M&G Investment Management Ltd Possible offer for UK Mortgages Limited "UKML" (0116U)

TIDMUKML

RNS Number : 0116U

M&G Investment Management Ltd

24 July 2020

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION.

THIS ANNOUNCEMENT IS NOT AN ANNOUNCEMENT OF A FIRM INTENTION TO MAKE AN OFFER UNDER RULE 2.7 OF THE CITY CODE ON TAKEOVERS AND MERGERS (THE "CODE") AND ACCORDINGLY THERE CAN BE NO CERTAINTY THAT AN OFFER WILL BE MADE.

FOR IMMEDIATE RELEASE

24 July 2020

M&G Investment Management Limited

Possible offer for UK Mortgages Limited ("UKML" or the "Company")

-- UKML's restored dividend policy is unsustainable, being significantly funded from capital resources rather than earnings

-- MAGIM reiterates UKML's Net Asset Value is not an accurate representation of the Company's current true value

   --     MAGIM continues to attempt constructive engagement with the board of UKML

M&G Investment Management Ltd ("MAGIM"), in its capacity as manager of M&G Speciality Finance Fund (GBP) SCSp, notes the announcement released by UKML on 22 July 2020.

UKML intends to restore the Company's dividend to its annual target level of 4.5p per share. However, UKML has not historically generated sufficient income to cover this dividend target. An annual dividend of 4.5p per share (GBP12.3m in aggregate) would only be 57% covered by UKML's total comprehensive gain of GBP7.0m for the financial year ended 30 June 2019 and 55% covered by UKML's total comprehensive gain of GBP3.4m for the six month period ended 31 December 2019 annualised to GBP6.8m.

MAGIM believes that dividends significantly funded from capital are not sustainable and MAGIM notes that the additional and uncovered interim dividend of 1.5p per share announced this week, shortly after the announcement of the Fourth Interim Dividend, avoids the requirement for a continuation vote.

UKML's announcement failed to address the uncertain outlook for the Company's future profits resulting from payment holidays, arrears and defaults in the current economic environment as well as significantly increased funding costs, as evidenced in the recent pricing of Oat Hill No. 2 securitisation, in which the senior tranche's cost of financing increased to SONIA + 128bps from 3m GBP Libor + 85bps as in Oat Hill No. 1 securitisation. MAGIM believes that these factors will further affect the dividend coverage and intrinsic value of the Company.

MAGIM further believes that UKML's Net Asset Value (NAV) is based on the historical purchase price of its assets which does not take into account the impact of widening credit spreads, the economic outlook and weakening performance of UKML's underlying assets including payment holidays and likely increasing arrears. These factors reduce the net present value of UKML's future cash flows and as a result the Company's intrinsic value (which the current approach to calculating NAV fails to capture).

MAGIM has continued to seek to engage in constructive discussion with UKML's Board following the Company's 22 July 2020 announcement. MAGIM encourages UKML's shareholders to ask the Company's Board to initiate discussions with MAGIM on the Proposal. MAGIM continues to believe the Proposal is highly attractive and in the best interests of all UKML shareholders irrespective of the recent strategic update announcement from UKML. As a result, the best way for shareholders to realise long term value now is through MAGIM's Proposal of 67p per share plus the announced Fourth Interim Dividend of 0.375p per share.

Reservations

As set out in its announcement on 20 July 2020, MAGIM continues to reserve the right to announce an offer at a price below 67p per UKML share in the event that:

   a)     the Board of UKML agrees and recommends an offer at the reduced price; 
   b)    a third party announces a firm intention to make an offer for UKML;

c) UKML announces, declares or pays a dividend or any other distribution or return of capital to its shareholders after 20 July 2020 (other than the Fourth Interim Dividend), in which case MAGIM reserves the right to reduce the offer price by an amount up to the amount of such dividend, distribution or return of capital; or

   d)    UKML announces a whitewash transaction pursuant to the Takeover Code.

There can be no certainty that that an offer will be made for UKML under the Takeover Code. A further announcement will be made as appropriate.

Capitalised terms used but not defined in this announcement have the meanings set out in MAGIM's announcement regarding the Proposal on 20 July 2020.

Sources and Bases

Unless otherwise stated, financial and other information concerning UKML has been extracted from published sources. The aggregate annual dividend target amount of GBP12.3m is calculated using 4.5p dividend per share multiplied by 273,065,390 UKML ordinary shares in issue, as publicly disclosed. UKML's 2019 total comprehensive gain of GBP7.0m is derived from its audited consolidated accounts for the year from 1 July 2018 to 30 June 2019. UKML's 2020 interim total comprehensive gain of GBP3.4m is derived from its interim management report for the period from 1 July 2019 to 31 December 2019 and annualised (by multiplying it by two) to GBP6.8m. The dividend cover ratio is calculated by dividing the total comprehensive gain by the aggregate annual dividend target amount. The stated cost of financing of Oat Hill No. 1 is taken from the announcement issued by UKML on 5 June 2017, and the stated cost of financing of Oat Hill No. 2 is taken from the securitisation pricing announcement on 10 July 2020. Both cost of financings are based on the assumed discount margin to first optional redemption date.

Enquiries:

FTI Consulting

Ed Berry +44 (0) 7703 330199

M&G Investment Management Limited

Alexandra Ranson, Director of Communications +44 (0) 7833 236533

Alexandra.ranson@mandg.co.uk

RBC Capital Markets, Financial Adviser to M&G Investment Management Limited, on behalf of M&G Specialty Finance Fund (GBP) SCSp

+44 (0) 207 653 4000

Eric Richard

Oliver Hearsey

Alexander Thomas

Paul Lim

Further Information

This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities whether pursuant to this announcement or otherwise.

The distribution of this announcement in jurisdictions outside the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about, and observe, such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.

Important notices relating to financial adviser

RBC Europe Limited (trading as "RBC Capital Markets"), which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom, is acting exclusively for M&G Investment Management Limited and for no one else in connection with the subject matter of this announcement and will not be responsible to anyone other than M&G Investment Management Limited for providing the protections afforded to its clients or for providing advice in connection with the subject matter of this announcement.

Publication on a website

A copy of this announcement will be made available, subject to certain restrictions relating to persons resident in restricted jurisdictions, at www.sfoffer.uk. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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