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Twenty Four Income and UK Mortgages to merge

Twenty Four Income and UK Mortgages to merge – the boards of TwentyFour Income Fund and UK Mortgages have agreed the terms of a proposed merger of the two companies. The merger will be effected by way of a scheme of reconstruction of UK Mortgages, consisting of the winding-up of that fund, the transfer of its assets to TwentyFour Income and the issue of new ordinary shares by TwentyFour Income to UK Mortgages’s shareholders.

The plan is to get this done over the next three months. Both boards have consulted with major shareholders, all of whom have been supportive. Holders of a total of 47% of UK Mortgages’s shares have provided written support for the idea.

Rationale:

  • Creating a market-leading listed credit fund
  • Strengthened market position due to greater scale and combined asset management and securitisation expertise.
  • Enlarged group should have total net assets of about £720m and a yield of about 7.2%.
  • There will be 11 investment professionals at TwentyFour Asset Management LLP focussed on the combined entity.
  • Complementary portfolios
  • TwentyFour Income’s evolving strategy seeks a yield premium for accepting lower liquidity, recognising that sourcing attractive risk-adjusted returns has become more challenging.
  • Merger provides TwentyFour Income with access to UK Mortgages’s stable income generating assets
  • Increased diversification
  • An enhanced return profile
  • Combined earnings expected to be a strong underpin to annual dividend target of at least 6p per share.
  • Merger expected to be NAV accretive over medium term.
  • Access to high quality originators
  • Combined group better placed to capitalise on existing counterparty relationships across the asset-backed securities market
  • Consolidated focus on TwentyFour’s future origination.
  • Increased liquidity with a more diverse shareholder register
  • Increased liquidity expected in the secondary market given greater scale and increased weighting in UK indices.
  • High quality and more diverse shareholder register with scope to appeal to a broader universe of potential investors.
  • Synergies expected to create value for shareholders
  • Cost efficiencies and economies of scale expected as a result of the merger.
  • Lower combined ongoing charges ratio expected over time.

Specific benefits for UK Mortgages shareholders:

  • Significant uplift in market value for UK Mortgages’s portfolio, currently estimated at about 15% helped by closing of discount (currently 8%)
  • Retain exposure to high quality assets as part of a broader and more diversified investment mandate
  • Greater stability anticipated in earnings, dividend and capital performance as part of TwentyFour Income’s broader investment policy with proven track record.
  • Maintain exposure to UK Mortgages’s assets
  • Enhanced scale, liquidity and discount control
  • Part of a larger, more liquid, Premium listed investment company.
  • Ability to benefit from TwentyFour Income’s realisation opportunity in Q4-22 and three yearly thereafter [This is important – even if UK Mortgages shareholders don’t fancy the idea, at least they now have a route to cash in their shares close to asset value within a reasonable timeframe.]
  • Attractive alternative to managed wind down
  • Cost ratio of combined entity expected to be approximately 1% compared to UK Mortgages’s standalone ratio of circa.3%

Transaction structured to defer potential tax liability

The mechanics of the scheme are designed with the intention of allowing certain UK Mortgages shareholders subject to UK tax to continue to receive investment returns without triggering an immediate liability to capital gains tax.

Mechanics

After setting aside a provision for the costs of the scheme and any liabilities, the remainder of UK Mortgages’ assets will transfer across to TwentyFour.  UK Mortgages shareholders then get new TwentyFour Income shares at a price representing a 1.25% premium to NAV. This values UK Mortgages shares at about 83.32p.

Overseas shareholders that for whatever reason cannot participate in the scheme  will have their TwentyFour Income shares sold on their behalf.

UK Mortgages does not intend to declare any further dividends on its shares. The new TwentyFour Income shares will be entitled to receive all dividends declared by TwentyFour Income afterwards.

TwentyFour Income and UK Mortgages have each agreed to bear their own costs in relation to the scheme.

The scheme is subject to a number of conditions, including UK Mortgages shareholder approval.

TFIF / UKML : Twenty Four Income and UK Mortgages to merge

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