Re: Octaviar MFS Premium Income Fund PIF
Thanks Great Dame and Jadel. I think a rights issue is a concern.
In response to the above quote:
The corporations act says you only need a 50% vote to replace the RE so I'd say holding a majority of units would mean you can take over the fund.
Hello All,
Please correct me if I am wrong, but I am trying to understand what has happened to LLA and relate that to what may happen to our units if listed on a stock exchange. I am thinking aloud here and maybe it won't make much sense. Let me know if it doesn't.
It seems to me that Packer/Arctic have, for a (substantial) investment of $100 Million achieved 49.3 percent holding of the stapled securities in LLA by issuing rights to shares in Arctic's proportion of LLA at 4 cents each when the value of the stapled security was 4.6 cents. So for 4 cents an investor received 4.6 cents worth per share and immediately made 15% capital gain. The existing security holders did not in the main participate because the poor so-and -sos had no money with which to buy shares and had seen their holding diminish in value even further as the new shares were issued. The value of each security is so low because the stock market considered that there was substantial risk that LLA could not repay previous financing loans from earnings and capital, these loans having been called upon for full payment upon default of due loan repayments. The threat of imminent liquidation prompted the management of LLA to seek refinancing of LLA whereupon Packer/Arctic stepped in with the rescue package buying 49.3 percent of the company. I suppose that the market valuation of the stapled securities did not represent anywhere near the net tangible assets per security and that the NTA per security was in excess of the stock market valuation otherwise Packer/Arctic would not have been interested.
Turning to the situation of the PIF:
Should the units in PIF be listed on a stock exchange (NSX or ASX) I envisage that they will also be stapled to listed shares as a legally allowable means of listing units which can not otherwise be directly listed. The value of these stapled securities will be set by by potential purchasers who will therefore set the value of the stapled securities at much less than the NTA per security (45 cents) and probably much much lower, maybe below 14.5 cents. The value will depend on what the puchaser is prepared to pay for taking the risk of future rewards. If one purchaser or a consortium of purchasers have enough money they can buy as many stapled securities as they can afford at the market value and perhaps buy a controlling interest in the fund but only if enough of us are desperate to sell.
Now how much is a controlling interest and what control does it get them? PIF is not a listed company. It is an Investment Fund and does not itself have a board of directors but a Responsible Entity to manage the fund on behalf of the unit holders. The RE reports to a Trustee who holds the units on behalf of the investors. As we see in the case of Octavia the Trustee can, with good reason apply to the courts to wind up the fund and I suppose perform other duties of which I am unaware. Whilst the shares are listed the corresponding unit is held by the Trustee at arms length and are not directly controlled by the Responsible Entity. As I understand it, 75% of the vote is required to change the constitution or 50% to appoint a new Responsible Entity. Is it likely that one company or consortium is likely to hold enough of the equity in the PIF and hence be able to do what they want with the fund? No. And what changes can they make to a fund to substantially benefit themselves? If they do substantially benefit themselves they will also be substantially benefitting all unit holders because as I understand the PDS all units are equal in benefit. I therefore do not believe it is possible to change the value of some units in preference over other units. To raise finance can the Responsible Entity issue shares at any value? - at a discount to market price? I don't think it would be possible even if the one entity owned 75% or more of the securities. . To do so would require a change to the the Constitution and require unit holder support. Not in any unit holders self interest.
Another fund in which we have stapled securities listed on the ASX a few months before the credit crunch. The RE wanted to change the constitution to introduce a bonus scheme for RE management personnel by issuing securities to them for performance related achievement and as soon as the fund was listed sent out voting papers and argument as to why this bonus scheme should be implemented. Needing 75% of the vote they failed miserably because security holders saw the dilution effect this scheme would have had on the value of the units. If someone or some group has more than 75% holding in PIF they may be able to approve this sort of change but as it is diluting their unit value it would be against their best interests IMHO.
It appears to me that their is no conclusion to be drawn from a rights issue made by LLA because of the different structure of the two entities.
Could I have some considered opinion on this topic please with reasoned logic backed by some understanding of corporate structure, not empty rhetoric by finger happy interjectors.
Mutchy