Asset rejig may solve trust funds' discount problem

Cameron McKenna is advising a trust fund on a pioneering restructuring that could show the way for all the other funds in the country plagued by the problem of trading at a discount to net asset value.

First Ireland Investment Company shares are worth around £60m on the London and Irish stock exchanges, 10 per cent less than the underlying value of the assets in which the company has invested. This leaves it vulnerable to takeovers by rival funds keen to liquidate the assets.

The problem is common to many of the UK's 300 investment trusts, which together have more than £50bn under management. In the past three years the average discount across the sector has nearly trebled from 4.1 per cent to 12 per cent and analysts believe the discount could grow further to 20 per cent.

There are too many trust shares on the market and not enough people who want to buy them. And investment trusts are not normally allowed to buy back shares and so reduce the supply.

First Ireland, advised by Merrill Lynch and a Camerons team led by corporate partner Peter Smith, is proposing to replace shareholders' existing shares with a 60:40 combination of convertible loan stock and ordinary shares. The loan stock can then be bought back at a price agreed with the stockholder.

The move now awaits shareholders approval at an extraordinary general meeting on 13 August and approval from the companies court in September. Camerons assistant Jonathan Martin said the deal would be closely watched by other trusts and their lawyers who faced the discount problem.

A similar restructuring attempt several years ago by the First Spanish Investment Trust failed because buy-backs were available to all stockholders by tender offer. Martin said with the First Ireland restructuring, buy-backs would be at prices agreed with individual stockholders at times determined by the company.

A restructuring by Kepit (Kleinwort European Privatisation Investment Trust) last year was pre-empted by a hostile bid from another trust fund, Treg (TR European Growth Trust).

Adrian Harris, a unit trust partner at Richards Butler, has been advising US players interested in carrying out takeovers in the UK. He has issued a press release urging investment trust boards to “formulate bold and well-considered responses” to the discount problem before more aggressive US players made bids. He said: “Trusts could change their fund manager, put poison pills in place to deter predators, take advantage of gearing, reconstruct either by partial or complete unitisation or re-organise their share capital.”