Notice of General Meeting
Small Companies Dividend Trust PLC
General Meeting convened to consider a
ZDP Share issue by Small Companies ZDP PLC
and related changes to Articles and investment policy
For immediate release
1 August 2012
The Board of Small Companies Dividend Trust PLC ("SCD Trust" or the "Company")
announced on 22 March 2012 that it was considering a potential issue of
non-equity securities to replace SCD Trust's borrowing facilities and to
increase its gross assets. Following consultation with SCD Trust's major
shareholders, the Board is now pleased to announce its proposals for Small
Companies ZDP PLC ("ZDPCo"), a new subsidiary of SCD Trust, to issue redeemable
zero dividend preference shares ("ZDP Shares"), to raise £8.5 million. The ZDP
Shares are redeemable in January 2018 together with the accumulated return to
the ZDP Shareholders.
A circular is today being posted to shareholders of SCD Trust, convening a
General Meeting for 11.00 a.m. on 24 August 2012, to be held at the offices of
Speechly Bircham LLP, 6 New Street Square, London EC4A 3LX to seek
shareholders' approval for the issue of ZDP Shares, related changes to the
Articles and a change to SCD Trust's investment policy ("the Proposals"). The
Circular is available on-line at www.chelvertonam.com.
A prospectus has been published in respect of the new ZDP Shares (the
"Prospectus") and is available at www.chelvertonam.com. The Prospectus
contains portfolio information about SCD Trust as at 30 July 2012 (being the
"latest practicable date" prior to its publication). The net asset value per
SCD Trust Ordinary Share as at close of business on 30 July 2012 was 103.45
pence.
Copies of the Prospectus and the Circular have been submitted to the National
Storage Mechanism and will shortly be available for inspection at http://
www.Hemscott.com/nsm.do.
1. Background to the Proposals
As at 30 July 2012, SCD Trust's borrowings comprised a fixed loan of £4 million
and in addition to which approximately £0.9 million of its current £2 million
overdraft facility is drawn down.
SCD Trust has been informed that its lenders will not renew SCD Trust's
existing £4 million borrowing facility, which is due to expire on 1 May 2014,
on the same terms. Following consultation with the majority of substantial
shareholdersin SCD Trust and having considered the alternatives with SCD
Trust's investment manager and other advisers, the Directors have decided to
recommend to Ordinary Shareholders that SCD Trust raises £8.5 million cash by
way of a placing of new ZDP Shares to be issued by ZDPCo.
The proceeds of the Placing will be lent by ZDPCo to SCD Trust by way of a
secured loan agreement, and will be used both to repay the existing fixed loan
and to increase the capital available to SCD Trust for investment in its
portfolio. Further information on the ZDP Shares and the Placing is set out in
paragraph 2 below.
SCD Trust's Articles of Association currently provide for a resolution to be
put to shareholders on or about 30 April 2014, and thereafter at five yearly
intervals, to approve the continuation of SCD Trust. If the Continuation Vote
is not passed, the Board has to make arrangements for the return of capital to
shareholders. The next Continuation Vote is due to be put to Ordinary
Shareholders in April 2014. Accordingly the proposed ZDP Share issue is
subject to Articles of Association being changed to make the timing of
Continuation Votes more compatible with the use of ZDP Shares. A further
proposed change to the Articles clarifies the definition of "borrowings" to
exclude ZDP Shares.
It is also proposed that SCD Trust's Investment Policy be amended to introduce
a gearing policy in accordance with the current requirements of the Listing
Rules. Currently, borrowings may not exceed 100% of net assets at the point at
which borrowing is incurred or increased, but nevertheless gearing could
increase without any set limit as a result of investments falling in value.
Accordingly the proposed new gearing policy confirms that there is no set limit
on SCD Trust's gearing. The Listing Rules require that changes to the
Investment Policy are approved by shareholders in general meeting.
The ZDP Share issue, the changes to the Articles of Association and the change
in Investment Policy are conditional on the approval of Ordinary Shareholders
at the General Meeting, notice of which is set out in the Circular.
2. Proposed issue of ZDP Shares
A ZDP Share is not an equity share and does not entitle the holder to any
dividends, but is redeemable on a fixed redemption date at a higher price than
the initial subscription price, giving the holder a fixed return. The amount
due to holders of ZDP Shares, which accrues over time, is accounted for as a
liability rather than as share capital. The ZDP Shares are expected to have a
life of approximately five years and four months.
Application has been made for the standard listing of the ZDP Shares on the
Official List and for them to be admitted to trading on London Stock Exchange
plc's main market for listed securities. It is expected that admission will be
effective and dealings will commence on 28 August 2012.
The ZDP Shares do not entitle the holder to any dividends or, save in certain
circumstances, to vote at general meetings of ZDPCo; however SCD Trust may not
(save in certain circumstances), without the prior approval of ZDP Shareholders
(inter alia): (i) take on any bank borrowings (save for short term borrowings
in the ordinary course of business such as to settle share trades or borrowings
to finance the redemption of the ZDP Shares) until the ZDP Repayment Date; (ii)
pay any dividends out of capital reserves; (iii) pass a resolution releasing
the Directors from their obligation to redeem the ZDP Shares on the ZDP
Repayment Date; (iv) issue any securities or shares which rank pari passu with
or in priority to the ZDP Shares; (v) make any material change to SCD Trust's
investment policy which, at the time of making such change, appears likely in
the reasonable opinion of the Directors to be materially prejudicial to the
holders of the ZDP Shares; (vi) make any material change to the basis on which
SCD Trust charges expenses to its revenue and capital accounts; or (vii) pass
any resolution to vary, modify or abrogate any of the special rights attached
to the ZDP Shares.
Key information about the ZDP Shares
Expected admission date 28 August 2012
Redemption date 8 January 2018
Issue price per ZDP Share 100 pence
Final Capital Entitlement per ZDP Share 136.7 pence
Redemption Yield at the Placing Price 6.0 per cent. per annum
Initial Cover 2.07 times
Hurdle rate to receive the Final -12.7 per cent. per annum
Capital Entitlement
Hurdle rate to receive the initial - 17.6 per cent. per
subscription price annum
ISIN: GB00B8FJ5797
SEDOL Code: B8FJ579
Ticker: SDVZ
Use of proceeds
The estimated net proceeds £8.3 million will be applied to repay all SCD
Trust's £4.0 million loan and repay any of the overdraft which is outstanding
at the relevant time, with the balance being added to SCD Trust's Portfolio to
be managed in accordance with its existing investment policy.
Rationale for the creation and issue of ZDP Shares
The Directors and a majority of the substantial shareholders who were consulted
considered the ZDP shares to be the most appropriate form of gearing having
regard to the following points:
· Light covenants: bank covenants damaged shareholder returns in 2008/9 when
the market suffered a major setback and investments had to be sold at an
inopportune time.
· Term: the capital from a ZDP issue is available for a longer period (five
years and four months in this case) than bank facilities, which in current
credit markets are difficult to arrange for this type of asset class for a term
of more than two or three years. As discounts can widen when there is doubt
about gearing renewal, the less frequent ZDP renewals give ZDP shares an
advantage over bank debt.
· Fees: although the initial costs of the ZDP issue exceed bank arrangement
fees, the latter would fall due more than once during the proposed five years
and four months life of the ZDP Shares. To address any concern about the
additional initial costs, Chelverton has agreed to contribute £100,000 towards
the costs of the Proposals, subject to the Admission of the new ZDP Shares.
· Lower market price discount to NAV due to higher dividends (as no income is
applied to pay interest or a running yield on ZDP Shares).
· Reduced net income required for dividends if no interest is paid on bank
debt, permits the portfolio income target to be reduced while increasing
dividends. This enables the Manager to place greater emphasis on capital
return while meeting income targets.
· An advantage of debt, if available on a revolving credit basis, is that it
permits the temporary degearing of the fund without exposing SCD Trust to
paying more for its longer term funding than it receives on uninvested funds.
Any such advantage of debt funding would, however, be eroded by any
non-utilisation fees applicable to the revolving credit facility.
· Exposure to interest rate movements: the return to holders of ZDP Shares is
fixed and does not fluctuate with changes in interest rates. As there is more
scope for interest rates to increase from their present historically low level
than for them to decrease, the refinancing of SCD Trust's bank debt with ZDP
Shares eliminates SCD Trust's exposure to increases in financing costs without
incurring the expense of hedging.
Overall whilst the cost of the ZDP shares (comprising the 6 per cent. gross
redemption yield and the initial costs of the issue) are slightly higher than
the indicated increased costs of a bank facility in the short term, the
Directors are concerned that the replacement of the bank debt with new loans
could, over time, lead to higher interest costs and bank charges, which would
reduce the amount of future dividends and which, they believe, may result in
the Ordinary Shares trading at a wider discount to NAV.
Interest rates are at a historically low level and there is more scope for them
to increase than decrease over the next few years. While recognising that
longer term interest rates are higher than current 'spot' rates, it is possible
that fixing the cost of borrowings for five years and four months by way of the
ZDP Share issue may turn out to be preferable to the alternative of exposing
SCD Trust to possible higher rates when any replacement debt falls due for
renewal in two or three years' time.
As the holders of ZDP Shares will not receive dividends, all the portfolio
income (net of expenses charged to revenue) should be available to pay
dividends on the Ordinary Shares. In addition to the expected increase in net
income as a result of the cessation of interest payments on the bank debt, the
increase in the size of the investment portfolio is intended to deliver
additional dividend and interest income. Any Ordinary Share dividend uplift
will not be immediate, as the first of the quarterly dividends following the
ZDP Share issue will reflect the net income received under the present capital
structure. Ordinary Shareholders should note that although the proposed issue
of ZDP Shares is intended to result in enhanced dividend income, over time the
ZDP Shares' accruing redemption liability will reduce the net assets
attributable to the Ordinary Shares. Therefore, the Ordinary Shareholders may
get increased income (although there can be no guarantee that the Proposals
will lead to the payment of increased dividends) but on a return of capital the
final capital entitlement of the ZDP Shareholders will rank in priority to the
capital entitlement of the Ordinary Shareholders and Ordinary Shareholders may,
subject to the performance of the underlying assets, receive reduced capital as
compared to the present arrangements.
Effect of the issue of ZDP Shares on gearing
ZDP Shares are accounted for as debt under IFRS. As at 30 April 2012, being
the date of SCD Trust's most recent audited financial statements, SCD Trust had
assets excluding debt (cash and portfolio investments, less certain creditors)
of £22.13 million, £4.95 million of debt and net assets of £17.18 million i.e.
a ratio of debt to assets of 22 per cent. If SCD Trust raises £8.5 million
through the issue of ZDP Shares, after repayment of the bank debt and the
payment of approximately £237,000 estimated net issue costs, the ratio of debt
to assets would be 33 per cent.
The higher gearing which would result from the ZDP Share issue would normally
be expected to result in an increase in the exposure of Ordinary Shareholders
to movements in the underlying asset values.
A 10 per cent. increase or decrease in the gross asset value of a fund with a
gearing ratio of debt to gross assets of 22 per cent. would result in an
increase or decrease in net asset value of approximately 13 per cent. By
comparison, a 10 per cent. increase or decrease in the gross asset value of a
fund with a gearing ratio of debt to gross assets of 33 per cent. would result
in an increase or decrease in net asset value of approximately 15 per cent.
The arrangements for the proposed ZDP Share issue will prohibit the incurrence
of any bank borrowings by SCD Trust while the ZDP Shares are in issue (save for
any short term bank borrowings in the ordinary course of business, such as to
settle share trades, or borrowings to finance the redemption of the ZDP
Shares), unless such borrowings are approved by holders of ZDP Shares (by
special resolution).
3. Risks associated with the Proposals
Ordinary Shareholders should have regard to the following risk factors when
considering the Proposed ZDP Share issue:
â—The ZDP Shares' accruing redemption liability will reduce the net assets
attributable to the Ordinary Shares. On a return of capital the final capital
entitlement of the ZDP Shareholders will rank in priority to the capital
entitlement of the Ordinary Shareholders and Ordinary Shareholders may, subject
to the performance of the underlying assets, receive reduced capital as
compared to the present arrangements.
â—The higher gearing which would result from the ZDP Share issue may result in
an increase in the exposure of Ordinary Shareholders to movements in the
underlying asset values. Further detail on the impact of higher gearing is set
out in paragraph 2 above.
â—There can be no guarantee that SCD Trust will achieve its investment objective
or that dividends will be increased as a result of the proposed Placing and
change in capital structure.
â—The proposed issue of ZDP Shares is intended to assist in limiting the size of
the discount at which the Ordinary Shares trade to the underlying NAV per
Ordinary Share. However, there can be no guarantee that such an effect will
occur either immediately or in the future.
â—If the Proposals are approved and the ZDP Shares are issued, then certain
actions of SCD Trust will be subject to prior approval by the holders of ZDP
Shares by special resolution. These actions include, without limitation, the
issue of new shares (in certain circumstances); a reduction of capital
(including, in certain circumstances, a buy back of shares); any change to SCD
Trust's investment policy which is likely to be materially prejudicial to the
holders of ZDP Shares; the incurrence of any bank borrowings (save for any
short term bank borrowings in the ordinary course of business such as to settle
share trades or borrowings to finance the redemption of the ZDP Shares) and
payment of dividends (in certain circumstances) out of SCD Trust's capital
reserves. The requirement for SCD Trust to obtain the consent of ZDP
Shareholders in certain circumstances may result in SCD Trust being prevented
from taking certain actions which would otherwise be in the interests of
Ordinary Shareholders.
â—The different rights and expectations of the Ordinary Shareholders and the ZDP
Shareholders may give rise to conflicts of interest between them. ZDP
Shareholders can be expected to have little or no interest in the revenue
produced by the Portfolio, save to the extent that SCD Trust's operating costs
exceed that revenue. ZDP Shareholders can be expected to want the capital value
of the Portfolio to be sufficient to repay the final capital entitlement of the
ZDP Shares on the ZDP Repayment Date, but can be expected to have little or no
interest in any growth in capital in excess of that amount. Conversely,
Ordinary Shareholders can be expected to be interested in both the revenue that
the Portfolio produces (and hence the level of dividends which will be capable
of being paid on Ordinary Shares) and increases in the capital value of the
Portfolio in the period to the ZDP Repayment Date, in excess of the final
capital entitlement of the ZDP Shares. In certain circumstances, such as a
major fall in the capital value of the Portfolio such that the final capital
entitlement of the ZDP Shares is significantly uncovered but where the
Portfolio is still generating revenue, the interests of ZDP Shareholders and
the Ordinary Shareholders may conflict. The ZDP Shareholders may wish the
Portfolio to be re-balanced or more revenue to be retained in order to meet
their final capital entitlement whilst the Ordinary Shareholders may recognise
that they then have little prospect of a sizeable capital return and so may be
more concerned with maximising dividends in the period to the ZDP Repayment
Date. In such circumstances, the Directors may find it impossible to meet fully
both sets of expectations and so will need to act in a manner which they
consider to be fair and equitable to both Ordinary Shareholders and ZDP
Shareholders, but having regard to the entitlements of each class of shares.
4. Changes to the Articles of Association
The proposed ZDP Share issue will have a life of approximately five years and
four months, which is incompatible with the currently required Continuation
Vote in April 2014. Accordingly, it is proposed that the Articles be changed
(by special resolution) to alter the date of the Continuation Vote to a date
which is shortly before the redemption of the ZDP Shares. This would facilitate
roll-over provisions for ZDP Shareholders being published in the knowledge that
the Continuation Vote had been passed.
A resolution is to be proposed at the General Meeting to change Article 166 to
remove the current requirement for a Continuation Vote in April 2014 and at
intervals of five years thereafter and to replace it with a requirement for a
Continuation Vote in October 2017 and at up to seven year intervals thereafter,
but giving the Board power to vary the date of the Vote to a date four months
earlier or four months later so as to align the vote with any timetable for a
further ZDP Share issue or to save costs by holding the Continuation Vote at
the Annual General Meeting or some other general meeting.
Article 121 limits SCD Trust's borrowings to an aggregate amount at any one
time of a sum equal to 100 per cent. of the value of the net assets of SCD
Trust at the time at which the borrowing is incurred or increased. An
amendment is proposed to the definition of "borrowings" to exclude liabilities
in respect of zero dividend preference shares, whether issued by SCD Trust or
wholly-owned subsidiaries.
5. Change to Investment Policy
The Listing Rules currently contain a requirement that an investment company's
published investment policy includes a policy towards maximum gearing
exposures. SCD Trust's investment policy, which was adopted prior to the
current version of the Listing Rules being implemented, contains no reference
to gearing policy.
In order to protect the interests of ZDP Shareholders, the arrangements for the
issue include a loan agreement containing a restriction on the Group incurring
any other borrowings (other than short term indebtedness in the normal course
of business, such as when settling share transactions) except where such
borrowings are for the purpose of paying the Final Capital Entitlement due to
holders of ZDP Shares. However, this will not prevent gearing increasing as a
result of investments falling in value. There are no set gearing limits.
A resolution is to be proposed at the General Meeting to amend SCD Trust's
Investment Policy to confirm that there is no set limit on SCD Trust's gearing.
The amended investment policy as it will be after the passing of the relevant
resolution at the General Meeting is as follows:
· The investment objective of SCD Trust is to provide Ordinary Shareholders
with a high income and opportunity for capital growth.
· SCD Trust's assets comprise investments in equities in order to achieve its
investment objectives. It is the aim of SCD Trust to provide both income and
capital growth predominantly through investment in smaller capitalised United
Kingdom companies admitted to the Official List of the United Kingdom Listing
Authority and traded on the London Stock Exchange' Main Market or traded on
AIM.
· The Company will not invest in preference shares, loan stock or notes,
convertible securities or fixed interest securities or any similar securities
convertible into shares; nor will it invest in the securities of other
investment trusts or in unquoted companies.
· There is no set limit on SCD Trust's gearing
6.Recommendation
The Board, which has been so advised by Fairfax, considers the Proposals to be
in the best interests of SCD Trust and Ordinary Shareholders as a whole.
Accordingly, the Board unanimously recommends that Ordinary Shareholders vote
in favour of the Resolutions to be proposed at the General Meeting, as they
intend to do in respect of their own beneficial holdings of Ordinary Shares
representing approximately 0.9 per cent. of SCD Trust's issued shares.
Enquiries:
Chelverton Asset Management Investment Manager
David Horner: Tel: 01225 483030
Fairfax I.S. PLC Financial adviser and broker
James King, John Korwin-Szymanowski, David Floyd: Tel: 020 7598 5368
Fairfax I.S. PLC ("Fairfax"), which is authorised and regulated by the
Financial Services Authority, has given and has not withdrawn its written
consent to the publication of this document containing references to its name
in the form and context in which they appear. Fairfax is acting exclusively
for Acorn Income Fund and not for any other person in relation to the matters
referred to in this document and will not be responsible to any other person
for providing the protections afforded to customers of Fairfax in relation to
the matters referred to herein.
This announcement does not constitute an offer or invitation to subscribe for
securities.
Definitions
The following terms and expressions have the following meanings when used in
this document unless the context requires otherwise:
"Admission" the admission of the ZDP Shares to
listing on the Official List and to
trading on London Stock Exchange plc's
main market for listed securities
"Articles of Association" or "Articles" the articles of association of SCD Trust
"Chelverton" or "Manager" Chelverton Asset Management Limited, SCD
Trust's investment manager
"Circular" the circular dated 1 August 2012
containing the notice of the General
Meeting
"Company" or "SCD Trust" Small Companies Dividend Trust PLC
"Continuation Vote" vote by Ordinary Shareholders on the
continuation of SCD Trust
"Directors" or "Board" the directors of SCD Trust
"Fairfax" Fairfax I.S. PLC, the financial adviser
and broker to SCD Trust
"Form of Proxy" the form of proxy to vote at the General
Meeting, which accompanies this document
"Investment Policy" SCD Trust's investment policy, as
approved by Shareholders from time to
time
"General Meeting" or "GM" the general meeting convened to consider
the Proposals
"Ordinary Shares" ordinary shares of 25 pence each in the
capital of SCD Trust
"Ordinary Shareholder(s)" holder(s) of Ordinary Shares
"Placing" the placing of ZDP Shares with investors
"Portfolio" the portfolio of investments of SCD
Trust
"Proposals" the proposed issue of ZDP Shares,
changes to the Articles of Association
and change to Investment Policy
"Shareholder(s)" holder(s) of Ordinary Shares
"ZDP Repayment Date" the date on which the ZDP Shares are to
be redeemed
"ZDP Shareholder(s)" holder(s) of ZDP Shares
"ZDP Shares" redeemable zero dividend preference
shares proposed to be issued by a new
subsidiary of SCD Trust