Total buyout will cost €45 million including €14.5m in compensation
Bank of Valletta today announced that it will making a conditional offer to the investors in the La Valette Multi Manager Property Fund to acquire their shares in the Fund at a consideration of €0.75 per qualifying share.
Roderick Chalmers, the Bank of Valletta Chairman, stated that the Offer was being made "without prejudice" and "without admission of liability", and is a bona fide effort by the Bank to provide investors with an opportunity to settle matters that are in dispute in a fair and equitable manner.
The gross cost of the Offer to the Bank as compensation, will be €14.5 million, and will be taken as a charge against profits before taxation in the second half of Financial Year 2011.
The total buyout value will be €45 million.
The Chairman referred to the events leading up to the suspension of the Fund in August 2008, and the judicial protests and regulatory enquiries which commenced in 2010. He said that the investigations being carried out by the MFSA were ongoing, and that the bank was providing the Authority with every assistance and co-operation in this regard.
He said that differing views appeared to be being formed around the interpretation and subsequent application of the investment restriction contained in the Fund's prospectus (referred to as IR(v)).
This, he explained that this was a complex technical matter, and whereas BOV and its advisors maintained that a proper construction and interpretation required that IR(v) should be viewed in the context of the entire prospectus and in the light of its intended application to a European property fund, contrary views were emerging, structured on a much narrower and literal interpretation, based exclusively on a view of the so-called ordinary natural meaning of the term "net assets".
The chairman stated that BOV's legal counsel had commissioned independent research by KPMG with respect to the prevalent international market practice for the calculation of gearing or leverage of property funds.
KPMG concluded that the term "net assets" and "net asset value" may have differing meanings when applied to the different definitions of gearing, and that out of a total of 58 property funds documentation reviewed by KPMG for the purpose of their engagement, 52 (or 90%) based borrowing restrictions on the basis of "debt to assets". KPMG concluded that this represented the prevalent market practice.
"Notwithstanding the firm views held by BOV and its advisors on IR(v), the Board of Directors believe that an effort should be made to find some form of accommodation with the investors in the interests of all the parties concerned," Mr Chalmers said.
This view was being driven by a belief that lengthy, complex and expensive court proceedings, potentially spanning over many years, would not be in the interest of the investors or of the BOV group. The Bank was also aware that a complex and adversarial legal dispute could result in conflict between BOV and the Regulator, which was something the Board was "very keen to avoid".
Referring to Valletta Fund Management as the "pioneer of the funds industry in Malta" he said that both BOV and VFM were very conscious of their "reputation and brand", and that they were aware that the attendant publicity that would come with protracted judicial proceedings would do nothing to enhance the brand, even if, as they expected, BOV's views were to prevail.
Mr Chalmers also drew attention to the fact that the Property Fund dispute had been a "huge, but necessary distraction" for senior management, and that at a time of significant economic, financial and geo-political stresses and challenges, it was important that BOV's senior executive management team was able to turn their "full time undivided attention back to the running of the business".
The chairman said that the Board had concluded that the making of a bona fide substantive proposal to all eligible investors in the Fund was "in the best interest of all concerned including the investors, the Bank and its customers, and the financial services sector generally".
Mr Chalmers went on to explain in some detail the conceptual framework behind the proposal. He said that the current position was that, as at the last official valuation date, investor shares in the "Main Pool" of the La Valette Multi Manager Property Fund represented a value of €0.275 per share, whilst the "Side Pocket" shares (which are currently suspended and are therefore illiquid) represented a value of €0.226 each. He explained that discussions with investors had shown that there was considerable dissatisfaction with the suspended nature of the Side Pocket shares – so much so, that a number of investors said that they attributed little value to these shares.
He said that the starting point for the formulation of a proposal was an acceptance that the Fund had indeed underperformed - something that has never been disputed by the Bank, which was on record as having expressed its regret at the Fund's performance, and the distress that this had caused investors.
It was believed that this underperformance was "quantifiable", and that the bank had engaged PricewaterhouseCoopers (PwC) to compare the performance of the La Valette Multi Manager Property Fund against representative indices of other funds in the sector. He said that at BOV's request, PwC had specifically focused on an index of "low geared funds" thus addressing the expressed concern around IR(v), and also on the performance of the HSBC Property Investment Fund offered by HSBC Malta which likewise had strictly defined and curtailed gearing parameters.
Chalmers said that this research showed that the underperformance of the La Valette Multi Manager Property Fund as compared with the property fund offered by HSBC Malta and the low geared index was of between €0.20 and €0.24 per LVMMPF share. The Chairman explained that BOV had used these components to formulate the Offer that they were making to the eligible investors to acquire their shares. These components were the cash value of the Main Pool (€0.275), the value of the Side Pocket (€0.226) – but to be made liquid and to be paid in cash - and a compensatory component of between €0.20 and €0.24 per share. Chalmers said that BOV had taken the upper range of the compensatory component, which made for an aggregated Offer price of €0.741 per share, which BOV had elected to round up to the final Offer price of €0.75 per share.
Pointing out that the Bank has always stated that it would treat all investors in the Fund on a "fair and equivalent basis", Mr Chalmers stressed that the offer was being made "to all investors in the Fund as at the 12 August, 2008, and not just the minority who had been parties to the judicial protests." He said that the Offer would also be extended to those investors who had sold their Main Pool shares since the Fund re-opened for dealing in August 2010.
The Chairman said that BOV believed that this approach made for a "fair and equitable Offer" – from a current liquid component of €0.275, investors were receiving a cash offer of €0.75 per share, and this as a result of BOV offering to "liquify the suspended Side Pocket shares and recognising the underperformance of the Fund (which addressed the IR(v) gearing dispute) through a compensatory payment of €0.249 per share."
Explaining the conditions of the offer, Mr Chalmers said the price had been set at €0.75 per combined (Main Pool and Side Pocket) share, and that the Offer would lapse on 30 June 2011, following which BOV would be under no obligation to acquire the shares not tendered by that date.
He explained that BOV would be entitled to withdraw the Offer in the event that acceptances were below 70% of the outstanding shares. He acknowledged that the Bank "perfectly understood" that certain investors may not wish to accept the cash Offer, and may instead elect to pursue legal action or register complaints. He said that these investors were "fully entitled" to follow such a course of action, understanding that after the Offer lapse date, the cash Offer would no longer be "on the table".
Chalmers concluded by saying that the BOV Group had long stated that there were a number of issues in contention that were "technical in nature" and upon which "reasonable people could form differing views". "The BOV Group" he said, "was willing to defend its view in court to the hilt", but for the reasons he had already explained, the Group wished to avoid long, drawn out adversarial disputes with its customers that may take years to resolve. Hence the decision to formulate what he described as a "fair and equitable" proposal, which he hoped would be "welcomed by investors" and be regarded as an opportunity to put "this exceptional and unhappy episode behind all of us".