GAM Star Credit Opps GBP Aviva pref shares

Today Aviva in their results presentation referred to their 4 issues of preference shares and the possibility of reimbursing them at par, well below the prices at which they had been trading. We hold some in our funds.

If this happens the price impact, which has already been reflected to a large extent in market prices, would mainly affect the GBP fund and to a small extent the other two funds.

To explain in more detail, Aviva believe that there is an ability to cancel their preference shares through a capital reduction at par (plus accrued interest and arrears) ‘via a court approved reduction of capital, subject to approval from the relevant issuer’s ordinary and preference shareholders voting together’. They announced that they have taken legal advice to conduct something that we would qualify as unprecedented and they believe to be legally enforceable, going against the best interest of preference shareholders.

It is important to note that the quality of the issuer hasn’t changed and this only concerns a certain amount of UK preference shares of Aviva, and has no impact on other bonds of Aviva.

It also has no impact on the credit quality of financials and no impact on the AT1, legacy Tier 1, Tier 2 or senior debt of financials in general.

This announcement has also affected the prices of other UK preference shares in the market. We have reviewed the entire UK preference share asset class that the funds own and have looked into the possibilities of other preference shares being treated in the same manner as Aviva. It is as yet unclear whether other companies will be able or wish to go the same route and whether it is the same for insurance company preference shares and banking preference shares. The impact on USD and EUR fund would be very marginal beyond Aviva, and for the GBP fund another couple of percent or so in the unlikely event all others wish to and are able to call at par.

Our understanding is that the company, to justify this investor unfriendly action, feels that preference shareholders have enjoyed very good returns on these securities for many years and indeed the fund has held these and enjoyed good returns on them for some time.

It is likely that some investors will mount a legal challenge to this. We will keep you updated with developments.


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8 March 2018

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