GAM Star Credit Opps GBP Aviva pref shares update

Further to our note last week (and this mainly is about the GBP fund as the impact in EUR fund and USD is less than 30bp in EUR and much less than that in USD fund).

The UK preference share market been marked down heavily, nevertheless most prefs are currently trading well above par.

As mentioned last week, if Aviva decided to cancel them at par the maximum impact from Wednesday prices (before the announcement) would be -2.27% on our fund. Please take note that Aviva have not yet done anything and that interest is continuing to accrue. Prices of Aviva/General Accident are trading within the 120 region and the price of most other of the prefs are way above par, between 130m and 160 so there is clearly still some uncertainty as to the final outcome both in Aviva and for the pref market as a whole.

While the prospectuses of many of the other UK preference shares have similar language to Aviva, these prospectuses were usually written in the 1990s and the language used was never understood to be supposed to be used for this purpose – but more for when a company had to return capital on liquidation. We understand how Aviva think they can do the cancellation, but many are questioning the ethical aspect of using the language or the meaning to justify such a procedure. Therefore it is unclear whether other companies will want to do the same with their prefs. We have contacted the investor relations of all the companies we own and, a number of them have come back to us saying they have not changed their view on the preference shares. Ecclesiastical has gone further and issued a public statement saying they have no plans to cancel their own preference shares through a reduction of capital at par like Aviva and took a swipe at Aviva by including a paragraph reminding Aviva of their published governance principles of building trust through being honest, etc. and hoping they would follow those principles. This does not mean they won’t in the future follow developments closely with Aviva and review possibilities. The Marc Taber FII twitter feed contains quite a bit of discussion from other parties for those who want more detail on the reaction of others in the market.

Some have asked if this is an opportunity. There is too much uncertainty for us to see it is an opportunity and at the right price levels we could even want to reduce our position for risk management purposes.

We will keep you updated with developments.


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12 March 2018

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