UK Mortgages Ltd - Publication of a Circular and Notice of EGM
UK Mortgages Ltd - Publication of a Circular and Notice of EGM
PR Newswire
London, July 25
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UK Mortgages Limited
(a closed-ended investment company incorporated in Guernsey with registration number 60440)
LEI Number: 549300388LT7VTHCIT59
(The "Company")
PUBLICATION OF A CIRCULAR AND NOTICE OF EXTRAORDINARY GENERAL MEETING
The Board of Directors of UK Mortgages Limited (the “Company") announces the publication of a circular relating to proposals for changes to the Articles, changes to the Company’s investment policy and share buyback policy (the “Circular”) dated 26 July 2019.
Summary
The investment landscape has changed significantly since the Company’s launch and, despite strong credit performance from the Company’s Portfolio, asset yields have reduced as has the longer term return outlook. In addition, the margin between 5 year and 2 year rates has compressed from around 1 per cent. to approximately 25 bps. Meanwhile, AAA RMBS spreads have remained largely the same, whilst AA-BBB spreads have compressed. The net result is a lower return horizon for the Company whilst more levered investors, many of which the Company competes with for investment opportunities, benefit from a cheaper cost of funding. These factors taken together have adversely affected the level of returns generated by the Portfolio and the ability of the Company to deploy capital. The Portfolio Manager believes that the Proposals will lead to improvements in total returns to Shareholders.
Proposals
The Company proposes in the Circular:
1. That the investment policy of the Company is amended as more particularly described below, relating to the cash management and leverage policy.
2. The Articles are changed to (i) amend the borrowing powers of the Company; and (ii) amend the arrangements for Shareholders to vote on an Ordinary Resolution for the continuation of the Company.
3. That the share buyback policy is amended as further described below.
Chairman’s Statement
UK mortgage lending continues to exhibit very low levels of risk. Investments in UK Mortgages have proven to be resilient throughout economic cycles and are uncorrelated to broader fixed income investments. However, high quality portfolios of mortgages are typically lower yielding and the Portfolio Manager proposes to amend the investment policy of the Company in order to improve the returns generated by the Portfolio and the Company’s cash position, without at the same time increasing the credit risk of the underlying securitisations.
In particular, the Portfolio Manager is seeking to increase the leverage multiple on Shareholders’ funds where leverage is used to gain exposure to Mortgage Portfolios. The Portfolio Manager believes that as a result of the proposed changes the Company’s income will increase and at the same time funding costs in relation to capital deployed will be less than would currently be the case. The key advantage of this approach is that the Company will, as a result, have more capital available which can be invested in other (or larger) transactions.
The Portfolio Manager also wishes to increase the limit on borrowings that the Company may incur for short-term liquidity purposes. This will enable the Company to finance the purchase of larger mortgage pools whilst funding loan originations.
In addition, the Portfolio Manager wishes to clarify the Company’s cash management policy to explicitly give it the ability to invest uninvested cash into AAA rated UK RMBS. This should allow the Portfolio Manager to more effectively manage cash and improve returns as AAA rated UK RMBS ordinarily provide a real return over cash equivalent instruments, as they typically have stable pricing and deep liquidity.
The Company has mostly been paying dividends from capital since its launch, which consequently decreases the NAV of the Company on an ongoing basis. The falling NAV and any capital raised by issuing Ordinary Shares at the current NAV, increases the yield required to be generated from each investment to enable it to meet the dividend. In order to rebuild the Company’s NAV, improve the Company’s cash flow and rebuild capital to generate returns in excess of the required dividend, the Board, in consultation with the Portfolio Manager, has decided to reduce the annual dividend to 4.5p. As the refinancing of the Company’s facilities are scheduled to take place over the course of the next three years (with the earliest scheduled for May 2020), it is expected that any change to the leverage policy will have minimal effect in the near-medium term. As a consequence, the Directors have decided to put forward for Shareholder approval a proposal to change the Articles, such that Shareholders’ will have the opportunity to vote on an Ordinary Resolution on the continuation of the Company in the event that the total dividend per Ordinary Share in respect of any financial year of the Company is less than 4.5p (decreased from 6p) (a “Continuation Resolution”). Because of the change to the investment policy and dividend, the Continuation Resolution due to take place at the fifth AGM is amended such that this will not be required until 2024. It is also proposed that the Articles will also be amended to reflect the proposed amendment to the borrowing powers of the Company.
Furthermore, subject to the Board determining that the Company has sufficient surplus cash resources available, the Company intends to buy back Ordinary Shares whilst the Company is trading at a discount in excess of 5 per cent. to Net Asset Value per Ordinary Share, as further described below.
The Company will only implement the Proposals if each of the Resolutions is passed at the Extraordinary General Meeting.
If the Resolutions are not passed at the Extraordinary General Meeting, the Directors will come back to the Shareholders with alternative proposals.
The Circular sets out the background to and details of the Proposals, explains the reasons why the Board considers that the Proposals are in the best interests of Shareholders as a whole, and convenes the Extraordinary General Meeting at which the resolutions required by the Law to implement the Proposals will be proposed.
The Board is recommending that Shareholders vote in favour of the Proposals.
Background to the Proposals
As stated in the Summary, the credit performance of the Company’s Mortgage Portfolio has been strong. However, yields from mortgage portfolios have fallen as long term rates have reduced and the margin between 5 year and 2 year rates has compressed. At the same time, AAA funding costs have remained broadly unchanged over the Company’s life, while AA-BBB spreads have narrowed significantly putting the Company at something of a commercial disadvantage to a number of its competitors. Consequently, the Portfolio Manager believes that these Proposals are appropriate and will lead to improvements in the total return to Shareholders.
Details of the Proposals
Amendments to the investment policy
The Portfolio Manager has advised the Board that in order to improve the performance of the Portfolio, certain changes are required to be made to the investment policy.
The key elements of the proposed changes to the investment policy are set out below.
Amendment to cash management policy
The Company may currently invest uninvested cash or surplus capital or assets on a temporary basis in:
- Cash or cash equivalents, namely money market funds or short term money market funds (as defined in the ‘Guidelines on a Common Definition of European Money Market Funds’ published by the Committee of European Securities Regulators (CESR) and adopted by the European Securities and Markets Authority (ESMA)) and other money market instruments (including certificates of deposit, floating rate notes and fixed rate commercial paper of banks or other counterparties having a ‘‘single A’’ or higher credit rating as determined by any internationally recognised rating agency selected by the Board which, may or may not be registered in the EU); and
- Any UK ‘‘government and public securities’’ as defined for the purposes of the FCA Rules.
The Company intends to amend the cash management policy to clarify that the Portfolio Manager is able to invest uninvested cash into AAA UK RMBS.
Amendment to leverage policy
It is proposed that the restriction limiting the Company’s ability to borrow in excess of 10 per cent. of the Company’s Net Asset Value at the time of drawdown be amended so that the Company may borrow up to 20 per cent. of the Company’s Net Asset Value at the time of drawdown. This will enable the Company to borrow, on a short term basis, sufficient funds to be able to make typical investments without the need to publicly raise new capital ahead of an investment. The additional borrowing will allow also the Company to more effectively fund its future flow investments on an ongoing basis.
In addition, the Company proposes that the leverage multiple on Shareholders’ funds used to gain exposure to Mortgage Portfolios going forward will be in the range of 10 to 20 times and the average leverage multiple on Shareholders’ funds over time is expected to be in the region of 15 times. Nonetheless, in order to comply with the retention requirements established by European regulators to align the interests of originators of securitisations with investors, the leverage multiple on Junior Notes held by the Acquiring Entity in any Warehouse SPV or Issuer SPV cannot exceed 20 times the nominal amount of such Junior Notes.
It is also proposed the Company retain the current intention not to use leverage to the extent that this would result in RMBS Senior Notes issued by an Issuer SPV being rated less than AAA at issue but additionally it is also intended not to use leverage to the extent that this would result in any RMBS Mezzanine Notes issued by an Issuer SPV being rated less than BBB at issue, ensuring that any notes that are issued remain investment grade. It is not intended that the risk profile of the Mortgage Portfolios in which the Acquiring Entity invests will change.
The existing investment policy and the existing investment policy marked-up to show the proposed changes are set out in Part II of the Circular.
The proposed amendments, which constitute a material change of the Company’s investment policy, require the approval of the Ordinary Shareholders at the forthcoming Extraordinary General Meeting.
The ordinary resolution numbered 2 to be proposed at the forthcoming Extraordinary General Meeting will, if passed, approve the adoption of the new investment policy set out in Part II of the Circular.
Amendments to the Articles
The Company wishes to amend the Articles (i) to enable the Company to implement the reduction in the annual dividend trigger from 6p to 4.5p; (ii) to provide that the Continuation Resolution due to take place at the AGM in 2020 will now take place at the date of the AGM in 2024 and every fifth AGM thereafter; and (iii) the proposed new investment policy described above and in Part II of the Circular. It is therefore proposed that:
- Shareholders will have the opportunity to vote on an Ordinary Resolution on the continuation of the Company in the event that the Company fails to pay a total dividend per Ordinary Share of 4.5p in respect of any financial year of the Company beginning on or after 1 July 2019 thereafter;
- the Continuation Resolution currently scheduled for the AGM of the Company to be held in 2020 will now be proposed at the AGM held in 2024 and every fifth AGM thereafter; and
- the limit on borrowings be increased from 10 per cent. to 20 per cent. of the NAV of the Company as at the time of drawdown.
Other technical changes have been made so that the Articles conform to Guernsey law, as currently in force and Guernsey and UK current best practice.
Further details of the proposed amendments to the Articles are set out in Part III of the Circular.
Share Buybacks
The Board does not intend to reinvest further capital other than in the re-financing of the existing portfolio, whilst the Company is trading at a discount in excess of 5 per cent. to Net Asset Value per Ordinary Share. At this level of discount, subject to the Board determining that the Company has sufficient surplus cash resources available for the ongoing funding of the existing TML and Keystone investments, repayment of any existing credit facilities and any other foreseeable commitments, the Company intends to buy back Ordinary Shares. The making and timing of any share buybacks is at the absolute direction of the Board.
Extraordinary General Meeting
Resolution 1 will be proposed as a special resolution to adopt the New Articles.
Resolution 2 will be proposed as an ordinary resolution to approve the proposed amendments to the investment policy of the Company described above and in Part II of the Circular.
Each Resolution is conditional on the other Resolution being passed. If one Resolution is not passed then both Resolutions will fail.
All Shareholders are entitled to attend and vote at the Extraordinary General Meeting. In accordance with the Articles, all Shareholders present in person or by proxy shall upon a show of hands have one vote and upon a poll shall have one vote in respect of each Ordinary Share held. In order to ensure that a quorum is present at the Extraordinary General Meeting, it is necessary for two Shareholders entitled to attend and vote to be present, whether in person or by proxy (or, if a corporation, by a representative). The formal notice convening the Extraordinary General Meeting is set out on pages 20 to 22 of the Circular.
All Shareholders are entitled to vote on the Resolutions.
Recommendation
The Board considers the Proposals to be in the best interest of Shareholders as a whole. Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Resolutions to be proposed at the Extraordinary General Meeting. The Directors intend to vote in favour of the Resolutions in respect of their holdings of Ordinary Shares amounting to 55,000 Ordinary Shares in aggregate (representing approximately 0.02% per cent. of the issued Ordinary Share capital of the Company, as at 24 July 2019, the latest practicable date prior to the publication of the Circular).
Notice of the Extraordinary General Meeting
Notice is hereby given that an extraordinary general meeting (the “Meeting”) of the Company will be held on Friday, 16 August 2019 at 2 p.m.at the offices of Northern Trust International Fund Administration (Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL, Channel Islands to consider and, if thought fit, approve resolution 1, which will be proposed as a special resolution and resolution 2, which will be proposed as an ordinary resolution (the “Resolutions”).
Unless otherwise defined, capitalised words and phrases used in this announcement shall have the meaning given in the Circular.
Enquiries:
Northern Trust International Fund Administration Services (Guernsey) Limited
The Company Secretary
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
IMPORTANT NOTICES
This Announcement has been issued for information purposes only, it is not a prospectus. This Announcement does not constitute or form part of and may not be construed as an offer to sell, or an invitation to purchase, investments of any description, nor as a recommendation regarding the possible offering or the provision of investment advice by any party. No information in this announcement should be construed as providing financial, investment or other professional advice and each prospective investor should consult its own legal, business, tax and other advisers in evaluating any investment opportunity. It is issued by and is the sole responsibility of the Company. No representation or warranty, express or implied, is or will be made to, or in relation to, and no responsibility or liability is or will be accepted by Numis Securities Limited ("Numis") or by any of its affiliates or agents as to or in relation to, the accuracy or completeness of this Announcement or any other written or oral information made available to or publicly available to any interested party or its advisers, and any liability therefore is expressly disclaimed.
Numis is authorised and regulated by the Financial Conduct Authority. Numis is acting for the Company as its sponsor, broker and financial advisor and is not acting for anyone else and will not be responsible to anyone other than the Company for providing the protections afforded to its clients nor for providing the protections afforded to customers of Numis nor providing advice in relation to the contents of the Circular or any matters referred to therein. To the fullest extent permitted by law recipients agree that Numis shall not have any liability (direct or indirect) for or in connection with this Announcement or any matters arising out of or in connection herewith. Numis has not authorised the contents of, or any part of, this document.
The distribution of this Announcement in certain jurisdictions may be restricted by law. No action has been taken by the Company or Numis that would permit an offering of any Ordinary Shares or possession or distribution of this Announcement or any other offering or publicity material relating to be Company’s such Ordinary Shares in any jurisdiction where action for that purpose is required. Persons into whose possession this Announcement comes are required by the Company and Numis to inform themselves about, and to observe, such restrictions.
The information contained in this Announcement is subject to change without notice and neither the Company nor Numis assume any responsibility or obligation to update publicly.