At its annual results presentation on March 8, Aviva made clear that it wanted to reduce hybrid debt by £900m and as such pointed out that it has the ability to cancel its irredeemable preference shares at par value – something which came as a surprise to retail and institutional investors.
The company argued that preference shares have a number of characteristics which make them burdensome. They carry high coupons that are not tax-deductible and they will not count as regulatory capital from 2026. They are also considered debt for leverage calculations as the shares are not currently recognised as qualifying capital by ratings agencies S&P and Moody’s.
Aviva wants to find more than £500m in additional capital returns and so it argued that it would make sense to find this through the cancellation of preference shares at par value, subject to a shareholder vote and court approval.
Investors were unhappy with this, not least because the understanding was these shares couldn't be cancelled. As stated in the prospectus, the securities are irredeemable, but it transpires that there is a clause within the terms and conditions which allows for a “return of capital” via a court approved capital reduction at par or slightly higher if the deal was issued at a premium. The company stated that it had not made any firm decisions regarding any planned capital returns but “wanted to flag” to the market that this would be on the table as an option. Aviva has 4 of these irredeemable preference shares in issue, totalling £450m. The price of these shares obviously fell dramatically in the wake of the statement and sparked a public outcry amongst private and institutional investors alike.
Aviva later issued a statement that said that since its full year results announcement, it had heard a wide range of views , had spoken to a large number of investors and had received strong feedback and criticism. The company went on to say that as a result it had decided to take no action to cancel its preference shares.
The price of the Aviva preference shares bounced on Friday, but not to the level that they were trading at prior to the Aviva announcement:
(Past performance is not a reliable indicator of future results.)
Aviva may have backed off from its proposal but it has not just been the Aviva preference shares that have been impacted by this turn of events. Most irredeemable preference shares in issue carry the same “return of capital” clause in their prospectus and as such there has been a re-pricing across most of this market. Technically, the default price for these shares is around par but the accrued income, given the high coupons and unlikely event of them all being cancelled will allow for a premium to par to continue.
In light of this new found event risk, it is unlikely these instruments will ever trade as high as they did previously and investors are still relying on the goodwill, or the good sense, of issuers to waive their right to cancel the shares at par. Given the public clamour against the Aviva statement, it is unlikely that any other issuer in the irredeemable preference share market will even mention the possibility of cancelling these shares at par via the ‘return of capital’ process. What matters is that the mechanics to do so are still technically available to them. Investors are not likely to forget that.
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