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Zeros, warrants and subscription shares

Zeros, warrants and subscription shares

Each month we publish our monthly roundup of news, performance and discount moves in the investment company sector. This section covers zeros, warrants and subscription shares. We’ll update the valuation sheet here at least monthly. Bear in mind that the net asset value numbers that go into calculating the final asset cover may be out of date for funds that invest in assets such as private equity and property.

November Zeros warrants and subscription shares

Comments, New issues and maturities

UIL has redeemed its 2020 ZDPs at their full entitlement.

GLI Finance has been busy repurchasing its zeros ahead of their redemption date in December. The company has 20,791,418 ZDP shares in issue, of which 12,009,030 are held as treasury shares leaving 8,782,388.

New ZDPs from Premier Global Infrastructure

PGIT Securities 2020 has published a circular in connection with proposals for the reconstruction and voluntary winding-up of PGIT Securities 2020 and for a rollover option for ZDP shareholders into ZDPs issued by PMGR Securities 2025.

Under the proposals, PGIT Securities 2020 will be wound up on 30 November 2020. ZDP shareholders who are on the register as at 6.00 p.m. on 20 November 2020 will be entitled to elect:

  • to roll over some or all of their investment into New ZDP Shares issued by PMGR Securities 2025, a newly incorporated subsidiary of the Parent (the “Rollover Option”); and/or
  • to receive cash in the liquidation in respect of all or part of their investment in PGIT Securities 2020.

New ZDP shares are also being made available under the placing. Shareholders who are considering applying for further New ZDP shares in the placing should contact their broker or N+1 Singer.

The New ZDP shares:

  • will have a repayment date of 28 November 2025 and will effectively rank as to capital in priority to the ordinary shares;
  • provide for a pre-determined level of capital growth equivalent to a gross redemption yield of 5.0 per cent. per annum based on the issue price of a new ZDP share of 100p (subject to the Group having sufficient assets at the relevant time), which represents an increase from the gross redemption yield of 4.75 per cent. provided for by the existing ZDP shares; and
  • subject to the Group having sufficient assets at the time and assuming the scheme is effective on 30 November 2020, will carry the right to be paid the 2025 final capital entitlement of 127.6111p in cash on 28 November 2025.

The issue price will be 100 pence per new ZDP share. Accordingly, if an existing ZDP shareholder were to elect for the rollover option, where there is no scaling back, they would receive 1,256 new ZDP shares for every 1,000 existing ZDP shares held on the effective date (entitlements will be rounded down to the nearest whole number).

Valid elections to participate in the rollover option were received in respect of 8,648,877 existing ZDP shares. Accordingly, as the maximum issue size was not exceeded there will be no scaling back.

27 November: Further to the announcement on 3 November 2020, the Placing closed at 1:00pm yesterday. The Company is pleased to announce that pursuant to the Placing, PMGR Securities 2025 plc has raised a total of £3.35m from new ZDP shareholders at the issue price of 100 pence. This is in addition to the Rollover elections made by the Existing ZDP Shareholders as announced on 23 November 2020.

14,217,339 New ZDP Shares in PMGR Securities 2025 plc are expected to be issued to satisfy Existing ZDP Shareholders who opted for the Rollover Option and to new ZDP shareholders who have participated in the Placing.

GLIF refinancing

The board of GLI has announced proposals for a fundraising, a refinancing of the Group’s liabilities and a restructuring of the business to focus its resources on delivering the strategy of Sancus BMS Group.

In summary:

  • Proposed firm placing and open offer to raise up to £4m at 2.25p, of which £2.95m has been underwritten by Somerston Group, GLI’s largest shareholder.
  • Proposed refinancing of the group’s existing bonds by way of a bond issue, with attaching warrants, of up to £15m, for which commitments of £8.2m have been received including £6m from Somerston Group.
  • Proposed continuation of the group’s ZDP shares, with extension of the final capital repayment to December 2022.
  • Extension of, with potential further extension and increase to, the group’s credit facility with Honeycomb Investment Trust (“HIT”).

The ZDP maturity date is currently 5 December 2020, on which date the holders of ZDP shares are entitled to receive 141.152p for each ZDP share that they hold.

If the proposals are adopted, the ZDP shares:

  • will have a repayment date of 5 December 2022;
  • are intended to provide ZDP shareholders with a level of capital growth at a rate of 8 per cent. per annum;
  • subject to the company having sufficient assets at the time to satisfy the solvency test set out under Guernsey company law, will carry the right to be paid the 2022 final capital entitlement of 164.64 pence in cash on 5 December 2022; and
  • will continue to benefit from the protection afforded by the Cover Test.

Earlier updates are available here

Definitions

Zero dividend preference shares or ZDPs are shares that will be redeemed at a fixed price at some defined point in the future (provided that sufficient assets are available). Their entitlement to the assets of the company rises in a straight line between their entitlement on issue and their redemption value. They are not entitled to receive dividends. They will usually get paid out before the ordinary shares on a winding up.

warrant is an instrument that gives the holder a right but not the obligation to buy ordinary shares at a pre-determined price (the strike price or exercise price) on a given date or within a range of dates.

Subscription shares are identical to warrants but they are eligible for inclusion in an ISA while a warrant is not.

The ZDP cover ratio / Zero Dividend Preference share cover ratio is an indicator of the likelihood of a split capital company being able to repay its zero dividend preference shares (ZDPs) when they fall due. The method of calculation varies from firm to firm but, for the purposes of producing our monthly sheet on zeros we have adopted the following method.

  1. take the gross assets of the company (based on the latest available net asset value including accrued income) and adding back bank debt
  2. deduct bank debt (unless it specifically ranks below the zeros – but this is unlikely)
  3. deduct the final capital entitlement of any prior ranking zero dividend preference share issues
  4. divide the resultant number by the final capital entitlement of the ZDP issue for which you want to calculate the ZDP cover ratio

Some other measures of ZDP cover try to adjust the calculation for management fees, interest on debt and estimated wind up costs. We think this gives a spurious accuracy (since it is hard to forecast some of these expenses) to what is really only just a rough guide to whether the zero will easily be repaid out of available assets when it falls due.

Gross redemption yield or GRY is a measure of the rate of return offered by an investment up until the date it matures. It is usually expressed as an annualised percentage – a bit like an interest rate. NB, as ZFPs near maturity, annualised GRYs can get a bit distorted – also dealing costs (which our sheets do not factor in as they vary) become more of an issue.

There are two discount/premium columns in the valuation sheet. The first “price/exercise (discount)/premium” is looking at how far in or out of the money the warrants or subscription shares are. The second, additional column “price+warrant or sub share price / exercise discount/premium” is looking at whether it make sense to buy these warrants or the subscription shares at their current price.

 

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