BB Healthcare Trust Redemption

RomfordNavy

Just received Corporate notice of optional share redemption of holding in BB Healthcare trust but confused as to whether I should do this or not. What is the purpose of a share redemtion?

Problem is the value of the share redemtion is not announced in advance so I have no idea what value will be redemed for how many shares, I am baffled as to whether to take the share redemption or not.

bowlhead99

The purpose of the facility is basically a discount control mechanism, something that helps keep investors confident that they are not investing blindly in a pool of assets that the market thinks is terrible.

Once a year, they give investors the chance to redeem their shares - the company would buy them back for cash based on the value of the underlying assets attributable to the shares being redeemed.

Example: say the shares of the trust trade at 90p on the market even though the underlying assets are worth 100p, because the market doesn't like the trust's prospects. Market price is 10% discount to NAV. But if you hold those shares you can simply tell the company you want to cash them in for the 100p (or whatever the NAV will be on the redemption date).

Of course, you don't really know it will definitely be 100p, because we haven't reached the redemption valuation date yet, but you know it will be whatever the underlying assets can be sold for - rather than what the market is currently willing to pay for the shares.

The fact that this facility exists should stop you seeing discounts as large as 10% in the first place, because people have confidence that they can always get out at a sensible price (at least, by comparison to underlying market value), if they need to.

It also means that a strategic long term investor doesn't need to try to dump large amounts of stock on the market, depressing the open market price when they eventually decide to exit their investment. Instead they can approach the company and say they plan to redeem, giving the managers the chance to place their shares at NAV with an incoming investor or liquidate part of the portfolio and buy them out for cash.

According to the announcement, at the time they reminded investors of the facility ahead of this year's November redemption 'opportunity', the market share price exceeded NAV anyway. If those conditions persist until the redemption date, investors with normal sized holdings would have no reason to ask the company to cash in their shares at NAV when they can get more by selling them on the open market.

And the conditions (market price is not below NAV) are likely to persist because if you can redeem for NAV, why would you sell off to someone else for less than NAV. So supply of shares on the open market below NAV would be very low.

It's not an infallible discount control mechanism as if you are looking to sell and you fear a huge crash in the underlying assets' values, you might prefer to dump your BBH shares right now in the market for a guaranteed price offered by a market participant, rather than waiting to take whatever the NAV is in November.

But there doesn't seem to be any market concern with the BBH underlying assets at the moment. Thursday's NAV was about 125 4p, today's market price is 124.5-127.0. I can see why the announcement says the board have no plans to redeem their own holdings in exchange for cash, and I would not either The market is currently willing to pay more to buy the trust than they would pay to buy the underlying assets, which is positive, but the very existence of the facility each year should help ensure it doesn't swing significantly the other way.

RomfordNavy

Many thanks for the comprehensive explanation @bowlhead99. No action necessary then.