Notice of EGM - ZDP issue

RNS Number : 6710S

Acorn Income Fund Ld

23 November 2011

 



Acorn Income Fund Limited

EGM convened to consider

ZDP Share issue, treasury share dealing policy and

powers to issue and buy back shares

For immediate release

23 November 2011

The Board of Acorn Income Fund Limited ("Acorn Income Fund" or the "Company") is pleased to announce that it has convened an Extraordinary General Meeting for 11.00 a.m. on 15 December 2011, at Anson Place, Mill Court, La Charroterie, St Peter Port, Guernsey' GY1 1EJ to seek shareholders approval for the issue of new zero dividend redeemable preference shares ("ZDP Shares"), a treasury share dealing policy and powers to issue and buy back shares ("the Proposals").

1.         Background to the Proposals

Bank of Scotland has informed Acorn Income Fund that it is not willing to renew the Company's existing £6 million borrowing facilities which are due to expire on 13 February 2012 (the "Bank Loan").  Following consultation with substantial shareholders and having considered the alternatives with the Company's investment manager, and other advisers, the Directors have decided to recommend to Ordinary Shareholders that Acorn Income Fund raises up to £13.5 million by way of a placing of new ZDP Shares (the "Placing").

The proceeds of the Placing will be used to both repay the Bank Loan and enlarge the Company's portfolio.  Further information on the ZDP Shares and the Placing is set out in paragraph 2 below.

An increase in the authorised share capital of the Company will be proposed to facilitate the creation of the new ZDP Shares.

The Directors are conscious that the Ordinary Shares have generally traded at a discount to the underlying net asset value ("NAV") per Ordinary Share.  The proposed issue of ZDP Shares and implementation of a new treasury share dealing policy are together intended to lead to a reduction in the size of such discounts.

It is proposed that under the new treasury share dealing policy, no new Ordinary Shares will be sold from treasury unless the sale price exceeds the NAV per Ordinary Share, save where additional ZDP Shares are also being issued at the same time on terms whereby the NAV per Ordinary Share is enhanced and gearing is not thereby increased. Any such sale of Ordinary Shares at a price which is below NAV per Ordinary Share is only permitted under the listing rules of the United Kingdom Listing Authority (the "Listing Rules") if shareholders have authorised such sales.   A Resolution will therefore be proposed at the EGM.

A Resolution will be proposed at the EGM seeking Ordinary Shareholders' approval for market purchases of ZDP Shares (subject to and conditional on the approval of the ZDP Share issue and the Placing) in connection with the treasury share dealing policy.

The Board also proposes to seek Ordinary Shareholders' approval for powers of allotment and sale of Ordinary Shares and a waiver of pre-emption rights both in connection with the treasury share dealing policy and in order to permit the issue of new Ordinary Shares.  No new Ordinary Shares will be allotted unless the issue price exceeds the NAV per Ordinary Share, save where additional ZDP Shares are also being issued at the same time on terms whereby the NAV per Ordinary Share is enhanced by such issue and gearing is not thereby increased.  The issue of new Ordinary Shares at a discount to NAV is only permitted under the Listing Rules if shareholders have authorised such issues.  Accordingly a Resolution is to be proposed at the EGM to seek such approval.

Further information on the powers of sale and allotment and the disapplication of pre-emption rights is set out below.  Although not required under the Articles, the Board considers it appropriate that Ordinary Shareholders should be given the opportunity to vote on the issue, or sale from treasury, of Ordinary Shares and therefore a Resolution will be proposed at the EGM seeking approval for the authority to sell shares from treasury and to allot new ordinary shares, subject to specified limits. A further Resolution then seeks to disapply pre-emption rights in connection with any such sale or allotment, without which   the Listing Rules would prevent the Company from issuing or selling Ordinary Shares from treasury for cash without first offering those shares pro rata to existing Ordinary Shareholders.

Following the retirement of Michael McKean from the Board with effect from 30 September 2011, the Board has commenced the process of selecting a new non-executive director.  An announcement will be made when the new appointment has been made. 

2.         Proposed issue of ZDP Shares

The ZDP Shares and use of proceeds

A ZDP Share is not an equity share and does not entitle the holder to any dividends, but is redeemable on a fixed redemption date at a higher price than the initial subscription price, giving the holder a fixed return.  The amount due to holders of ZDP Shares ("ZDP Shareholders"), which accrues over time, is accounted for as a liability rather than as share capital. The ZDP Shares are expected to have a life of approximately five years.

The proceeds of the Placing will be used, in part, to repay the Bank Loan with the balance being divided between Acorn Income Fund's two portfolios (the "Smaller Companies Portfolio" and the "Income Portfolio", and together the "Portfolios") to be managed in accordance with their existing investment policies.  It is proposed that approximately 70-80 per cent. will be allocated to the Smaller Companies Portfolio and the balance to the Income Portfolio.  The investors in the ZDP Shares are likely to expect the ZDP Shares to be quoted and capable of being traded on a stock exchange and for there to be an issue size of around £13.5 million.

The effect of the issue of the ZDP Shares on the financial statements of Acorn Income Fund will be to show a long term liability in respect of the amounts due to holders of ZDP Shares, which will increase over the life of the ZDP Shares. 

Rationale for the creation and issue of ZDP Shares

The principal differences between replacing the Bank Loan with similar borrowings from another lender and the ZDP Share issue are that: (i) the initial costs of the ZDP Share issue are likely to exceed the arrangement fees for new debt; (ii) lenders charge interest and fees until the debt is repaid, whereas no cash is due to investors in ZDP Shares until the final redemption date of the ZDP Shares; and (iii) it is possible to issue ZDP Shares which are not redeemable until the expiry of five years or more, whereas bank debt is less readily available in current credit markets for such a long period such that the initial costs of the issue of ZDP Shares, while higher than fees for arranging new bank debt, are spread over a longer period.

The Directors are concerned that the replacement of the Bank Loan with debt from a different lender will lead to higher interest costs and bank charges, which would reduce the amount of future dividends and which, they believe, may result in the Ordinary Shares trading at a wider discount to NAV. 

The return to holders of ZDP Shares is fixed and does not fluctuate with changes in interest rates.  As there is more scope for interest rates to increase from their present historically low level than for them to decrease, the refinancing of the Bank Loan with ZDP Shares eliminates Acorn Income Fund's exposure to increases in financing costs arising from higher interest rates while the gearing is in the form of ZDP Shares rather than interest bearing debt.

The Proposals are designed to increase net income as a result of the cessation of interest payments on the Bank Loan; and the increase in the size of the Portfolios is intended to deliver additional dividend and interest income.  Ordinary Shareholders should note that although the proposed issue of ZDP Shares is intended to result in enhanced dividend income, over time the ZDP Shares' accruing redemption liability will reduce the net assets attributable to the Ordinary Shares. Therefore, the Ordinary Shareholders may get increased income (although there can be no guarantee that the Proposals will lead to the payment of increased dividends) but on a return of capital or liquidation the final capital entitlement of the ZDP Shareholders will rank in priority to the capital entitlement of the Ordinary Shareholders and Ordinary Shareholders may, subject to the performance of the underlying assets, receive reduced capital as compared to the present arrangements. 

Rights attaching to the ZDP Shares

As the holders of ZDP Shares will not receive dividends, all the portfolio income (net of expenses charged to revenue) should be available to pay dividends on the Ordinary Shares. 

Under Guernsey law there is no distinction between revenue and capital reserves. However, for accounting purposes the Company does (and will continue to) distinguish between revenue and capital returns. In connection with the proposed Placing, the Company will allocate £1.2 million of current revenue reserves to capital, which the Board would not intend to distribute as dividends. Going forward, the Board intends to distribute by way of dividends all the amounts allocated to revenue in its accounts (net of expenses charged to revenue). Under its existing accounting policies (which are not intended to be changed as a result of the Placing) all fees and expenses are charged to revenue except that 75 per cent. of the investment management fee and, if it should arise, 75 per cent. of any bank interest, is charged to capital. The accruing returns to ZDP Shareholders will be charged 100 per cent. to capital.

The ZDP Shares are expected to provide ZDP Shareholders with a gross redemption yield of between 5.75 per cent. and 6.5 per cent., depending on the size of the Placing and a number of other assumptions which may or may not materialise. The ZDP Shares will entitle the holders to a fixed capital return at the end of the approximately five year life of the ZDP Shares (the "ZDP Repayment Date"). In order to pay the holders of ZDP Shares the fixed capital return, the ZDP Shares will be redeemed on the ZDP Repayment Date.

The ZDP Shares will, in general, carry no right to vote at general meetings of the Company. However, if the Proposals are approved and the ZDP Shares are issued, then certain actions of the Company will be subject to prior approval by the holders of ZDP Shares at a separate class meeting. These actions include, without limitation, the issue of new shares (in certain circumstances) by the Company; a reduction of capital (including, in certain circumstances, a buy back of shares) by the Company; any change to the Company's investment policy which is likely to be materially prejudicial to the holders of ZDP Shares; the incurrence of any bank borrowings by the Company (save for any short term bank borrowings in the ordinary course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares); any material change to the basis on which the Company charges expenses to its revenue and capital accounts after the date the ZDP Shares are issued; and the payment of dividends (in certain circumstances) out of the Company's accounting capital reserves.

The final terms of the ZDP Shares will be settled by the Board, pursuant to the authority granted to them by shareholders at the EGM. Full details of the ZDP Shares will be set out in a prospectus to be issued by the Company and which is expected to be available on the Company's website (www.premierassetmanagement.co.uk) in late December 2011.

Effect of the issue of ZDP Shares on gearing

As at 31 October 2011, being the date of the valuation and other information set out in the Company's latest Interim Management Statement, Acorn Income Fund had a portfolio valuation of £22.76 million (comprising cash and portfolio investments of £23.12 million less £0.36 million due to settle the purchase of investments), £6.0 million debt and net assets of £16.76 million i.e. a ratio of debt to gross assets of 26 per cent.  If Acorn Income Fund raises £13.5 million through the issue of ZDP Shares (which are classified as debt) the ratio of ZDP liability (debt), after repayment of the Bank Loan and estimated costs, to portfolio assets would be 45 per cent. 

The higher gearing which would result from the ZDP Share issue would normally be expected to result in an increase in the exposure of Ordinary Shareholders to movements in the underlying asset values.  However, in the Company's case the downside exposure is expected to be limited to some extent by the split nature of the Portfolios, with between 20 per cent. and 30 per cent. invested in bonds and fixed interest securities which are generally less volatile than equities. 

A 10 per cent. increase or decrease in the gross asset value of a fund with a gearing ratio of debt to gross assets of 26 per cent. would result in an increase or decrease in net asset value of approximately 14 per cent.  By comparison, a 10 per cent. increase or decrease in the gross asset value of a fund with a gearing ratio of debt to gross assets of 45 per cent. would result in an increase or decrease in net asset value of approximately 18 per cent.

The Articles contain no restriction on the Company's power to borrow.  However, the holders of ZDP Shares will be given a right of prior approval (at a separate class meeting) of the incurrence of any bank borrowings by the Company (save for any short term bank borrowings in the ordinary course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares).

The Board is conscious of the increase in gearing which would result from the ZDP Share issue.  However, having considered the potential for increased income returns from the Portfolio as a result of the ZDP Share issue and the other factors set out above, the Board has concluded that the proposed ZDP Share issue is in the best interests of Acorn Income Fund so far as Ordinary Shareholders are concerned.

3.         Treasury share dealing policy

Discount management

The market prices of quoted shares in closed end investment funds fluctuate in relation to the underlying NAV per share.  In many cases the market price of such shares are quoted at a discount to the underlying NAV per share.

Acorn Income Fund proposes to adopt a treasury share dealing policy whereby it may buy in Ordinary Shares (or ZDP Shares) or sell them out of treasury to help manage such discounts. 

The Directors intend to monitor the discount or premium to net asset value at which the Ordinary Shares are trading in the market and exercise their powers to buy and sell Ordinary Shares (or ZDP Shares) into and out of treasury in accordance with the treasury share dealing policy. 

Pursuant to the treasury share dealing policy, the Company may sell Ordinary Shares from treasury at a discount to NAV per Ordinary Share where ZDP Shares are issued at the same time at a premium such that the combined effect of the sale of Ordinary Shares at a discount to NAV and the issue of the ZDP Shares at a premium is that NAV per Ordinary Share is increased and where there is no increase in gearing as a result of the transaction.  The Listing Rules prohibit the sale of shares from treasury at a discount to net asset value (otherwise than pro rata to existing shareholders) unless shareholders authorise such a sale. Accordingly, a resolution to be proposed at the EGM seeks Ordinary Shareholder approval for the issue of shares from treasury at a discount to the prevailing net asset value per Ordinary Share in the limited circumstances described above.

Restrictions on sale and purchase of Ordinary Shares in treasury

Acorn Income Fund currently has 215,000 Ordinary Shares in treasury (being 2.46 per cent. of the Company's issued Ordinary Shares (excluding treasury shares) at the date of this announcement).

Subject to the passing of the relevant resolution at the EGM, a maximum of 872,479 Ordinary Shares may be sold from treasury or allotted (being 10 per cent. of the Company's issued Ordinary Shares (excluding treasury shares) at the date of this announcement). 

In order to avoid an increase in the overall gearing ratio as a result of the operation of the treasury share dealing policy over time, it is intended that Ordinary Share purchases into treasury be limited to the number of Ordinary Shares sold out of treasury following the passing of the relevant resolution at the EGM, or such other limit as may be approved by Ordinary Shareholders in general meeting.  This restriction will not apply:

(i)      to purchases of Ordinary Shares into treasury at the same time as ZDP Shares are bought in, if the overall gearing ratio is not increased as a result of such purchases; and provided that the purchases of both Ordinary Shares and ZDP Shares are at prices the combined net effect of which result in NAV per Ordinary Share being enhanced; or

(ii)      to purchases of Ordinary Shares into treasury where the ratio of gross assets to the amount due to ZDP Shareholders on the ZDP Repayment Date is in excess of 1.85 times following the purchase. 

Accordingly, although a resolution was passed at the 2011 annual general meeting of the Company giving authority for market purchases of Ordinary Shares up to a maximum of 1,307,846 Ordinary Shares (being 14.99 per cent. of the Ordinary Shares in issue as at the date the resolution was passed), if the Proposals are approved by Ordinary Shareholders at the EGM, the maximum number of Ordinary Shares which would be purchased into treasury would be 872,479 unless (i) or (ii) above applies.

A Resolution will be proposed at the EGM seeking approval for the Company to make market purchases of ZDP Shares (subject to and conditional on the approval of the ZDP Share issue and the Placing) in connection with the treasury share dealing policy. Any ZDP Shares purchased pursuant to this authority will be cancelled. The minimum price payable by the Company for each ZDP Share shall be 1p and the maximum price payable by the Company for each ZDP Share shall be the higher of (i) an amount equal to 105 per cent of the average of the middle market quotations for a ZDP Share as derived from the London Stock Exchange for the five business days immediately preceding the day on which the ZDP Shares are purchased and (ii) the higher of the price of the last independent trade and highest bid on the London Stock Exchange when the purchase is carried out.

4.         Authority to allot new Ordinary Shares

In addition to the power to sell treasury shares in connection with the proposed treasury share dealing policy, the Board is seeking Ordinary Shareholders' approval to issue up to 436,240 new Ordinary Shares (being approximately 5 per cent. of the Company's issued Ordinary Shares, excluding treasury shares).  No new Ordinary Shares will be issued unless the issue price is equal to or greater than the NAV per Ordinary Share prior to the date of allotment. This restriction will not apply where the circumstances in (i) and (ii) below both apply:

(i)      where ZDP Shares are issued at the same time at a premium such that the combined effect of the issue of both new Ordinary Shares at a discount to NAV and the issue of ZDP Shares at a premium is that NAV per Ordinary Share is increased; and

(ii)      where there is no increase in gearing.

The Directors do not expect to exercise the power to allot new Ordinary Shares while there are any remaining Ordinary Shares in treasury. This power will expire (unless renewed) at the next annual general meeting.

5.         Disapplication of pre-emption rights

In connection with the authority to sell Ordinary Shares from treasury and to issue new Ordinary Shares referred to above, pursuant to the Listing Rules the Company is required to seek Ordinary Shareholder approval to sell or issue those Ordinary Shares otherwise than pro rata to existing Ordinary Shareholders. A Resolution will therefore be proposed at the EGM seeking Ordinary Shareholders' approval for the disapplication of pre-emption rights in connection with any such sale or issue. The power to disapply pre-emption rights in relation to the allotment of new Ordinary Shares and sale of Ordinary Shares from treasury will be limited to 872,479 Ordinary Shares in aggregate (being 10 per cent. of the issued Ordinary Shares at the date of this document, excluding treasury shares). In respect of the allotment of new Ordinary Shares the power will be limited to 436,240 Ordinary Shares (being approximately 5.0 per cent. of the issued Ordinary Shares at the date of this announcement).

This power will expire (unless renewed) at the next annual general meeting.

6.         Risks associated with the Proposals

Ordinary Shareholders should have regard to the following risk factors when considering the Proposals:

●       The ZDP Shares' accruing redemption liability will reduce the net assets attributable to the Ordinary Shares.  On a return of capital or liquidation the final capital entitlement of the ZDP Shareholders will rank in priority to the capital entitlement of the Ordinary Shareholders and Ordinary Shareholders may, subject to the performance of the underlying assets, receive reduced capital as compared to the present arrangements.

●       The Company's capital structure is such that the underlying value of any assets attributable to the Ordinary Shares will be geared by the performance of the Company's assets relative to the rising capital entitlement of the ZDP Shares. Accordingly, Ordinary Shareholders are likely, to a disproportionate extent, to suffer from any underperformance of the Company's assets compared to the finance cost of the ZDP Shares, but conversely will benefit from any performance above such cost. Further detail on the impact of higher gearing is set out in paragraph 2 above. 

●       There can be no guarantee that the Company will successfully invest any part of the proceeds of the Placing in accordance with its investment policy, that the Company will achieve its investment objective or that dividends will be increased as a result of the proposed Placing and change in capital structure.  Past performance or experience is not necessarily a guide to the future.

●       The proposed issue of ZDP Shares and new treasury share dealing policy are together intended to lead to a reduction in the size of the discount at which the Ordinary Shares trade to the underlying NAV per Ordinary Share.  However, there can be no guarantee that such a lowering of the discount will be effective either immediately or in the future. 

●       If the Proposals are approved and the ZDP Shares are issued, then certain actions of the Company will be subject to prior approval by the holders of ZDP Shares at a separate class meeting. These actions include, without limitation, the issue of new shares (in certain circumstances); a reduction of capital (including, in certain circumstances, a buy back of shares); any change to the Company's investment policy which is likely to be materially prejudicial to the holders of ZDP Shares; the incurrence of any bank borrowings (save for any short term bank borrowings in the ordinary course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares); any material change to the basis on which the Company charges expenses to its revenue and capital accounts after the date the ZDP Shares are issued; and payment of dividends (in certain circumstances) out of the Company's capital reserves. The requirement for the Company to obtain the consent of ZDP Shareholders in certain circumstances may result in the Company being prevented from taking certain actions which would otherwise be in the interests of Ordinary Shareholders.

●       The different rights and expectations of the Ordinary Shareholders and the ZDP Shareholders may give rise to conflicts of interest between them. While ZDP Shareholders will expect the capital value of the Portfolios to be sufficient to repay the final capital entitlement of the ZDP Shares on the ZDP Repayment Date, they can have no interest in or entitlement to any growth in capital in excess of that amount.  Conversely, Ordinary Shareholders can be expected to be interested in both the revenue that the Portfolios produce (and hence the level of dividends which will be capable of being paid on Ordinary Shares) and increases in the capital value of the Portfolios in the period to the ZDP Repayment Date, in excess of the final capital entitlement of the ZDP Shares. In certain circumstances, such as a major fall in the capital value of the Portfolios such that the final capital entitlement of the ZDP Shares is significantly uncovered but where the Portfolios are still generating revenue, the interests of ZDP Shareholders and the Ordinary Shareholders may conflict. The ZDP Shareholders may wish the Portfolios to be re-balanced or more revenue to be retained in order to meet their final capital entitlement whilst the Ordinary Shareholders may recognise that they then have little prospect of a sizeable capital return and so may be more concerned with maximising dividends in the period to the ZDP Repayment Date. In such circumstances, the Directors may find it impossible to meet fully both sets of expectations and so will need to act in a manner which they consider to be fair and equitable to both Ordinary Shareholders and ZDP Shareholders but having regard to the entitlements of each class of shares.

7.      Recommendation and letters of intent

The Board, which has been so advised by Fairfax, considers the Proposals to be in the best interests of the Company and Ordinary Shareholders as a whole.  Accordingly, the Board unanimously recommends that Ordinary Shareholders vote in favour of the Resolutions to be proposed at the EGM, as they intend to do in respect of their own beneficial holdings of Ordinary Shares representing approximately 0.28 per cent. of Acorn Income Fund's issued shares.

Letters of intent to vote for the Proposals have been received in respect of 2,277,729 Ordinary Shares representing 26 per cent. of the Company's issued share capital.

Enquiries:

Anson Fund Mangers Limited (Administrator and Company Secretary)

Matthew Rowe                                                                                                  Tel: [phone]

Unicorn Asset Management Limited - Investment adviser to the Smaller Companies portfolio

John McClure                                                                                                    Tel: [phone]

Premier Fund Managers Limited - Investment adviser to the Income portfolio

Nigel Sidebottom                                                                                                Tel: [phone]

Fairfax I.S. PLC - Financial adviser and broker to Acorn Income Fund                Tel:[phone]

David Floyd

John Korwin-Szymanowski

Fairfax I.S. PLC ("Fairfax"), which is authorised and regulated by the Financial Services Authority, has given and has not withdrawn its written consent to the publication of this document containing references to its name in the form and context in which they appear.  Fairfax is acting exclusively for Acorn Income Fund and not for any other person in relation to the matters referred to in this document and will not be responsible to any other person for providing the protections afforded to customers of Fairfax in relation to the matters referred to herein. 

This announcement does not constitute an offer or invitation to subscribe for securities.

E&OE - in transmission

End of announcement

 

END

 

 

NOEDKNDDOBDDDDB