As FTAdviser previously reported, Aviva was permitted to buy back around £450m of preference shares this month at par value, despite the assets trading at a substantial premium to that price.
When the bonds were issued, Aviva made it clear it had the right to buy the bonds back at face value, even if the shares were trading at a price considerably above that. In the company’s recent results statement, it made clear it was considering buying the bonds back.
Jason Hollands, managing director for business development and communications at wealth manager Tilney, said the outcome for the owners of the bonds is an example of “buyer beware.”
Preference shares work like bonds in that they have a fixed income, but are counted as equity. The Aviva preference shares paid an income of 8 per cent, while Aviva’s ordinary shares have a yield of about 5 per cent.
The value of Aviva’s preference shares fell by about 30 per cent when the company said it was considering buying them back. The price of preference shares issued by other companies also fell.
Now Nicky Morgan MP, who chairs the Treasury Select Committee, has written to FCA chief executive Andrew Bailey to ask him to investigate whether Aviva’s actions, which prompted the preference shares of many other companies to fall sharply in value, comply with the FCA’s remit to ensure that markets work well.
She asked Mr Bailey to ascertain whether the manner in which Aviva communicated its intention to buyback the shares complied with the listing rules for UK stock market quoted companies.
Ms Morgan said she was motivated to write the letter after receiving a “large volume” of correspondence about the issue.
The shares could be bought back only after a vote of all shareholders, those with preference shares and those with ordinary equity.
Aviva’s market cap is about £20bn for the ordinary shares, and about £450m for the preference shares.
It was in the interests of the ordinary shareholders to vote to buy back the preference shares, as it increases the amount of cash available to them in future.
The Personal Investment Management and Financial Advice association (PIMFA) said it has been monitoring Aviva’s actions and said it is for the FCA and legal profession to determine whether breach of law or rules has occurred with regard to such questions as irredeemability and misleading information to clients.
"For PIMFA and its members it is of paramount importance that an ethical approach should at all times inform proposed or implemented actions in relation to retail investors, and that such actions should, as required by law, always be in the clients’ best interests.
"The decision to cancel preference shares at par value does not further the excellent work of our member firms in ensuring that private investor interests are properly and ethically catered for and feature fully alongside those of major institutions in investment decisions.”
James Foster, who jointly runs the £1.2bn Artemis Strategic Bond fund, said he tends not to own preference shares in his fund.
He said: “Aviva has just declared that: ‘The fact that the preference shares are described as “irredeemable” does not prevent them from being subject to Aviva’s ability to re-pay them in accordance with their terms following a reduction of capital.’
"This seems slightly misleading.
"Aviva gets to refinance a high-yielding bond with a low-yielding bond (or cash) – but in my view, it does so purely via a legal loophole. In effect, equity holders will gain at the expense of bondholders.”
When contacted for comment, Aviva said it had nothing to add to its previous statements. Ms Morgan has asked for a reply from the FCA by the end of the month.
An FCA representative said: “We have received the Treasury Select Committee’s letter and will respond.
"The FCA has already been making active enquiries into the issue, including asking the firm to explain the legal basis for its statements concerning the cancellation of the preference shares.
"We are engaging with the firm, its advisers and security holders, including complainants. Given the ongoing nature of this matter, and usual policy, we are unable to make any further public comment at the moment.”
David.Thorpe@ft.com
