The Lemon Fool

Tara wrote:

SKYSHIP wrote:A lot of over-complexity posted above.

1. Aviva will NOT do anything to disadvantage the pref shareholders. That lesson learnt and painfully obvious - to most at least

2. The prefs will trade with reference to interest rates and track pretty much the other company prefs we all know well

3. The statement below by Goseigen is demonstrably incorrect - witness the Aviva pref prices over the past 2yrs. Take GACA. In the Summer of last year they traded at 162p on a yield of 5.5% - a 62% premium to par. As inflation falls and as interest rates moderate, GACA will climb back in line with others. Clearly at 114p and still cum dividend, they are anomalously good value.

"The bigger problem long term is that these shares will always be priced as if there is a call option at par. The capital upside is therefore rather limited, more so than for other preference shares, NWBD for example, or the various PIBS out there whose capital growth is only limited by the zero-bound and credit spreads."

All well and good, but does anyone have any idea what GACA are going to be replaced with in less than four years?

Something with the same risk or less risk? Something with the same yield or less yield? What if they are replaced with something yielding 5% and so current holders are faced with a potential loss of income of 30% or 40%?

Without knowing much more about this it is difficult to know exactly how good a buy GACA are at the present price.

Regulators dislike these sort of prefs as they are now considered not sufficiently loss absorbing in a crisis, but the FCA have banned replacement capital securities from being offered to retail investors. That means that Aviva could only offer cash or ordinary shares to retail investors. They may simply do a non-coercive offer to buy back the prefs at a small premium to market price, as Lloyds and NatWest did with their prefs. Alternatively there is a risk that they would offer new hybrid securities alongside a low ball cash offer, with a sweep up clause. The hybrid securities would not be available to retail or anyone with less than say 200k nominal of prefs. The offer would be readily acceptable to institutions, not so for retail. I am not saying that this scenario is likely as I have no way of assessing the level of risk, but it would not be the first time that retail got a lousy offer compared to institutional holders.

hiriskpaul wrote:

Tara wrote:

SKYSHIP wrote:A lot of over-complexity posted above.

1. Aviva will NOT do anything to disadvantage the pref shareholders. That lesson learnt and painfully obvious - to most at least

2. The prefs will trade with reference to interest rates and track pretty much the other company prefs we all know well

3. The statement below by Goseigen is demonstrably incorrect - witness the Aviva pref prices over the past 2yrs. Take GACA. In the Summer of last year they traded at 162p on a yield of 5.5% - a 62% premium to par. As inflation falls and as interest rates moderate, GACA will climb back in line with others. Clearly at 114p and still cum dividend, they are anomalously good value.

"The bigger problem long term is that these shares will always be priced as if there is a call option at par. The capital upside is therefore rather limited, more so than for other preference shares, NWBD for example, or the various PIBS out there whose capital growth is only limited by the zero-bound and credit spreads."

All well and good, but does anyone have any idea what GACA are going to be replaced with in less than four years?

Something with the same risk or less risk? Something with the same yield or less yield? What if they are replaced with something yielding 5% and so current holders are faced with a potential loss of income of 30% or 40%?

Without knowing much more about this it is difficult to know exactly how good a buy GACA are at the present price.

Regulators dislike these sort of prefs as they are now considered not sufficiently loss absorbing in a crisis, but the FCA have banned replacement capital securities from being offered to retail investors. That means that Aviva could only offer cash or ordinary shares to retail investors. They may simply do a non-coercive offer to buy back the prefs at a small premium to market price, as Lloyds and NatWest did with their prefs. Alternatively there is a risk that they would offer new hybrid securities alongside a low ball cash offer, with a sweep up clause. The hybrid securities would not be available to retail or anyone with less than say 200k nominal of prefs. The offer would be readily acceptable to institutions, not so for retail. I am not saying that this scenario is likely as I have no way of assessing the level of risk, but it would not be the first time that retail got a lousy offer compared to institutional holders.

I think all anyone can do with these is read all the relevant information and form your own opinion.

FWIW the evidence so far on the bank prefs/PIBS which have already ceased to be regulatory capital (or is it at the end of December I'm not sure) is that a)where there is a call clause they have been called b) a few tender offers (Lloyds and NatWest) have been made offering an exit at around the offer price so hardly generous c)there are plenty where no action has been taken at all and it seems the banks/building socities are happy to let them drift.

My guess based on this is that there will be no significanct profit to be made if a tender offer is made but also I think it unlikely there will be forced redemption at par, or at least not without Aviva giving significant notice. I think relying on goodwill that the Aviva Board will not screw over retail investors would however be foolhardy. They were ready to so before and the FCA objection was the appalling communication process around it.

Personally I don't see great value in GACA when compared with the returns available to institutions on bank/insurance regulatory capital (the CoCo's retail aren't allowed to buy). Very broadly this can be circumvented by buying a CoCo fund as long as you sign you rights away as a retail investor, which will be the case to buy GACA anyway.

I am 99.99% sure the date that tier 2 capital no longer counts as regulatory is 31st December 2025

I remember the date because Co-op 42TE matures and 42TF completes repaying installments just prior to that.

I stand to be corrected of course

I agree with hiriskpaul and Gan020's comments/asessments above

Wozzitworthit wrote:I am 99.99% sure the date that tier 2 capital no longer counts as regulatory is 31st December 2025

I remember the date because Co-op 42TE matures and 42TF completes repaying installments just prior to that.

I stand to be corrected of course

I agree with hiriskpaul and Gan020's comments/asessments above

I've just read Aviva's Pillar 3 document and they classify the preference shares as T1 restricted capital. The document gives no indication when or if it will cease to be regulatory capital, only that this is under transitional provisions

This is different from bank PIBS. These are currently being grandfathered from T1 to T2 which is now 90% done and will be complete by the end of this year. At this point the PIBS continue to be T2 capital.

I bought some GACA last week because of the income, not capital gain. Very happy with the investment as I very much doubt that Aviva will try and repeat thier 2018 disasterous redemption effort again. They have already stated by RNS that they will make another offer based upon market prices at the relevant time so unless the prefs fall below par I dont expect they will try and cancel at par again. In the meantime I will collect the very nice divis.

https://www.investegate.co.uk/aviva-plc ... 00057183I/

"...........Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards. If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time......."

Ticking up nicely this. GACB not far behind.

airbus330 wrote:Ticking up nicely this. GACB not far behind.

Ex dividend 1st December so likely to drop back a few pence later this week. Short term, very nice though, and I appreciate the heads up from members on it. Thank you.

Nice juicy 4.4% payment today after holding for a month and a bit, and the share price up 5% since purchase too. Can't complain.

Scott.

swill453 wrote:Nice juicy 4.4% payment today after holding for a month and a bit, and the share price up 5% since purchase too. Can't complain.

Sorry not actually 4.4% on purchase price, more like 3.9%.

Scott.

Time to buy GACA again soon? Heading back towards the 113p region which was short term pretty profitable last time.

BullDog wrote:Time to buy GACA again soon? Heading back towards the 113p region which was short term pretty profitable last time.

Yes...a top up for me when LGEN dividends arrive next week.

BullDog wrote:Time to buy GACA again soon? Heading back towards the 113p region which was short term pretty profitable last time.

GACA has not become cheaper at all, in fact a touch more expensive, it's just the ex-Div date today. Traded prices, adjusted for the div drop, are higher today than yesterday.

BondSquared wrote:

BullDog wrote:Time to buy GACA again soon? Heading back towards the 113p region which was short term pretty profitable last time.

GACA has not become cheaper at all, in fact a touch more expensive, it's just the ex-Div date today. Traded prices, adjusted for the div drop, are higher today than yesterday.

That's why I said "soon". Thanks.

BullDog wrote:Time to buy GACA again soon? Heading back towards the 113p region which was short term pretty profitable last time.

Yes, a lot of 7%ish yields atm.
AV.A/B, NTEA, ELLA, NWBD, RSAB.
And GACB of course.
LLPE, if you can pick them up below par as they are callable on 15.3.24.

V8

88V8 wrote:

BullDog wrote:Time to buy GACA again soon? Heading back towards the 113p region which was short term pretty profitable last time.

Yes, a lot of 7%ish yields atm.
AV.A/B, NTEA, ELLA, NWBD, RSAB.
And GACB of course.
LLPE, if you can pick them up below par as they are callable on 15.3.24.

V8

Dont forget BoI at currently at over 7.7%

Why are these prefs shares falling in value? Because bond yield and interest rates are improving?

But these are still above those rates at 7%+

The only way these are a bad buy is if they suspend the dividend. What am I missing?
A 5% bond yield is more secure than this, especially if you consider the 2026 changes?

Magnets wrote:Why are these prefs shares falling in value? Because bond yield and interest rates are improving?

But these are still above those rates at 7%+

The only way these are a bad buy is if they suspend the dividend. What am I missing?
A 5% bond yield is more secure than this, especially if you consider the 2026 changes?

Just mentioning that the 2026 date is relevant for insurance prefs - many grandfathered UK bank prefs (or more generally, legacy T1 & T2 instruments) have already lost their staus as regulatory capital on 01Jan22, e.g. LLPC/D, SAN/B. Draw your own conclusions as to the absence of any hostile action (to date) by the bank issuers. Not saying it can/will never happen, but we're well past a specific due date. Friendly tenders are a different thing altogether.

The markets are now pricing in interest rates in the UK of 5.5%.
Recently short dated gilts were yielding nearly 5%.
Currently there are any number of Building Societies and Banks offering 5% and more on 1 year, 2 year, 3 year and 5 year Bonds with no risk to capital.
An extra 2% yield on Prefs or any subordinated debt nowhere near compensates for the extra risk in my book.

Just checked, you can get:

1 yr: 5.25%
2 yr: 5.21%
3 yr: 5.0%
4 yr: 5.0%

fixed term deposits with banks.

If the base rate goes down, these GACA shares should go up in value though? right? That would be assuming we are eventually heading for another period of low rates (who knows)

Magnets wrote:If the base rate goes down, these GACA shares should go up in value though? right? That would be assuming we are eventually heading for another period of low rates (who knows)

Well yes, when the BoE rate was 0.25% or less, these were in the £1.50 - £1.60 range. I don't think I'd bet the farm on that happening again any time soon though.

Scott.