BFS Income & Growth aims to be the first split cap to buy back some of its zero dividend preference ...
BFS Income & Growth aims to be the first split cap to buy back some of its zero dividend preference shares.
The £170m trust is preparing to repurchase up to 14.99% of its zeros in issue. Although zeros are being recommended as a sound investment by Credit Lyonnais, Merrills and Exeter among others, the market is still suffering from oversupply of the paper. As at 10 April the trust's zero shares were trading at a discount of 16.9% to their so far accrued capital entitlement. The trust is proposing to buy back unwanted zeros at 97% of the accrued capital entitlement at the time of repurchase.
Ordinarily the zeros would mature in August 2005 when they will pay out 179p per share. At present they are priced at 95.75p which to some investors may look an attractive investment with the paper on a gross redemption yield (GRY) of 12.33%. As the discount illustrates sufficient demand from investors does not exist.
John Szymanowski, investment trust analyst at Warburgs, welcomed the move by the board of the trust and said he hoped other split cap trusts would follow its lead.
He said: "There is a overhang in the market and although retail interest is picking up, this on its own will not get rid of the oversupply problem. If some kind of equilibrium is restored it may encourage new split launches to include zeros in their capital structures."
The oversupply has discouraged new splits from including zeros because of the cost of servicing them. Issues last year offered GRYs of more than 9% and zeros in the secondary market are on GRYs of 12%. In order to maintain the capital structure of the trust, the zeros that are repurchased will be replaced by bank debt. In simple terms zeros and bank borrowings fulfil the same purpose of providing a trust with gearing but at the moment bank debt is the more attractive option as it is cheaper to service compared to zeros.
At the same time as buying in zeros and arranging new bank borrowing to gear the trust, it is also intended to issue up to 15 million new income shares and 15 million new ordinary shares to raise approximately £23m.
The issue of new shares and the bank debt will increase the trust's size by £73m.
The funds will be used to invest in old economy stocks which seem to be recovering following the boom in the tech, media and telecoms sectors.
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