Proposals for the Company's Future

RNS Number : 3792X

SME Loan Fund PLC (The)

21 February 2017

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN OR INTO THE UNITED STATES, CANADA, AUSTRALIA, JAPAN OR SOUTH AFRICA OR ANY JURISDICTION FOR WHICH THE SAME COULD BE UNLAWFUL.  THE INFORMATION CONTAINED IN THIS ANNOUNCEMENT DOES NOT CONSTITUTE AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION, INCLUDING IN THE UNITED STATES, CANADA, AUSTRALIA, JAPAN OR SOUTH AFRICA.

The information contained in this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.  Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

21 February 2017

THE SME LOAN FUND PLC
(THE "COMPANY" OR "SMEF")

Proposals for the Company's Future

Introduction

The Directors of The SME Loan Fund plc (the "Directors") announce that the Company is in discussions regarding proposals which, if implemented, should:

·           address investors' concerns regarding conflicts of interest between the Company, its current investment manager and its largest shareholder;

·           provide the Company with access to a broader range of investment management skills through the appointment of SQN Capital Management, LLC ("SQN") as the Company's investment manager;

·           enable the Company to continue to provide attractive returns to shareholders (an initial target annual dividend of 6.25p per share (increasing to at least 7.0p per share with effect from July 2018) and a target annual net asset value total return of at least 8%);

·           continue to provide shareholders with the opportunity to vote on the Company's future in the event of the Company's shares trading at an average discount of more than 10% over any three-month period;

·           diversify the Company's shareholder base through a secondary placing of SMEF shares currently held by GLI Finance Limited ("GLIF") and, as a result, improve the market liquidity in its shares;

·           enhance the prospect of increasing the size of the Company through share issues in due course; and

·           provide shareholders with an opportunity to vote on the continuation of the Company if it has not grown its net assets to more than £250 million by 31 December 2019.

In particular, the Company is in discussions with:

·           its current investment manager, Amberton Asset Management Limited ("Amberton"), and SQN regarding the potential transfer of the provision of investment management services to SMEF from Amberton to SQN (the "Transfer of Management Services"); and

·           GLIF, which owns 50% of Amberton and approximately 48% of SMEF's issued share capital, regarding the potential secondary placing of GLIF's holding in SMEF at 90p per share (the "Secondary Placing").

The Transfer of Management Services would be conditional on the Secondary Placing being completed.  In the event that the Secondary Placing is not completed, the Directors intend to bring forward proposals for the orderly realisation of the Company's investments and return of surplus capital to shareholders via mandatory redemptions.

Transfer of Management Services

If the Secondary Placing is completed, SQN will become SMEF's investment manager.  The SQN group, which is headquartered in New York City with operations in the UK, is an independent asset manager that specialises in alternative asset management and focuses on generating secured income through investment vehicles the performance of which is designed to be uncorrelated to traditional equity, debt, and commodity markets.  SQN seeks to deliver its objectives through diversified investments in under-served segments of the market and/or in segments in which it has unique market access or structuring capability.

The SQN group currently provides investment advisory and portfolio management services in respect of assets with an aggregate value in excess of US$1 billion on behalf of two US-based private offerings, three public direct participation programs, a line of Cayman Island-based investment funds, separately-managed accounts and the London-listed SQN Asset Finance Income Fund Limited ("SAIF").  SAIF, a diversified equipment leasing and asset finance investment company, was launched in July 2014 and has raised £540 million, to date, through consistently oversubscribed share issues. 

As the Company's investment manager, SQN would be entitled to a management fee at a rate of 1.0% p.a. of SMEF's net assets up to £250 million, 0.9% p.a. for net assets greater than £250 million and lower than or equal to £500 million and 0.8% p.a. for net assets greater than £500 million.  In addition, SQN would be entitled to charge an additional structuring fee of up to 1.0% of the costs to the Company (ignoring gearing and transaction expenses) of acquiring each investment (excluding any investment acquired from SQN or the funds they manage).  No performance fee would be payable by SMEF to SQN

In the event that SQN becomes SMEF's investment manager, SQN intends to appoint Amberton as its sub-investment adviser in relation to SMEF's existing portfolio of loans.  No termination fees would be payable by SMEF to Amberton as a consequence of Amberton ceasing to be SMEF's investment manager.

Secondary Placing

The Directors believe that, to enhance SMEF's marketability to investors, it needs to improve the market liquidity in its shares and increase its market capitalisation.  As a first step in assisting SMEF to achieve these objectives, GLIF has agreed to sell its c.48% holding in SMEF via a secondary placing, to be co-ordinated by Cantor Fitzgerald Europe, at 90p per share (the "Placing Price").  The Placing Price represents:

·           a discount of 9.6% to SMEF's net asset value per share as at 31 January 2017 (adjusted for the monthly dividend of 0.6p per share to be paid on 24 February 2017) of 99.61p per share; and

·           a discount of 3.2% to SMEF's closing share price of 93p on 20 February 2017.

SQN has indicated its intention to participate in the Secondary Placing up to an aggregate participation of £7.0 million.

Investment Policy

If the Secondary Placing is completed:

The Directors intend to seek shareholder approval to make certain changes to the Company's investment policy, including:

·           removing any obligation on the Company to invest through SME loan origination platforms and SME finance companies in which GLIF holds strategic equity investments; and

·           focus the Company's investment strategy to concentrate on wholesale lending, trade and receivable finance and collateralised lending opportunities as either debt or structured notes including equity or equity participations.

If the Secondary Placing is not completed:

The Directors intend to seek shareholder approval to amend the Company's investment policy to allow for the orderly realisation of the Company's investments, surplus capital to be returned to shareholders via periodic mandatory redemptions and, ultimately, the Company to be wound up.  As at 31 January 2017:

·           39.3% of the Company's portfolio was due to mature within six months, 43.1% (cumulative) within 12 months and 55.8% within 18 months; expire and

·           the weighted average maturity date of the portfolio was 2.8 years. 

Amberton considers that it would be possible to expedite an orderly realisation with secondary transaction in some of the Company's investments.  However, it could still; take a significant period of time to realise the Company's portfolio in its entirety.

Target Returns

When the Company was launched in 2015, it set an annual dividend target of 8.0p per share (being a yield of 8.0% per annum on the issue price of 100p per share). At present, the Company pays a monthly dividend of 0.6p per share, equivalent to an annual dividend of 7.2p per share.

If the Secondary Placing is completed:

Following discussions with SQN regarding the anticipated returns from the Company's portfolio in the event that shareholders approve the changes the Company's investment policy referred to above, the Directors anticipate:

·           rebasing the Company's initial annual target dividend to 6.25p per share, being a level SQN believes will be covered by net revenues in normal market conditions and sustainable throughout a market cycle, increasing to at least 7.0p per share with effect from July 2018; and

·           targeting an annual net asset value total return of at least 8%. 

The rebased annual target dividend would be equivalent to:

·           an annual yield of 6.3% based on SMEF's net asset value per share as at 31 January 2017 (adjusted for the monthly dividend of 0.6p per share to be paid on 24 February 2017) of 99.61p; and

·           an annual yield of 6.9% based on the Placing Price.

The Company would continue to pay dividends monthly.

If the Secondary Placing is not completed:

If shareholders approve the changes to the Company's investment policy to allow for the orderly realisation of the Company's investments, the implementation of the new investment policy may have a negative impact on the Company's revenues.  Accordingly, there may be some volatility in the level of dividends paid each month over the remaining life of the Company.

Discount Control

At present, the Company aims to manage the discount at which its share trade through share buy-backs and, at the Directors' discretion, a six-monthly redemption facility for up to 20% of the Company's issued share capital at a redemption price equal to 99.5% of the NAV per share.  To date, the Company has not bought back any shares. 

The first potential redemption opportunity is 31 March 2017.  Having reviewed the operation of the redemption facility and, in particular, the need to build up cash balances in advance of a redemption date in order to be able to satisfy redemption requests, the Directors have concluded that the six-monthly redemption facility is an inefficient and inflexible structure that is not well-suited to the less liquid assets that the Company invests in.  Accordingly, the Directors have exercised their discretion and decided not to implement the first potential redemption opportunity at 31 March 2017.  Furthermore, irrespective of whether or not the Secondary Placing is completed, the Directors intend to seek shareholder approval to amend the Company's articles of association by deleting the provisions relating to the six-monthly redemption facility.

The Directors are currently required to propose a continuation resolution (an ordinary resolution) in the event that the Company's shares trade at a discount to their net asset value of greater than 10% for three consecutive months (calculated on a rolling three monthly average of daily numbers). 

If the Secondary Placing is completed:

The discount-triggered continuation resolution will remain in place, providing shareholders with the opportunity to review the future of the Company in the event that the Company's shares trade, on average, at a discount of more than 10% over any three month-period.  In addition, the Directors will continue to seek an annual (and, if required, more frequent) renewal of the Company's authority to buy-back shares. 

If the Secondary Placing is not completed:

If shareholders approve the changes to the Company's investment policy referred to above, the Directors intend to seek shareholder approval to amend the Company's articles of association by deleting the provisions relating to the discount-triggered continuation resolution.

General

The Directors recognise the importance to investors of increasing the Company's size to increase the liquidity in its shares in the secondary market.  The Directors believe that the Company's prospects for issuing further shares in due course will be enhanced significantly if the Secondary Placing is completed and the other proposals referred to in this announcement are implemented.  However, the Directors recognise that there are no guarantees that the Company can increase its size substantially.  Accordingly, if the Secondary Placing is completed, the Directors will seek shareholder approval to amend the Company's articles of association so that they will be required to convene a general meeting of the Company to consider a continuation resolution (an ordinary resolution) if the Company's net assets at 31 December 2019 are less than £250 million.

SMEF's second largest shareholder, the Somerston Group (which, through its wholly owned subsidiary Somerston Golf GP Limited, holds approximately 28% of SMEF's issued share capital and 50% of Amberton) has confirmed that:

·           it will vote in favour of the resolutions to amend the Company's investment policy and articles of association referred to in this announcement; and

·           subject to the Secondary Placing being completed, it will enter into a six-month lock-in on disposals of its holding of shares in SMEF without the prior approval of the Company . 

The Company will make a further announcement regarding the outcome of its discussions with Amberton, SQN and GLIF in due course.

Enquiries

The SME Loan Fund plc	Richard Hills (Chairman)	T: [phone]
Cantor Fitzgerald Europe	Sue Inglis (Corporate Finance) Andrew Davey (Sales) Ben Heatley (Sales)	T: [phone] T: [phone] T: [phone]

Important Note

Cantor Fitzgerald Europe is authorised and regulated in the United Kingdom by the FCA and acting only for the Company in connection with the matters described in this announcement.  Persons receiving this announcement should note that Cantor Fitzgerald Europe will not be responsible to anyone other than the Company for providing the protections afforded to customers of Cantor Fitzgerald Europe, or for advising any other person on the matters described in this announcement.

 

END

 

 

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