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Thousands of investors in Aviva (AV) preference shares have been dealt a blow after the insurer signalled it may seek to cancel the high-yielding investments.
The insurer revealed it is considering cancelling £450 million of preference shares, which will save it £38 million a year in coupon payments.
The shares feature high fixed dividends of between 7.875% and 8.875% and their strong yields had led to them trading at high premiums to their 'par' values, or issue price.
Aviva's threat to cancel the shares at par value, announced alongside full-year results on Thursday, sent them tumbling. Aviva's 8.75% preference shares are down 30.7% since the announcement, while the 8.375% shares have dropped 28.8%.
Preference shares issued by General Accident, the car insurer which merged with Aviva predecessor Norwich Union in 2000, have also been hit by the news. Its 8.875% preference shares have fallen 30.3%, with the 7.875% shares dropping 22.1%.
Aviva warned in its full-year results that it had 'the ability to cancel preference shares at par value through a reduction in capital, subject to shareholder vote and court approval'.
'The preference shares carry high coupons that are not tax-deductible and they will not count as regulatory capital from 2026.'
Bond expert and investor activist Mark Taber of Fixed Income Investments has written to Aviva on behalf of the 580,000 retail investors who could see their incomes hit.
He said that the insurer had made ‘no previous public reference to believing the preference shares could be cancelled at par without a class vote [of the holders]’ and that the prospectus stated they ‘shall not be redeemable, save with the approval of the holders’.
Taber criticised the insurer for the way it has gone about trying to redeem the preference shares, involving ordinary shareholders who are likely to vote for redemption in order to save £38 million in coupon payments and whose votes outweigh those of the preference shareholders.
Taber added that ‘for many years the market has priced the preference shares on the basis that they cannot be redeemed without class consent of holders or a winding up of the company’.
‘Aviva will have been well aware of this and has taken no steps to inform the market otherwise,’ he said.
The news also knocked the broader preference shares market. Insurer Ecclesiastical, whose preference shares dropped 11% on Aviva's announcement before rebounding, issued a statement to the market yesterday reassuring investors.
'Ecclesiastical notes Aviva's governance statement that "as one of the biggest companies in our sector, we aim to make our industry work better for everyone",' it said.
'Ecclesiastical trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action.'
Ecclesiastical is also a holder of Aviva and General Accident preference shares, but said the holdings were 'not material in size in the context of Aviva's announcement and Ecclesiastical's balance sheet strength'.
The situation with Aviva mirrors that of Lloyds (LLOY) in 2016, which bought back £3 billion of bonds from investors but not before a Supreme Court battle.