GACA and GACB Consolidating

[Magnets]

The AVIVA/GA prefs appear to be the highest yield of the bunch

[OldBoyReturns]

fwiw I feel GACA and GACB are more than fully valued relative to many other prefs and PIBS. If this is due to the market awarding a premium based on likelihood of a tender offer being made 'soon' then perhaps the market is slightly over optimistic. Aviva's last utterance refers to 2026, the date when its prefs will cease to count as capital, for remediation and that is still 3 years away. During that time I would say it is fairly likely other issuers of prefs and PIBS will tender. I have had attractive tenders for 5 different PIBS and prefs I owned in the past year and none were insurers.

What do you think represents the best value of the remaining PIBS and Prefs?

I don't think there is a 'one size fits all' answer to that one. In practice it depends on how much one is investing (due to liquidity constraints) and one's objective - ie locking in long term income or potential for a shorter term relative yield trade.

For long term income the highest yielding PIBS look best at the moment with 8%+ yield obtainable. Which one depends on what is available in the size you want well within quoted spread day to day. So I ask broker to look around for me. For example you may get lucky and pick up HALB close to quoted bid price if there happens to be a seller. Obvs these are long term holdings in illiquid issues for income which I do not expect to be able to sell in the market so will only ever exit if the issuer makes a friendly tender offer.

For a shorter term relative yield play I am going for a mix of NWBD and INVR. I have been buying a yield of 7.25% on NWBD. Not one of the highest but NWBD usually trades on a yield somewhat lower than other financial prefs due to its stronger terms etc. This has been squeezed, more than higher yielders, by rising long term gilt yields so I expect NWBD yield for fall faster than others when / if long term gilt yields make a sustained move down. INVR as a high yielding (11%+) mis-priced (imho) tracker so both a great income producer and useful hedge.

[wmb194]

If you were to sell your shares tomorrow, the company could snap them up without you knowing

There is a general prohibition in law on companies buying there own shares so no, they could not "snap them up without you knowing".

Question, would the company need to inform by a RNS that they had purchase "Preference shares"?

Of course they would have to inform their shareholders -- they not only have to inform them, they have to get their express consent.

GS

For as long as I can remember every year Aviva obtains consent to purchase Aviva and GA prefs - IIRC at the 2023 AGM it was resolutions 26 and 27 - and you can find the resolution for GA on the Companies House website. I don't think that it's ever used this authority, though.

[Jwdool]

For example you may get lucky and pick up HALB close to quoted bid price if there happens to be a seller. Obvs these are long term holdings in illiquid issues for income which I do not expect to be able to sell in the market so will only ever exit if the issuer makes a friendly tender offer.

I'm looking at CAGP, HALB and HALP - Tier 2 LBG looks pretty good value at these levels. Do you perceive there to be any document risk on these notes along the lines of daft cancel/ call/ redemption nonsense - as per the ECNs, or Pref debacle - or should these things be viewed as "must pay", gone concern capital and interest situations?

Are there any other good parallels with other clearers or names with as good or better credit for Tier 2 "must pay". I know there is a bit of confusion at the moment with discretionary payers (such as the PIBS) and it seems to me the "must pay" stuff is better given the non-discretionary aspect of the notes. Appreciate any comments on this.

[GoSeigen]

I'm looking at CAGP, HALB and HALP - Tier 2 LBG looks pretty good value at these levels. Do you perceive there to be any document risk on these notes along the lines of daft cancel/ call/ redemption nonsense - as per the ECNs, or Pref debacle - or should these things be viewed as "must pay", gone concern capital and interest situations?

Are there any other good parallels with other clearers or names with as good or better credit for Tier 2 "must pay". I know there is a bit of confusion at the moment with discretionary payers (such as the PIBS) and it seems to me the "must pay" stuff is better given the non-discretionary aspect of the notes. Appreciate any comments on this.

I don't know too much about the specifics of those securities. However, some general comments.

Investors generally get in trouble because they are (as a group) over-confident in and overpaying for an asset. I wouldn't say that is the sort of environment we are in now. Prices have declined to somewhat sensible levels.

The ECNs were always known to have questionable terms -- that is why they were attractive to investors in the first place, certainly on these forums. Investors here thought they'd found an unnoticed wrinkle that gave the ECNs more value than they carried in the market at the time. A few years later that was shown to be a mistake by a supreme court judgment against the holders.

By Prefs debacle I assume you mean the Aviva situation. This was an investor over-confidence scenario. Holders of the Aviva Prefs had a heart attack because 1. the shares were trading far above par and 2. they had forgotten that investors are meant to get their money back, not give it away for ever and 3. they had forgotten that preference share holders have a right to return of their capital at par before any other shareholders.

Aviva's disclosure to the market was maybe poorly transmitted but it was a jolt of reality and a much-needed education for preference shareholders. I can say for myself that until I read the relevant parts of the company acts thoroughly I didn't appreciate the significance of companies being banned from purchasing their shares and that redemption was a company law term referring to one of the few ways they may do so legally. A second way is by a return of capital -- many retail investors STILL conflate these very distinct procedures in spite of Aviva.

The above comments are background to my main thought, which is that I am not aware of any issues with HALP and HALB which match the ECN and Aviva situations but more importantly, it should not matter too much if a surprise unknown unknown happens to any investor who 1. has paid a sensible price and 2. is not married to the share and is happy to offload when the time is right.


GS

[Jwdool]

The ECN situation was very tricky for any investor to discern. When the case came to Court, the investors won at the High Court, lost at the Court of Appeal and the final result was 3:2 at the Supreme Court with Lord Sumption finding for the investor. I seriously doubt that anyone could have predicted that set of circumstances by looking at the prospectus. This was also combined with a Lloyds Bank concession that they had committed a "drafting infelicity" - which led to the Supreme Court allowing for a very generous issuer result.

On the Aviva notes (and other related prefs), I agree. The situation was more governed by convention than by a close reading of the Companies Act, nevertheless, estoppel arguments now protect a majority of that paper from being cancelled/ called/ redeemed at par - so I'd view most of it as safe (certainly the GACA/ GACB/ AVA/AVB notes - and other issuers who have declared they wouldn't try it on at par e.g. ELLA).

My question about HALB/HALP and CAGP relates more to the way in which the Halifax names were able to suspend coupons during the last financial crisis in 2008, but payments were continually paid on CAGP. It seems to me this is now likely to be moot, given the absurd amount of CET1, AT1, CCB, and other capital that LBG need to hold (versus equivalent capital holdings in the GFC).

On a risk basis, this stuff looks like a great trade and certainly appears better than LLPC/ LLPD (albeit it doesn't have the same tax treatment if held in a company).

[GoSeigen]

The ECN situation was very tricky for any investor to discern. When the case came to Court, the investors won at the High Court, lost at the Court of Appeal and the final result was 3:2 at the Supreme Court with Lord Sumption finding for the investor. I seriously doubt that anyone could have predicted that set of circumstances by looking at the prospectus. This was also combined with a Lloyds Bank concession that they had committed a "drafting infelicity" - which led to the Supreme Court allowing for a very generous issuer result.

The final outcome was tricky, but the fact that there was a problem with the text was well known. I followed the early discussion very closely on TMF, unfortunately it is not available now to link to. However at the time I'm pretty sure OBR was involved as well as probably wshak, Avidya and some other knowledgeably Fools. If only we could extract the original discussion from Motley Fool, it would be very interesting to review.

On the Aviva notes (and other related prefs), I agree. The situation was more governed by convention than by a close reading of the Companies Act, nevertheless, estoppel arguments now protect a majority of that paper from being cancelled/ called/ redeemed at par - so I'd view most of it as safe (certainly the GACA/ GACB/ AVA/AVB notes - and other issuers who have declared they wouldn't try it on at par e.g. ELLA).

My question about HALB/HALP and CAGP relates more to the way in which the Halifax names were able to suspend coupons during the last financial crisis in 2008, but payments were continually paid on CAGP. It seems to me this is now likely to be moot, given the absurd amount of CET1, AT1, CCB, and other capital that LBG need to hold (versus equivalent capital holdings in the GFC).

On a risk basis, this stuff looks like a great trade and certainly appears better than LLPC/ LLPD (albeit it doesn't have the same tax treatment if held in a company).

Yes I agree, banks are not in the precarious position they were in in 2006/7. They are tightly regulated and investors are still suspicious of them so I think values are sensible. Sorry I can't comment specifically on LAB/HALP/CAGP. I have never held any of them.

GS

[Jwdool]

FWIW I worked with Mark on the ECN case and was responsible for the case being brought in the first place (along with Allen and Overy/ BNY Mellon). It was a complex case, but in my view, the Supreme Court got it wrong. The reg par call was pretty clear - in the sense that LBG couldn't simply describe what happened as sufficient. Unfortunately for investors, the Supreme Court took the view they would allow LBG off with their erroneous drafting - and adopted a generous (and in our opinion false) purposive interpretation of the docs.

Ultimately I accept investors are subject to interpretation of docs in extremis, but some cases are clearer than others. The CS AT1, for example, seems to me far easier to accept than the LBG one.

[hind]

Lets not forget Lloyds lost the first case, they won on appeal. The judges total was from memory 5 vs 4
And thats after one has ignored the morale/ bad faith argument from 2009 converters that did so at Lloyds request
The black horse kicks, not to be trusted at all. It defiantly should not be allowed near children on tv

[NealMorris]

Lets not forget Lloyds lost the first case, they won on appeal. The judges total was from memory 5 vs 4
And thats after one has ignored the morale/ bad faith argument from 2009 converters that did so at Lloyds request
The black horse kicks, not to be trusted at all. It defiantly should not be allowed near children on tv

Absolutely

[GoSeigen]

FWIW I worked with Mark on the ECN case and was responsible for the case being brought in the first place (along with Allen and Overy/ BNY Mellon). It was a complex case, but in my view, the Supreme Court got it wrong. The reg par call was pretty clear - in the sense that LBG couldn't simply describe what happened as sufficient. Unfortunately for investors, the Supreme Court took the view they would allow LBG off with their erroneous drafting - and adopted a generous (and in our opinion false) purposive interpretation of the docs.

Ultimately I accept investors are subject to interpretation of docs in extremis, but some cases are clearer than others. The CS AT1, for example, seems to me far easier to accept than the LBG one.

Jwdool, we corresponded briefly during the ECN case. I understand your disappointment given your own interest in the case and the work you did on it.

Of course it is not only the Supreme court but also the unanimous judgement of the Appeal court that you disagree with! Personally I feel that we should be able to live with the judgement of the two higher courts in the case. At the time, I commented that the result was disappointing, but that it didn't completely absolve Lloyds as they should have made clearer to investors what the real situation was. This is what I wrote after the appeal:


Very sorry about the negative outcome here. Perhaps this is easy for me to say having sold out, but I've read the judgement and found it reasonably convincing. I don't think there will be a further appeal but may be wrong!

This is a huge shame for Mark who put in so much work to get the cases heard. It would have been nice for Lloyds to lose and have the book thrown at them, and while I agree with the logic of the judgement itself, I think Lloyds's conduct has not been great, given that the judgement hinges on a finding that there was an error in the drafting.


By the time of the AT1 exchange offer, Lloyds should have been aware of the "drafting infelicity" which was to play such a large part in the outcome of their case. Was it not incumbent on them, morally if not legally, to point out the error at the time of the offer so that investors could properly measure up the risks?

While it is easy to understand the error when closely analysing this particular clause as the Honourable Judges did, it is not an mistake that would readily be picked up and taken into account in the context of the whole several-hundred-page Exchange Offer document. Indeed I don't recall any commentator of any level of expertise suggesting an actual drafting error in relation to the clause before it was mooted in Lloyds's own court submissions.

It would be nice if the regulator would take the lead in investigating exactly when Lloyds became aware of this mistake and, given the significant consequences for the value of the instrument, impose some level of compensation to holders for Lloyds's failure to disclose... but I am not holding my breath.

One thing holders can be truly thankful for is that in challenging the declared CDE, Mark has given holders another year of coupons, which slightly reduces losses, and which gave breathing space to switch to other instruments.


Lady Gloster's "commanding thoroughness" was persuasive for me and I did a lot of analysis prior to the Supreme Court case which I posted on TMF, including a forensic comparison of the Lloyds ECN text and the later YBS Notes text which was evidently produced by the same law firm. It's interesting how multiple people looking at the same evidence can come to different conclusions...

It would still be nice to see the original Motley Fool discussions from 2011 or so. Did anyone fortuitously keep a copy of those forum threads???


GS

[Jwdool]

I note your comments, but I remain of the view the case was wrongly decided. I think the dissenting judgement of Lord Sumption summed things up see para 55-62: https://www.supremecourt.uk/cases/docs/ ... dgment.pdf

My own view is that the judges who formed the majority of the decision, along with the Court of Appeal simply misunderstood the case and indulged LBGs slippery submissions. It is very hard to see how anyone who read the prospectus could have reached a conclusion other than Lord Sumption's final words on the subject:

"These were long-dated securities, which cannot have been intended to be
redeemed early except in some extreme event undermining their intended function
and requiring their replacement with some other form of capital. The function of the
notes was to be available to boost the Bank’s top tier capital in the hypothetical event
that the ratio of top tier capital to risk-weighted assets fell below the conversion
trigger. They have always served that function and still do. Whether that function
remains as important to the Bank as it was in 2009 is irrelevant"

[Gordon51]

As a long time holder of GACA/B who has recently stumbled across TLF I've followed with interest the above points.

On another site someone recently posted that the two AV prefs. offer more protection than the two GA prefs as the latter is a wholly owned subsidiary of Aviva which holds all of the ordinary share votes.

I'm not sure what to make of this and whether it would consequently be sensible to sell my GA prefs and replace with AV prefs.

Any thoughts from knowledgeable posters would be appreciated.

[88V8]

On another site someone recently posted that the two AV prefs. offer more protection than the two GA prefs as the latter is a wholly owned subsidiary of Aviva which holds all of the ordinary share votes.
I'm not sure what to make of this and whether it would consequently be sensible to sell my GA prefs and replace with AV prefs.

Given the assurances that the FCA demanded of issuers after the Aviva debacle, I don't expect any skulduggery from Aviva in respect of their own prefs, nor General Accident's, so I'm happy to hold both in size.

V8

[airbus330]

Anyone else feel that GACA/B are getting close to the top of their cycle?
I feel a need to trim back somewhat.

[Padders72]

Anyone else feel that GACA/B are getting close to the top of their cycle?
I feel a need to trim back somewhat.

No, still on the way up IMO. Unless you think interest rates and inflation are heading back up soon, logic suggests prices of FI like those may firm further from here. Unless you think it is all already priced in, but I don't personally. There is also the incentive of a possible friendly tender to make one considering sticking around.

[monabri]

Anyone else feel that GACA/B are getting close to the top of their cycle?
I feel a need to trim back somewhat.

No, keeping a firm hold on my prefs!

[airbus330]

Anyone else feel that GACA/B are getting close to the top of their cycle?
I feel a need to trim back somewhat.

No, still on the way up IMO. Unless you think interest rates and inflation are heading back up soon, logic suggests prices of FI like those may firm further from here. Unless you think it is all already priced in, but I don't personally. There is also the incentive of a possible friendly tender to make one considering sticking around.

I was thinking that the fairly consistent rise over the past few months has been driven by the anticipated reduction in interest rates. Current world events seem to have suddenly started pulling in the opposite direction and slowing any rate cuts that may occur over the next year. I was feeling that top slicing GAC might be prudent and re-entering if they fall. They have been a great investment the last couple of years and I keep some as a permanent fixture in an income portfolio. But the rest in an income/growth portfolio might be worth the risk of trimming.

[88V8]

No, still on the way up IMO. Unless you think interest rates and inflation are heading back up soon, logic suggests prices of FI like those may firm further from here. Unless you think it is all already priced in, but I don't personally. There is also the incentive of a possible friendly tender to make one considering sticking around.

I was thinking that the fairly consistent rise over the past few months has been driven by the anticipated reduction in interest rates.

I think we're a long way from actual rate cuts as distinct from talking about rate cuts, so the SP of prefs (exception, INVR) has a lot further to go. Look for a destination yield around 5%.
The spread makes trading in & out unattractive imho.

V8

[Padders72]

I personally think 5% yield might be optimistic, for GACA/B at least, they never quite got there even when interest rates were near zero and currently hover around 6.6% last I looked but I can see 5.5-5.75% as a decent exit point and we are way off that yet. There will always be ups and downs in the price, but if you believe the forecasts of 2-3% interest rates and similar inflation within a year or two then selling out now might not be all that sensible IMO. Others may have a contrary view of course!