TIDMSWEF
RNS Number : 7147O
Starwood European Real Estate Finan
23 August 2017
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION
Starwood European Real Estate Finance Limited (the Company)
Proposals regarding discount control mechanism, investment
management agreement and share issuance
Background
The board of directors of the Company (Board or Directors) have
today announced proposals that relate to the discount-triggered
realisation mechanism and realisation vote currently provided for
in the Articles of incorporation (Articles), certain amendments to
the investment management agreement with Starwood European Finance
Partners Limited (Investment Manager) (Investment Management
Agreement) and the replacement of the existing carried interest
entitlement with a performance fee payable to the Investment
Manager, together with a proposal to seek authorisation to allot
new shares in the Company (Shares) and dis-apply pre-emption rights
(together, the Proposals). The Proposals will not be implemented
without, and are conditional upon, obtaining the necessary
approvals from shareholders at an extraordinary general meeting of
the Company (Extraordinary General Meeting) to be convened in due
course.
The Proposals have been formulated in light of the
following:
-- the approaching fth anniversary of the life of the Company on
17 December 2017 and the potential application of the current
discount-triggered realisation mechanism and the realisation vote
(which would currently be held before 28 February 2018);
-- a review of the terms of the Investment Management Agreement
after the initial five year period;
-- facilitating a future restructuring of the underlying nancing
structure of the Group through the removal of the existing
partnership which is situated between the Company and its
Luxembourg holding company; and
-- the objective of raising fresh capital, including through a
placing programme (subject to the publication of a prospectus of
the Company) and through opportunistic tap issues taking advantage
of the recent implementation of the Prospectus Regulation which now
enables issuers such as the Company (subject to obtaining the
requisite Shareholder authorities) to issue up to 20 per cent. of
the securities already listed by way of such issues over 12 months
without any requirement to publish a prospectus (the previous limit
having been 10 per cent.).
Shareholders will be asked to vote on the Proposals at the
Extraordinary General Meeting, which will be convened by the
publication of a circular (Circular) in due course. The reason why
Shareholders will be asked to vote on the amendments to the
Investment Management Agreement and the related proposed
dissolution of the existing partnership is because the proposed
changes constitute a related party transaction for the purposes of
the Listing Rules. A further announcement will be made on the
publication of the Circular.
Full details of the Proposals are set out below.
Summary of the Proposals
The Proposals comprise:
-- an amendment to the Articles which would defer the current
provisions relating to a realisation offer and realisation vote
mechanisms (Realisation Offer and Realisation Vote respectively).
The current provisions provide that the Directors have discretion
to implement a Realisation Offer, if certain discount-related
conditions are met, or to propose a Realisation Vote by no later
than 28 February 2018 in the event that such conditions are not
met. It is proposed that the provisions relating to the Realisation
Offer will rst apply by reference to the last six months of the
nancial year ending 31 December 2022 and that the Realisation Vote
mechanism would apply (where the discount-triggered realisation
mechanism has not been activated) by no later than 28 February
2023, and in each case on successive ve year anniversaries of such
dates;
-- an amendment to the Investment Management Agreement to enable
the Company to terminate the agreement in the event of a change of
control of the Investment Manager, following a consultation process
with the Investment Manager;
-- amendments to the circumstances where the Company can
summarily terminate the Investment Management Agreement, to provide
additional clarity around the meaning of "material breach" by the
Investment Manager;
-- an amendment to the base management fee provided in the
Investment Management Agreement such that in calculating such fee,
there shall be excluded the un-invested portion of the cash
proceeds of any new issue of Shares until at least 90 per cent. of
such proceeds are invested in accordance with the Company's
investment policy (or deployed to repay borrowings under any
revolving credit facility of the Company or other liabilities of
the Company) for the rst time;
-- the proposed removal of the existing partnership
(Partnership) from the Company's group (Group) structure and the
replacement of the entitlement of Starfin Carry L.P. (Special
Limited Partner) to receive carried interest (Existing Carried
Interest Entitlement) with a performance fee at the Investment
Management Agreement level (Performance Fee), calculated
substantially on the same basis as the Existing Carried Interest
Entitlement but subject to a change in the measurement period for
the calculation thereof from a ve year period to two years; and
-- authorisation to allot new Shares and to dis-apply
pre-emption rights in respect of up to 20 per cent. of the issued
share capital on the date of the Extraordinary General Meeting.
These authorities are in substitution for the 10 per cent.
authorities taken at the 2017 Annual General Meeting of the Company
and are supplemental to the authorities taken in respect of the
placing programme of the Company.
Further details of the Proposals
Changes to the discount-triggered realisation mechanisms
The existing Articles currently provide for a discretionary
discount-triggered realisation mechanism (Article 49) and, save
where the discount-triggered realisation mechanism has been
activated, the discretion to hold a realisation vote (Article 50),
which are summarised in more detail below.
Realisation Offer
The current position in Article 49 is that if the Ordinary
Shares trade at an average discount to Net Asset Value per Share of
ve per cent. or more during the six month period ending 31 December
2017, the Directors at their absolute discretion may put the
Realisation Offer to Shareholders, subject to applicable legal
requirements. The terms of such Realisation Offer would provide,
broadly, that Shareholders may request for up to 75 per cent. of
their Ordinary Shares to be realised for cash.
In the event that a Realisation Offer is made, the Company will
cease investment (except in limited circumstances) in respect of
Ordinary Shares the subject of valid realisation requests and will
return capital to holders of such Ordinary Shares over time, net of
costs, as investments mature or are otherwise realised. It was
anticipated that a complete return of redeeming investors' pro rata
share of available capital, if any, in this manner may take several
years, depending on the remaining maturities of the investments
held at the time and whether, in the opinion of the Investment
Manager, any such investments require restructuring or the
extension of maturities in order to maximise value for
Shareholders.
Realisation Vote
In the event that the discount-triggered realisation mechanism
is not activated, the current position in Article 50 is that the
Directors shall exercise their discretion under Article 50 to put
forward the Realisation Vote (as an ordinary resolution) to
Shareholders by no later than 28 February 2018.
If Shareholders vote in favour of this resolution then the
Company will procure that a realisation offer on substantially the
same terms as the Realisation Offer described above is offered to
Shareholders. Following the receipt of all elections, if either:
(i) more than 75 per cent of the Ordinary Shares then in issue were
elected for realisation; or (ii) the NAV of the Company following
the realisation would be less than GBP100 million, the Directors
may exercise their discretion not to proceed with the Realisation
Offer and instead put forward alternative proposals which are no
less favourable to electing Shareholders and which may include the
reorganisation or winding up of the Company.
If Shareholders vote against this realisation resolution, then
the Company will continue in existence as it is then constituted
without any liquidity event for Shareholders.
Proposed amendments to the Articles
The Directors are proposing that Article 49 (Realisation Offer)
and Article 50 (Realisation Vote) be amended at the Extraordinary
General Meeting. It is proposed that the discount-triggered
realisation mechanism set out in Article 49 (Realisation Offer)
will be changed such that the existing provisions relating to a
Realisation Offer which are calculated by reference to the discount
over the six month period ending 31 December 2017 shall not apply
as of that date but shall rst apply by reference to the last six
months of the nancial year ending 31 December 2022 and (subject to
not being previously activated) on successive ve year anniversaries
of the same. Further it is proposed that Article 50 (Realisation
Vote) will apply (where the discount-triggered realisation
mechanism has not been previously activated) by no later than 28
February 2023 and on successive ve year anniversaries of such
date.
In assessing this change Shareholders should note that the
Shares are currently trading at a premium to Net Asset Value, and
whilst this cannot be assured, it is questionable whether the
existing discretionary discount related realisation mechanism set
out in the Articles and which applies to the last six months of the
current nancial year will actually be triggered under the existing
scenario.
If the relevant resolution is not approved by Shareholders, the
current provisions contained in the Articles will remain in force
and in the event that the conditions for making a Realisation Offer
are not triggered, a Realisation Vote will be put forward to
Shareholders by no later than 28 February 2018.
Proposed amendments to the Investment Management Agreement and
conditional termination of the Special Limited Partner's carried
interest entitlement
As part of the Proposals, the Directors are also proposing that
certain changes be made to the Investment Management Agreement.
These changes, which comprise a related party transaction, are
subject to the passing of the necessary resolution at the
Extraordinary General Meeting with the Investment Manager and any
members of its group (as related parties) abstaining from voting on
such resolution.
Termination provisions
Save in certain fault based scenarios, the Investment Management
Agreement is currently terminable by either the Investment Manager
or the Company giving to the other not less than 12 months' written
notice. The terms of the Investment Management Agreement provide
that such notice could not have been given before the fourth
anniversary of the IPO Admission (being 17 December 2016) and
therefore the original term of the Investment Management Agreement
was for a minimum initial ve year period.
Certain changes to the termination provisions are now being
proposed.
First, an additional termination right for the Company. The
Company will be able to terminate the appointment of the Investment
Manager in the event of a change of control of the Investment
Manager (as described further and in the manner set out below).
The proposed amendment provides that at any time within 90 days
following a change of control of the Investment Manager (as more
particularly described below), the Company shall be entitled to
give 90 days' written notice to the Investment Manager (Review
Period) during which time the Investment Manager shall seek to
satisfy the Board as to the ability of the Investment Manager to
properly carry out its duties to the Company as set out in the
Investment Management Agreement in a manner that is in the best
interests of the Shareholders as a whole. In the event that at the
end of the Review Period, the Board (acting reasonably) is not
satis ed about the continuing ability of the Investment Manager to
carry out its duties as set out in the Investment Management
Agreement in a manner that is in the best interests of the
Shareholders as a whole, the Board shall be entitled to terminate
this agreement by immediate notice in writing to the Investment
Manager without compensation.
The Investment Manager is licensed by the Guernsey Financial
Services Commission (GFSC) to carry on controlled investment
activities. Under the Protection of Investors Law, the approval of
the GFSC is required for any change of control of the licensed
entity, in this case the Investment Manager. A change of control
shall be deemed to occur where a person acquires a direct or
indirect interest in the Investment Manager and which is calculated
by reference to 15 per cent. or more of the voting rights. Any such
change of control shall require the making of a prior noti cation
to the GFSC under section 28A of the Protection of Investors Law
and for the GFSC to notify or be deemed to notify its non-objection
to such transaction.
A change of control triggering the application of the above
provision shall be deemed to occur when there has been a change of
control pursuant to the Protection of Investors Law, as summarised
above.
Secondly, the Company and the Investment Manager propose that
certain breaches of the Investment Management Agreement should be
deemed to be material breaches which entitle the Company summarily
to terminate the Investment Management Agreement. In particular,
any failure by the Investment Manager to act in good faith with the
due skill, care and diligence which would reasonably be expected
from an experienced manager in the sector and to exercise
appropriate prudence in the management of the Company's portfolio
would constitute a material breach.
For the avoidance of doubt, save as set out above, all of the
other grounds for termination of the Investment Management
Agreement will remain unaltered.
Management fee
The base management fee is currently 0.75 per cent. per annum of
the Net Asset Value attributable to the Ordinary Shares. The
Directors and the Investment Manager have determined that, in the
light of further planned equity capital raisings of the Company, in
calculating such fee, there shall be excluded from the Net Asset
Value attributable to the Ordinary Shares the uninvested portion of
the cash proceeds of any new issue of Shares (or C Shares) until at
least 90 per cent. of such proceeds are invested in accordance with
the Company's investment policy (or deployed to repay borrowings
under any revolving credit facility of the Company or other
liabilities of the Group) for the rst time.
Performance fee
The Company is proposing certain changes to the incentive
arrangements for the Investment Manager and affiliates. It is
proposed that:
-- the Investment Management Agreement will be amended to
incorporate the Performance Fee payable to the Investment Manager;
and
-- the Existing Carried Interest Entitlements of the Special
Limited Partner (which is an af liated company of the Investment
Manager) will be terminated and, as described further below under
"Proposed Changes to Group Structure", the Partnership is intended
to be subsequently dissolved under the Restructuring.
These related changes, which are described in more detail below,
together form part of a related party transaction (as described
further below under "Related party transaction") and are
conditional upon the passing of an ordinary resolution at the
Extraordinary General Meeting.
The provisions relating to the Performance Fee will apply from 1
January 2018 or from such later date on which the partnership
agreement has been dissolved or amended to remove the carried
interest entitlement of the Special Limited Partner (in such latter
case to take effect as if made on 1 January 2018).
The Company and the Investment Manager do not believe that any
Existing Carried Interest Entitlement will be earned by the Special
Limited Partner in respect of the ve year period to 31 December
2017.
Currently, as described in the ongoing expenses sections of the
original IPO prospectus and the prospectus of the Company issued in
2015 in connection with the then placing programme, for successive
ve year periods commencing 1 January 2018, the Hurdle Total Return
will be calculated by reference to the NAV at the start of each
such ve year period (instead of at IPO Admission) and to the
dividends paid and payable in respect of such period.
Once the new arrangement is implemented, the Carried Interest
Entitlement will be replaced by the Performance Fee payable to the
Investment Manager. As with the Existing Carried Interest
Entitlement, the amount of such Performance Fee will continue to be
20 per cent. of the excess (if any) of the returns generated by the
Company over the Hurdle Total Return (described below). In
addition, however, the measurement period over which the
Performance Fee will be calculated will be shortened from ve years
under the Existing Carried Interest Entitlement to two years, with
the payment of any performance fee earned being made at the end of
each such two year period. The other material terms of the Existing
Carried Interest Entitlement will be substantially grandfathered
into the Performance Fee (with appropriate changes to re ect the
modi cation from a limited partnership interest to a contractual
payment mechanism under the Investment Management Agreement).
Accordingly following the proposed change, the Hurdle Total
Return will be achieved in respect of the Performance Fee when the
NAV of the Company at the end of the two year period, plus the
total of all dividends declared and paid to Ordinary Shareholders
in that two year period, is equal to the NAV of the Company at the
start of each two year measurement period, as increased by 8 per
cent. per annum, on a simple interest basis (but excluding
performance fees accrued and deemed as a creditor on the balance
sheet at the start of the two year measurement period). No
performance fee will be payable in relation to performance that
recoups previous losses (if any).
To the extent that the Company makes further issues of Ordinary
Shares and/or repurchases or redeems Ordinary Shares, the Hurdle
Total Return will be adjusted accordingly, by reference to the
issue proceeds of such further issues and dividends declared
subsequent to such issues. Other corporate actions will also be re
ected as appropriate in the calculation of the Hurdle Total
Return.
Authorities to allot New Shares and dis-apply pre-emption
rights
In addition to obtaining the placing programme authorities at
the 2017 Annual General Meeting, the Company was granted authority
from Shareholders to allot new Shares and partially dis-apply the
pre- emption rights contained in the Articles in order to allow the
Company to issue new Shares and/or sell such new Shares out of
treasury by way of tap issues without rst offering them to existing
Shareholders on a pro rata basis. Such authorities were obtained in
respect of up to 10 per cent. of the Shares in issue as at the date
of the Annual General Meeting.
At the time of the Annual General Meeting there was an exemption
from the requirement to publish a prospectus in respect of an
application for admission to trading for shares representing, over
a period of 12 months, less than 10 per cent. of the securities
already admitted to trading. Following the implementation of the
Prospectus Regulation in the United Kingdom on 20 July 2017, this
threshold was increased from 10 per cent. to 20 per cent. and this
now enables issuers such as the Company (subject to obtaining the
requisite Shareholder authorities) to issue up to (but not
including) 20 per cent. of the securities already admitted to
trading over 12 months by way of tap issues without any requirement
to publish a prospectus.
The Investment Adviser continually monitors and sources suitable
investment opportunities for the Company and these may exceed the
capital available to the Company. The Directors wish to take
advantage of the enlarged exemption in order to allow the Company
to carry out larger tap issues and pursue larger investment
opportunities in a timely manner as they arise in the future
without the requirement to publish a prospectus and incur the
associated advisory costs.
The Board will therefore be seeking Shareholder authorities to
allot new Shares and dis-apply the pre-emption rights contained in
the Articles in respect of up to 20 per cent. of the Shares in
issue at the date of the proposed Extraordinary General Meeting.
These authorities will replace the existing tap issue
authorities.
The Company will only allot new Shares (or sell such shares out
of treasury) at a premium to the prevailing Net Asset Value per
Share and when there is suf cient demand for the Shares.
The proceeds of any share issuance and sales out of treasury,
implemented pursuant to this power will be invested in accordance
with the Company's investment policy or deployed to repay
borrowings under any revolving credit facility of the Company or
other liabilities of the Group.
The existing placing programme authorities will not be affected
by the passing of the enlarged tap issuance authorities.
Proposed changes to Group structure
The Company is proposing that the internal structure of the
Group will be reorganised in due course to facilitate greater
exibility for the way in which the Company nances the investments
it makes (Restructuring).
The Partnership currently sits between the Company and its
Luxembourg subsidiary (Luxco). As a preliminary step under the
Restructuring, it is proposed that the Partnership will be
dissolved (with the Investment Management Agreement being amended
accordingly as described above).
It is intended that the Company will then replace the
Partnership with a new wholly-owned entity (New Intermediate
Company). Under the Restructuring it is also envisaged that a
parallel investment structure to the New Intermediate Company and
Luxco will also be established under the Company.
The Restructuring will be subject to certain third party
approvals which have not yet been obtained, including the consent
of Lloyds Bank plc and the related amendment of the existing
revolving credit facility of the Company.
The speci c logistics of the Restructuring and its
implementation will also be subject to tax and other advice. It is
currently expected that the Restructuring will be implemented
before the end of 2017.
Other than to the extent that it relates to the Investment
Management Agreement and the Partnership Agreement or otherwise
represents a related party transaction with the Investment Manager
or its af liates requiring the approval of Shareholders under the
Listing Rules, the Restructuring is not expected to require the
approval of Shareholders.
Bene ts of the Proposals
The Board considers that the opportunity for non-bank,
alternative lenders to extend debt nancing to the real estate
sector in Europe that Starwood Capital Group observed in 2012,
resulting in the Company's launch, continues. The Investment
Manager continues to identify new and attractive investment
opportunities for the Company and with the terms outlined in this
announcement, the Investment Manager and the Investment Adviser
should be able to continue to further strengthen their European
real estate debt platform, to the bene t of the Company.
The removal of any uncertainty relating to the application of
the Realisation Offer and Realisation Vote in the near term is
expected to provide the Company and the Investment Manager with a
more stable platform for new investment and for future equity
capital raisings, while the adoption of a set five year cycle of
potential Realisation Offers and Realisation Votes should provide
comfort to Shareholders and prospective investors in relation to
the risk of a long-term discount emerging.
The Board believes that the changes proposed to the Investment
Management Agreement provide greater clarity as regards the
existing termination provisions and the consequences of such
termination in these circumstances. The proposed two year
measurement period for the Performance Fee is more appropriate
given the typical duration of loans within the portfolio. These
amendments should also enable the Investment Manager and the
Investment Adviser to further strengthen their European real estate
debt platform, to the bene t of the Company.
Increasing the number of new Shares which may be issued pursuant
to tap issues and therefore taking advantage of the new prospectus
exemption, will allow the Company to continue to issue (or sell)
Ordinary Shares at a premium to the prevailing net asset value per
Ordinary Share when there is suf cient demand for the Ordinary
Shares, and thereby enable the Company to react quickly to secure
new investment opportunities sourced by the Investment Manager as
they arise.
In short, the Board believes that the expertise of Starwood
Capital Group and its employees and their access to transactions
continues to confer signi cant bene ts on the Company in terms of
the ability to source and underwrite attractive lending
opportunities offering good risk adjusted returns that other
lenders would not typically be in a position to provide. The
Company has also bene ted in its rst ve years from being able to
co-invest with other funds managed by Starwood Capital Group, and
this has made possible access to lending opportunities such as
Centre Point, Aldgate Tower and Salesforce Tower that would
otherwise have been too big for the Group. The Directors believe
that this co-investment opportunity will continue to be bene cial
to the Company.
The Board is of the view that with the continued involvement of
the Investment Manager on the basis of the Proposals, the Company
is in a strong position to meet its objectives over the medium to
longer term.
Related party transaction
The Investment Manager and the Special Limited Partner are both
"related parties" for the purposes of the Listing Rules and the
proposed amendments to the Investment Management Agreement (and the
related proposed amendments and dissolution of the Partnership)
therefore will require Shareholder approval at the forthcoming
Extraordinary General Meeting by the necessary enabling resolution,
with the Investment Manager and any members of its group (as
related parties) abstaining from voting on the relevant
resolution.
Update on Current Performance
The Company expects to release its interim results for the 6
month period to 30 June 2017 on or about 11 September 2017. The
Company continues to perform in line with the Board's expectations
and the unaudited NAV as at 31 August 2017 is not expected to vary
signi cantly from the unaudited NAV as at 31 July 2017, as
announced by the Company on 14 August 2017.
Enquiries
Duncan MacPherson
Starwood Capital Europe Advisers, LLP
Tel: +44 20 7016 3650
Robert Peel
Fidante Capital
Tel: +44 20 7832 0983
Notes:
Starwood European Real Estate Finance Limited is an investment
company listed on the main market of the London Stock Exchange with
an investment objective to provide Shareholders with regular
dividends and an attractive total return while limiting downside
risk, through the origination, execution, acquisition and servicing
of a diversified portfolio of real estate debt investments in the
UK and the wider European Union's internal market.
www.starwoodeuropeanfinance.com.
The Group is the largest London-listed vehicle to provide
investors with pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance
Partners Limited, an indirect wholly-owned subsidiary of the
Starwood Capital Group.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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