The Board of Directors of GCP Infrastructure Investments Limited (LON:GCP) has announced that it has agreed heads of terms with the board of GCP Asset Backed Income Fund Limited in respect of a proposed combination of GCP Infra with GABI.
The combination will be effected by way of a contractual scheme of reconstruction resulting in the solvent winding-up of GABI and the transfer of its assets to the Company in exchange for the issue of new ordinary shares in GCP Infra to GABI shareholders. The number of GCP Infra shares issued to GABI shareholders will be determined on a formula asset value (“FAV“) for FAV basis. The FAVs shall be calculated based on the net asset value of each of the Company and GABI on an agreed calculation date, less each party’s transaction costs. The GABI Scheme, if completed, is expected to conclude before the end of 2023.
The Board is also pleased to announce that it is in separate discussions with the board of RM Infrastructure Income plc (“RMII“) with the intention of agreeing a potential combination of the enlarged GCP Infra with RMII (the “RMII Scheme“). It is expected that this combination will be effected by way of a scheme of reconstruction of RMII and the associated transfer of a material proportion of its assets to GCP Infra in exchange for the issue of new shares in GCP Infra. The Company will provide a further update as and when appropriate.
The Board believes that, if completed, the GABI Scheme will bring benefits to both the existing and any new shareholders in the Company. The Board has further proposed that, following the completion of the GABI Scheme, there will be an increased return of capital to shareholders and the Company will reduce its leverage. GCP Infra’s investment policy will be amended to maximise access to attractive investment opportunities, with a focus on sustainable assets. These mechanisms further support the benefits of the GABI Scheme to shareholders and are detailed further below.
In accordance with customary practice for such transactions involving investment companies and investment trusts, the City Code on Takeovers and Mergers (the “Code“) is not expected to apply to the GABI Scheme. However, the GABI Scheme will be subject to other regulatory and tax requirements. The ongoing discussions in respect of the RM Scheme similarly do not anticipate any offer for RMII by GCP Infra, recommended or otherwise, under the Code.
Liquidity Commitments
The Board remains conscious of the discount to the prevailing net asset value per ordinary share at which the Company’s shares have been trading in recent months. Further, the Board considers that the benefits of the Company’s leverage are reduced given the current all-in cost of the Company’s revolving credit arrangements, which have been impacted by increases to SONIA, the base lending cost. The Company has, therefore, been focused on using available cash proceeds to both: (i) reduce leverage, with the c. £50 million net proceeds of the recent biomass refinance expected to reduce the Company’s outstanding debt to c. £100 million; and (ii) prioritise the buy-back of shares over new investments: in the quarter ending 30 June 2023 the Company made new investments totalling only £1.4 million and spent £4.2 million in buying back shares during the quarter.
Under the terms agreed with GABI, following the implementation of the GABI Scheme (if approved) the Company will commit to utilise £200 million of cash available to the enlarged portfolio (including without limitation from portfolio repayments and realisations) in the two-year period following completion of the GABI Scheme as follows:
– £100 million to further reduce the Company’s leverage to a target drawn balance (after a drawdown in respect of the GABI Scheme as detailed below) of c. £50 million; and
– £100 million to distribute to shareholders by way of share buy backs, special dividends or otherwise. This commitment is in addition to the remaining commitments under the £15 million buy-back programme announced by the Company on 14 March 2023.
(together, the “Liquidity Commitments“).
If the GABI Scheme is approved, GCP Infra intends to draw on its revolving credit arrangements to fund the repayment in full of the outstanding balance under the GABI revolving credit facility, which currently has £40 million outstanding (the “GABI Debt Amount“), in connection with the transfer of the assets from GABI to GCP Infra under the GABI Scheme. GABI has agreed not to draw further on its revolving credit arrangements prior to completion of the GABI Scheme or, if a further draw down is contemplated, that it must seek the prior consent of GCP Infra. GCP Infra has agreed to prioritise the use of its cash resources, in the first instance and as part of the Liquidity Commitments, to repay the additional debt drawn by GCP Infra in respect of the GABI Debt Amount.
The GABI Scheme would support the ability of GCP Infra to offer the Liquidity Commitments due to the shorter duration of GABI’s investment portfolio. Across GCP Infra and GABI, c. £140 million of loan repayments are forecast to be received in the first six months of 2024.
Investment Policy
Following implementation of the GABI Scheme (if approved), the enlarged GCP Infra will continue to be advised by Gravis Capital Management Limited (“Gravis“). As part of the GABI Scheme, the Board will propose certain amendments to the Company’s investment policy and objectives (the “Investment Policy Change“) which will be subject to customary approvals. The purpose of the proposed Investment Policy Change is to adapt the Company’s investment approach in recognition of the evolution that has occurred in the infrastructure landscape over the 13 years since IPO and to maximise the pool of attractive investment opportunities available to the Company moving forward with a focus on sustainable assets. The relevant section of the proposed revised investment policy of the Company will be changed as follows:
“To invest at least 75% of its total assets in infrastructure and real assets that:
(a) benefit from public-sector backed, contracted, or predictable cash flows;
(b) have no construction risks;
(c) that have a high standard of sustainability by reference to: (i) meeting a credible minimum standard for environmental and/or social sustainability; or (ii) align with a specified environmental and/or social sustainability theme; and
(d) are located in the UK.”
It will be proposed that the investment objectives of the Company will be amended to: (i) pay shareholders a regular and sustainable dividend; (ii) invest in a diversified portfolio of debt and/or similar assets secured against sustainable infrastructure and real assets; and (iii) preserve the capital value of its investments over the long-term.
The GABI Scheme and the Investment Policy Change are together referred to as the “Proposals“.
Strategic Rationale for the Proposals
The Board believes that the Proposals, will bring multiple benefits to both the existing and any new shareholders in the Company. The GABI Scheme will consolidate two listed infrastructure and real asset debt vehicles to form a sizeable investment company that offers all shareholders of the enlarged GCP Infra the following benefits:
· The Liquidity Commitments: as described above, which will utilise at least £200 million of the Company’s cash resources to both: (i) reduce the leverage in the enlarged vehicle over the medium-term to c. £50 million; and (ii) return c. £100 million of capital to shareholders.
· Access to a shorter duration: GABI has a shorter average weighted average loan life than GCP Infra, at 5 years compared to GCP Infra’s 10 years[1]. As a result, allowing for the Liquidity Commitments, the enlarged GCP Infra will be more agile and able to re-invest in accordance with the revised investment policy and at the prevailing market rates (which are higher now than at any point during the life of GCP Infra), at the same risk level, more quickly than it could prior to the Proposals.
· Enhanced secondary market liquidity: the Board recognises the importance of scale from the perspective of liquidity for shareholders. Based on the market capitalisations of both GCP and GABI as at close on 10 August 2023, the enlarged market capitalisation would be £907 million. In the three months to 31 July 2023, average daily value of shares traded in GCP Infra and GABI (excluding on-market buybacks) were c. £1.29 million and c. £0.46 million, respectively.
· Realigned mandate: the proposed Investment Policy Change, including the introduction of an explicit sustainability objective, is expected to provide a wider universe of potential investment opportunities with attractive risk-adjusted returns.
· Shareholder register: the Proposals will allow several shareholders to consolidate their holdings across the two companies while also creating a more diversified shareholder base through a combination of the two share registers.
· Lower costs: certain annual fixed costs are duplicated across GCP Infra and GABI and so the GABI Scheme will remove such costs and the Company’s fixed costs will be spread over a larger asset base, resulting in a lower ongoing expense ratio. The cost savings are projected to be c. £0.8 million per annum following implementation of the GABI Scheme.
The Board expects that the RM Scheme, should it progress, will have similar benefits to those of the GABI Scheme. The Company will announce further details of the benefits of the RM Scheme as and when appropriate.
1.Loan durations as at 30 June 2023
Costs of the Proposals and Gravis Contribution
Each company shall bear its own costs incurred in relation to the development and progression of the Proposals. Gravis is the investment adviser to GCP Infra and the investment manager of GABI and has agreed to pay, or otherwise make, a contribution towards the costs of the Proposals to GCP Infra and GABI of £1 million (the “Gravis Contribution“), to be apportioned between GCP Infra and GABI by reference to each company’s total transaction costs. The expected costs to GCP Infra of the GABI Scheme (post the Gravis Contribution) are £ c. £1.4 million.
Further, the investment advisory fee payable to Gravis by the Company on an ongoing basis shall be revised from the current investment advisory fee of 0.9% per annum on net assets (excluding cash) to:
(i) in respect of net assets (excluding cash) up to £1.3 billion, a fee of 0.9% per annum of such net assets; and
(ii) in respect of net assets (excluding cash) above £1.3 billion, a fee of 0.8% per annum of such net assets.
Continuation vote
Infrastructure debt investments are long-term investments (with the weighted average outstanding term of GCP Infra loans being 10 years as at 30 June 2023). Reflecting the long-term nature of the portfolio, and the need to incentivise the investment adviser over the long-term in alignment with the portfolio, GCP Infra does not currently have a commitment to hold a continuation vote. However, as part of the Proposals, the Board will commit to providing shareholders with a continuation vote at the Company’s AGM in 2028 and every four years thereafter.
Gravis team
The portfolio managers of the enlarged GCP Infra will continue to be Philip Kent, Ed Simpson and Max Gilbert, and the management of the Company will continue to be supported by the wider Gravis business, including the Chief Investment Officer of Gravis’ private market investment funds.
The Board notes that Gravis is already responsible for managing the GABI assets and so the combination under the GABI Scheme will rely on existing personnel knowledgeable about the GABI portfolio and its underlying assets.
Expected timetable
A circular to shareholders of the Company, providing further details of the Proposals and convening a general meeting to approve the Investment Policy Change, alongside a prospectus, is expected to be published in due course. A circular to shareholders of GABI, providing further details of the GABI Scheme and convening a general meeting to approve the GABI Scheme, is also expected to be published in due course. The GABI Scheme, if completed, is expected to conclude before the end of 2023.
The Chairman of GCP Infrastructure Investments, Andrew Didham, commented:
“There has been considerable consolidation amongst investors in investment companies like GCP Infra. With this comes the need for consolidation amongst investment companies, to provide their investors with entities of greater scale, more liquidity and lower ongoing costs. GCP Infra is well placed to drive this consolidation, and the Board believes that the GABI Scheme and, if progressed, the RM Scheme, will deliver improved liquidity in the Company’s shares, a lower ongoing charges ratio and a wider pool of potential investors. We expect the enlarged Company will be well placed to continue to deliver attractive, long-term risk adjusted returns to shareholders.”
