To say that Aviva’s (AV.) announcement that it was considering cancelling £450m of preference shares at par value has riled investors would be an understatement – and you can see why. Floating the idea in the insurer’s 2017 results wiped around 30 per cent off the value of some issues in just one day.
The ‘irredeemable’ shares seem to have been priced on the assumption that there was no possibility they could be cancelled at par, typically trading at a premium since issue. That means even if Aviva doesn’t go ahead with the cancellation, the damage has probably already been done. That’s a big loss for investors, many of whom held the high-yielding shares for pensionable income.
The IC has received many responses from retail investors arguing that Aviva’s cancellation rights had not been communicated clearly, prior to the announcement on 8 March. Mark Taber of Fixed Income Investments is agitating on behalf of affected shareholders, asserting the insurer “had made no previous public reference to believing the preference shares could be cancelled at par without a class vote of preference shareholders, and the market was not otherwise aware of Aviva’s position on the matter”.
But a spokesperson for Aviva told us that the issuer’s rights relating to cancellation were contained in the relevant prospectuses sent out to preference holders. They pointed to paragraph 4 (iii) in each, which states that where a return of capital occurs – which is not a result of a winding up, redemption or repurchase of shares – repayment shall be made at par plus accrued dividend (plus, in the case of the General Accident preference shares, premium paid on issue). “This would include a return of capital, following a reduction of capital through which the preference shares are cancelled,” the spokesperson said.
The option has been put forward as part of Aviva’s plan to deploy £2bn in excess capital this year. The issuer said it could use a mechanism under the 2006 Companies Act, which enables it to repay any paid-up share capital in excess of the company’s needs. Changes in legislation since the preference shares were issued 25 years ago mean that the preference shares will not count as regulatory capital from 2026.
If the group does decide to push forward with a cancellation, it would need to be approved by at least 75 per cent of ordinary and preference shareholders at a vote. However, given ordinary shareholders vastly outnumber the latter, they could easily sway the issue, particularly as a cancellation would save almost £40m in coupon payments.
The Financial Conduct Authority (FCA) said it was making active enquiries into the matter and engaging with the insurer, its advisers and security holders. “We are seeking to understand the basis upon which the firm is taking this action and we are considering whether they have put sufficient information into the public domain,” a spokesperson said.
Chair of the Treasury Select Committee Nicky Morgan has also written to the FCA, after being inundated with complaints from investors. Ms Morgan is asking the regulator to clarify whether it is satisfied with Aviva’s assertion that the shares can be cancelled, and what the regulator’s role is in resolving any dispute over whether the preference shares are in fact redeemable.
Mr Taber said he had not only been contacted by scores of retail investors but institutions, too. That’s unsurprising, given the fact that on the day of Aviva’s announcement, around £1bn was wiped off UK preference shares, with shares in companies including Lloyds (LLOY) and Santander suffering losses. “There’s a huge contagion risk here,” Mr Taber said.
Despite no concrete decision yet being made, Aviva’s announcement has brought the lack of clarity around the regulation of preference shares to the fore. At present, investors seeking to understand the terms of the shares must refer to a complex combination of the issue’s prospectus, Companies Act and Articles of Association – which goes some way to explaining why many investors feel blind-sided by Aviva’s announcement.
