Aberforth Geared Capital & Income Trust
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Introduction
Aberforth Geared Capital & Income Trust plc is a split capital investment trust which has two classes of share - Capital Shares and Income Shares - both of which are traded on the London Stock Exchange. It was launched, and received its listing on the London Stock Exchange, on 18 December 2001 with net issue proceeds amounting to £34.3m. The Trust has a planned winding up date of 31 December 2011.
Objective
The investment objective of Aberforth Geared Capital & Income Trust plc is to provide Income Shareholders with a high level of income payable half yearly with the potential for income growth and to provide Capital Shareholders with geared capital growth.
Policy
The assets of the Trust are invested in a diversified portfolio of between 60 and 100 individual investments selected by the Manager from the ordinary shares and convertible securities of companies within the Trust's investment universe. The investment universe comprises companies which are or which would be constituents of the Hoare Govett Smaller Companies Index (Excluding Investment Companies). The upper limit of this index was companies with a market capitalisation of £1,104m as at 1 January 2007 (the date of the last annual index rebalance). This market capitalisation limit will change due to movements in the stockmarket. In seeking investments the approach will be fundamental in nature involving regular contact with the management of prospective and existing investments in conjunction with rigorous financial analysis of these companies. The Trust's portfolio will be invested in a manner that is believed to have the potential to achieve capital growth and generate an above average and rising level of dividend income.
Risk Warning - Gearing
Investment Trusts may borrow money in order to make further investments. This is known as "gearing". The effect of gearing can enhance returns to shareholders in rising markets but will have the opposite effect on returns in falling markets. Aberforth Geared Capital & Income Trust plc is considered to be highly geared. Please see the section below headed "Capital Structure - Bank Facility" for details on the Trust's gearing.
Management Charge
Under the terms of the management arrangement, the Trust will pay Aberforth Partners LLP a Management Fee of 0.25% per calendar quarter of the lower of the Trust's Shareholders' funds and its market capitalisation, plus 5% of the Trust's total income (excluding any tax credit) per annum (plus irrecoverable VAT thereon).
Capital Structure - General
The Trust has a split level capital structure consisting of 24.5m Income Shares and 10.5m Capital Shares. It has long-term bank debt facilities available amounting to £34.3m, being equal to 100% of the net proceeds of the original issue of shares. In addition, there is an overdraft facility amounting to £4.0m, raising the total facilities to £38.3m. The purpose of the overdraft is to allow consistent and efficient use to be made of the £34.3m long-term bank debt. It is intended that these long-term facilities will be used close to their full extent throughout the life of the Trust. The effect of this structure is to increase the yield and to provide the potential for a growing level of dividend income for Income Shareholders, together with the potential for geared capital appreciation for Capital Shareholders.
Capital Structure - Income Shares
All net income earned by the Trust is attributable to the Income Shares and it intends to distribute substantially the whole of its net income each year in accordance with its objective to provide a high dividend yield. The Directors aim to increase dividends over the planned life of the Trust. Dividends will be paid half-yearly in August and February each year.
The Income Shares were issued with an initial capital entitlement upon a winding up of 50.00p per Income Share which increases daily, from the date of issue, on a straight line basis until 31 March 2011 at such a rate as will give a final entitlement of 100.00p. In the event that the Trust is not wound up on the planned winding up date of 31 December 2011, the capital entitlement of the Incomes Shares will continue at a value of 100.00p. The Income Shares will rank after repayment of the total bank debt and any other liabilities of the Trust but before any payment on the Capital Shares. In the event that the value of the investment portfolio falls significantly, it is possible that the Income Shares will have no underlying value at the planned winding up date.
Capital Structure - Capital Shares
The Capital Shares have a return that is entirely in the form of capital and they have no entitlement to income. Capital Shareholders will be entitled to all the Trust's remaining net assets at the planned winding up date after providing for payment in full of the final capital entitlement of 100.00p per Income Share. In the event that the value of the investment portfolio does not rise sufficiently, it is possible that the Capital Shares will have no underlying value at the planned winding up date of 31 December 2011.
Capital Structure - Bank Facility
The Trust seeks to enhance the returns to its Shareholders by utilising gearing in the form of bank borrowing. Accordingly, it has bank debt facilities with Bank of Scotland under which it is entitled to draw down an aggregate principal amount of up to £38.3m. Of these facilities, £30.0m is linked to LIBOR and has been matched with an interest rate swap transaction, which has the effect of fixing the total interest cost at 6.57% for the period to 30 September 2011. The swap transaction is not included in the Trust's investment portfolio; however, changes in its fair value are recognised on the Trust's Income Statement and Balance Sheet. The balance of the debt facilities, which amount to £8.3m, has a variable rate of interest linked to bank base rate and is utilised as required.
The long-term bank debt amounting to £34.3m is repayable on 31 December 2011, although it may be repayable earlier if an event of default occurs. The long-term debt facilities agreement contains, amongst others, a financial covenant (tested annually at 31 December) that the Trust's total assets are not less than 140% of the long-term bank debt drawn down. The balance of the Trust's debt facilities, the overdraft facility amounting to £4.0m, is repayable on demand and is reviewed annually.
Interest on the bank debt and other indebtedness is charged 70% to the capital reserves of the Trust and 30% to the revenue account of the Trust. Changes in the fair value of the swap transaction are allocated 100% to the Trust's capital reserve.
Capital Structure - Duration
The Directors are obliged by the Trust's Articles of Association to convene an Extraordinary General Meeting of the Trust between 1 October 2011 and 31 December 2011 (both dates inclusive) at which an Ordinary Resolution will be proposed to wind up the Trust voluntarily on the planned winding up date - being 31 December 2011. In the event that such resolution or any other resolution to wind up, reconstruct or reorganise the Trust is not passed at such a meeting or at any subsequent meeting, the Directors are obliged to convene an Extraordinary General Meeting for the same date (or the immediately preceding business day) in each succeeding year at which a resolution to wind up the Trust on the next anniversary of the planned winding up date will be proposed. Income Shareholders shall have no vote on such resolutions. A winding up will enable Capital Shareholders to realise the residual capital value of their investment after the payment of the creditors, liquidation costs and the capital and dividend entitlements of the Income Shareholders.
The Directors shall not be required to convene such an Extraordinary General Meeting if a resolution shall previously have been passed to reconstruct or reorganise the Trust. In the event that such a resolution for reconstruction is put to the Trust at any time in the period after 1 April 2011, Income Shareholders shall have no vote on such a resolution if the proposals contained in it would result in the Income Shareholders receiving not less than 100.00p in cash (in addition to any entitlement to any undistributed revenue reserve) for each Income Share held (whether or not an option may be given to elect to receive such entitlement otherwise than in cash).
Please note that the capital structure details shown above represent a summary only. Full details of the Trust's capital structure, including the rights attached to the Income Shares and Capital Shares, are set out in the Trust's Articles of Association.