Analysts have warned of a potential breakdown in the relationship between the board of the beleaguered Hipgnosis Songs Fund and its investment adviser.
In a stock exchange announcement today (19 October), the Hipgnosis board announced a strategic review and said it would consider “all options” for the trust’s future, including a review of future management arrangements.
After engaging with shareholders in recent weeks, the board said: “These meetings highlighted a continued belief in the company’s portfolio and growth prospects of the asset class as well as the need for changes by the company in order to deliver value for shareholders.”
The trust is subject to an AGM and EGM next week (26 October), at which it will face votes on continuation and on the sale of a portion of the Hipgnosis portfolio to a Blackstone-owned private vehicle.
Reacting to the update, Stifel analysts said: “At this stage, we were hoping that investors and analysts would be able to pause for breath before any other announcements from the company.
“We note that the manager is not included in the contact information and so this points to a board initiative and potentially a breakdown in the relationship to what has previously been perceived as overly close.
“We see little point in announcing this today, given we would have expected such an announcement next week if the continuation vote failed as expected. In our view, as investors have such little trust with the existing board, we are not clear how decisions taken by them will have broad support. In practical terms, the strategic review will have to be carried out by their successors.”
See also: Hipgnosis Songs scraps dividend after hit to expected royalty payments
Call option
The board noted it had considered serving notice on the current investment adviser, Hipgnosis Song Management (HSM), but decided it was not currently in shareholders’ interests to do so as it would lead to a default on its revolving credit facility due to the termination fee.
Directors revealed HSM had declined to remove a clause which entitles it to acquire the trust’s portfolio in the event of a termination.
According to Stifel analysts, termination would effectively cost two years worth of fees, which amounts to around £17m.
“Our working assumption is that part of the notice could also be paid in cash rather than the manager remaining in place for a full twelve months, but this would require further clarification,” the analysts said.
“For example, if notice was served today, we would expect a six-month transition (to find an alternative) followed by eighteen months of fees paid in cash. The call option would then lapse in early Q4 2024.”
See also: AVI urges Hipgnosis shareholders to vote against ‘truly dreadful’ proposed portfolio sale
A spokesperson on behalf of HSM told Portfolio Adviser: “We fully recognise that the board needs to act as they see fit. We continue to believe that HSM is uniquely positioned to deliver value to SONG shareholders as a result of our deep relationship with the songwriters that make up the catalogue and our song management expertise. We intend to continue to demonstrate this through our actions.”
‘Appetite’ for private sale
It added the refusal to remove the call option suggests Blackstone has “the appetite” to purchase the trust’s assets.
“Unless this could be achieved at a materially lower price than net asset value (NAV), we think the use of the call option is unlikely,” the team continued.
“It is clear to us the relationship between Blackstone and the legacy Hipgnosis team must be strained given that this is rapidly becoming a public spat between all stakeholders.
“Nevertheless, if Citrin Cooperman continues to produce an inflated NAV, we think investors would be quite happy for Blackstone to purchase the assets anywhere close to the current £1.57 NAV, even if we provision for some reduction.”
On the potential sale, James Carthew, QuotedData head of investment companies, added: “There seems to be an underlying suggestion that the company’s finances are so precarious that it needs to sell these catalogues – even at knock down prices – to shore up its balance sheet.
“Given that risk free yields are still climbing and the transactional evidence will undermine the NAV, there must be a high risk of a big NAV writedown to come. Would investors still have a continued belief in the portfolio then?”
The trust’s lenders have also agreed to amendments to the revolving credit facility, the board said, following its decision on 16 October to scrap its interim dividend.
The board stressed it does not envisage any offer being made for the trust.
Today’s update comes a day after shareholders in the AIC’s only other music royalty trust, Round Hill Music, approved its sale to US firm Concord.
See also: Jefferies: Hipgnosis shareholders could vote against portfolio sale
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