Select Committee on Treasury Minutes of Evidence


Annex A

FACTS AND FIGURES

FIGURES FROM CAZENOVE—4 JULY 2002

Split Sector Statistics

  With the sharp fall in markets, we thought that it would be worthwhile looking at the overall health of the split capital sector.

  First, looking at the entire Fundamental Data/Cazenove universe of 136 funds, the total assets are £11.4 billion. Taking off debt of £4.4 billion, leaves net assets of £7 billion, to which the market cap of the whole sector trades at a 2.8 per cent discount. Overall bank debt is well covered (2.21 times) by total assets net of other fund investments of £1.6 billion (the sector now owns 23 per cent of its own market cap).

  
Amount
All Splits
136
Total Assets (£'000)
11,379,985.4
Assets in other funds (£'000)
1,630,966.5
Total assets net of funds (£'000)
9,749,018.8
Bank debt (£'000)
4,420,388.1
Cover
2.21
Market Cap of sector (£'000)
6,767,757.1
Net assets of sector (£'000)
6,959,597.3
Overall discount
2.76 per cent
Source: Fundamental Data/Cazenove.


  However, while there is not an overall sector problem, taking subgroups of the sector using Total Asset/Debt ratios, shows the severe pressure certain funds are under. And it also reveals the problems facing banks and shareholders. As the table below shows, there are 56 Splits with TA/Debt ratios of less than two. This accounts for 41 per cent of the sector by number, 38 per cent by total assets, but only 22 per cent of the sector by market cap. However, these 56 funds account for almost 70 per cent of total sector cross shareholdings, showing the concentrated nature of the problem. It can be seen that by subtracting cross held assets from total assets, on the worst case assumption that they are valueless, liquid assets are only £3.2 billion. This covers bank debt by only 12 per cent. Moreover this takes no account of break charges on the loans. These trusts as a group surprisingly trade nearer to their overall asset value (with the splits valued at mid market values) than the whole sector.

  
Amount
Number of Splits with Total Assets/Debt<2
56
Total Assets (£'000)
4,306,999.4
Assets in other funds (£'000)
1,111,405.7
Total assets net of funds (£'000)
3,195,593.7
Bank debt (£'000)
2,851,045.5
Cover
1.12
Market Cap of sector (£'000)
1,449,751.7
Net assets of sector (£'000)
1,455,953.9
Overall discount
0.43 per cent
Source: Fundamental Data/Cazenove.


  The situation becomes more acute for those Splits with Total Assets/Debt ratios of less than 1.5 times, which shows that for these 24 funds, the banks, in aggregate are 85 per cent covered, if one assumes that the assets in other funds are not realisable (or are valueless). This clearly does not bode well for all classes of shareholder, yet despite this they trade at an aggregate 9.3 per cent premium to the published value of their net assets (again with the splits at mid price).

  
Amount
Number with Total Assets/Debt<1.5
24
Total Assets (£'000)
1,570,548.3
Assets in other funds (£'000)
471,169.8
Total assets net of funds (£'000)
1,099,378.5
Bank debt (£'000)
1,296,965.8
Cover
0.85
Market Cap of sector (£'000)
299,022.1
Net assets of sector (£'000)
273,582.6
Overall discount
+9.30 per cent
Source: Fundamental Data/Cazenove.


  There are 12 trusts where Total Assets/Debt ratios are less than 1.25 and it can be seen that real bank cover is even lower at 67 per cent. These funds, puzzlingly, trade at 65 per cent premium to their net assets, when they effectively, as a group, look to be in severe difficulty.

  
Amount
Number with Total Assets/Debt<1.25
12
Total Assets (£'000)
749,888.9
Assets in other funds (£'000)
285,879.6
Total assets net of funds (£'000)
464,009.3
Bank debt (£'000)
696,738.6
Cover
0.67
Market Cap of sector (£'000)
87,844.30
Net assets of sector (£'000)
53,150.3
Overall discount
65.28 per cent
Source: Fundamental Data/Cazenove.


  Without wanting to end on a negative note, the good news is that there are 45 funds (33 per cent by number) with total assets of £3.8 billion (33 per cent of total sector assets), and a market cap of £3.3 billion (50 per cent of the sector) that have total assets to debt ratios over four, or no debt at all. This group only has a tiny exposure to other funds and will clearly not be forced sellers (of anything) to repay the banks. Interestingly, this group offers the best value on a 3.3 per cent overall discount.

  
Amount
Number with Total Assets/Debt >4 or No debt
45
Total Assets (£'000)
3,849,111.0
Assets in other funds (£'000)
101,460.0
Total assets net of funds (£'000)
3,747,651.0
Bank debt (£'000)
345,882.4
Cover
10.84
Market Cap of sector (£'000)
3,386,125.1
Net assets of sector (£'000)
3,503,228.6
Overall discount
3.34 per cent
Source: Fundamental Data/Cazenove.




Conclusion

  There will be a severe overhang of split capital paper as funds look to repay bank debt and zeros that come up for redemption over the next year or so. Much of this split paper, we suspect, will be in funds in a similar predicament (ie mainly the bank debt geared barbell new issues over the last two to three years), but some will be in the better quality issues, which may create some interesting opportunities in the latter.

  Our top down analysis suggests that the lending banks to a sizeable number of trusts are underwater assuming that the cross holdings are worthless, but despite this the equity in these funds still has a relatively high value with reference to its "published" assets (clearly there probably ought to be some kind of option value in the equity, though we would challenge anyone to value it given the nature of the underlying, and constantly changing capital structures). It is difficult to square these valuations with the funds in the strongest financial position which trade on an overall discount of 3.3 per cent.

  Inevitably there will be a prolonged death ("controlled realisation") for many funds. However, it is important not to lose sight of the fact that the majority of funds by market cap do not have difficulties, and still offer the prospect of respectable returns. It is these funds that we hope mainly to highlight in our research, but there is occasional value to be found in some of the paper in the bombed out trusts, despite the bleak top down view.

AITC DATA

Number of trusts which have made changes
66
Event
Conventional
HGO
Split Capital Trust
Total
Allocation of Expenses—under review
  
1
2
3
Allocation of Expenses—changed
  
1
13
14
Changed Dividend Policy to Quarterly
 
  
2
2
Directors Fee—Changed
1
2
8
11
Dividend Increase
  
  
1
1
Dividend Reduced
  
4
19
23
Dividend Review
  
  
1
1
Dividend Suspended
3
5
24
32
Management Fee—Changed  
2
9
11
Management Fee—Review     
1
1
Management Fee—Waived
1
1
5
7
Shares Suspended
  
1
1
2
Controlled Realisation
  
  
1
1
Issued New Shares
  
  
8
8
TOTAL
5
17
95
117


NEW ISSUES

New Issues Split Capital Issues
Total
1990-97
41
1998
11
1999
28
2000
32
2001
35
2002-date
7
TOTAL
154


NEW ISSUES BREAKDOWN

Year
Total launch assets
(£ million)
Bank loans
Zero value at launch
(£ million)
Ordinaries value at launch
(£ million)
Income value at launch
(£ million)
Capital value at launch
(£ million)
CULS
1999
3,687
1,031
841
1,285
322
176
32
2000
5,839
2,480
360
1,914
637
187
262
2001
5,252
1,654
888
1,673
775
103
160
2002
903
187
213
237
189
57
20
1998-date
15,681
5,351
2,302
5,109
1,922
523
474


DEBT CHANGES

Event
Dates
£ million
Debt repayment
31 December 1997-2000
0
Debt repayment
31 December 2000 to date
1,279
New Bank loans
31 December 1997-2000
3,762
New Bank loans
31 December 2000 to date
1,803





 
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