Acorn Income Fund announces rollover proposal for 2017 ZDPs
Extending life to 2022 with 3.85% pa gross redemption yield
Acorn Income Fund (AIF) has published proposals to extend the maturity of its 2017 zero-dividend preference shares (ZDPs) by five years. The ZDPs were issued at 100p in December 2011 with a maturity date of 31 January 2017 and a final capital entitlement of 138p, equating to a gross redemption yield of 6.5% pa. Following positive performance from AIF – which invests most of its assets in a portfolio of UK smaller company shares managed by Unicorn Asset Management, and a smaller proportion in a portfolio of high-yielding securities managed by Premier Asset Management – the 2017 ZDPs are set to meet their final capital entitlement in full.
The board of AIF has proposed an extension of the life of the ZDPs to 28 February 2022, with a final capital entitlement of 167.2p equating to a gross redemption yield of 3.85% pa. While lower than the yield on the 2017 ZDPs, this is still higher than the returns on offer from cash or many bond investments. It is important to note that the return is not guaranteed, although in order for the final entitlement not to be met in full, AIF’s gross assets would have to fall by 15.9% each year until February 2022. For an investor who bought the ZDPs at issue in 2011 and holds them until the new redemption date, the annual return over the whole period would equate to 5.17%.
AIF uses the ZDPs as gearing for the portfolio, and since the first ZDP issue in December 2011 has sought to maintain the ratio of ordinary shares to ZDPs at the same level (1:1.342), issuing and repurchasing ordinary shares and ZDPs in the same proportions to manage a discount or a premium. This practice will continue following the rollover of the ZDPs, and AIF has also proposed the issue of new ordinary and ZDP shares (allowing non-holders of the 2017 ZDPs to participate in the 2022 ZDPs).
Holders of the 2017 ZDPs who do not elect for the rollover will receive the final capital entitlement as cash. Investors may elect to roll over a portion of their holding and receive the rest in cash.
The proposals require the approval of ordinary and ZDP shareholders and the adoption of new articles, and will be put to an EGM and separate class meetings on 20 December 2016. Proxy votes must be received by 16 December. The rollover is contingent on a minimum issue size of 3.62m amended ZDPs. Full details are contained in the EGM circular and prospectus here.
AIF has also announced a fourth interim dividend of 4.0 pence per ordinary share for the year ending 31 December 2016, which represents an increase of 14.3% compared to the corresponding dividend for the year ended 31 December 2015. Total distributions for 2016 will be 15.50 pence compared to 13.75 pence in 2015, an increase of 12.7%.
Read our last note on Acorn Income Fund here.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.