Questor: Aviva inflicts £1bn losses on income investors – this is how you can fight back

Pedestrians walk past an Aviva logo outside the company's head office in the City of London
Aviva has said it will consider cancelling its preference shares Credit: Stephen Hird/REUTERS

Income investors have suffered a severe shock – and a paper loss of £1bn – over the past few days following the announcement on March 8 by Aviva, the insurer, that it was considering the cancellation of its high-dividend preference shares.

“Prefs” normally have a low profile, and Questor’s Income Portfolio does not currently contain any, but they have something in common with types of asset that we do own, such as retail bonds and permanent interest-bearing shares (Pibs) issued by building societies.

Accordingly, we believe that all income investors should take careful note of what is happening in the preference share market.

What has Aviva done?

In its 2017 accounts the insurer said: “We have the ability to cancel preference shares at par value subject to shareholder vote and court approval. As we evaluate the alternatives, one of the things we are considering is how to balance the interests of ordinary and preferred shareholders.”

The implications

Aviva’s reference to its ability to cancel its prefs came as an unpleasant surprise to many holders. The insurer’s own website refers to its preference shares as “irredeemable”, although it contradicts itself, in smaller print, a few lines later by saying: “The [preference] shares cannot be redeemed without approval by shareholders [preference and ordinary] at an extraordinary general meeting.” (This latter sentence appears to have been added after the March 8 announcement.)

As ordinary shareholders could outvote their preference counterparts, the markets decided that the prefs could indeed be cancelled and their prices fell severely.

Low interest rates have caused many income-producing assets to be pushed to expensive valuations. Aviva’s 8.75pc prefs, for example, had been trading at 176p before the announcement, compared with a 100p issue price. So if an organisation threatens to cancel prefs, Pibs or similar securities at par value, the price is likely to fall sharply.

The losses already suffered

After Aviva’s announcement its 8.75pc prefs fell by as much as 30.7pc. But every preference share quoted in London was affected, said campaigner Mark Taber, of Fixed Income Investments. For example, Lloyds Banking Group’s 9.25pc prefs fell by 21.5pc.

The collective loss of value across the market at one point was about £1bn, Taber said, although it is now about £700m. “It was a disorderly market – some investors panicked and sold at very low prices,” he said.

Are Pibs in similar danger?

The market seems to think not: our Newcastle Pibs barely moved, for example. However, Pibs issuers have been taken over in the past and new owners could be tempted to follow Aviva’s lead.

For example, in 2016 Lloyds controversially bought back bonds converted from Halifax and Cheltenham & Gloucester Pibs at par. Investors would be well advised to read the terms of any Pibs issue carefully.

And retail bonds?

Prefs and Pibs generally have no redemption date, although issuers sometimes give themselves, quite legitimately, the option to “call” them – buy them back – at par and investors should always be sure to check this. Retail bonds, by contrast, do have maturity dates so there would be no need for an issuer to think of cancelling them early.

What can you do about this?

Aviva’s proposal, if carried through, threatens the income of many and the broader integrity of London’s financial markets. Make your views known: you can email Aviva’s chief executive at officeoftheceo@aviva.com, while readers who use social media could tweet @avivaplc.

IHT Portfolio: Conviviality

We tipped Conviviality, the drinks distributor, for our Inheritance Tax Portfolio of Aim shares two weeks ago. Regrettably, accounting problems have led to the shares being suspended.

In light of the prefs scandal we lack the space to reassess Conviviality this week but will publish an update next Friday.

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