Connaught Income Fund update
By Bridging Loan Directory -
The Directors of Connaught Asset Management (Guernsey) Limited, Investment Manager of the Issuer, have announced that an Extraordinary General Meeting will be held on 22 August 2012.
Recommended Proposals Relating to the Termination and Winding-up of the Fund
It is proposed that the Fund be terminated and wound up in an orderly manner and that the listing of Units in the Fund on the Official List of The Channel Islands Stock Exchange, LBG be cancelled.
Reasons for the Proposals
In March 2012 the specialist partner to Connaught Income Fund, Series 1 (“Series 1”) advised CAML, as the asset manager for Series 1, that it would not be able to meet the income distribution liability to Series 1’s investors, due for the period ended 31 March 2012. This was due to the fact that its parent company, Tiuta PLC (which is also the parent company and guarantor to the Specialist Partner of the Fund), was experiencing cash flow problems because of the financial model used in its lending operation. This caused a particular problem for Series 1 because it has significantly more assets under management than the Fund.
The Investment Manager was concerned that the news regarding Series 1 would have an impact on confidence in the Fund and it was clear from the rising number of requests for Unitholder redemptions from the Fund that this was the case. Consequently the Investment Manager took the decision to suspend the Fund as it foresaw that the value of potential redemption requests would soon exceed the amount of liquidity available to meet those requests. In view of the continuing difficulties experienced by the Specialist Partner and Tiuta PLC, and the likelihood that the commitments to the Fund and Unitholders would not be met at the end of the current quarter or for the foreseeable future, the Investment Manager is now of the view that it should not seek to have the suspension of the Fund lifted.
The Investment Manager has received a report from the accountancy firm BDO LLP, who were instructed by CAML to review both Series 1 and the Fund and the finances of the Specialist Partner and Tiuta PLC. Upon the findings of that report, and given the nature of the Fund’s assets, the Investment Manager has recommended that an orderly wind-down of the Fund is in the best interest of Unitholders.
An orderly wind down will allow for the current loans to redeem at the end of their contractual term and for the redemption monies to be returned to the Fund for repayment to Unitholders. Where a loan is in default the Fund can use its powers under the relevant legal charge to take the appropriate action, including seeking recovery of the debt using a legal process.
Tiuta PLC is continuing to trade using a number of new funding lines and the Directors intend to use the guarantee and other security granted by Tiuta PLC to CAM Lux to seek the repayment of any monies owing to the Fund from any trading profits Tiuta PLC may achieve from this trading activity in the future should full recovery not be achieved during the winding down process.
An alternative to an orderly wind down was to seek immediate repayment of all debts due back to the Fund using the guarantee and other security granted by Tiuta PLC. The Directors are concerned that this may have caused a ‘fire-sale’ of the Specialist Partner’s loan debts. A firesale of the loan debts would have ultimately increased the recovery costs and losses to Unitholders arising from the sale of assets at a discounted price.
In order to prevent a fire-sale of the loan book of the Specialist Partner, on 12 June 2012 CAML acquired the shares of the Specialist Partner and, therefore, is now the beneficial owner of the loan book and any loan interest, fees, etc. that are due back to the Specialist Partner. CAML plans to use its ownership of the Specialist Partner to the Fund to place the Specialist Partner into a voluntary administration to facilitate this process and to protect the interests of Unitholders.
In exercising its rights of control over the Specialist Partner and its underlying assets, CAML intends to act at all times in the interests of Unitholders. To ensure this is the case, and to guard against any possible conflict of interests, it is intended to place the Specialist Partner into a voluntary administration whereby an independent Expert Administrator will take control of the Specialist Partner’s loan book and manage the loan book down with a view to obtaining the best possible return for Unitholders. The Expert Administrator will be under an obligation to carry out his functions in the interests of the creditors of the Specialist Partner, which includes the Fund (and therefore Unitholders) as it is the sole secured creditor of the Specialist Partner.
Given this preferred approach to the winding-up of the Fund, it is anticipated that this process could take approximately 6 to 12 months. However, as loans are repaid to the Specialist Partner over this period, the Trustee will consider whether it is appropriate to make interim distributions to Unitholders in proportion to their respective interests in the Fund and in accordance with the terms of the Trust Instrument.
In some circumstances where the underlying loans made by the Specialist Partner to borrowers are for development purposes, and the Expert Administrator of the Specialist Partner considers it in the best interests of creditors (which includes the Fund, and therefore Unitholders) to do so, the Expert Administrator may consider it appropriate to make further loan draw-downs available to the borrower so as to allow the development to be completed. Further advances will be considered only when the completion of a development project increases the likelihood of the outstanding loans being repaid to the Specialist Partner.
Whilst the Fund is suspended and during the period that it is wound up no Annualised Interest Rate Payments will be paid to Unitholders.
CAML will be presenting to the EGM detailed estimates of the general costs and expenses of the winding-down process including any extraordinary fees it expects to see charged to the Fund, or which may be deducted from the loan redemption monies received before payment to the Fund account. However, those fees are likely to be payable through several mechanisms.
Firstly, the Specialist Partner is now owned by CAML, which is currently negotiating with an appropriate firm of licensed insolvency practitioners to act as Expert Administrator to place the Specialist Partner into administration. The role of the Expert Administrator will be to realise the assets of the Specialist Partner, which solely comprise the secured loans funded by the Fund, in favour of the creditors of the Specialist Partner (which includes the Fund, and therefore Unitholders). Unitholders should note that the loan balances forming the assets of the Specialist Partner include accrued interest, fees and fines, over and above the original principal balance due to the Fund, and, in an administration process the whole of the loan balance secured under the relevant legal charge, including the accrued interest and fees, will be repaid to the Fund after deduction of the costs of the administration. It is impossible at this stage to estimate what the additional income to the Fund from these balances will amount to as it is constantly accruing, but this additional income may go some way to defraying the cost of the administration and loan book managed wind-down.
The Expert Administrator will provide a statement, which will be sent to Unitholders within 30 days of the Expert Administrator’s appointment, and this statement will provide a detailed estimate of the sums that will be recovered from the loan book, the additional profits on the loans due back to Unitholders, the cost of administration and an estimated net position of the sum available for repayment to Unitholders by the end of the wind-down process. At this point in time, the Directors would estimate that the general cost of the winding-down process and recovery of the loan book will be in the region of 3% of the Net Asset Value of the Fund, including the costs of the Expert Administrator and legal fees for recovery of those loan debts where a legal process for recovery of the underlying loan has to be used, but excluding the Fund Administrator’s and the Trustee’s fees. It is estimated that the Fund Administrator’s fees for the administration will be approximately £120,000. The Trustee shall continue to receive its fees pursuant to the Trust Instrument and the Scheme Particulars for the Fund and the Trustee will also charge for its time spent in the administration at its normal hourly rates, but which in aggregate are not expected to exceed £60,000.
Secondly, under the Expenses Agreement originally entered into by all parties to the Fund, all fund expenses including the investment management fee payable to the Investment Manager and the fees of the Fund Administrator and the Trustee are payable by the Specialist Partner. However, as the Specialist Partner is no longer able to meet these fees and expenses, a “Guarantor Trigger Event” as specified under the Expenses Agreement has occurred, meaning that those fees and expenses are now claimable from the Trustee out of the Fund. In order to mitigate the impact of the Guarantor Trigger Event on the Fund and Unitholders, CAML has undertaken to pay the fees and expenses of the Investment Manager (including the Directors’ fees) during the winding-up process. However, the fees of the Fund Administrator, the Trustee and other service providers’ fees and associated expenses (such as legal fees) will be payable out of the Fund in accordance with the terms of the original Expenses Agreement and the Trust Instrument.
Finally, the Trustee may also consider it prudent to retain further amounts for contingent
liabilities before making any final distribution to Unitholders.