Restructure Proposals
23 Febbraio 2012 - 5:34PM
UK Regulatory
TIDMCHY
City Merchants High Yield Trust plc
23 February 2012
Recommended proposals for reconstruction and voluntary winding up
On 3 October 2011 the Company announced that it was considering proposals for
the assets of the Company to be transferred to an offshore-domiciled successor
vehicle in order to continue to deliver tax-efficient investment returns from
high-yielding fixed-interest securities.
The Board has today published a Circular in connection with recommended
proposals for the reconstruction and voluntary winding up of City Merchants
High Yield Trust plc (the "Company") and the transfer of the assets of the
Company to City Merchants High Yield Trust Limited ("CMHYTL") (the
"Proposals"). CMHYTL is a newly-formed closed-ended investment company
incorporated in Jersey, Channel Islands and established as a collective
investment fund, authorised by the Jersey Financial Services Commission as a
listed fund. CMHYTL will be the offshore successor to the Company if the
Proposals are approved and implemented. CMHYTL has today published a prospectus
in connection with the Proposals (the "Prospectus").
Enquiries
Guy Short, Invesco Asset Management - 020 7065 3000
Clive Nicholson, Chairman, City Merchants High Yield Trust plc - 020 8741 4000
Neil Morgan, Winterflood Investment Trusts - 020 3100 0292
BACKGROUND
The Company is resident in the United Kingdom for tax purposes and has
historically been approved as an investment trust. UK companies which qualify
for tax purposes as investment trusts are exempt from UK corporation tax on
realised capital gains. The exemption from tax applies to capital profits but
the Company remains taxable on its income profits. A significant proportion of
the income received by the Company from its investment portfolio, being derived
mainly from fixed-interest securities, is therefore liable to UK corporation
tax.
In recent years, the Company's ability to pay dividends has been enhanced
because it has been able to reduce its liability to UK corporation tax through
offsetting against taxable income the surplus management expenses which arose
through the merger with Exeter Selective Assets Investment Trust plc in
November 2005.
These surplus management expenses are now nearly exhausted and the Company is
writing down the associated deferred tax asset on its balance sheet, which is
giving rise to a tax charge of an amount equal to the amount of the write down.
Consequently, the Company has incurred a tax charge in each of the years ended
31 December 2010 and 31 December 2011 and, for the same reasons, would incur a
tax charge for the current financial year if the Company continued in its
present form. Thereafter, the surplus management expenses having been
exhausted, the Company would be liable to UK corporation tax on the full amount
of its taxable investment income. Such a tax charge would have a significant
and recurring impact on distributable reserves, which would reduce dividends
and total returns to Shareholders. Based on current revenue levels, it is
estimated that a full annual UK corporation tax charge would be approximately GBP
1.9m, equivalent to approximately 2.6 pence per Share.
The Directors, together with the Company's advisers, have examined methods to
enable the Company to continue to deliver tax-efficient investment returns to
Shareholders from high-yielding fixed-interest securities. The Board has
determined that the best interests of Shareholders as a whole would be served
by transferring the assets of the Company to CMHYTL in exchange for the issue
of shares in CMHYTL to the Shareholders. The Board has chosen Jersey because of
the established practice of Invesco Asset Management Limited (the "Investment
Manager") in Jersey, together with its relationships with services providers
there.
As a consequence of the Proposals the Company has written off GBP1.445 million of
the deferred tax asset on the Company's balance sheet equivalent to 2.0 pence
per Share, representing the estimated value of surplus management expenses that
will be unused at the Effective Date. Although this will negatively affect the
Net Asset Value, there would be a similar impact if the Proposals were not
implemented and the Company continued in its present form, as it is estimated
that the deferred tax asset would be written off fully by the end of 2012.
Therefore, although the write-off of the tax asset is accelerated, the Company
will not lose any tax benefit by moving offshore.
BENEFITS OF THE PROPOSALS TO THE COMPANY
The Proposals are intended to put Shareholders in a position equivalent to
previous years when the Company had sufficient surplus management expenses to
offset fully its liability to UK corporation tax. The Proposals are expected to
provide the following benefits for CMHYTL:
* CMHYTL will not be subject to UK corporation tax, which should significantly
increase its net distributable income as compared with the Company and thereby
enhance total returns;
* any uncertainty over the Company's tax situation that may have affected trade
in the Shares will be removed; and
* CMHYTL may enjoy increased flexibility as compared with the Company because
it will not seek to be approved as an investment trust in the UK.
Following implementation of the Proposals, the annual running costs of CMHYTL
will not be materially different from those currently paid by the Company.
Additionally, for Shareholders who are liable to stamp duty or SDRT when
purchasing Shares, such taxation would not be due when purchasing CMHYTL
Shares.
IMPACT OF THE PROPOSALS ON SHAREHOLDERS
If the Proposals are approved and implemented, the Company's assets will be
transferred to CMHYTL and Shareholders will receive one CMHYTL Share for each
Share held on the Record Date. Shareholders will receive a Special Dividend
from the Company and, following the Scheme becoming effective, will receive
future dividends from CMHYTL. Further information on dividends is given below.
Save for UK individuals who hold (or are deemed to hold) at least 10 per cent.
of CMHYTL's Shares and small companies, as defined in section 931S Corporation
Tax Act 2009, under current legislation the UK tax treatment of dividends
received from CMHYTL will be the same as the UK tax treatment of dividends
received from the Company. All CMHYTL Shareholders will benefit from greater
distributions compared to those they would have received in future if they were
to remain invested only in the Company, which is tax resident in the UK. This
is in consequence of CMHYTL being zero-rated for tax in Jersey and,
accordingly, not being liable to any Jersey tax on its income or gains.
SUMMARY OF THE SCHEME
In order to implement the Proposals shareholder approval is sought to implement
a scheme of reconstruction whereby the Company will be placed into members'
voluntary liquidation. As part of the liquidation, after provision has been
made for the Liquidation Fund required to discharge its liabilities (including
contingent liabilities) and the costs incurred by the Company in relation to
the Proposals as referred to below, the Company's investments and other assets
will be transferred in specie, in accordance with the Transfer Agreement, to
CMHYTL.
Shareholders will then receive one CMHYTL Share for every Share held by them.
CMHYTL's investments will be managed by the Investment Manager, the Company's
existing investment manager, on substantially the same terms as the Company is
currently managed and the CMHYTL Shares will be listed on the Official List
with a premium listing and traded on the main market of the London Stock
Exchange in the same way that the Shares are currently listed and traded.
DIVIDENDS AND ANNUAL REPORT AND ACCOUNTS
On 17 January 2012, the Directors declared an Interim Dividend of 2.5 pence per
Share in respect of the quarterly period ended on 31 December 2011 which the
Directors intend to pay to Shareholders on the register at 6.00 p.m. on 27
January 2012. The Shares went ex-dividend on 25 January 2012 and the Interim
Dividend is scheduled to be paid on 24 February 2012.
On 22 February 2012, the Directors declared a Special Dividend of 2.4 pence per
Share which the Directors intend to pay to Shareholders on the register at 6.00
p.m. on 9 March 2012. The Shares will go ex-dividend on 7 March 2012 and the
Special Dividend is scheduled to be paid on 28 March 2012.
It is intended that for the period from Admission to 31 December 2012, on the
basis of current market conditions, CMHYTL will target a dividend of 7.6 pence
per CMHYTL Share which, together with the Special Dividend to be paid by the
Company, would represent total dividends of 10.0 pence per share in respect of
the 12 months to 31 December 2012. This is a target dividend level which is
based on certain assumptions and does not constitute a profit forecast. There
can be no guarantee that the target dividend level will be achieved.
The board of CMHYTL intends to pay quarterly dividends in February, May, August
and November each year with the first such dividend to be paid in August 2012.
CITY MERCHANTS HIGH YIELD TRUST LIMITED
Investment objective and policies
CMHYTL will have the same investment objective as the Company, which is to seek
to obtain both high income and capital growth from investments predominantly in
high yielding fixed-interest securities. CMHYTL will seek to provide a high
level of dividend income relative to prevailing interest rates through
investment in fixed-interest securities, various equity-like securities within
fixed-income markets and equity-linked securities such as convertible bonds and
in direct equities that have a high income yield. It will also seek to enhance
total returns through capital appreciation generated by investments which have
equity-related characteristics.
CMHYTL will have the same investment policy as the Company. It will be actively
managed and will seek to ensure that its portfolio is diversified, having
regard to the nature and type of securities (including duration, credit rating,
performance and risk measures and liquidity) and the geographic and sector
composition of its portfolio. CMHYTL may hold both illiquid securities (for
example, securities where trading volumes are relatively low and unlisted
securities) and concentrated positions (for example, where a high proportion of
CMHYTL's total assets is comprised of a relatively small number of
investments).
CMHYTL will adopt the same investment limits as the Company as follows:
* CMHYTL may invest in fixed-interest securities, including but not
restricted to preference shares, loan stocks (convertible and redeemable),
corporate bonds and government stocks, up to 100 per cent. of total assets;
* investments in equities may be made up to an aggregate limit of 20 per
cent. of total assets at the time a new investment is made;
* the aggregate value of holdings of shares and securities in a single issuer
or company, including a listed investment company or trust, will not exceed
15 per cent. of the value of CMHYTL's investments at the time of
investment; and
* investments in unlisted investments will not exceed 10 per cent of CMHYTL's
total assets for individual holdings and 25 per cent. in aggregate of total
assets at the time a new investment is made.
CMHYTL may enter into derivative transactions (including options, futures and
contracts for difference, credit derivatives and interest rate swaps) for the
purposes of efficient portfolio management. CMHYTL will not enter into
derivative transactions for speculative purposes. CMHYTL may hedge against
exposure to changes in currency rates to the full extent of such exposure.
CMHYTL's gearing policy will be determined by its board. The level of gearing
may be varied from time to time in light of prevailing conditions subject to a
maximum of 30 per cent. of CMHYTL's total assets from time to time.
Board composition
The board of CMHYTL will be comprised of Clive Nicholson and Winifred Robbins,
who are currently directors of the Company, and Philip Austin, John Boothman
and Philip Taylor who are Jersey resident (and who are not directors of the
Company). These changes to the Board result from the requirement for CMHYTL to
have a majority of non-UK resident directors.
Investment Manager and other service providers
As stated above, the Company's existing investment manager, Invesco Asset
Management Limited, will be appointed to act as investment manager of CMHYTL on
substantially the same terms, including as to fees, as those on which it is
currently engaged with the Company.
CMHYTL has appointed R&H Fund Services (Jersey) Limited as its company
secretary and administrator in Jersey. The Bank of New York Mellon, the
Company's existing custodian, will be appointed as custodian to CMHYTL and
Capita Registrars (Jersey) Limited has been appointed as its registrars.
ISA, SIPP and SSAS investors
CMHYTL Shares will be eligible for inclusion in the stocks and shares component
of an ISA. CMHYTL Shares will also qualify as an investment that may be held in
a SIPP or SSAS. Accordingly, where existing Shares are held in an ISA, SIPP or
SSAS, CMHYTL Shares obtained pursuant to the Scheme in respect of those Shares
can be retained (subject to the specific terms applicable to the relevant ISA,
SIPP or SSAS) within the ISA, SIPP or SSAS.
COSTS OF IMPLEMENTATION OF THE PROPOSALS
The costs and expenses relating to the Proposals to be paid by the Company,
including legal and other professional costs, additional Directors' fees, the
costs of printing this document and the costs relating to the liquidation of
the Company (excluding GBP50,000 retained by the Liquidators in respect of
contingent and unknown liabilities) are estimated to amount to GBP335,000
including VAT. In recognition of the additional work undertaken on behalf of
the Company in connection with the Proposals, the Directors will receive
additional fees equal to one quarter of their current respective annual
remuneration.
A further GBP515,000 is estimated to be payable in connection with the launch of
CMHYTL. This amount (which is not subject to VAT as CMHYTL is incorporated and
registered in Jersey) will be payable by CMHYTL and will be provided for upon
its launch.
OVERSEAS AND DISSENTING SHAREHOLDERS
Subject to certain exceptions, Overseas Shareholders who have registered
addresses in Restricted Jurisdictions will not be issued CMHYTL Shares pursuant
to the scheme. Such Overseas Shareholders will have their interests purchased
by the Liquidators at a price equal to their respective entitlements under the
Scheme.
Shareholders who do not vote in favour of the special resolution at the First
EGM can express their dissent from the Scheme in writing to the Liquidators at
the Company's registered office within seven days after the passing of the
special resolution. Any such dissenting Shareholder may require the Liquidators
either, at the Liquidators' option, to abstain from carrying the resolution
into effect or to purchase such Shareholder's interests at a price to be agreed
between them or determined by arbitration.
FURTHER INFORMATION
The Proposals are conditional on the resolutions to be proposed at the EGMs
being passed.
Copies of the Circular and Prospectus will be submitted to the National Storage
Mechanism and will shortly be available for inspection at www.hemscott.com/
nsm.do.
Copies of the Circular and Prospectus can be viewed at the offices of Ashurst
LLP, Broadwalk House, 5 Appold Street, London, EC2A 2HA
Capitalised terms in this announcement have the same meaning as that set out in
the Circular of the Company dated 23 February 2012.
EXPECTED TIMETABLE
2012*
Ex-dividend date for the Shares in respect of the 25 January
Interim Dividend
Record date for the Interim Dividend 27 January
Payment of Interim Dividend 24 February
Ex-dividend date for the Shares in respect of the 7 March
Special Dividend
Record date for the Special Dividend 9 March
Latest time and date for receipt of Forms of Proxy 12.30 p.m. on 20 March
for the First EGM
First EGM 12.30 p.m. on 22 March
Date from which it is advised that dealings in 26 March
Shares should only be for cash settlement and
immediate delivery of documents of title
Latest time for receipt of Forms of Proxy for the 12.30 p.m. on 28 March
Second EGM
Payment of Special Dividend 28 March
Record date for the Scheme 6.00 p.m. on 28 March
Shares disabled in CREST** 6.00 p.m. on 28 March
Shares reclassified, Official List amended and 8.00 a.m. on 29 March
dealings in Reclassified Shares commence on the
London Stock Exchange
Listing of Reclassified Shares on the Official 7.30 a.m. on 30 March
List suspended
Second EGM 12.30 p.m. on 30 March
Effective date for implementation of the Proposals 30 March
Date on which the Company's assets are transferred 2 April
to CMHYTL
Dealings commence in CMHYTL Shares 8.00 a.m. on 2 April
Shareholders holding Shares in uncertificated form 8.00 a.m. on 2 April
credited with CMHYTL Shares
Certificates for CMHYTL Shares despatched by 16 April
* All references in this document to times are to London times.
** For the avoidance of doubt, the Register will remain open until the
Effective Date.
It is expected that the listing of the Shares will be cancelled on or as soon
as practicable after 30 March 2013.
END
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