Aviva 8 3/4% Pf Discussion Threads

[nisbet] 10/6/2021 10:14

Makinbuks, the cumulative relates to the certainty of future dividend payments. In the case of non-cumulative securities any dividend payment that is passed/cancelled is lost as there is no legal obligation on the company to make good. With cumulative securities no ordinary dividend can be paid until any historic missed payments are paid to preference holders. Hence the word cumulative, the dividends accumulate and represent an implied liability.

The certainty that this provides warrants a premium rating.

[makinbuks] 10/6/2021 09:53

Would they? To my understanding the cumulative aspect only adds value if a payment were missed when future payments are calculated on the principal plus the accumulated interest. As they are paid up to date the cumulative aspect does not affect the premium. I could well be wrong!

[nisbet] 09/6/2021 18:07

It will be interesting to see the result of the institutional tender for the NatWet preference issue on the 16th June. Whatever the final terms are, don’t lose sight of the fact that all the Aviva/General Accident preference issues are cumulative and would therefore warrant a decent premium over any offer for non-cumulative securities.

[p@] 08/6/2021 19:18

NWBD- Offer Buyback at £1.75

[nisbet] 26/5/2021 16:59

Interesting to see that today Legal & General redeemed £300m 10% subordinated bonds 2041 issued in 2009. This is in accordance with the terms of the prospectus.

[skyship] 05/5/2021 08:06

Yields at Offer prices:

# AV.A 8.75% @ 164.0p-165.5p = 5.29%
# AV.B 8.375% @ 159.0p-161.2p = 5.20%
# GACA 8.875% @ 161.4p-162.7p = 5.45%
# GACB 7.875% @ 141.0p-142.0p = 5.55%

All enjoyed a great run recently. AV.A & GACA go XD 3rd June...

[skyship] 10/4/2021 12:40

All 4 Aviva prefs had a steady/good week; but AV.A were on steroids rising a full 4.5% to close out the week at 161.5p-164.0p!

[skyship] 06/4/2021 12:46

Yields at Offer prices:

# AV.A 8.75% @ 155.75p-156.9p = 5.58%
# AV.B 8.375% @ 153.5p-155.8p = 5.38%
# GACA 8.875% @ 155.4p-157.4p = 5.64%
# GACB 7.875% @ 135.6p-137.9p = 5.71%

All steady after recent minor pullbacks...also AV.B & GACB recently XD

[yf23_1] 30/3/2021 19:05

Thanks, interesting to see what will transpire (as long as its not a forced redemption at par, LOL).

[nisbet] 30/3/2021 15:32

Yf23

The preference capital has a nominal value of £500m and therefore represents a small fraction of Aviva’s Tier 1 capital. Secondly, at some point in 2022 Preference capital will no longer be permitted in the calculation of Tier 1 capital but we have not heard whether the U.K. will continue to mirror the regulations of the EU insurance industry.

If you look at the total of Aviva’s shareholders funds it is clear that the Preference capital is no longer required. Remember, this capital was issued in the early 1990’s when Commercial union had severe financial difficulties, and was desperately needed. Those days are way in the past and today the company is over capitalised and has absolutely no need for this very costly capital.

As at the latest balance sheet, ordinary shares plus retained earnings totalled £17bn.

[yf23_1] 30/3/2021 15:07

What would be the cost of replacing tier 1 capital ?
You can't just get rid of tier 1 capital, its more expensive than tier 2, 3 to replace.

[nisbet] 30/3/2021 13:57

CC2014

Around 12 years ago U.K. base rates fell to 1% and at that time there was much speculation surrounding the the elimination of the stable of Aviva Preference shares. Consensus was that there will be ample opportunity to embark on a buyback programme when over the next few years interest rates were bound to rise. Of course, we know that did not happen.

The implications for servicing the colossal Government debt are such that it's going to be a very long time before we see interest rates at 3%. In addition, 3% base rates would be catastrophic for a U.K. housing market which has a level of gearing higher than at any time in the history of home ownership.

The long end of the gilt market has been a very accurate indicator of the outlook for inflation and with the 30-year gilt yielding 1.37% the message is very clear. Even the 10-year is yielding a paltry 0.87%.

Finally on the basis of a gross cost of 10.9% per annum, the last 12 years has cost Aviva around £650m to service £500m of Preference “debt”. Without doubt, removing this costly equity/quasi debt will be very high priority once the company starts to see cash flow from recent disposals.

[cc2014] 30/3/2021 12:48

My view is that with rising gilt, treasury and corporate bond yields the prefs will slowly fall in price and if it's cheaper to buy them back in the future than it is now any buyback is unlikely in the near term.

If I was Aviva I would wait for interest rates to rise to say 3% by which time perhaps GACB is trading around or below par and then make an offer.


(I note this topic comes up from time to time usually when the pref prices start falling)

[alphorn] 30/3/2021 11:59

GACB might be the punt for a redemption being the 'cheapest' of the Prefs.

Any views please?

[future financier] 29/3/2021 11:54

Good analysis - thanks nisbet - might just buy a few more!

[nisbet] 29/3/2021 11:27

When Aviva attempted to rip-off Preference shareholders the AV.A were trading at 180p, and a yield of 4.8%. This reflected pretty much the yield of the whole sector. What Aviva did with its actions is considerably undermine the whole sector and create a discount which the sector still has not recovered from.

Based on an analysis of the fixed interest market I believe that discount to be in the region of one percentage point, implying the yield on the ‘A” share today would be in the region 4.6% without the influence of the parent company shenanigans.

When Aviva finally makes its move it wants to be certain of success. An offer to take out Pref. shareholders at 5% would represent an insignificant premium over today’s market rating and, more importantly, a discount to the prevailing rating of some 2 years ago.

Given that the cost of this element of capital to Aviva is 10.9%, a take-out at 4% would represent good value to all concerned, so I’m with Skyship on this one.

Before the company can buy any of its own equity, it has to get shareholder permission. Preference shares represent part of the company’s permanent capital. Anyway at the first sign of any purchase or intended purchase they give the game away and whoosh go the share prices of these securities and the whole sector will be instantly re-rated down to a much lower yield basis.

[future financier] 29/3/2021 09:59

I'd be happy enough at a 5% yield - sadly I cannot see them paying out based on 4% so I won't start spending my £2.20/share!

[skyship] 27/3/2021 13:39

Ramellous - No way! Buying in the Market would just push the price up, secure only a limited %age; and then what? An Offer or a Tender which looks far less generous versus the increased share price

No, an Offer or a Tender is the best solution; with the latter being seen to be the fairest as it is up to shareholders to accept or not as they see fit. That may also be true of an Offer; but the Tender assumes life after the Tender for those who wish to turn down the immediate 40% gain.

Also the problem with a public offer is the expense of an offer document, versus pennies for a Tender offer.

[ramellous] 27/3/2021 11:20

Wouldn’t it just be easier for them to buy them in the market and take them out of circulation?

[alphorn] 27/3/2021 10:31

Sky - agree.

[skyship] 27/3/2021 09:02

nisbet - quite right to highlight that, even if an old story.

But for sure, circumstances have changed:

# The disposal of so many of their overseas assets, raising vast sums of cash

# The awful Pref PR mistake of just one year ago

I'm sure Aviva would like to be shot of the Prefs for sound economic reasons; and also to irrevocably put that Pref PR chapter behind them for good.

So, what will they do. Do nothing and fester. Or make a general fair offer.

To my mind, the option open to the least criticism would be to make a Tender for all 4 prefs based upon a yield they believe the Market would likely accept.

I suggest 4%. So for:

-- AV.A the offer price would be 218.75p - a rise of 40.7%

-- GACA the offer price would be 221.9p - a rise of 43.2%

[nisbet] 26/3/2021 13:32

Given the major Bond buy-back programme of recent weeks, don’t lose sight of Aviva’s most expensive debt, which is the four Aviva Preference issues.

The four securities have a combined aggregated coupon of around 8.75% paid as a dividend so the real cost to the company is 8.75% grossed up by whatever rate of corporation tax Aviva pays. If the rate is around 20%, then the cost is 8.75% divided by 0.8 which equals 10.93%.

The total nominal/par value of the Prefs. is around £500m and it will takes at least an 80-100% premium over par to get the acquiescence of shareholders.

The aggregated receipt of all disposals should total £5 billion-plus and I’m pretty sure some of that will be used to put right something the company has wanted to do for many years. And they know that ripping off Pref. shareholders will not be tolerated.

[cassini] 15/3/2021 09:49

Bond interest rates have been rising lately, depressing the value of the bonds.

I imagine preference shares are suffering from the same effect.

[nerja] 04/3/2021 16:12

The prefs seem to be coming off a bit lately

[nisbet] 01/3/2021 13:03

Given that GACB and AV.B are going ex this Thursday, the theoretical accrued dividend in the two share prices is much greater.

When comparing yields each stock should be stripped of the theoretical accrued dividend in order to compare accurately.

To be precise, dividend stripping should be done with reference from the last pay date rather than the ex date.