The insurer’s signal that it could cancel the shares, announced alongside full-year results last week, has sent their values tumbling and been met with anger from investors.
Aviva’s threat hangs over four preference shares, two under the Aviva name and another two issued by General Accident, the car insurer which merged with Aviva predecessor Norwich Union in 2000.
They feature high fixed dividends of between 7.875% and 8.875% on their issue price, which had led to them trading at big premiums.
But all four have suffered heavy falls on Aviva's announcement. The General Accident 8.875% preference share is down 30%, with the other three having fallen around 25%.
Angry investors have pointed to prospectus documents for the Aviva preference shares which state they ‘will not be redeemable, save with the approval of the holders’. Documents for the General Accident preference shares state simply that they are ‘irredeemable’.
Aviva insisted in its results last week that it ‘had the ability to cancel preference shares at par value through a reduction in capital, subject to shareholder vote and court approval’.
The insurer has now issued a further statement arguing that ‘the fact that the preference shares are described as “irredeemable” does not prevent them from being subject to Aviva or General Accident’s ability to re-pay them in accordance with their terms following a reduction of capital’.
Ordinary shareholders will seal fate
It claimed this was ‘a different mechanism under law to redemption’. Crucially, Aviva said this would be put to a vote, not just of preference shareholders, but all investors, including ordinary shareholders. At least 75% of votes would need to be in favour of the measure for it then to be taken to the courts for approval.
In the case of the General Accident preference shares, Aviva, as the only General Accident ordinary shareholder, would be able to wave through the plans.
‘Aviva is the sole holder of the ordinary shares in General Accident and would be entitled to exercise its votes on a resolution for the reduction of capital in these circumstances,’ it said. ‘Aviva has sufficient votes to approve any such resolution.’
For holders of the Aviva preference shares, the fear is that ordinary shareholders would back the plans, lured by the prospect of bigger payouts to which the insurer has explicitly linked its move.
In a vote, Aviva preference shares would carry four votes each versus one vote for each ordinary shares. But there are only 200 million preference shares in issue versus more than four billion ordinary shares.
The insurer said that a cancellation of the shares was ‘one of a number of options Aviva is considering for the deployment of £2 billion surplus capital in 2018’ and that ‘no decision has yet been taken’. It said ‘market purchases or tender offers’ were other options.
'Treating preference shareholders very poorly'
‘Morally, we believe without much justification, it is treating preference shareholders very poorly indeed,’ he said, arguing investors ‘believed they were genuinely irredeemable, and were anticipating they could hold them forever’.
‘Those investors in a fair situation should be paid out according to what the market value was before the announcement.’
That echoes the views of retail investors commenting on the Citywire Money website, who have reacted angrily to Aviva’s move.
‘Bond holders who potentially might be considering holding Aviva debt might quite reasonably require a higher level of credit spreads on such investments in the future,’ he said.
Veysey narrowly escaped being hit by Aviva’s move, having sold a 1.5% portfolio position in Aviva and General Accident preference shares in early February.
‘The reason was not because we could foresee this potential situation,’ he said, but that debt on financial companies was trading at expensive levels, just as government debt had become cheaper in the bond market sell-off that greeted the start of the year.
Chris Ainscough, manager of the £69.5 million Charles Stanley Monthly High Income fund, sold his 0.8% portfolio holding in Aviva preference shares shortly after the announcement.
‘We saw the announcement regarding their consideration of a cancellation at par and acted quickly to exit these positions in anticipation of the market’s reaction to this unprecedented action. The majority of the holding was sold before any move in the price which insulated us from this specific event,’ he said.
Ainscough was able to take advantage of a delayed market reaction to Aviva’s move, to which it devoted just five lines carried towards the end of its main results announcement. The sell-off only really began around midday on the Thursday, after fixed income campaigner Mark Taber had tweeted about the move.
The Shires Income (SHRS) investment trust was the fund worst hit by Aviva’s move, with its net asset value down 4.1% in a single day after the announcement. Manager Ed Beal holds 5.1% of his portfolio in the General Accident 7.875% preference share.
Move reverberates across market
But it wasn’t just that investment weighing on the fund. The impact of Aviva’s move reverberated across the small preference share market, with around £1 billion wiped off in the immediate aftermath, as investors feared other issuers would also attempt cancellation.
Among Shires Income’s other holdings are a 6.1% position in Royal Sun Alliance preferred shares, now down 15% since the start of the year, a 5% holding in Santander preferred shares which are down 16% and 4% held in Standard Chartered preferred shares, down 10%.
One preference share to have recovered from the sell-off is that issued by Ecclesiastical Insurance, a 6.2% position in the Shires Income trust. Investors have taken heart at the Church of England insurer’s unambiguous statement that it had no plan to cancel its preference shares. That was delivered with a side-swipe at Aviva, highlighting the insurer’s stated aim of ‘building trust with our customers, investors and shareholders by running our business honestly and transparently’.
Veysey called on other institutional shareholders to follow Ecclesiastical’s lead and place public pressure on Aviva over the move.
Ainscough, who also has a small position in preference shares from other issuers, said he had spoken to Aviva to ‘raise our concerns regarding what would be a very detrimental course of action for remaining preference share investors and the broader asset class’.
‘We continue to hold Aviva bonds so welcome balance sheet rationalisation but care needs to be taken with regards to treating investors fairly,’ he said.
The £1 billion GAM Star Credit Opportunities fund is one of the largest investors, with a 2.1% portfolio position in the General Accident 8.875% preferred shares.
GAM Investments said in a statement: ‘We are very disappointed to hear that Aviva is considering cancelling its preference shares at par value. We will continue to engage with Aviva on this issue and seek the best possible outcome for our investors.’
Other funds to have been hit include the Aberdeen Smaller Companies Income (ASCI) investment trust, with 2% of its portfolio held in Aviva preference shares and 1.9% in those from General Accident.
The £2.1 billion M&G Charifund meanwhile holds a 2.1% portfolio position in General Accident preference shares. The City Merchants High Yield (CMHY) investment trust meanwhile details a 3.5% position split between Aviva preference shares and the insurer's unaffected perpetual shares, but does not give the proportion for each.
Some of the other fund groups affected have declined to comment, but Taber suggested that they were lobbying Aviva behind closed doors. ‘I know in private an awful lot more is going on,’ he said.
Pressure on Aviva is meanwhile not just coming from investors. City regulator the FCA has also been asking questions.
‘The FCA is aware of the issue and making active enquiries into the matter. We are engaging with the firm, its advisors and security holders,’ said an FCA spokeswoman.
‘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.’