PSSL Operational Restrictions – Statement by Pollen Street Capital
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9 March 2020
PSC Credit Holdings LLP ("PSC")
Operational restrictions on managing Pollen Street Secured Lending plc ("PSSL")
As explained in PSC's announcement on 2 March 2020, on 8 January 2020, the board of PSSL (the "Board") sent PSC a list of operational steps which, the Board said, should not be undertaken without the prior approval of the Board (the "Operational Restrictions").
PSC promptly informed PSSL of the practical implications of these restrictions on 9 January 2020 and has made numerous attempts to suggest alternative proposals. PSSL has refused to engage on any alternative and instead relied on the Operational Restrictions to allege a breach by PSC of the investment management agreement between PSC and PSSL (the "IMA").
As explained below, the practical effect of these Operational Restrictions is that PSC is severely constrained in its ability to manage PSSL on a day-to-day basis, which PSC believes risks causing real damage to PSSL and its shareholders.
2. The Operational Restrictions
The Operational Restrictions are as follows:
(i) the entering into of any new investments or arrangements or commitments or variations to existing investments or arrangements or commitments which, in each individual case, exceed £3 million in value (or the foreign currency equivalent thereof) and/or which in the aggregate exceed £20 million in value (or the foreign currency equivalent thereof);
(ii) the disposal of any investment;
(iii) the entering into of any new debt or borrowing facilities and/or the variation of the terms of any existing facility; and
(iv) the drawdown of any existing facilities.
3. The Operational Restrictions compared to the City Code on Takeovers and Mergers (the "Code") and PSC's alternative proposal
The Board has stated that the Operational Restrictions are necessary to ensure compliance with provisions in the Code to prevent actions which may frustrate a potential offer. The Operational Restrictions are far more restrictive than PSSL's shareholder-approved investment policy or the restrictions that would otherwise apply to PSSL under the Code during an offer period. In terms of the Code, transactions of 10% or more of the assets of an offeree would normally be regarded as being of a material amount. In contrast, by way of example, the Operational Restrictions capture all disposals of any investment and any new investment which is greater than 0.5% of the assets of PSSL as at 31 January 2020.
The alternative restrictions PSC proposed to the Board required PSC to seek Board approval for any new investments exceeding 5% of PSSL's NAV, which is well within the Code requirements, and to prepare for the Board monthly reports to provide additional visibility of the operations of PSSL during the offer period.
4. The impact of the Operational Restrictions
The Operational Restrictions are so broad as to capture a significant number of the ordinary course transactions undertaken by PSC in managing PSSL on a day-to-day basis under PSSL's pre-existing investment policy. The Board does not have the expertise, knowledge or relevant authorisations from the Financial Conduct Authority ("FCA") to make decisions on the day-to-day management of PSSL.
PSSL's underlying assets are redeemed by borrowers on an on-going basis, with PSSL receiving on average more than £50 million each month in 2019. It is therefore necessary to make investments frequently to ensure PSSL's resources are deployed to maximise shareholder value. With the Operational Restrictions set at £3 million individually and £20 million in aggregate, PSC cannot now proceed, without approval from the Board, in the ordinary course redeployment of capital. In addition, PSC is unable to enter into new hedging arrangements as existing hedges mature or draw down existing facilities without such approval, which means day-to-day cash management activities and accessing liquidity is severely challenging.
PSC has significantly improved the performance of PSSL since it assumed management in 2017 by reinvesting capital in high quality assets. Last week PSSL missed the opportunity to make a significant investment in a strong asset portfolio that PSC believes would have made a material contribution to the 2020 performance of PSSL. New and existing relationships are at risk due to PSC's inability to execute investment decisions promptly and without significant additional uncertainty and documentary complexity.
5. Next steps
As explained above, PSC promptly informed PSSL of the practical implications of these restrictions on 9 January 2020 and has made numerous attempts to suggest alternative proposals. PSSL has instead relied on the Operational Restrictions to allege a breach by PSC of the IMA. PSC fears that this nonengagement will have a material negative impact on the performance of PSSL. PSC therefore encourages PSSL shareholders to consider appointing their own representatives to the Board to ensure the Board has the relevant expertise and, if necessary, to lead a strategic review of the options available to PSSL before significant and permanent damage to PSSL occurs.
In light of the Operational Restrictions, PSC has notified the FCA of the effect these are having on PSC's ability to manage PSSL in accordance with PSC's regulatory obligations.
Lindsey McMurray, managing partner of Pollen Street Capital, said:
"The restrictions imposed by the board are severely restraining our ability to manage PSSL for the benefit of shareholders. It is now time for shareholders to appoint their own representatives to the board to avoid causing significant and permanent damage to PSSL."
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