The end of the road for some LMIs and just the start for others
Share/Unit holders of a number of LMIs had their say during the month of June with MGF unitholders approving the exchange to open-ended units, QVE shareholders voting in favour of the merger with WLE and MAAT delisting as a result of unitholders approving a merger with the equivalent unlisted fund. While it is the end of the road for some LMIs it is the beginning for others with PCX listing during the month. Below we take a look at the key news flow for LMIs in June.
KKC Provides FY25 Distribution Guidance
On 21 June 2024, KKR Credit Income Fund (ASX: KKC) announced the distribution guidance for FY25 of 1.67 cents per unit per month, equivalent to 20 cents per annum. The distribution amount is the same as for the previous financial year period.
The distribution represented an annualised yield of 8.0% based on the NAV as at 31 May 2024 and 8.5% based on the unit price as at 31 May 2024. The target distribution assumes income levels based on current and future cash flow from the portfolio after fees and costs.
Since listing in November 2019, KKC has paid an increasing annual distribution amount.
In line with the increasing distribution amount, KKC has delivered an improved yield since the Trust began paying distributions. The trailing 12-month distribution yield has been slightly higher than the running yield due to the discount to NAV at which KKC has been traded.
QVE Shareholders Vote in Favour of Acquisition by WLE
At the Scheme meeting in June, shareholders voted in favour of the proposed acquisition of QVE shares by WAM Leaders Limited (ASX: WLE). 91.9% of shareholders voted in favour of the proposal. The acquisition remains subject to court approval, which is scheduled for 4 July with QVE shares scheduled to be suspended from trading post approval with the Scheme to be implemented on 15 July. QVE shareholders have the option to receive WLE shares as consideration for their QVE shares, cash or a combination of both. The pre-tax NTA value on 4 July will be used for determining entitlements for QVE shareholders. Cash consideration will be provided at a 2.5% discount to the pre-tax NTA on the Calculation Date while scrip consideration will be calculated based on the pre-tax NTA of QVE and WLE. New WLE shares issued under the Scheme are scheduled to commence trading on 16 July, subject to the pre-tax NTA not being required to be referred to an auditor.
MGF Unitholders Vote in Favour of Conversion to Open-Ended Units
In an unsurprising outcome, during the month unitholders of Magellan Global Fund (ASX: MGF) voted in favour of the proposal to convert closed-ended units into units in the active ETF (MGOC).
MGF units are scheduled to be suspended from trading on 11 July 2024 with a Conversion Date of 15 July 2024. The number of units in MGOC received by MGF unitholders will be based on the Conversion Ratio which is the NAV of MGF divided by the NAV of MGOC on the Calculation Date.
The vote ends a rather long running saga surrounding MGF, which had traded at an elevated discount for a prolonged period of time and endured significant agitation from both unitholders and option holders. Conversion into the open-ended units now provides unitholders the ability to transact around NAV.
Pengana Global Private Credit Fund (ASX: PCX) Lists
PCX listed on 21 June 2024. The Trust raised $156.7 million through the issue of 78.4 million units at a price of $2.00 per unit. The Trust is the first new LIC to come to market since October 2022.
The Trust will invest in a portfolio of private credit funds with the goal of generating strong risk-adjusted returns with a high degree of capital protection. The Trust has a target cash distribution yield of 7%p.a. (net of fees, costs and taxes) with distributions intended to be paid monthly.
The structure is complex with the Trust providing an avenue for investment in the Master Fund, which is expected to provide exposure to 19 underlying private credit funds and in excess of 2,000 loans/securities. With this many underlying funds, the Trust does risk high levels of fee leakage with fees expected to be charged by the Manager of the Trust and the underlying funds.
The Trust is seeking to mitigate one of the pitfalls of listed closed-ended structures, the potential dislocation between the portfolio value and market price. The Trust is seeking to do this through the provision of a regular off-market buy-back scheme, in which the Responsible Entity will offer to buy-back up to 5% of the issued capital on a quarterly basis. The buy-back price will be equal to the NAV per unit at the buy-back pricing date plus the amount of distributions that unitholders would be entitled to if the units were not cancelled from the buy-back. This is the first time such a mechanism has been used for a closed-ended vehicle. Only time will tell whether or not the buy-back scheme achieves the desired result with some potential pros and cons associated with the scheme.
SEC Increases Quarterly Dividend Target
On 5 June 2024, Spheria Emerging Companies Limited (ASX: SEC) announced it is increasing the quarterly dividend target to 1.50% of post-tax NTA per share. This is up from the previous 1.25% of post-tax NTA per share. The new target is equivalent to a annual yield of 6.0% of post-tax NTA (8.6% grossed-up).
The increased dividend target will be effective for the June quarterly dividend. The increase in the dividend target comes from a strong level of dividends received from the investments in the portfolio combined with a healthy level of retained profits and franking account.
Under the new dividend policy, based on the post-tax NTA as at 31 May 2024, the Company would pay a quarterly dividend of 3.37 cents per share, which is an increase on the previous quarterly dividend of 3 cents per share.
SEC has provided a growing dividend since the commencement of dividends in 2018. Initially the Company had a target quarterly dividend of 1.0% of post-tax NTA. This was increased to 1.25% of post-tax NTA for the June 2023 quarter before the most recent increase to 1.5% of post-tax NTA.
While pegging the dividend to the post-tax NTA will potentially result in some volatility in the dividend amount it does offer the benefit of potentially tempering the payout ratio in down years to limit the impact on the ability of the Company to deliver capital growth.
The Company has sought to implement a number of initiatives to create demand and narrow the discount to NTA, with the Company proposing to pursue avenues to exchange shares for units in the Spheria Australian Smaller Companies Fund in the event the average discount during the 4Q’CY24 exceeds 5%. Since this announcement, the discount has narrowed with SEC trading at a discount of 4.1% to pre-tax NTA as at 31 May 2024. This compares to an average discount of 11.2% since listing.
OPH Estimates Annual Distribution of 6 cents per Unit
On 14 June 2024, Ophir High Conviction Fund (ASX: OPH) announced an estimated distribution for the FY24 period of 6 cents per unit. The final distribution is expected to be calculated and announced in mid July and may vary from the estimated distribution.
In May, the Trust announced changes to the Distribution Reinvestment Plan (DRP), which will be available for the annual distribution. Units issued in the DRP will now represent the lower of the NAV or the market price. Where the units are trading at a discount to NAV, units will be purchased on-market. If the NAV is below the market price new units will be issued. We view the change as a positive for unitholders, particularly given the discount at which OPH units have been trading. Purchasing units on-market to satisfy the DRP in the event units are trading at a discount removes the potential dilutionary impact that would occur if new units were issued at the discounted price.
QRI Raises More Capital
Qualitas Real Estate Income Fund (ASX: QRI) raised more capital during the month with a Placement to wholesale investors. The Trust raised $36.9 million through the issue of 23.07 million units through the Placement. This comes after the Trust raised $18.5 million from the Unitholder Purchase Plan (UPP) in May. All capital raisings to date have been done at a price equivalent to the NAV of $1.60 per unit, meaning the capital raisings have not been dilutive.
The Trust has continued to raise capital to increase the size of the Trust when trading at or above NAV. The Trust has now grown to a market cap of in excess of $660 million with 422.8 million units on issue.
WGB Announces Increased Final Dividend
On 3 June 2024, WAM Global Limited (ASX: WGB) announced a fully franked final dividend of 6 cents per share. This will take the full year dividend for FY24 to 12 cents per share, a 4.3% increase on the pcp.
WGB has been reasonably aggressive with its increases in annual dividend since listing as shown in the below chart, although we note the extent of the increases has tapered off in recent years. The Company is seeking to provide shareholders with an above market yield, which is one of the mechanisms used to create demand and manage the discount. Based on the share price at 31 May 2024, the FY24 dividend of 12 cents per share represented a yield of 5.4% (7.7% grossed-up). This is an attractive yield for a global portfolio.
RF1 Estimates Semi-Annual Distribution of 15 cents per Unit
On 25 June 2024, Regal Investment Fund (ASX: RF1) announced an estimated distribution for the half-year ended 30 June 2024 of 15 cents per unit. The final distribution amount is expected to be calculated and announced in late July. The distribution is an estimate and may change from the actual distribution.
The DRP will be available for the distribution. The DRP price will consider the relationship between the NAV and the market price of RF1, with new units issued through the DRP at the lower of NAV or the market price.
The estimated distribution would take the distribution for the FY24 period to 22 cents per unit, slightly below the 22.78 cents per unit in the prior year.
MAAT Calls it a Day
During the month, Monash Investors Small Companies Trust (Hedge Fund) (ASX: MAAT) unitholders approved the merger of MAAT with the Monash Investors Small Companies Fund (MAIF). Units in MAAT were suspended from trading during the month.
MAAT was originally structured as a LIC before restructuring to an active ETF structure. However, the fund has struggled to grow with the Manager deciding to merge the units with the equivalent unlisted fund. Given the inability to scale the ETMF it appears in the best interests to convert into the unlisted fund structure for MAAT unitholders.
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