Kirk, manager of the TwentyFour Dynamic Bond and TwentyFour Focus Bond funds, questioned Aviva’s corporate governance after it announced plans to redeem ‘irredeemable’ preference shares at par value, or issue price, ignoring the premium they trade at.
The insurer said it is considering cancelling £450 million of preference shares in order to save £38 million a year in coupon payments. The shares offer fixed dividends of between 7.675% and 8.875% making them popular with income investors.
Four bonds are at risk, two from Aviva and two issued by General Accident, the car insurer that merged with Aviva predecessor Norwich Union in 2000.
Kirk said he did not hold any of the bonds in his portfolio but ‘as bond investors we always need to make sure that the companies we invest with are manging our interests alongside those of other stakeholders’.
He said, Aviva’s plan ‘clearly favours the short-term interests of shareholders at the expense of bondholders’ as the debt is ‘old, inefficient and expensive’ for the insurer and getting rid of it frees up more money for shareholder payouts.
However, Kirk argued that Aviva could shoot itself in the foot and ultimately cancelling the preference shares would be worse for shareholders.
‘If this action is carried out it will also impact the long-term interest of shareholders, since the cost of future debt is likely to increase,’ he said.
‘Can the company be trusted in acting in investors’ interests when one of their perpetual bonds reaches a call date? This uncertainty will require investors to be compensated with additional spread.’
He added that fixed income investors worked with the insurance sector ‘with a high degree of mutual trust’, accepting ‘relatively tight credit spreads’ on the premise that the insurers would keep their word.
Kirk said Aviva should have redeemed the preference shares at market price rather than calling them at par ‘or by threatening to cancel then holding a coercive tender below the previous price’.
It is not just the cost of future debt that could be impacted by redeeming the bonds at par, or reduced market, value, as Kirk said it had repercussions for fund managers around due diligence.
The Aviva governance statement states that it aims ‘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’.
‘This will clearly be questioned if the company goes ahead and exercises a regulatory par call even if it is legally entitled to,’ said Kirk. ‘We would also take a dim view in the event of a deeply discounted tender for the preference shares.’
Bond expert and founder of Fixed Income Investments Mark Taber has challenged Aviva over its redemption plans. He has written to the insurer on behalf of the 580,000 retail investors who could see their income hit.
He said it has made ‘no previous public reference’ of a cancellation at par and the prospectus stated they ‘shall not be redeemable, save with the approval of the holders’ and the market has priced them on this information.
‘Aviva will have been well aware of this and has taken no steps to inform the market otherwise,’ he said.
The situation mirrors that of Lloyds (LLOY) in 2016, which bought back £3 billion of bonds from investors but not before a Supreme Court battle. The ‘enhanced capital notes’ paid a generous 10% interest but the courts ruled that the bank was within its rights to redeem them despite a campaign headed by Taber to prevent it from doing so.