ELLA: Tender/ Cancellation - thoughts.

[Laughton]

Recently released Annual Report can be found here (in case you haven't seen it) -

https://www.londonstockexchange.com/new ... t/16951326

[simoan]

While appreciating the logic of Ella following the AV/GA route of retiring their Prefs due to regulatory change, I do wonder if Ella is in the same position as the Aviva Group of having the funds to do it?
I hold a number of Ella Prefs but am unsure about going in stronger as if Ecclesiatical don't make a move I'm aware the sp will probably slip back from the current level. Does anyone have any information or a view on this point of affordability?

Why would they need any funds to cancel the Prefs? All they need to do is replace the 8.625% Prefs with some form of cheaper debt, which shouldn’t be too difficult. I make it there are 106.45m prefs costing £9.81m in total coupon payments a year (please check my fag packet maths!) and as of the last balance sheet for FY24 released on 21st March they had £105m in cash. Seems they have ample financial headroom to cancel the prefs should they wish to.

All the best, Si

[Redhill]

Thank you both for replies.
I hadn't looked at the accounts but have just done so and that answers my question as I see they appear to be strong financially. I did the same calculation as simoan from the CFO's report on dividends with the same result(!) of 106.45m prefs, and also note that 4.65% of the Prefs are owned by the parent company (which may or may not be of any interest). That means retiring the Prefs by paying, say, 150p each would cost around £160m, which seems very do-able.

[simoan]

Thank you both for replies.
I hadn't looked at the accounts but have just done so and that answers my question as I see they appear to be strong financially. I did the same calculation as simoan from the CFO's report on dividends with the same result(!) of 106.45m prefs, and also note that 4.65% of the Prefs are owned by the parent company (which may or may not be of any interest). That means retiring the Prefs by paying, say, 150p each would cost around £160m, which seems very do-able.

Well done on looking at the balance sheet, which shows a clearly financially strong company. It’s maybe not as detailed as I would ordinarily like, but it tells you enough to know they have plenty of financial flexibility should they wish to retire the prefs.

[88V8]

While appreciating the logic of Ella following the AV/GA route of retiring their Prefs due to regulatory change, I do wonder if Ella is in the same position as the Aviva Group of having the funds to do it?
I hold a number of Ella Prefs but am unsure about going in stronger as if Ecclesiatical don't make a move I'm aware the sp will probably slip back from the current level. Does anyone have any information or a view on this point of affordability?

Why would they need any funds to cancel the Prefs? All they need to do is replace the 8.625% Prefs with some form of cheaper debt, which shouldn’t be too difficult. ...

I would expect the SP to rise as interest rates fall. Indeed, this is Ecclesiastical's own assumption as mentioned in the annual report.
So, if they intend to retire the Prefs it will be less costly to do it now, rather than wait. Assuming they tender at a 10% premium to current levels, as said they will need to stump up nearly £160mio.
Otoh, as rates fall, it will be less costly for them to rotate into an alternate instrument.

They have c£383mio of Solvency II headroom, vs a Prefs issue of £106mio, so for solvency purposes there is no time pressure.
They could just elect to do nothing until they judge that the time is right.

V8

[NealMorris]

Given their approach during the Aviva pref meltdown debacle, and their subsequent public statements on the matter, that they would not be redeeming them, and given their ethical business model.

I would not expect them to be attempting to cancel, or redeem them in any way. Even at an attractive incentive to existing holders. They do not need to, despite solvency rules, they have no external pressures to, why would they!

Would not make sense. I suspect anyone buying these post Aviva cancellation (attempted carpet bagging style), in the hope of an quick return will be sorely disappointed. They made a promise when they issued these and I would expect them to keep that.

Not everyone operates to make as large a profit as possible, certainly not Ecclesiastical.

[simoan]

Given their approach during the Aviva pref meltdown debacle, and their subsequent public statements on the matter, that they would not be redeeming them, and given their ethical business model.

I would not expect them to be attempting to cancel, or redeem them in any way. Even at an attractive incentive to existing holders. They do not need to, despite solvency rules, they have no external pressures to, why would they!

Would not make sense. I suspect anyone buying these post Aviva cancellation (attempted carpet bagging style), in the hope of an quick return will be sorely disappointed. They made a promise when they issued these and I would expect them to keep that.

Not everyone operates to make as large a profit as possible, certainly not Ecclesiastical.

I agree and FWLIW would not be the least bit bothered if I get the capital uplift over a longer time period whilst collecting coupons along the way. It seems to me that given this is not a listed entity with external shareholders, there is much less pressure to optimise the capital structure in the way that Aviva or RSA were subject to.

[Borderline]

This is the statement made by Ecclesiastical on 12th March 2018:

Announcement by Ecclesiastical Insurance Office plc
 
Ecclesiastical Insurance Office plc ("Ecclesiastical") notes the recent movement in the price of its 8.625% preference shares.  Ecclesiastical assumes this is a result of Aviva's announcement on 8th March, in which Aviva stated that it has "the ability to cancel [Aviva's and General Accident's] preference shares at par value through a reduction of capital, subject to shareholder vote and court approval". 
 
Ecclesiastical notes Aviva's governance statement that "as one of the biggest companies in our sector, we aim to make our industry work better for everyone.  That starts with us building trust with our customers, investors and shareholders by running our business honestly and transparently."   Ecclesiastical trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action.
 
Ecclesiastical has holdings in Aviva and General Accident's preference shares, but these are not material in size in the context of Aviva's announcement and Ecclesiastical's balance sheet strength.
 
Ecclesiastical has no plans to cancel its own 8.625% preference shares at par value through a reduction of capital. 
 
END

[88V8]

This is the statement made by Ecclesiastical on 12th March 2018:
....Ecclesiastical has no plans to cancel its own 8.625% preference shares at par value through a reduction of capital. 

Given their approach during the Aviva pref meltdown debacle, and their subsequent public statements on the matter, that they would not be redeeming them, and given their ethical business model....

They said they would not cancel them at par.
They did not say they would not retire them by other means.
We shall see.

As I have mentioned I have a large position in anticipation of a tender, but I would be happy to continue collecting the divi.

V8

[Jwdool]

It is reasonable for ELLA to say they had no plans for cancelation / tender in 2018 - given the 10 year 2015 Solvency II window. The statement was also made in the context of the FCA investigation into Aviva's conduct around that time. I don't believe this statement means they will indefinitely maintain an expensive form of capital that will have no regulatory effect - certainly beyond Dec 2025.

ELLA are likely to follow precedent, i.e. Aviva and RSAB.

[Holts]

It is reasonable for ELLA to say they had no plans for cancelation / tender in 2018 - given the 10 year 2015 Solvency II window. The statement was also made in the context of the FCA investigation into Aviva's conduct around that time. I don't believe this statement means they will indefinitely maintain an expensive form of capital that will have no regulatory effect - certainly beyond Dec 2025.

ELLA are likely to follow precedent, i.e. Aviva and RSAB.

I interpreted their statement as suggesting that they would not behave in similar fashion to Aviva at the time but not excluding them from dealing with them reasonably if they ever came to do so .

[GoSeigen]

Thank you both for replies.
I hadn't looked at the accounts but have just done so and that answers my question as I see they appear to be strong financially. I did the same calculation as simoan from the CFO's report on dividends with the same result(!) of 106.45m prefs, and also note that 4.65% of the Prefs are owned by the parent company (which may or may not be of any interest). That means retiring the Prefs by paying, say, 150p each would cost around £160m, which seems very do-able.

Well done on looking at the balance sheet, which shows a clearly financially strong company. It’s maybe not as detailed as I would ordinarily like, but it tells you enough to know they have plenty of financial flexibility should they wish to retire the prefs.

I think it's worth investors taking to heart the general fact that UK banks are in rude health and awash with capital and use that as a starting assumption when considering them as an investment or deciding what they might do. Obviously there may be exceptions but as a foundation for the near future it's sound I think. If one constantly distrusts UK banks then there's danger of some missed opportunities or wrong decisions.


GS

[GoSeigen]

Why would they need any funds to cancel the Prefs? All they need to do is replace the 8.625% Prefs with some form of cheaper debt, which shouldn’t be too difficult. ...

I would expect the SP to rise as interest rates fall. Indeed, this is Ecclesiastical's own assumption as mentioned in the annual report.
So, if they intend to retire the Prefs it will be less costly to do it now, rather than wait. Assuming they tender at a 10% premium to current levels, as said they will need to stump up nearly £160mio.
Otoh, as rates fall, it will be less costly for them to rotate into an alternate instrument.

They have c£383mio of Solvency II headroom, vs a Prefs issue of £106mio, so for solvency purposes there is no time pressure.
They could just elect to do nothing until they judge that the time is right.

V8

There's a few things to unpack here, LOL.

It's a myth that bond/FI prices rise when interest rates fall. The correct relationship is that bond prices rise when yields fall. Big difference.

Oh and there's not even a guarantee that interest rates will fall so investors must beware that the above argument is full of faulty premises and logic.

It should also be crystal clear by now after all these offers, surely, that companies have to give their investors a good price to take their shares off them, not a crap price. So the idea that ELLA might choose to time their offer in order to foist some cash on their shareholders at a worse rate is I think faulty. The market may lead there of it's own accord but I don't think the directors will be thinking in that way -- at least if I were on the board I would urge them to look at the matter differently.

I agree with those arguing that this issuer won't struggle to finance the purchase, we are not in a capital-constrained environment for banks. The key point for the issuer here is wasteful interest payments and other costs of maintaining these shares and their listing.


GS

[GoSeigen]

Given their approach during the Aviva pref meltdown debacle, and their subsequent public statements on the matter, that they would not be redeeming them, and given their ethical business model.

I would not expect them to be attempting to cancel, or redeem them in any way. Even at an attractive incentive to existing holders. They do not need to, despite solvency rules, they have no external pressures to, why would they!

Would not make sense. I suspect anyone buying these post Aviva cancellation (attempted carpet bagging style), in the hope of an quick return will be sorely disappointed. They made a promise when they issued these and I would expect them to keep that.

Not everyone operates to make as large a profit as possible, certainly not Ecclesiastical.

This is even more faulty IMO.

First, there was no commitment not to repurchase in perpetuity at the time of Aviva. This was their wording:

"Ecclesiastical has no plans to cancel its own 8.625% preference shares at par value through a reduction of capital. "

Don't read more into it than is there.

Second, they cannot redeem their shares for the simple reason that they are not redeemable. So way may as well discount that possibility completely. Also no issuer is compelled to eliminate their preference shares by Solvency rules, it just makes financial sense to do so. It makes as much sense for Ecclesiastical to do so as any other company.

I do agree that an offer is not a foregone conclusion. The market may change in a way that makes investors averse to deals or makes them unattractive to the issuer.

I'd love to know what "promise when they issued these" [quote] the above poster is referring to. If he means that the shares would be perpetual, then that is not a promise, it's a threat. It's a refusal to repay the shares unless forced to or until the issuer chooses. If it's another promise perhaps the poster could be more precise about what he means.

Finally, Ecclesiastical is not a charity run for the preference shareholders (or anyone else). They have a fiduciary duty to run the company for the benefit of their members as a whole and it should be assumed that they will make decisions on that basis.


GS

[GoSeigen]

They said they would not cancel them at par.

They didn't say that. They said they had no plans to do so which is an even weaker statement. If the shareholders want a cancellation at par as has just happened with Aviva then I think that is what they will get.

GS

[Holts]

Well done on looking at the balance sheet, which shows a clearly financially strong company. It’s maybe not as detailed as I would ordinarily like, but it tells you enough to know they have plenty of financial flexibility should they wish to retire the prefs.

I think it's worth investors taking to heart the general fact that UK banks are in rude health and awash with capital and use that as a starting assumption when considering them as an investment or deciding what they might do. Obviously there may be exceptions but as a foundation for the near future it's sound I think. If one constantly distrusts UK banks then there's danger of some missed opportunities or wrong decisions.


GS

Is it not more of a case of when the government decide they can be used as cash cow again either directly or indirectly as in the next mis selling case .

[Alaric]

Is it not more of a case of when the government decide they can be used as cash cow again either directly or indirectly as in the next mis selling case .

With the closure of many of their retail outlets, perhaps there's less scope for Banks to throw money away by paying commission to staff for dubious sales and then compensation for those misled.

[Holts]

Is it not more of a case of when the government decide they can be used as cash cow again either directly or indirectly as in the next mis selling case .

With the closure of many of their retail outlets, perhaps there's less scope for Banks to throw money away by paying commission to staff for dubious sales and then compensation for those misled.

Those misled often didn’t listen and then were those that claimed who were not entitled , I came across two who freely admitted at least one of their claims was invalid but the banks seemed to reach a point where they were overwhelmed and just wanted rid