LeggMason Investors International Utilities Trust plc
Dividend declaration and review of capital structure
In its announcement of 3 October 2002, the Board of the Company stated that it
was reviewing various options open to the Company which might be of benefit to
shareholders as a whole and which might include a repurchase of Zero Coupon
Preference (ZCP) shares. The Board has now concluded this review.
Although the market price of the ZCP shares currently represents a significant
discount to the net asset value of those shares, a repurchase of ZCP shares
would only be possible in the event that all classes of shareholders approved
such action. Whilst the repurchase of a significant proportion of the ZCP
shares could materially enhance the net assets of the Company, the reduction in
the Company's assets arising from the sale of investments to finance such
repurchase would in turn reduce the income on the Company's portfolio and hence
income available for distribution by way of dividend to Ordinary and Income
Moreover, whilst an enhancement of net assets would benefit the capital
position of ZCP shareholders and, if sufficiently large, Income shareholders,
it is extremely unlikely that it would benefit Ordinary shareholders.
Accordingly, given that Ordinary shareholders' only returns on their investment
for the remainder of the Company's life are likely to be the dividend income on
such shares, the Board believes that it is highly unlikely that Ordinary
shareholders would vote in favour of such a proposal so that, however desirable
for improving the balance sheet of the Company, it is impracticable.
The Board is very conscious of the accruing priority capital entitlement on the
ZCP shares. As at 22 November 2002 the net assets attributable to the ZCP
shares were approximately £127.76m and the final entitlement of the ZCP shares
on the 31 December 2003, being the anticipated winding up date of the Company,
is £141m. Thus an 8.4 per cent rise in the value of the Company's gross assets
in the period to the winding up date on 31 December 2003 (equivalent to an
annualised rate of 7.6 per cent) would be required for the ZCP shares' final
entitlement to be fully covered at the winding up date.
As a result of the prior capital entitlement of the ZCP shareholders, the
Directors believe it is appropriate to retain as much income within the Company
as possible, at least until required to pay this out, in order to try and
improve prospects for a capital return to ZCP and, potentially, Income
The Board also recognises the capital rights of the Income shareholders and
notes that on the basis of the Company's existing net assets as stated above,
an increase in the value of the Company's gross assets of approximately 40 per
cent in the period to the winding up date would be needed to return to Income
shareholders their full capital entitlement.
Article 4C of the Company's Articles of Association requires that 'Prior to the
liquidation meeting the directors shall resolve to pay a final interim
dividend, which shall be paid before the liquidation meeting to the holders of
the ordinary shares and income shares in accordance with their respective
entitlements and of an aggregate amount equal to (as nearly as practicable and
after making such provisions as the directors shall consider appropriate), and
no greater than, the amount standing to the credit of any revenue reserves
arising from undistributed net revenues of the Company together with any
undistributed net revenues of the Company arising in the then current financial
year up to the date of the liquidation meeting.'
Based on legal advice, this Article creates a mandatory obligation upon the
Directors to pay out their estimate of the revenue reserves and the then
undistributed net revenue of the financial year before the meeting for the
winding up of the Company in December 2003.
The Directors are committed to conducting the Company's affairs in order to
maintain its Investment Company status and in line with the requirements of
Section 842 of the Income and Corporation Taxes Act 1988 to preserve its status
as an Investment Trust and the associated benefits. For this purpose the
Directors are required to distribute at least 85% of the Company's income from
shares and securities.
Accordingly, the Directors have resolved to pay third interim dividends of 0.9p
net per Income and Ordinary share in respect of the period ended 30 September
2002. These dividends will be paid on 20 December 2002 to shareholders on the
register on 6 December 2002. In the absence of unforeseen market circumstances
it is anticipated that fourth interim dividends of approximately 1.0p net per
Ordinary and Income share will be paid in respect of the final quarter of the
current financial year. This will ensure that the Company will meet the income
distribution test, and should ensure that it maintains Investment Company
In view of the short time remaining until the Company's anticipated winding up
date, the prior repayment rights of the ZCP shares and the fall in value of
assets which had increased the level of gearing, the Board decided to repay a
significant proportion of the Company's outstanding bank indebtedness.
Accordingly, as announced on 24 October 2002, a repayment of $41.8m of the
$79.5m debt outstanding was made on 23 October 2002. The repayment of debt and
reorganisation of the portfolio to reduce risk will have a material adverse
impact on income receivable by the Company, particularly in the final financial
year. This, coupled with the income retention referred to above, means that the
Company's first three interim dividend payments in the next financial year are
likely to be materially lower than they have been historically.
The last four months have been profoundly difficult not only for the Company,
but also for equity markets generally. It is highly unfortunate that the market
has fallen so dramatically when the Company has only a short time remaining
until its winding up date. The Board will continue to examine all available
options in the light of market conditions.