, GAM, Edentree, Blackrock and Legal & General came together to rebuff Aviva’s original proposal and met with chairman Adrian Montague and asking him to uphold the trust of investors.
Together the group holds 15% of Aviva’s ordinary shares and 29% of its preference shares.
After Aviva announced it was abandoning its plan to cancel the shares, the group said in a statement: “Having taken this step we would encourage Aviva, and other companies with similar instruments, 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 as set out in the initial offering documentation and subsequent investor communications.”
According to the fund literature at 30 June 2017, the sterling denominated Gam Star Opportunities fund held 12.9% of the portfolio in preference shares, down from 11.09% the previous year. This includes 2.08% in the Aviva 8.375% preference share and 0.48% in the 8.75% issue.
Gam was not available for comment.
