This will apply to a limited number of our readers, but here it is anyway. Just Group are having a general meeting on Wednesday 16 March, to seek authority from its members to issue restricted tier 1 bonds convertible into ordinary shares on the occurrence of ‘trigger events’.
The first resolution is to provide the directors with power to allot up to £42m or about 45% of the nominal value of existing share capital in connection with the issue. Remember the nominal value relates to 10p shares whose market value (last time I looked) is is about 95p, so this amounts to a considerable dilution. The second is that the new shares will not be offered to existing shareholders.
Now convertible bonds are nothing new, the interesting factor is the trigger event upon which conversion occurs.
The announcement says
A Trigger Event may only occur if the Group determines, in consultation with the PRA, that it has ceased to comply with its capital requirements under Solvency II in a significant way. This may occur if the amount of capital held by the Group falls below 75 per cent. of its capital requirements, if the Group fails to comply with its capital requirements for a continuous period of three months or more or if the Group fails to comply with other minimum capital requirements applicable to it. Only if a Trigger Event occurs (and not under any other circumstances) would any Restricted Tier 1 Bonds issued by the Company convert into new Ordinary Shares. The holders of any Restricted Tier 1 Bonds would not have the option to require conversion of the Restricted Tier 1 Bonds at their discretion.
My emphasis. The peculiarity is the way that existing shareholders are directly exposed to the result of a regulatory decision (obviously they are always indirectly exposed, via market fluctuation), and the way that the PRA is exposed to the ‘in consultation with’ threat. Suppose capital levels fall to the stated 75% (which is somewhat above the Solvency II dictated minimum capital requirement). There are all kinds of ways of tweaking this number. Remember that it is the ratio of capital available, which is a fictitious number that includes ‘transitionals’, and capital required, which depends on an estimate of the variability of fictitious capital. So you have one imaginary number divided by another. (‘Imaginary’ in the work of pure fiction sense, rather than the mathematical sense).
At that point the firm approaches the PRA for a solemn meeting to argue for a more favourable made up number, and some poor apparatchik is put on the spot and must make a decision. Stand by the made up number for three months and shareholders be damned? Or make up a better number, as the firm has asked?
Nothing to envy there. I had toyed with buying £100 of shares and going to the meeting myself, but life too short. We shall see.