Aviva has had a rethink on preference shares, but what now?

Aviva offices in London © Getty Images
Aviva has lost trust with investors

Earlier this month Aviva announced that it intended to cancel £450m of its preference shares using a legal loophole discovered by their very clever lawyers (see here for our take on it when it was first announced). Outrage instantly followed. And quite right too.

The preference shares (preference shares are non-voting shares, but take precedence over ordinary shares when it comes to dividend payouts) were paying a fixed yield of 8%-9% and so were trading well above their face value of £1 to reflect the fact that you can’t get that kind of low risk return anywhere else.

They were also considered by their holders to be irredeemable – and nothing in the documentation around them suggested otherwise. So while it might make sense for Aviva to want to cancel them (why pay 9% in an era in which you can borrow money for 2%?), none of their City or retail investors had imagined for a second that it was possible.

On Friday, Aviva gave in. It had canvassed a wide range of opinion, it said, and decided not to utilise the obscure legal loophole after all (for those of you who are interested, this hinges on the idea that redeeming a share and canceling a share are different things). Instead, things were to remain just as they were: “preference shareholders can rest secure in their holdings,” said Aviva. All’s well that ends well. Or so you might think.

The problem, of course, is that things do not remain exactly as they were. Before the initial announcement, the shares were trading at 170p. At the low – when it looked like the redemption might go ahead – they went to 120p, with each sale that moved the price down effectively representing some panicked pensioners seeing their carefully saved nest eggs collapsing in value. Now, crisis over, they are back near 160p.

So what of the people who sold in the middle of the crisis? What comeback do they have against Aviva – which is surely responsible for the troubles it has caused?

Maybe some. Bill Blain of Mint Partners reckons that Aviva CEO Mark Wilson should listen to suggestions that “he and his board personally recompense any and every investor that lost money for their stupidity and abuse of markets”. If they don’t fancy that much, says Blain, “I’ve been advised by one of lawyer chums there is a very strong case for investors to haul Aviva in front of the courts.”  

Aviva says it has reversed its thinking in order to “restore” the trust it thinks investors have in it. It might be a bit late for that.

  • alan

    Perhaps Bill Blain and Mint Partners should contact the wider media/press and those pushing inflammatory language around this issue. My understanding is that AVIVA were considering this possibility. At NO point did they say we are definitely going to cancel the Prefs. The Press should not chase a story and create the wrong language. The press should base reporting on Fact and Reality, not on assumption. The media at large should compensate everyone that considers themselves worse off. Its a disgrace that Aviva were harassed at all. If they had said 100% ….then that’s a different matter.
    It’s like turning ‘Negociations’ into ‘Trade Wars’…..the media should compensate everybody affected by tbe repurcussions of inaccurate and misleading information!! A crazy notion perhaps?…. but no less crazy than the Pref cancellation consideration. Aviva should sue the press for reputational damage !
    Wheres the commendation to Aviva management for trying to manage a business thoroughly? This has been an absurd media driven furore to a mere ‘consideration’, Aviva even had to make a statement to say they were not going to to something that they may not have done anyway!! Unbelievable.

    • Neal Morris

      I think your being rather pedantic and splitting hairs. Aviva was giving guidance it wanted to look at extinguishing them and it noted it had the right to cancel them. That was irresponsible and its actions caused panic. I witnessed retail investors selling for as low as £1 In a chaotic market hours and days following fund managers whom had already seen the bizzar news and had already sold out at £1.75. I really do think this was exceptionally unfair and misguided. I do not know whom is more culpable Aviva or the FCA. However I do believe in this instance redress is necessary. I also believe the City needs a capable and culpabable regulator, if it actually had fit and proper regulation this would and could have never have happened and the legal loop hole Aviva had found would have already been closed. As it is the loop hole is still wide open !

  • Chantryguy

    I commend Moneyweek for raising the issue of losses sustained by investors who sold. No one who invested in these prefs for the last 25 years did so believing they could be cancelled at par nor is it evident from the prospectus. That’s what caused the furore. If you’re going to raise funds using a listed instrument marketed to retail investors make sure you are upfront. To do otherwise casts a shadow over the whole market. Aviva have not sought to correct market perception for 25 years. From what I’ve heard this was a marketed scheme to help companies extract themselves from past obligations at below market value. About the same ethical level as tax avoidance, but using investors as the muppets. Yes it’s all very clever to find some weasel words that can be used but as an ordinary shareholder in Aviva I don’t know if I want to be associated with a company that even proposes to profit from a bunch of pensioners in this way. No, Aviva should compensate all those who lost out especially as details of the proposals were not communicated properly either. Management crossed an ethical line on this one and the FCA and Treasury Committee need to throw the book at them. The compensation scheme imposed on Tesco would be a start.

  • I disagree. It’s not Aviva’s problem how the market values these shares. The fact that they were trading at 120p implies it was far from certain anyway. Buyers will still get their dividend.

    On the other hand, if Aviva wants shot of these shares they’d better pay the market price for them.