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JohannesBorgen @jeuasommenulle
, 18 tweets, 4 min read Read on Twitter
Following #Aviva's shocking announcement the situation unfolding in the UK #pref space is quite fascinating following #Aviva's announcement. Bear with me for an analysis. 1/n
Basically we are talking about fixed income instruments, issued a long time ago, with vey high coupons and counting as regulatory capital for banks and insurers. 2/n
Because they have coupons in the range of 8% - 13% they trade very high, sometimes above 200% of par. Because they are regulatory capital instruments, they cannot be redeemed and are perpetual. Every single prospectus says "non redeemable" bond. 3/n
But all of sudden #Aviva comes to the market and says "hey guys, maybe you don't know your company law, but these are issued as shares and as such I can redeem them at will (well, with shareholders approval) and at par" 4/n
At par !? When they're worth 200+ ? The market crashes badly, -30%, sometimes more - and #Aviva IR is flooded with phone calls. All other issuers watch, wondering if this an opportunity to get rid of those 13% bonds or not 5/n
Investors are spooked obviously : the bond says it can't be redeemed, that rights can't be abrogated with 75% pref holders approval and you're telling me ordinary shareholders can vote to screw me ?! 6/n
So what? Can #Aviva really do this ? It's actually very tricky. The general principle is that capital can be reduced by shareholders. However, the contract can stipulate more protections for investors. 7/n
However, irredeemable is not a protection - this simply means that the company can't exercise a call and is unrelated to capital reduction (yeah I know it's misleading.) 8/n
What about the fact that you can't abrogate rights without holders' approval? This is where it gets very very interesting. The key case law here is House of fraser plc. The court ruled that : 9/n
""Abolition or abrogation are not appropriate expressions to describe the situation where a right and its corresponding obligations have been extinguished by performance". So capital reduction is normal performance of contract not abrogation 10/n
Why ? Because of an older case law Saltdean Estate Co Ltd [1968] 1 WLR 1844 which basically said (& this is the key) "The liability to prior repayment on a reduction of capital,(...)is part of the bargain between the shareholders and forms an integral part of the definition (11/n
[of] a preference share. Giving effect to it does not involve the variation or abrogation of any right attached to such a share.’" 12/n
So can these "pref" be redeemed at par ? Well, I don't think so. Aviva relies on a ruling that basicall says that the fair & normal meaning of a pref is that capital reduction can happen at any time. But this is not true for regulatory capital !! 13/n
Regulatory capital *cannot* be redeemable at any time (economically, whatever the legal intrincacies). This would contradict solvency rules (usually EU rules.) So in practice investors cd argue that in all fairness the intent of the contract was *not* to give that possibility 14
presumably this is why all other issuers have never used that possibility even Lloyds which has very expensive prefs and did not hesitate to go to courts to redeem other instruments (ECN) 15/n
But if the main point of Saltdean Estate Co Ltd [1968] 1 WLR 1844 is negated (i.e. the possibility to reedem was not the fair interpretation of the deal) than the whole reasoning of House of fraser plc collapses and issuers do not have the right to repay. 16/n
Retail and pension funds are large holders of these, so the story is far from being over. If Aviva goes through with its attempt, expect many litigation and a fascinating story for many years ! 17/n & end.
without 75% pref holders approval* obviously
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