M&G doubles down on trust takeover

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M&G doubles down on trust takeover

In stock exchange filings published on Friday (July 24), M&G Investment Management branded UK Mortgages’s dividend policy “unsustainable” and claimed the trust’s net asset value was not an accurate representation of its current true worth.

It added: “M&G Investment Management encourages UK Mortgages’s shareholders to ask the company's board to initiate discussions with MAGIM on the proposal. 

“M&G Investment Management continues to believe the proposal is highly attractive and in the best interests of all UK Mortgages shareholders.”

The comments come after M&G revealed last week it had made several approaches to the board of UK Mortgages, a debt-focused investment trust, with a view to take over the company — all of which have been rejected.

It is making the bid on behalf of its Specialty Finance fund, a vehicle for institutional private credit clients to gain exposure to pools of mortgages and consumer credit.

Following last week’s announcements, UK Mortgages published a strategic update on July 23 saying it intended to restore the company’s dividend to its annual target level of 4.5p per share, which represented a yield of 7 per cent.

It also acknowledged the offer made by M&G, noting it was “unsolicited” and explaining that together with its financial adviser, Numis, the board had “unanimously rejected” the offer.

UK Mortgages said it had concluded the terms offered “materially undervalued” the company and its prospects.

But M&G refuted UK Mortgages’s strategic update. In its latest stock exchange filing, M&G said: “UK Mortgages has not historically generated sufficient income to cover this dividend target.

“M&G Investment Management believes that dividends significantly funded from capital are not sustainable.”

It also criticised the fact UK Mortgages’s update “failed to address the uncertain outlook for the company’s future profits” resulting from payment holidays, arrears and defaults in the current economic climate.

Questioning the company’s true value, M&G Investment Management added: “[We] further believe that UK Mortgages’s net asset value 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 its underlying assets including payment holidays and likely increasing arrears. 

“These factors reduce the net present value of [the trust’s] future cash flows and as a result the company's intrinsic value.”

M&G Investment Management said it had continued to seek constructive discussion with the board of UK Mortgages, adding that its proposed buyout was the best way for shareholders to realise long-term value.

Run by Twentyfour Asset Management, the UK Mortgages trust had been trading at a premium until the beginning of 2019.

But the 15 per cent discount the trust had been trading at throughout 2019 widened to 57 per cent when markets tumbled in March this year due to the pandemic, only narrowing back to 16 per cent as at yesterday (July 26).

It has lost 15 per cent in share price terms over the past three years, compared to an AIC sector average of -12.5 per cent, as it struggled amid the pandemic due to falling interest rates and a turbulent credit market.

In June, the company missed its minimum dividend target of 1.125p per share, only offering 0.375p for both Q1 and Q2 of 2020. It had paid out 4.5p per share in 2016 and 2017.

imogen.tew@ft.com

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