Capital Gearing Trust

aroominyork

Today's finance news say CGT is "seeking approval from the Northern Irish courts to reclassify its share premium account as distributable reserves. Company has since 2015 operated a discount control policy aiming to keep its share price close to the underlying net asset value. Says reclassification will support the DCP's operation for the forseeable future. The court process may take approximately three months to conclude due to delays caused by administrative and technical issues. Company's available distributable reserves now stand at around GBP23.8 million, and it says it will temporarily limit daily buyback authority until it receives court approval despite those reserves supporting additional buybacks." 

The share price fell nearly 3% on the news. Was this because CGT will scale back its DCP in the short term so investors are getting out in anticipation of an increasing discount - even if only a temporarily increased discount?

Also, can someone please translate "reclassify its share premium account as distributable reserves" into lay English?

masonic

"Distributable reserves" are simply company assets that can be paid out as a distribution. Section 830 of the Companies Act 2006 requires that distributions can only be made out of profits available for the purpose. The share premium account is not currently classified as part of the trust's distributable reserves, so it needs to be reclassified.

It's quite likely, as you say, that some investors fear the trust will face a widening discount in the short term, and though their concern have precipitated just that outcome.

Today's drop appears to bring its share price down almost 15% below its previous high, almost double the loss it faced during the pandemic. I certainly dodged a bullet getting out in profit before all the trouble it faced this year, but it proved to be a good place to park my defensive capital for a couple of years while I waited for the impending bondpocalypse.

Linton

AIUI

CGT has for many years had a policy of stabilising its share price by buying and selling its own shares on the market.  This used a pot of money known as the share premium account.

In the old days with interest rates at  <1% CGT's aim to provide at least inflation matching over the medium term was very attractive to investors more interested in preserving the money they had than aiming for high growth and possibly failing.

Now that safe interest rates are around 5% with inflation slowly falling CGT is much less desirable so the price has been falling.  This has of course reduced the desirability of the shares even further.  CGT has not been able to counter this major fundamental movement by buying its own shares - I think it is now on a 4% discount to Net Asset Value.

So what I think they want to do is to use the share premium account money to provide better returns to the shareholders and stem the sell-off in that way.  What they can do if this doesnt work I dont know.

Perhaps someone with a better understanding of these things will correct me if I have got it wrong.

aroominyork

So do you understand that money set aside for discount control is going to be distributed to shareholders as a sizeable dividend? I believe they are currently using short term maturing gilts to fund much of their share buying/discount control.

Linton

aroominyork said:

So do you understand that money set aside for discount control is going to be distributed to shareholders as a sizeable dividend? I believe they are currently using short term maturing gilts to fund much of their share buying/discount control.

Yes or something else with the same effect. Perhaps once the new gilts start delivering the increased dividend will be sustainable.  I think their use of short dated gilts extends far beyond the discount control.

masonic

aroominyork said:

So do you understand that money set aside for discount control is going to be distributed to shareholders as a sizeable dividend? I believe they are currently using short term maturing gilts to fund much of their share buying/discount control.

With about 23.6 million shares in issue, monies of £23.8 million would be enough to pay out a dividend of about £1 per share, so about double the size of the typical ~1% annual dividend. If added on to next years, perhaps it will come to something like 3-4%. Perhaps they will not spend it all in March 2024 or on a single special dividend.

aroominyork

Some more insight into the situation here https://citywire.com/investment-trust-insider/news/capital-gearing-blames-court-delays-for-three-month-drop-in-buybacks/a2429356

aroominyork

CGT yesterday announced "The High Court of Justice in Northern Ireland has today approved the cancellation of the amount of £1.1 billion standing to the credit of the Company's share premium account and the crediting of an equivalent amount to the Company's distributable reserves."

£1.1bn? Does that mean they have that much in the bank? With that amount they could buy back every share - the company size, accoring to the December 2023 factsheet, is £1134m.

Hoenir

Only if it liquidated the entire investment portfolio. 

wmb194

aroominyork said:

CGT yesterday announced "The High Court of Justice in Northern Ireland has today approved the cancellation of the amount of £1.1 billion standing to the credit of the Company's share premium account and the crediting of an equivalent amount to the Company's distributable reserves."

£1.1bn? Does that mean they have that much in the bank? With that amount they could buy back every share - the company size, accoring to the December 2023 factsheet, is £1134m.

No, it's just technical shenanigans to allow it to, IIRC, pay its dividend. It's moving the amount from one part of the balance sheet to another.

aroominyork

It's not for a special dividend. It's to buy back shares to support CGT's discount control policy of keeping share price within c.2% of NAV. My question is whether there is over £1bn in the bank; that seems inconceivable.