Circular Announcement
July 28 2009 - 2:01AM
UK Regulatory
TIDMTLI
Alternative Asset Opportunities PCC Limited
28 July 2009
Proposed Conversion to a UK Investment Trust, Proposed Change to the
Life of the Company, Proposed Adoption of New Memorandum of
Incorporation and New Articles of Incorporation
Further to the announcement on 17 June 2009, the Company has
published a Circular to Shareholders in connection with certain
proposals for the Company:
- to amend its Articles in order to move from having a fixed
life in respect of the Company's Cell, US Traded Life Interests Fund
(terminating on 31 March 2012) to offering Shareholders annual
continuation votes from the Company's 2012 AGM onwards, and in order
to remove reference to the intention to effect capital distributions
on 31 March 2010 and 31 March 2011 (the "Life of the Company
Proposal");
- to convert to a UK investment trust (the "Investment Trust
Proposal"); and
- to adopt a New Memorandum of Incorporation and New
Articles of Incorporation (the "New Articles Proposal"),
to be proposed at an Extraordinary General Meeting of the Company to
be held in Guernsey on 28 August 2009.
The Company was launched in April 2004, and raised GBP40 million before
expenses by means of a placing and offer for subscription. The
Company has created one Cell known as the US Traded Life Interests
Fund and that Fund's investment objective is to provide a capital
return by investing in a diversified portfolio of US traded life
interests.
During the period from the launch of the Company to July 2006, a
diverse portfolio of US traded life interests were acquired by the
Fund, achieving full investment in 160 policies secured on 134
individual lives and one joint-life policy (of which approximately
two thirds were male and one third were female). At the time
acquired, the average remaining life expectancy of the lives assured
was approximately 7.6 years and, in accordance with the investment
strategy of the Fund, none of these lives were less than 78 or
greater than 92 years old at the time of acquisition.
Over the past five years, there have been 19 policy maturities
(secured on 15 individual lives) generating approximately $27.0
million of cash and realising an aggregate profit (net of acquisition
costs and premiums paid) on these maturities of approximately $15
million. The internal rate of return on the policies that have
matured to date is approximately 47 per cent.
As at 30 June 2009 (the date of the most recent valuation), the
portfolio consisted of 140 policies secured on 119 individual lives
(of which 76 were male and 43 were female). The face value of these
policies was approximately $229 million, compared to a current
valuation of approximately $95 million.
Background to and Reasons for the Proposals
Conversion to UK Investment Trust
The Company's interim management statement, announced on 19 May 2009,
highlighted the fact that the Board, together with the Company's
professional advisers and its manager, RCM (UK) have been informed by
the Company's US legal counsel, Locke Lord Bissell & Liddell ("LLB")
of a recent US Internal Revenue Service Revenue Ruling 2009-14 (the
"IRS Ruling") which could potentially have an adverse impact on the
Company.
The Company has been advised by LLB that the effect of the IRS Ruling
is that death benefits arising from US term life insurance policies
purchased by non-US persons in the secondary market will be treated
by the US Internal Revenue Service as US source income and may be
"fixed or determinable, annual or periodic" income in nature. In the
event that the predominantly universal life insurance policies held
in the Fund's portfolio are deemed to be treated similarly, a US
withholding tax of 30 per cent. may be levied by the US Internal
Revenue Service on any profit arising on any death benefits on future
portfolio maturities at the point when the proceeds are remitted to
the Company's payment agent in the US.
In light of the IRS Ruling, the Board has concluded that it will
benefit the Company if it becomes UK tax resident and is approved by
HMRC as a UK investment trust. The Board has discussed this
possibility with legal and tax counsel in the UK, a jurisdiction that
has a double tax treaty with the United States. The Board believes
that the Investment Trust Proposal would enable the Company to avail
itself of treaty protection and thus mitigate the impact of US
withholding taxes on future payments of death benefits as a result of
the IRS Ruling.
Once the Company becomes resident in the UK for tax purposes, it will
be able to apply for treaty relief under the UK-US double tax treaty,
provided that its Shares continue to be regularly traded on the
London Stock Exchange. Treaty relief will enable the maturity
proceeds of the policies to be remitted to the Company without the
imposition of any US withholding tax. In December 2008 the UK
introduced a new regime for non-resident funds which might have
adverse consequences for UK-based investors in the Company's Shares.
The adoption of UK residence as an investment trust would thus have
the added advantage that the Company would not be classified as an
'offshore fund', as defined under this new regime.
It is not clear, and could be subject to legal challenge, whether the
IRS Ruling would, in practice, be applied retrospectively to death
benefits previously remitted to the Company. In the event that any
such retrospective tax charge were sought to be levied on the
Company's historic maturities, its payment agent in the US, Wells
Fargo Bank, N.A. ("WF") would be liable for the tax to the IRS, but
under its agreements with WF, the Company would be liable to
reimburse WF for any withholding tax assessed by the IRS against WF
for these prior maturities. It is estimated that the potential
liability could be approximately $3.3 million or 5p per share
(excluding any penalties and interest which could be applied by the
IRS).
Life of the Company
Independently of the above developments, your Board has been
considering the planned life of the Company. The Articles contain
provisions which oblige the Directors to put forward proposals to
liquidate the Fund not later than 31 March 2012. The Directors may
also consider, at their sole discretion and subject to prevailing
market conditions, capital redemption opportunities for Shareholders
prior to this date. The prospectus of the Company published at the
time of its launch (the "Prospectus"), referred to the expectation
that the Board would exercise this discretion by redeeming 25 per
cent. of the aggregate number of Shares in issue, pro rata to each
Shareholder's holding of Shares, on both 31 March 2010 and 31 March
2011.
The Board believes that the Investment Manager has constructed a
diversified portfolio of TLIs. However, the pace of policy maturities
has fallen short of expectations. The slow pace of maturities could
be attributed to numerous factors. In particular, as referred to in
previous annual and interim reports, the Board has noted, amongst
other factors, the likelihood that, compared to a random sample of
the population, the Company's portfolio may exhibit "select"
characteristics and also the inherent uncertainty in extrapolating
life expectancy estimates to a relatively small portfolio of TLIs.
Since the launch of the Company, the Board has always expected that
the Fund would have a residual portfolio of policies that had not
matured by March 2012 and that it would be necessary to sell this
residual portfolio on or before that date. Projections, such as those
shown in Table 1 below, have always allowed for a range of
assumptions in this respect, covering both the percentage of the
lives assured which might survive and the range of possible prices
that might be obtained for the residual portfolio. The central
assumption of this table is that life expectancies match those
assumed in the Company's valuation model and that prices for the
residual portfolio also correspond to those used for valuation. Table
1 below illustrates the range of illustrative predicted yields,
depending on the assumptions used, over the remaining life of the
Fund to 31 March 2012, with reference to the valuation as at 30 June
2009.
Table 1 - Illustrative predicted yields to 31 March 2012
Impact
80yr
old on Valuation IRRbasedonexitpricerange5:
male of -10c -5c 0c +5c +10c
Variation in non Proportion surviving
mortality1 smoker2 surviving3 policies4
125% -1.09 60% 41.3c +10.2% +13.9% +17.4% +20.7% +23.8%
110% -0.48 63% 41.6c +6.4% +10.4% +14.2% +17.7% +21.1%
100% 0.00 66% 41.8c +3.8% +8.1% +12.0% +15.8% +19.3%
80% +1.20 71% 42.3c -1.7% +3.2% +7.6% +11.8% +15.7%
50% +4.12 81% 43.0c -11.9% -5.5% +0.2% +5.4% +10.2%
30% +8.00 88% 43.5c -21.2% -13.0% -5.9% +0.4% +6.0%
Ignore
Medical
Underwriting 80% 43.8c -10.2% -4.0% +1.5% +6.6% +11.2%
& Use Full
VBT Table6
Source: Surrenda-link Limited
Notes
1. The central case (100 per cent.) assumes that claims experience
matches the valuation basis in force at 30 June 2009. The other
scenarios assume mortality experience is higher (e.g. 110 per cent.)
or lower (e.g. 80 per cent.).
2. This shows the effect of the selected mortality experiences on the
life expectation (in years) for an otherwise normal 80 year old male
non-smoker.
3. This shows the percentage of the lives assured which are assumed
to survive to 31 March 2012.
4. This shows the assumed average realisation values (per $1 of TLI
policy face value) for the surviving lives at 31 March 2012. The
third row in this column (41.8c) corresponds to the valuation
assumptions used in arriving at the 30 June 2009 NAV.
5. This shows how returns might be expected to vary should
realisation values differ from those shown in column 4 by the margins
shown.
6. This shows the returns using the full VBT Select Table without any
adjustments for the life expectancy assessments.
If policy maturities continue to fall below expectations, the
consequence is that the size of the residual portfolio will be
substantially larger than expected. For example, if actual mortality
experience were 80 per cent. of the valuation basis then the average
life expectancy would increase by 1.2 years (corresponding to a 15.8
per cent. increase in life expectancy), and the residual portfolio
would increase from approximately 66 per cent. of the current
portfolio to approximately 71 per cent. Such an increase in life
expectancy would not only reduce returns, but it would result in
increased reliance on the actual price which could be obtained for
the residual portfolio.
Table 2 below shows the potential size of the residual portfolio
(based on the valuation of the current portfolio as at 30 June 2009)
at the dates shown, both on the basis of actual maturities occurring
in line with expectations set out in the valuation model ("100%") and
on the basis of actual maturities being half those expected in the
valuation model ("50%").
Table 2 - Illustrative size and valuation of the residual portfolio
Proportion of Proportion of policies
Number of lives policies surviving surviving by number of
alive by valuation policies
Date 100% 50% 100% 50% 100% 50%
31/03/2012 93 113 66.6% 83.8% 66.2% 80.8%
31/03/2013 78 103 56.2% 77.2% 56.0% 73.9%
31/03/2014 65 93 46.5% 69.9% 46.8% 66.8%
31/03/2015 54 84 37.8% 62.5% 38.6% 60.2%
31/03/2016 44 75 30.1% 54.6% 31.5% 53.7%
Source: Surrenda-link Limited
Trading conditions in the secondary market for TLIs have
deteriorated, with transactions by value significantly reduced
compared to prior years. While these conditions partly reflect the
illiquid conditions currently evident in many financial markets,
which may not still apply in 2011 and 2012, the Board is concerned at
the possibility of having to make a substantial disposal of policies
simply to meet the date originally set at the launch of the Company,
especially as the rate of return on the portfolio may be materially
affected by the sale price achieved.
The existence of this residual portfolio and the requirement for its
disposal by a specified date would be a matter of public record. This
factor could prejudice the Company's prospects of achieving sales
prices at or close to reasonable values for the benefit of
Shareholders. Table 3 below illustrates how the NAV as at 30 June
2009 would be affected if a premium or discount were applied to the
valuation of the residual portfolio in existence as at 31 March 2012.
Table 3 - Illustrative NAV as at 30 June 2009
Premium (+)/discount (-) applied to the valuation of the
residual portfolio
+10% 0% -10% -20% -30% -40%
NAV as at 30
June 2009 100.2 93.4p 86.6p 79.8p 73.0p 66.3p
Source: Surrenda-Link Limited
It is a requirement of the Company's borrowing facilities that the
proceeds of TLIs which mature are (after the deduction of expenses)
utilised to reduce borrowings.
The Board believes that there is no longer any realistic possibility
of the Company being in a position to meet this requirement and also
to offer Shareholders the opportunity to redeem part of their
holdings in 2010 or 2011 without materially reducing the value of the
Fund's portfolio. In addition, the Board believes that it is no
longer in Shareholders' best interests to continue with the planned
liquidation of the Fund on a fixed date in March 2012.
In light of the above, in the Board's view it is important that the
Company address this issue now, rather than at a later date.
Companies (Guernsey) Law, 2008 (as amended)
On 1 July 2008, the Companies (Guernsey) Law, 2008 (as amended) (the
"Companies Law") came into force in Guernsey. Guernsey companies are
required by the Companies Law to amend their articles to comply with
the Companies Law by 1 July 2011.
The Board is proposing that the Company adopt a New Memorandum of
Incorporation and New Articles of Incorporation to reflect changes
introduced by the Companies Law. The Board believes that this will
enable the Company to comply with the new provisions introduced by
the Companies Law.
The Proposals
Conversion to UK Investment Trust
To effect the Investment Trust Proposal, the Board will pass
appropriate board resolutions approving the conversion of the Company
to a UK investment trust and the move to UK tax residency. As a
result, the Directors also propose to change the composition of the
Board. As a minimum, it is proposed that Christopher Sherwell resign
as a director of the Company once the proposals become effective and
that he is replaced by a new UK-resident Director to be appointed
when the Company's UK tax residency becomes effective.
The Company will also need to amend its Articles of Association to
effect the Investment Trust Proposal. The Board therefore proposes
that the New Memorandum of Incorporation and the New Articles of
Incorporation include amendments appropriate to reflect the Company's
proposed status as a UK investment trust, and its UK tax residency,
should the Investment Trust Proposal be approved by Shareholders.
Once the Company has become resident in the UK for tax purposes, it
is intended that the Company will be managed in such a way as to meet
the conditions for investment trust status in Section 842 of the
Income and Corporation Taxes Act 1988 in respect of the accounting
period which will commence when it becomes resident in the UK for tax
purposes and subsequent periods.
Assuming that the Company obtains investment trust status, it will be
exempt from United Kingdom corporation tax on chargeable gains, as
computed for tax purposes, in respect of each accounting period for
which such approval is granted. It is expected that any maturity or
disposal proceeds from the policies should therefore be exempt from
corporation tax.
The Company will be liable to UK corporation tax on any income in the
normal way. However, the Board is satisfied that the Company should
have sufficient administrative and other expenses such that it should
not have any meaningful exposure to UK corporation tax in the future.
The Company's UK tax accounting period will commence on the date the
Company becomes UK resident. The Board proposes to change the
Company's accounting reference date to ensure that the commencement
of the Company's UK tax accounting period is aligned with a financial
accounting period. It is therefore proposed that the Company's
accounting reference date be changed to 31 August in the current
year, reverting to 30 June thereafter. As a result, the current
financial accounting period will be the 14 months ending 31 August
2009, to be followed by a 10 month financial accounting period ending
30 June 2010.
Life of the Company
In order to effect the Life of the Company Proposal, it is proposed
that the Articles be amended so that they no longer include an
obligation for the Directors to bring forward liquidation proceedings
in respect of the Fund in March 2012, nor any reference to the
intention to effect capital distributions on 31 March 2010 and 31
March 2011, as stated in the Prospectus. It is also proposed that the
Articles be amended in order to offer Shareholders the opportunity to
vote on the continuation of the Fund at the annual general meeting in
2012 and annually thereafter.
The Board remains firmly committed to returning capital to
Shareholders in the Fund at the earliest practical opportunity having
regard to the desire to maintain a commercially viable portfolio. To
that end the Board has resolved, in accordance with the investment
policy and strategy of the Fund, that once future net cash flows of
the Company have been used to repay the Company's borrowings they
will subsequently, after allowance for the estimated future premium
payments and operational expenses required for a minimum of one year,
be used to provide capital distributions for Shareholders (to be
effected at the Directors' discretion) from time to time. In
addition, the Board may pursue opportunistic secondary market policy
sales where deemed appropriate, with a view to accelerating the
return of capital to Shareholders.
Management and other Costs and Expenses
It is proposed that, with effect from 1 September 2009, the current
annual fee of 0.5 per cent. of the Net Asset Value, payable to each
of the Investment Manager and the Manager, be reduced to 0.475 per
cent. and 0.425 per cent. respectively of the Net Asset Value from
time to time and, with effect from 1 April 2012, be further reduced
in respect of both the Investment Manager and the Manager to 0.4 per
cent. of the Net Asset Value from time to time. The existing
contracts with the Investment Manager and the Manager will not
otherwise be affected by the Proposals.
The costs and expenses incurred in relation to the Proposals will be
borne by the Company and are estimated to amount to approximately
GBP200,000.
Current Trading
As at 30 June 2009, the Net Asset Value per Share in the Fund was
93.4p. Since 31 March 2009, there have been two maturities secured on
two lives. The benefit of these maturities amounts to approximately
5.9 pence per share, and has been included in the Company's NAV as at
30 June 2009. In addition, on 12 May 2009, the Company completed the
disposal of a policy to a third party for $552,994, a discount of 11
per cent. to the valuation as at 29 May 2009.
As at 30 June 2009, $32 million of the $38 million borrowing facility
provided by Allied Irish Banks had been drawn down (which does not
take account of the $6.5 million face value due to be received in
relation to the two recent maturities).
Table 4 below sets out the illustrative annual cost of premiums to 31
March 2016, on the basis of: actual maturities occurring in line with
expectations set out in the valuation model ("100%"); actual
maturities being half those expected in the valuation model ("50%");
and no further maturities occurring ("0%"):
Table 4 - Illustrative annual cost of premiums
12 months to 31 March
$'m 2010 2011 2012 2013 2014 2015 2016
Maturity assumption
100% 6.22 8.06 7.47 6.87 6.18 5.59 4.99
50% 6.41 9.00 9.18 9.20 8.95 8.71 8.54
0% 6.62 10.11 11.47 12.77 13.72 14.52 16.12
Source: Surrenda-Link Limited
Expected Timetable
Latest time and date for receipt of Proxy 11.30 a.m. on 26 August
Forms for the Extraordinary General Meeting 2009
Extraordinary General Meeting of the Company 11.30 a.m. on 28 August
2009
Enquiries:
Simon White Tel: +44 (0) 20 7859
RCM (UK) Limited 9000
Gary Gould Tel: +44 (0) 20 7678
RBS Hoare Govett Limited 8000
Sharon Wrench Tel: +44 (0) 1481 752
Kleinwort Benson (Channel Islands) Fund 591
Services Limited
Terms used in this announcement shall, unless the context otherwise
requires, bear the meanings given to them in the Circular dated 27
July 2009.
A copy of the Circular will shortly be available for public
inspection at the Document Viewing Facility, the Financial Services
Authority, 25 North Colonnade, Canary Wharf, London E14 5HS.
=--END OF MESSAGE---
This announcement was originally distributed by Hugin. The issuer is
solely responsible for the content of this announcement.
Alternative Asset Opps Pcc (LSE:TLI)
Historical Stock Chart
From Jun 2024 to Jul 2024
Alternative Asset Opps Pcc (LSE:TLI)
Historical Stock Chart
From Jul 2023 to Jul 2024
