Pollen Street Capital’s further statement on PSSL

NOT FOR PUBLICATION, DISTRIBUTION OR RELEASE, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA (OTHER THAN THE UNITED KINGDOM), CANADA, AUSTRALIA, THE REPUBLIC OF SOUTH AFRICA OR JAPAN OR ANY OTHER JURISDICTION IN WHICH THE DISTRIBUTION OR RELEASE WOULD BE UNLAWFUL.

In response to the announcement by Pollen Street Secured Lending plc (“PSSL” or the “Company”) on 25 February (the “PSSL Announcement”), PSC Credit Holdings LLP (with its affiliates “PSC”) has received enquiries from concerned investors about the background to the situation and the potential impact on PSSL. A chronology of events relating to the points described below is included in the Annex to this announcement.

Summary

PSC would like to make it clear that:

  • PSC has always acted with the utmost integrity and in the best interests of all shareholders of PSSL. This continues to be the case following PSC becoming aware of the proposal from Waterfall Asset Management, LLC (“Waterfall”) to potentially make an offer for PSSL.
  • PSC strongly refutes the allegation that PSC has made ‘serious, repeated and ongoing breaches’ of the IMA as set out in the PSSL Announcement, and has received legal advice accordingly.
  • PSC urged PSSL to proceed with caution after PSSL’s Board (the “Board”) received a request for significant amounts of information (the “Diligence Request”) from Waterfall. PSC expressed this caution because the requested information was commercially sensitive and was to be provided to Waterfall, a competitor business, without appropriate and customary contractual confidentiality protections, and despite it being unclear whether Waterfall’s potential offer would be deliverable, given that:
    • The offer of 900p including the Q1 dividend is significantly below Net Asset Value (NAV).
    • The extent of the information requested as part of the process meant that there would be significant conditionality before any price would be confirmed.
  • PSC proactively attempted to meet with the Board on a number of occasions to discuss practical solutions to address these issues. Before PSC could even start on the Diligence Request the Board began threatening a breach of the investment management agreement between PSSL and PSC (the “IMA”) almost immediately after PSC had agreed a way forward and less than a week after informing PSC of the Waterfall approach.
  • PSC therefore urged the Board to consult with a wide body of shareholders regarding Waterfall’s proposed offer, to allow transparent and open discussions regarding how deliverable it would be, but this did not happen.
  • PSSL is a lending business and therefore requires day-to-day management and significant expertise. The PSSL Board risked significant value destruction for PSSL’s shareholders by imposing unnecessary operational restrictions on PSC as manager of PSSL that have the potential to disrupt the day-to-day operations of the trust.
  • Notwithstanding its concerns, PSC has at all times acted reasonably and in good faith to comply with PSSL’s due diligence requirements, placing more than 2,000 requested documents in a secure data room in line with the process agreed with the Board.
  • Information on the dividend was released by in accordance with protocols agreed with PSSL.

The below provides further detail and evidence regarding these points. A detailed chronology of events relating to the points described below is included in the Annex to this announcement.

Lindsey McMurray, Managing Partner of Pollen Street Capital, said:       

“Pollen Street Capital has acted with the upmost integrity throughout this process and has sought to fulfil its fiduciary duty as investment manager to always protect the interests of shareholders. Despite numerous attempts to provide expert advice and propose a practical approach since learning of the Waterfall proposal, the Board has refused to engage with us constructively and now risks endangering shareholder value. We are committed and ready to assist PSSL however we can for the benefit of all shareholders.”

Alleged Breach of the IMA

PSC strongly refutes the allegation that PSC has made ‘serious, repeated and ongoing breaches’ of the IMA as set out in the PSSL Announcement, and has received legal advice accordingly. Specifically:

  • PSC has sought to engage with PSSL to promptly comply with the extensive Diligence Request, whilst ensuring that PSSL does not disclose commercially sensitive information to a potential competitor prior to confirming the potential offer is deliverable and/or of interest to a wide body of shareholders. PSC considers that it has demonstrably acted reasonably and in good faith to meet PSSL’s requirements, including placing more than 2,000 documents requested in the Diligence Request into a data room.
  • Despite PSSL imposing broad and far-reaching operational restrictions on PSC’s authority and ability to manage its assets, PSC has made significant efforts to propose and agree appropriate restrictions in order to enable the Board to comply with the City Code on Takeovers and Mergers (the “Code”) during an offer period while seeking to manage the Company in accordance with its obligations under the IMA.
  • PSC has continued to source new opportunities to deploy capital on behalf of PSSL to build on the improved performance that has been delivered since PSC assumed management of the Company in 2017.
  • Information on the dividend was released in accordance with protocols agreed with PSSL.

In any event, PSC does not believe that PSSL giving notice to terminate the IMA is appropriate or justified, especially at a time when the Waterfall approach is under consideration.  PSC believes this decision by the Board has served only to create unnecessary risk to the delivery of performance of the Company.

 PSC’s attempted engagement with the Board

PSC has sought to engage constructively and in good faith with PSSL since the Waterfall approach, while acting at all times in what it considers are the best interests of PSSL shareholders as a whole, rather than any single shareholder.

From the moment that PSC was made aware of the Waterfall approach, on 8 January, PSC has acted proactively, diligently and prudently. Having considered the Diligence Request in detail, it wrote to the Board on 12 January expressing concern and caution. PSC met with the Chairman of PSSL on 13 January to agree a constructive and appropriate response. Since that meeting, the Board has presented a series of formal communications to PSC, including, as early as 15 January, accusations of breach of obligations under the IMA. At no point has the Board of PSSL sought to engage in constructive dialogue or practical solutions with PSC, to the detriment of PSSL’s shareholders.

Information sharing in relation to the Waterfall approach

As noted by PSSL, the potential offer by Waterfall is subject to due diligence. PSC was made aware of the Diligence Request on 9 January and notwithstanding its legitimate concerns regarding the sharing of extensive sensitive information has expended significant effort and resources both internally and externally to work with the Board to fulfil the request. 

PSC believes the Diligence Request made by Waterfall must be considered very carefully as:

  • Such an extensive list of due diligence requests indicates there is a significant amount of conditionality and risk that the proposal is ever delivered to shareholders.
  • Some of the items requested, such PSC investment papers, are not the property of PSSL and cannot be provided.

PSSL has described the Diligence Request as “confirmatory”, yet satisfying it will require the provision of thousands of documents, many of which are highly commercially sensitive.

  • Upon receipt of the Diligence Request, PSC promptly responded to PSSL and expressed concern that such request: (i) was far too detailed and off-market in the context of an offer for a public company and (ii) would result in confidential and sensitive information on PSSL being provided to a competitor to the detriment of shareholders.
  • PSC attended a meeting with PSSL where it provided its views on each item in the Diligence Request. At this meeting, PSC explained what would be required to collect the information requested (both in terms of the effort required to do so and the availability of the documents) and noted that some documents/information requested were proprietary to PSC.
  • PSC and PSSL together agreed to a specific list of items that would be collated and uploaded into a data room
  • PSC requested appropriate contractual protections be put in place to ensure the confidentiality of the documents and to restrict how they could be used by Waterfall, a competitor to PSSL as a provider of funds to PSSL’s underlying borrowers. PSSL failed to engage with PSC on these points and it is still unclear to PSC what protections against misuse of information have been put in place.
  • PSC has nonetheless worked with advisers and uploaded more than 2,000 documents to a data room specified by PSSL that addressed a significant number of the high priority items identified as such in the Diligence Request.

PSC has always been, and continues to be, ready to engage constructively with PSSL to respond to the Diligence Request.

Operational Restrictions

Following receipt of the proposal from Waterfall in January, PSSL sought to impose a list of transactions which should not be undertaken by PSC without the prior approval of PSSL (the “Operational Restrictions”).

The restrictions were set without reference to, or understanding of, the day to day operation of the Company. PSC promptly made significant efforts to discuss these Operational Restrictions and to propose alternatives in order to enable the Board to comply with the Code during an offer period, while also continuing to effectively manage the Company in accordance with its obligations under the IMA.

However, PSC is concerned at PSSL’s lack of constructive engagement in agreeing appropriate restrictions, and that this lack of constructive engagement may have a detrimental effect on the Company and its shareholders.

On 8 January, PSSL sent PSC the Operational Restrictions, a list of transactions which should not be undertaken without the prior approval of PSSL:

  • The scope of the Operational Restrictions related to more than “certain matters” as suggested by in the PSSL Announcement. Rather, the Operational Restrictions are instead so broad as to capture a significant number of the ordinary course transactions undertaken by PSC in managing the investment trust on a day-to-day basis, including its ability to meet its already agreed contractual commitments.
  • PSC responded promptly to PSSL’s request to implement the Operational Restrictions and expressed concern about their extensiveness, the impact they have on PSC’s ability to manage the investment trust effectively and, consequently, their potential to negatively impact shareholder value over time. PSC also noted that the Board does not have Financial Conduct Authority authorisation to make decisions on the day-to-day management of the Company
  • On 20 January a meeting took place whereby a revised set of proposals were agreed in principle and PSC submitted the revised proposal to PSSL in writing. This proposal continued to be more restrictive than required by the Code, but would not unduly restrict PSC’s ability to manage the investment trust effectively.
  • PSSL did not engage with the revised proposal submitted by PSC, nor any of the other proposals PSC made thereafter. Instead, PSSL continued to insist on the initial Operational Restrictions being complied with. PSSL failed to provide any rationale as to why the Operational Restrictions were appropriate, or why the revised proposals made by PSC were unacceptable.
  • PSC has sought to submit sufficient details of transactions to PSSL to enable the Company to give approval and has engaged with the Panel on Takeovers and Mergers to ensure no transactions are undertaken which could be frustrating actions under the Code.
  • PSC is concerned that PSSL’s lack of constructive engagement in facilitating the ordinary course day-to-day management of the Company’s assets may have a detrimental effect on PSSL and may therefore adversely impact shareholder value.

PSC has always been, and continues to be, ready to engage constructively with PSSL to agree a workable set of restrictions while the potential offer from Waterfall is being considered.

 Dividend

The move from a 12p per quarter dividend to 15p per quarter dividend has been a key milestone for PSSL’s shareholders since PSC took on the turnaround of the Company in 2017.

The recommendation of PSC to the Board to move to a 15p per quarter dividend was initially presented in the December 2019 newsletter to shareholders. The monthly newsletters seek to outline all material information to shareholders and the newsletter which announced information relating to PSSL’s dividend was prepared and released on entirely normal protocol as specifically agreed by the Board since PSC assumed management in 2017. This authority was not revoked by PSSL at the time PSC published the information in the December 2019 newsletter.

However, following PSSL’s request, PSC removed references to the 15p dividend from the factsheet published on PSSL’s website and proposed a daily call with PSSL to ensure that no further mis-communication was made during the potential offer process.  PSC’s proposal of daily calls has not been taken up by PSSL.

Consultation with Shareholders

Since being notified of the Waterfall approach, PSC requested on multiple occasions that the Board publicise the proposed offer so that it can be fairly assessed by all PSSL shareholders. These requests were denied until the PSSL Announcement.

Given that, and to the extent pursuing the potential offer was shareholders’ choice, the outcome of the Waterfall approach would have been determined in the coming months. PSC believes therefore that the termination of the IMA has served no purpose other than to destabalise the Company before it is known whether the potential offer is deliverable or desirable for PSSL shareholders.

Conclusion

PSC has strongly advised a careful, prudent but practical approach to information provision and management of the Company until the deliverability and attractiveness of the Waterfall proposal is established. The actions taken in good faith by PSC reflect its reputation as an experienced, professional investment manager that has always ensured the interests of all shareholders are considered and protected.

Almost immediately after PSC was informed of the Waterfall proposal, it was met with a confrontational approach from the Board, which has restricted its ability to respond to the Diligence Request and, more importantly, operate PSSL in the best interests of its shareholders.  PSC has nevertheless at all times attempted to engage proactively and constructively with the Board to explain the issues and reach practical solutions so that the Waterfall proposal could be properly assessed.

While PSC considers the termination to be wholly unjustified, unnecessary and an action which can only lead to potential risk and damage to shareholders, it is satisfied that the situation has been made public so that shareholders can consider and determine the appropriate and desired approach. PSC remains ready to assist and deliver value for all shareholders as they consider appropriate.

 

Annex

A. Information sharing in relation to the Waterfall approach

9 January

PSC received eight-page Diligence Request

12 January

PSC wrote to PSSL to express concern as to extent of Diligence Request

13 January

Simon King and PSC met to discuss the Diligence Request and agreed that PSC would provide input to staging of provision of information

13 January

PSC provided line-by-line input into the staging of information provision

15 January

PSSL wrote to PSC alleging PSC was in breach of the IMA

15 January

PSC wrote to PSSL requesting a meeting to agree a constructive approach

17 January

PSC met with PSSL to discuss the practicalities of sharing the information

20 January

PSC met with PSSL and advisers and worked through each item in the Diligence Request to agree what would be produced in the data room and where data would be redacted

22 January

PSC informed PSSL the data room with documents agreed to be provided at the meeting on 20 January would be ready by 24 January and requested standard contractual protections before opening the data room

23 January

PSC informed PSSL the data room was ready and included more than 2,000 documents

9 February

PSC informed PSSL that, despite PSSL failing to engage with PSC’s request for standard contractual protections to be put in place, PSC will open the data room early next week

10 February

PSSL wrote to PSC threatening to terminate the IMA unless documents are uploaded to a specified data room

11 February

PSC uploaded documents to the data room specified by PSSL

14 February

PSSL requested additional information and documents be uploaded to the data room

 

B. Operational Restrictions

8 January

PSSL imposed Operational Restrictions

9 January

PSC wrote to PSSL to express concern about extensiveness of restrictions and the impact they would have on PSC’s ability to manage the investment trust effectively

13 January

Simon King and PSC met to discuss Operational Restrictions. PSC awaited further input on Operational Restrictions from PSSL after this meeting.

15 January

PSSL wrote to PSC alleging PSC was in breach of the IMA

15 January

PSC wrote to PSSL requesting a meeting to agree a constructive approach

17 January

PSC met with PSSL where PSSL asked PSC to make a new proposal on the Operational Restrictions

20 January

PSC met with PSSL and advisers to agree a set of workable restrictions. PSC agreed to follow-up with workable restrictions in an email

21 January

PSC followed-up with restrictions agreed at meeting on 20 January

23 January

PSSL wrote to PSC requesting PSC comply with the Operational Restrictions or to propose a new set of restrictions, despite what was discussed at the meeting on 20 January

4 February

PSC wrote to PSSL reiterating the need to engage constructively on the Operational Restrictions

10 February

PSSL wrote to PSC threatening to terminate the IMA unless PSC complies with the Operational Restrictions