CQS Rig Finance Fund Ltd : Notice of EGM
For immediate release on 29 February 2012
CQS RIG FINANCE FUND LIMITED
Members' Requisition of EGM
On 14 February 2012 the Company announced that it had received a notice from Ironsides Partners Opportunity Master Fund LP ("Ironsides"), a holder of in excess of one tenth of the issued share capital of the Company, requisitioning an extraordinary general meeting of the Company ("EGM"). Further to that announcement, the Board is today publishing a circular containing a notice convening an Extraordinary General Meeting, to be held on Wednesday 21 March 2012, and setting out the Board's response to the Requisitioned Resolution.
The text of the Chairman's letter extracted from the circular and containing a unanimous recommendation of the Board that Shareholders vote against the Requisition Resolution is set out below.
Requisitioned Extraordinary General Meeting
The Company announced on 14 February 2012 that it had received a requisition notice from Ironsides Partners Opportunity Master Fund LP, a holder of in excess of one tenth of the issued share capital of the Company, requisitioning an extraordinary general meeting of the Company.
This letter provides Shareholders with details of the resolution that is to be put to Shareholders at the Extraordinary General Meeting and sets out the Board's response to the requisition.
The Board believes that the proposal put forward by the Requisitioning Shareholder is not in the best interests of the Company and Shareholders as a whole and is recommending that you VOTE AGAINST the Requisitioned Resolution at the Extraordinary General Meeting.
You will find at the end of this document the notice of the Extraordinary General Meeting at which such resolution will be proposed. The Requisitioned Resolution is an ordinary resolution which would require a simple majority of those Shareholders voting to be passed.
The Requisitioning Shareholder wrote to the Board on 12 January 2012 stating that it would like to realise its investment in the Company at or close to net asset value. It also requested that the Board announce that an ordinary resolution would be put forward at the forthcoming Annual General Meeting to enable Shareholders to vote on whether they would like to realise their investment at or near net asset value. The Company maintains regular contact with Shareholders and had not received any similar requests. The Board responded that it would be happy for the Company's brokers to work with the Requisitioning Shareholder to facilitate an exit for their shareholding in the market and that the Company's constitution provided for a continuation vote at the Annual General Meeting in 2014.
Simply because a Shareholder decides that it wishes to realise its investment in the Company does not, in the Board's view, provide sufficient justification for such continuation vote to be brought forward.
The Board was therefore disappointed to receive a requisition notice requiring the Board to go to the expense of convening an Extraordinary General Meeting. The Board believes that the Company's strong fundamentals, as evidenced by its net asset value performance, attractive portfolio, recently increased dividend policy and the continued opportunities available for further investment in the oil and offshore sector, provide a compelling justification for Shareholders to vote AGAINST the Requisitioned Resolution.
STRONG NET ASSET VALUE PERFORMANCE
Since the Company's Shares were re-admitted to trading on AIM on 18 May 2009 the Company's net asset value per Share has increased significantly from -4.6 pence to 33.7 pence as at 27 February 2012. In addition, the Company has paid out 1.55 pence in dividends during this period.
The graph below illustrates the strong performance during 2011 and the year to date period in 2012. During this period, the Company's net asset value per Share total return was 25.4 per cent. By way of comparison, the return on the Merrill Lynch High Yield Eur Index ex Financials, amounted to only 7.1 per cent.
[see graph on page 4 of the circular]
The Company has delivered strong net asset value performance since 2009 and, as referred to below, the Board believes there are significant opportunities for further investment to enable such strong performance to be continued.
SIGNIFICANT OUTPERFORMANCE OF THE PEER GROUP
The Company's net asset value performance has significantly outperformed the other high yield listed bond funds in the last two years. Set out in the table below is the net asset value total return for the Company and four comparable funds over that period:
|NAV Total Return|
|CQS Rig Finance Fund||121||124||135||148|
| City Merchants High Yield|| 105|| 97|| 106|| 113|
| Henderson Diversified Income|| 105|| 99|| 108|| 112|
| Invesco Leveraged High Yield|| 114|| 102|| 116|| 125|
| New City High Yield|| 105|| 106|| 114|| 121|
Source: Morningstar 27 February 2012
The Company has outperformed its peer group over 6 month, 1 year, 18 month and 2 year
periods ending 27 February 2012.
SUCCESSFUL IMPLEMENTATION OF NEW INVESTING POLICY
In April 2011 Shareholders approved a change to the investing policy of the Company to reflect the change in the market environment which had taken place since the IPO of the Company in December 2006. This reflected the Investment Adviser's belief that there were an increasing number of attractive opportunities available for the Company to invest in instruments that are unsecured and/or subordinated within individual issuers' capital structures and a wider range of sectors.
The original investing policy, which focussed on investments principally in secured debt instruments primarily issued to finance the construction, modification and/or refurbishment of rigs and other infrastructure and/or equipment used for offshore exploration and production of oil and natural gas, was expanded to permit investments in attractive related opportunities. The widening of the investing policy significantly increased the investable universe, thereby enabling the Company to source attractive investments while also increasing risk diversification and improving portfolio liquidity. The policy therefore also permits investments in unsecured and/or subordinated debt instruments, including convertible bonds and other associated securities relating to oil, natural gas and other resource sectors.
The Investment Adviser has been working successfully to ensure that those situations which required workout and/or restructuring have reached resolution and, as a result, only a small minority of non-performing assets remain. For example, the Company announced on 13 October 2011 positive news regarding the work-out of one of the Company's legacy positions. Following the completion of the acquisition of the deep producer vessel MT Laurita (which formed the major part of the collateral for the FPS Ocean AS bonds owned by the Company), the resulting proceeds had a significant positive impact on the Company's NAV.
The table below sets out the structure of the portfolio as at 31 January 2012 and illustrates that some 56 per cent. of assets is invested in holdings with 1st and 2nd lien security with very little of the portfolio exposed to assets with construction risk.
|Portfolio by sector/collateral type||Portfolio by seniority|
| Ultra deep water drilling units|| 52.2|| Ist lien|| 37.1|
| Seismic vessel|| 14.0|| Unsecured|| 31.3|
| Accommodation vessel|| 9.1|| 2nd lien|| 18.5|
| Jackup|| 8.1|| Convertible|| 12.7|
| Service vessel|| 6.4|| Equity|| 0.4|
| FPSO|| 4.4|
| Well intervention|| 3.0|
| Other|| 2.4|
| Transport vessel|| 0.4|
* These percentages are based on the long market value of the assets in the Company's portfolio.
The flexibility afforded by the Company's new investing policy has been a further positive step for the Company in delivering to Shareholders an attractive total return through a combination of capital appreciation and dividends.
INCREASED DIVIDEND POLICY
On 9 September 2011, the Board of Directors announced that the Company intended to recommence regular cash distributions in the form of semi-annual dividend payments and announced initial target dividends equivalent to an annual yield of 4 per cent. of the Net Asset Value per Share at the start of each financial year. In line with this policy, the Directors declared dividends in respect of the year ended 30 September 2011 of 0.55 pence per Share on 9 September 2011 and 0.6 pence per Share on 20 December 2011 amounting to a total 1.15 pence per Share or a yield of 4.2 per cent. based on the Net Asset Value per Share of 27.64 pence on 30 September 2010.
As a result of the Company continuing to increase the proportion of performing assets in its investment portfolio, increasing the income generating component to approximately 98 per cent. of the Company's investment portfolio as at 31 January 2012, the Board announced on 14 February 2012 that the Company intends to amend its dividend policy and to increase the regular cash distributions in the form of semi-annual dividend payments to target dividends equivalent to an annual yield of 5 per cent. of the Net Asset Value per Share at the start of each financial year.
This dividend policy will be applied to the current financial year and based on the opening Net Asset Value per Share on 1 October 2011 of 27.59 pence, a 5 per cent. yield would equate to approximately 1.38 pence per Share for the year to 30 September 2012.
The Company's income visibility from its investment portfolio provides a sound basis to deliver an increased dividend policy in line with its investment objective.
CONTINUED OPPORTUNITIES FOR INVESTMENT
The Company currently has positive net cash balances, having successfully repaid all its debt, placing the Company in a strong position to take advantage of a number of funding opportunities which are becoming available.
The oil and offshore sector continues to receive substantial investment, with global E&P spending forecast to increase by 10 per cent. year on year to US$600 billion in 2012 (source: Barclays Capital). Furthermore, since the search for oil continues to focus on deepwater fields, with more than 50 per cent. of new discoveries worldwide over the last decade being made in offshore markets, primarily deep waters, the Board believes that the outlook for day rates on ultra-deep water rigs is very positive. Since the average age of the existing worldwide rig fleet is over 20 years in some sectors (for example, the mid water fleet) further investment in new build rigs will be required and is currently being witnessed in the market. In addition, as a result of the relative scarcity of traditional bank financing in the current macro environment, the Board believes that there are likely to be a number of issuers looking to the high yield bond markets for finance and that it is more appropriate for the Company to be a buyer, rather than a seller, in the market.
The Board believes that the highly experienced investment management team will be able to secure opportunities for investment to provide the Company with further exposure to global energy demand with lower volatility than through equities and commodities.
LETTER FROM THE REQUISITIONING SHAREHOLDER
Yesterday the Requisitioning Shareholder wrote to a number of the Company's Shareholders stating that it was a supporter of the Company but believed that in light of the size of the Company and its discount "it is incumbent on the Company to facilitate arrangements whereby Shareholders who wish to are able to exit their investment in the Company at or near their underlying NAV". It also stated that it had been an investor in the Company since 2010.
The Company notes that the average market capitalisation of the Company in 2010 was £20.2 million and the average discount was 17.4 per cent. This compares to the current market capitalisation of £29.1 million (an increase of over 44 per cent.) and a discount significantly narrower at 11.4 per cent.
The Requisitioning Shareholder was therefore aware of the size of the Company and its discount when it acquired Shares in 2010 and the fact that the Company's constitution provided for a continuation vote in 2014.
EXTRAORDINARY GENERAL MEETING
The Notice convening the EGM to be held at Trafalgar Court, Admiral Park, St. Peter Port, Guernsey GY1 2JA, on Wednesday 21 March 2012 at 12.00 noon is set out at the end of this document. At the EGM the following resolution will be proposed as an ordinary resolution:
"THAT as soon as practicable following the passing of this resolution and in any event within three months of the passing of this resolution the Company shall put forward proposals whereby Shareholders who wish to realise their investment in the Company are offered an opportunity to do so at a consideration per share at or as near as possible to the prevailing net asset value per share."
ACTION TO BE TAKEN BY SHAREHOLDERS IN RESPECT OF THE EXTRAORDINARY GENERAL MEETING
Shareholders will find enclosed with this document a Form of Proxy for use in connection with the Extraordinary General Meeting. Whether or not you intend to be present at the Extraordinary General Meeting, you are requested to complete and return the Form of Proxy so as to reach the offices of Capita Registrars, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU no later than 12.00 noon on Monday 19 March 2012.
Completion and return of a Form of Proxy will not, however, prevent you from attending at the Extraordinary General Meeting and voting in person if you should wish to do so.
Your Directors unanimously consider that the proposal put forward by the Requisitioning Shareholder is not in the best interests of the Company and its Shareholders as a whole. Accordingly, your Directors unanimously recommend Shareholders to vote AGAINST the Requisitioned Resolution as they intend to do in respect of their own beneficial shareholdings.
Terms used and not defined in this announcement bear the meaning given to them in the circular dated 29 February 2012.
A copy of the circular will be available to view shortly on the Company's website in accordance with AIM Rule 26: www.cqsrigfinance.com
Kleinwort Benson (Channel Islands) Fund Services Ltd
Tel: +44 (0)1481 710 607
Alastair Moreton/Hannah Young
NOMAD and Broker
Westhouse Securities Limited
Tel: +44 (0)20 7601 6118
This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients.
The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.
Source: CQS Rig Finance Fund Ltd via Thomson Reuters ONE