How not to solve a problem like Aviva
Aviva’s preference share debacle shows that there is more to capital management than getting one over on your investors.
Aviva took the market by surprise when it said earlier this month that it could cancel its £450m of preference shares at par, without seeking separate approval from the holders of the securities.
But the market kicked back against the announcement. Helped by bondholder activist Mark Taber, investors and institutions rallied together to decry Aviva’s decision as underhand and flying in the face of established market practice.
Groups have also been putting pressure on the Financial Conduct Authority to consider whether Aviva has been clear enough about the rights of preference shareholders.
The public outcry around Aviva’s cancellation notice was enough to convince the UK insurer to row back on its decision last week, announcing that it had “listened” to its investors.
But all FIG issuers of capital should also have been listening.
Given the growth of the bond markets in recent years, issuers are relying more and more on debt investors for sustainable sources of funding and capital.
Upsetting them for a relatively small capital gain appears to be short-sighted and could be outweighed by a corresponding rise in implied financing costs.
Of course, the market should recognise that Aviva’s £450m preference shares are a burden on the company. They would cost close to £40m in interest expense every year — forever — if left outstanding.
But the UK insurance firm clearly has other options for cleaning up its balance sheet, as it appeared to recognise when it said it would take no action to cancel its preference shares.
For one thing, it could wait a little for rates to rise and preference share prices to fall before buying the instruments back at an acceptable cost to both the investors and the company itself.
With growing focus on environmental, social and governance (ESG) issues in all aspects of business and finance, banks and insurers would do well to recognise that sound legal advice does not always translate into sound market practice.
Aviva's schooling should be the industry's lesson.