1. Abelson's Barrons Column from March 9, 2009: I thought that I would go back and read Alan's column from the weekend just prior to the market's 50% or so spurt. Alan was on fire with negativity, and quoting none other than David Rosenberg who, according to his pal Alan, was "firmly convinced that the 'worst' has yet to be priced into the market". David and Alan were still negative after a drubbing of 56% from the peak. I am not convinced either of them would have turned bullish with a DJIA at 32 (1932 low) in March or even at ZERO. Some people are just like that, nothing changes for them, the class is forever empty or filled with raw sewerage even if it looks crystal clear and certified by multiple independent labs as safe to drink. At some point, the perennial pessimist starts to look ridiculous.
2. Professor Shiller's Valuation Measure: In the intelligent investor column in the WSJ.com, it was mentioned that Professor Shiller's preferred measure of valuation, average earnings over 10 years adjusted for inflation, has risen from 11.7 in March to 18.4 times, with the long term average at 16.3. This is a chart from the NYT in March that shows a chart using that criterion from the early 1900s to March. NYTimes The 10 year data is going to be influenced significantly for the next 2 to 3 years by having earnings from two recessions, the one occurring between 2000-2002 and the Great Recession starting in October 2007. Shiller would have missed the rally since March. Shiller said he was not ready to invest in stocks in February, wanting this 10 year adjusted p/e to fall below 10. Shiller Stocks Not Yet Cheap Enough for Me I do believe, however, that caution is the watchword when the number approaches 20, so I may start to do more paring soon.
3. Summary of Arguments to Stop EC from Causing Deferral of Payments on the Aegon Hybrids:
A. The key is classifying the securities issued to Aegon's majority shareholder in December 2008 as "Junior Securities" ( Junior Security) to the hybrids. I would just be shocked to find out that those securities, which are pari passu (Pari-passu) with common stock, were not Junior, for the reasons discussed below.
B. Aegon made a "payment" to the majority shareholder on those Junior Securities in May 2009.
C. The Junior Security is an Annual Payment Security.
D. A Payment on a Junior Security Triggers the Mandatory Payment Event in the Aegon hybrid prospectuses.
E. The number of Mandatory Payments depends on classifiying the Junior Security as paying distributions Annually, Semi-Annually or Quarterly.
F. A payment on a Junior Security that pays Annually would trigger 4 Mandatory Payment Events for the hybrids.
G. This would consequently require payment for the quarterly distributions in June, September and December 2009, and March 2010.
H. If Aegon buys Junior Securities from its majority shareholder in December 2009 as it plans to do, this would trigger a Mandatory Payment Event.
I. If the Junior Securities are purchased after 12/15, the Mandatory Payments on the hybrids would be for the entire 2010 year.
All of the foregoing arguments are based on my interpretation of the Mandatory Payment clauses in the prospectuses and the classification of the securities issued to the majority shareholder as Junior Securities to the hybrids and those Junior Securities pay Annual distributions within the meaning of the Mandatory Payment clause.
These arguments are discussed in these posts:
The agreement between Aegon and its majority shareholder: Exhibit 4.11
The prospectus language on Mandatory Events in the hybrid AEB at p. S-22 www.sec.gov
AEV: at p. S-21 www.sec.gov/
AED at p. S-20: www.sec.gov
AEH at p. S-21: www.sec.gov/
AEF at p. S-22: www.sec.gov
Based on what I know now, the EC is not trying to cause a violation of the loan covenants in order to implement its burden shouldering policy. If it did, the consequences would be disastrous for the European firms. In the U.S. a private actor (one not protected by sovereign immunity) inducing a breach of contract could be held liable for treble damages in an action for tortious interference with contracts. We take that kind of conduct very seriously in the U.S. Also, the remedy for a breach of covenants is not very good, and that can sometimes lead a party to violate a contract, knowing that the remedy is that they can only be forced to pay what is owed. This would be a disastrous choice for an insurance company wanting to sell products in the U.S.
The following is a quote from a hybrid prospectus on the ranking of the hybrids:
"The Capital Securities will be direct, unsecured, subordinated obligations and will rank equally without any preference among themselves and among our Existing Capital Securities. The Capital Securities will be subordinated to the claims of all of our Senior Creditors, present and future. Currently, our outstanding Common Shares and preferred shares are our only securities that rank below the Capital Securities and the Existing Capital Securities are our only securities that currently rank equally with the Capital Securities. All of our other securities currently rank senior to the Capital Securities." Page S-12: www.sec.gov
This is a quote about the ranking of the shares issued to the Majority shareholder:
| "Status and Subordination of the Securities |
The Securities constitute direct, unsecured, subordinated obligations of the Issuer and rank pari passu without any preference among themselves. The Securities will rank pari passu with the Common Shares of the Issuer (except that the Securities do not carry voting rights) and will be subordinated to the Senior Claims (as defined below).
For the purposes of this paragraph:
subordinated to the Senior Claims means and has the effect that any claims or rights that a Holder has under the Securities against the Issuer (the Junior Claims) are subordinated in right of payment (including any prepayment, repayment, distribution, set-off or recovery, whether in cash or in kind) in respect of all claims that any creditor of the Issuer has at any time against the Issuer (the Senior Claims). If (in the event of a winding-up, dissolution, or otherwise) the amount of payments to be made under the Junior Claims is to be calculated: (i) first it shall be calculated the amount to be paid on the Senior Claims and the Junior Claims based on their statutory ranking; (ii) second the amount to be paid towards the Junior Claims based on their statutory ranking shall be paid instead towards the Senior Claims until such Senior Claims are paid in full, and the remaining amount, if any, shall be shared among the Holders and the holders of Common Shares as set out in the following paragraph.
rank pari passu with the Common Shares means and has the effect that any proceeds remaining after payment of the Senior Claims and payments on the AEGON Preference Shares (the Excess Proceeds) shall be applied towards payment of amounts due under the Common Shares and the Junior Claims on a pro rata basis (theAttributed Amount). The Holders shall not have any rights to and, shall, to the extent necessary (upon acquiring any Securities) waive their rights to, receive payment of the Excess Proceeds which they may be entitled to receive on the basis of the statutory ranking of Junior Claims vis-à-vis the Common Shares in excess of the Attributed Amount in respect of the Securities.
Page 408: Exhibit 4.11
The hybrids are listed as bonds at Aegon's web site: Capital securities - Aegon
The description of the securities issued to the majority shareholder are described as in pari passu with the common shares at Aegon's web site: Convertible Core Capital Securities - Aegon
So, I am still waiting to hear the argument that the securities are not Junior to the hybrids
Since the hybrids are foreign to us in the U.S., uniquely European, I would like to have any input from my European readers who may have specialized knowledge about these securities as to their ranking in the capital structure.
I have no reason to believe that Fitch gave any consideration to any of the foregoing when downgrading the rating of Aegon's hybrids to junk. Nor do I have any information that Moody's gave any consideration to the points that I have made about ING and Mandatory Payment Events, when stating unequivocally that there was a high probably that the EC will ask ING to defer.
Please note that a valid Mandatory Deferral Event (a solvency type issue) occurring after a Mandatory Payment Event will allow for a deferral of prospective payments during the period of the valid Mandatory deferral.
There are a couple of relevant differences in my opinion relating to ING compared to the Aegon situation. First, unlike Aegon, ING has not announced that it intends to buy back the Junior Securities issued to the Dutch State at a time certain, more like a general intent to buy back those securities. Second, on the issue of whether the payments to the Dutch State by ING are annual payments, the wording of its contract is not the same as Aegon's agreement with its majority shareholder, and I will leave it with that observation. ( Compare Exhibit 4.11 with exv2w10)
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