The Lemon Fool

So, NTEA is an interesting issue and one worth revisiting given the UK 10 yr gilt is back below 3.5%. The preference share is currently paying out around 6.7% and trades at around 120p. There had been some talk of the notes being potentially cancellable as per the "Aviva 2018 debacle", however, in the 2019 accounts - following the "Dear CEO" letter from Andrew Bailey in 2018, the company writes:

"The terms of the cumulative preference shares:
• entitle holders, in priority to holders of all other classes of shares, to a fixed cumulative preferential dividend of
8.061p (net) per share per annum payable half-yearly in equal amounts on 31 March and 30 September;
• on a return of capital on a winding up, or otherwise, will carry the right to repayment of capital together with a
premium of 99p per share and a sum equal to any arrears or accruals of dividend. This right is in priority to the
rights of ordinary shareholders;
• carry the right to attend a general meeting of Northern Electric plc and vote if, at the date of the notice convening
the meeting, payment of the dividend to which they are entitled is six months or more in arrears, or if a
resolution is to be considered at the meeting for the winding-up of Northern Electric plc or abrogating, varying
or modifying any of the special rights attaching to them; and
• are redeemable in the event of the revocation by the Secretary of State of Northern Electric plc's Public
Electricity Supply Licence at the value given above."

Source: northernpowergrid.com/sites/default/files/assets/5551.pdf

My reading of this is that the response of Northern Electric won't exercise a cancellation at par unless there is an "event of revocation by the SoS" in respect to their Public Supply Licence - something I'm guessing isn't going to happen any time soon. This reading of the announcement is consistent with the Bailey letter: fca.org.uk/publication/correspondence/dear-ceo-letter-irredeemable-preference-shares.pdf, given CEOs were expected to provide clarity were there had been market risk.

I've written to the Investor Relations department at Norther Powergrid to clarify the situation and I'll report back here. If the cancellation/ redemption problem is off the table, I'd expect to see these notes trade at the same sorts of levels of BP.A or BP.B - i.e. at or around 160-180p range, given the stability of income and lack of risk to the underlying business. Regardless of that, these notes still represent phenomenal value at current prices. I'd be keen to hear the views of others on this note.

Hi

not looked at these before. The current yield is pretty good, but looking at the long term price (10 yr) of between 135 and 155, I would expect some capital gain as well over the next couple of years as bank rates come back down to pre-covid levels.

Mick

Used to hold these. They did not come up as 'safe' from being forcibly retired when there was an investigation of Prefs on TMF, so I sold them. The 'safe' ones back then were BWRA Bristol Water and NWBD, to which I would now add AV.A/B, GACA and ELLA.

Northern Powergrid - formerly CE Electric - are owned by Berkshire Hathaway, which perhaps gives a degree of comfort.
I would be happy to hold them again if they pass the smell test, as a diversification away from Financials.

V8

Northern Powergrid is a wholly owned subsidiary of Berkshire Hathaway Energy.
Berkshire Hathaway Energy (previously known as MidAmerican Energy Holdings Company until 2014) is a holding company that is 92% owned by Berkshire Hathaway Inc. 
This info can be found on Wikipedia.

Berkshire Hathaway Inc. own 77.19m [69.13%] of the Preference Shares.
This info can be found on the Investors Chronicle website.

The number of Preference shares owned by the holding company has not changed for many years.
I hold these in a SIPP as part of my DIY annuity.

As the nominal value of the pref is £0.01, is it possible that the "return of capital" on a winding up / call date / redemption would only be the nominal value + £0.99 (ie, £1.00 rather than £1.99)? I may be wrong and would appreciate some enlightenment.

Yes, I hold this and 1p + 99p + outstanding dividends is my understanding. But my understanding too is that this would only be relevant if the operating licence is revoked by the government and you have to take a view on how likely that is.

The main problem with the Aviva debacle is that it now has people chasing shadows where they might not exist. I slightly take issue with some of the other posts I see on here occasionally referring to what is, or is not, ‘safe’ as determined by some poster on TMF many moons ago. Each instrument is different in my experience and it’s too simplistic to bucket them like that in my view. But I haven’t yet found a similar instrument where I couldn’t access the written terms nor make a judgment on them without spending ages doing so.

mesb48 wrote:I slightly take issue with some of the other posts I see on here occasionally referring to what is, or is not, ‘safe’ as determined by some poster on TMF many moons ago. Each instrument is different in my experience and it’s too simplistic to bucket them like that in my view. But I haven’t yet found a similar instrument where I couldn’t access the written terms nor make a judgment on them without spending ages doing so.

If you were active on TMF at the time you may recall the thread where this was discussed, as you say there are difference in terms and the conclusions were based on scrutiny of the written conditions rather than a subjective view of the issuers.

BWRA and NWBD were judged safe on that basis, I add ELLA because they have said they won't seek forced redemption, and I add GACA and Aviva because they won't dare after their previous drubbing.

V8

How would a Return of Capital or whatever benefit Berkshire Hathaway Inc who own 69.13% of the preference shares and get a nice steady income stream from Berkshire Hathaway Energy?
A Tender Offer at an attractive price may be tempting but as they had cash reserves of $129 billion at the end of 2022 they probably don’t need the extra cash.

Because Berkshire Hathaway own such a high percentage of the prefs they can probably do whatever they like.

Borderline wrote:How would a Return of Capital or whatever benefit Berkshire Hathaway Inc who own 69.13% of the preference shares and get a nice steady income stream from Berkshire Hathaway Energy?
A Tender Offer at an attractive price may be tempting but as they had cash reserves of $129 billion at the end of 2022 they probably don’t need the extra cash.
Because Berkshire Hathaway own such a high percentage of the prefs they can probably do whatever they like.

Haha, no not short of cash.

But they might fancy a tidying up exercise.
And yes they can do whatever they wish, if they don't mind a degree of bad publicity.

Their prefs are probably OK, and will be on the list for the new ISA year, although there is some competition.
Be interesting to see whether JWDool gets any specific response from Investor Relations.

V8

Nothing yet. I'll post if I hear back.

88V8 raised an important distinction about scrutiny of the written conditions rather than a subjective view of the issuers.
My view of NTEA is clearly Subjective.

When the FCA finally got around to issuing a Final Notice on Aviva in October 2020 [18 months after the debacle] they acknowledged
that Aviva had the ability to cancel the Preference Shares at par, subject to a shareholder vote and court approval. 
The problem was they went about it the wrong way.
And may have realised they would not have got the required shareholder vote as many preference shareholders were also holders of ordinary shares.
Either way their decision could also be described as subjective.

Santander give themselves the right to purchase their own preference shares in the open market each year but don’t bother doing so.

NatWest tried a tender offer for NWBD and it was received with all the enthusiasm of a Jeremy Corbyn government.
[personally I thought it a very generous offer but don’t hold them]

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

So it is important that these are looked at both from the written and legal conditions perspective and also from the likelihood of it ever happening.

Hi everyone I've just joined this site and really enjoyed reading the various posts regarding NTEA and the other preference shares listed on this page. May I suggest that the risk, as discussed below, with regard to NTEA is the threat of a Labour Government revoking the licence to operate.

Otherwise NTEA looks like a good, sensible option - owned by Berkshire Hathaway Energy, which in itself is well diversified (Northern Electric provides 6% of BHE's revenues, Nevada 18% and is the largest contributor to revenues) and BHE appears to be consistently profitable, and, as you would expect with Buffet's mob, appears to provide cheaper electricity (certainly in the USA) than its peers.

Would be interested to learn how the risk of nationalisation is perceived out there - otherwise diversifying out of the banks and insurance preference shares looks like a good idea.

R/E Santander - many thanks for the prospectus - couldn't find it after repeated attempts on the Santander website

Also the BP A's and B's...looks like they are perpetual or, if called, payable at coupon+(average last 6 month market price) +balance interest.

Been bitten by so many shares that looked great on fundamentals this year that I've moved to fixed income for now in the shape of these preference shares while I sit out the forthcoming recession.

PrefHunter wrote:As the nominal value of the pref is £0.01, is it possible that the "return of capital" on a winding up / call date / redemption would only be the nominal value + £0.99 (ie, £1.00 rather than £1.99)? I may be wrong and would appreciate some enlightenment.

Yes - reading the Northern Electric articles of association the share structure is for preference shares of 1p and so GBP 1 returned plus dividend, not GBP 1.99. Hope this helps - documentation on the UK gov companies website under Norther Electric PLC 1995 articles of association.

It's been some time since I wrote about the NTEA situation, but as far as I've managed to ascertain - preference share holders should get some comfort from the Aviva situation back in 2018. I've linked the FCA deliberations here:

https://www.fca.org.uk/publication/fina ... c-2020.pdf

After what happened with Aviva - the FCA wrote to issuers and asked them to clarify the position, re: cancellation/ redemption/ calls etc with holders to ensure there couldn't be any further abuse. Some issuers expressly made statements (such as ELLA/ Aviva), others chose to remain silent (Lloyds, Santander/ NTEA). It seems to me that it would be very difficult for issuers to now look to rely on a par cancellation - after what happened with Aviva. It's not impossible - but unlikely, given if the price is too far above par - then CEOs may well come under pressure for not clarifying their position when they had the opportunity.

Do we know that "others chose to remain silent" or is it just that any response they might have made either wasn't made publicly or hasn't subsequently been made public?

The Aviva situation created an unprecedented disruption in the prefs market. The FCA took things seriously by reminding relevant issuers of their duties towards the market. Since that point the market has tentatively accepted no Board will seek to cancel prefs at par, given the inevitable market disruption that would cause. It is surprising that some issuers have refused to issue a clarification as with ELLA/ Aviva - but at the same time the dismissal of the Aviva CEO and the personal reputation damage to him along with the Board will have a significant effect on any other issuer wanting to follow down that path. The size of these issues, relative to the issuers capital stack is also quite small, so it would be surprising to see anyone wanting to take the reputational and regulatory risk of irritating holders and the market. Pref holders tend to be more active when it comes to raising complaints with regulators - so overall I'd argue market pricing is about right for these instruments, i.e. they should be trading with the current spread v gilts.

Jwdool wrote:The size of these issues, relative to the issuers capital stack is also quite small, so it would be surprising to see anyone wanting to take the reputational and regulatory risk of irritating holders and the market.

If I were looking to buy NTEA that is one aspect from which I would take comfort.
And currently they are at an unusually high yield relative to other prefs, typically they have traded half a point lower but today they are within a haggis toss of 7%, right up there with GACA/B.

V8

BobGe wrote:Do we know that "others chose to remain silent" or is it just that any response they might have made either wasn't made publicly or hasn't subsequently been made public?

For background I had several meetings with the FCA's Director of Enforcement during our campaign over Aviva's plan to return capital on and cancel its preference shares and several subsequent meetings over the wider issue of the position of other listed prefs. I recall him telling me the FCA was 'disappointed' over the lack of clarity provided by many issuers in response to the its Dear CEO letter. My take was that many issuers took legal advice and did the bare minimum they were advised they could get away with. In many cases this was simply making their Articles of Association (which contain the terms of the prefs) available on the investors section of their website. As usual, the issuer drifted off the FCA's agenda, and without a satisfactory conclusion.

History tells us that some issuers of preference will propose to return capital and cancel their prefs from time to time. Indeed this has happened with at least one small issue of listed prefs (Tate & Lyle) SINCE the Aviva fiasco.

What was the market price of the Tate & Lyle when they were cancelled? Were holders compensated?

Jwdool wrote:What was the market price of the Tate & Lyle when they were cancelled? Were holders compensated?

IDK as I was not a holder or otherwise involved. I think it was a low coupon pref so probably never traded much over par. But still an interesting example as it demonstrates that the return of capital route to cleaning ups old, inefficient preference shares is not completely off the table for issuers.