Aviva has reversed a decision to cancel its irredeemable preference shares at par value after an outcry from investors. What are the implications?
At its annual results presentation on 8 March 2018, insurance group Aviva said it wanted to reduce its hybrid debt by £900m – making the point that it had the ability to cancel its irredeemable preference shares at par value.
Investors were unhappy with this, as they were under the impression that they could not be cancelled in this manner. However, there is a clause in the terms and conditions that allows for a “return of capital” in certain circumstances. The news created such a media and investor furore that Aviva announced that it would reverse this decision at the end of March. There have now been further developments.
Aviva has now said it will offer a discretionary goodwill payment to shareholders who sold their preference shares in the period between 8 and 22 March (inclusive). The company said that it recognises the uncertainty that was created for preference shareholders whilst it considered its options and the impact it had on the wider reputation and trust in the company. Management said it hoped that the offer of a payment will restore some of this trust.
This moved followed the publication of a letter from the Financial Conduct Authority (FCA) regulator to issuers of irredeemable preference shares, which asked them to provide further information to investors. There was also an announcement by Lloyds Banking Group that is had “absolutely no plans to cancel its irredeemable preference shares through a reduction in capital”.
The base amount for the goodwill payment will be the amount by which the volume weighted average price of the relevant series of preference shares, over the relevant five business days, exceeded the sale price for that shareholder's preference shares, calculated using the prices as follows:
Aviva 8.375% preference shares: 150.81p.
Aviva 8.750% preference shares: 158.02p.
General Accident 7.875% preference shares: 140.01p.
General Accident 8.875% preference shares: 157.42p.
Aviva Preference Shares between 7th March to 23rd March (covering both announcement dates):
Eligible shareholders may also claim an amount equal to third-party transaction costs (eg broker commission) incurred in respect of any sale. An additional amount will be added to the sum of the basic goodwill payment and the transaction costs calculated by applying a rate of 6% per annum to that amount for the relevant period. The company has said that gains made by a shareholder from investing in preference shares during the relevant period will be offset against the goodwill payment. These payments are expected to cost Aviva about £14m.
The company has appointed KPMG as an independent administrator to handle the goodwill payment process. By 31 July 2018, Aviva expects to have completed the preparations required to open and operate that process and will make a separate announcement along with writing to each affected registered holder individually at that time setting out full details of how to claim their payment.
Eligible shareholders will have up to six months to make a claim from the date the goodwill payment process opens and will be contacted after KPMG has liaised with brokers and nominees on the most efficient way to process any claims. To receive any payments, shareholders will be required to release Aviva and KPMG from claims the shareholder may have in relation to the preference shares and the administration of the goodwill payment process.
The main consideration going forward, however, is that under the current regulatory environment these type of preference shares will no longer be recogised by the regulator as regulatory capital from 2026. Aviva will work towards obtaining regulatory approval for these types of shares, but there remains a risk that these instruments will no longer be recognised as being part of its capital buffers from 2026 onwards. This means the insurer may decided to buy them back at this time – but it will have to do it at the prevailing market price rather than at a discounted rate as first proposed.
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