Notice of AGM (9464F)

TIDMSED

RNS Number : 9464F

Saltus European Debt Strategies Ltd

22 June 2012

SALTUS EUROPEAN DEBT STRATEGIES LIMITED

(The "Company") (Registered in Guernsey - Number 46912)

Registered Office:

2(ND) FLOOR, REGENCY COURT, GLATEGNY ESPLANADE,

ST PETER PORT, GUERNSEY GY1 3NQ

TELEPHONE: [phone] FACSIMILE: [phone]

E-MAIL: [e-mail]

 
 For immediate Release   22(nd) June 2012 
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Posting of circular convening 2012 annual general meeting including recommended proposals for a restructuring of the Company

A circular has been posted today convening the annual general meeting ("AGM") for Saltus European Debt Strategies Limited (the "Company") to be held on 13 July 2012.

Summary of Proposals

The Board recognises that a significant proportion of Shareholders would like to have their capital redeemed whilst other significant Shareholders have recently approached the Board expressing support for continuing but with a revised investment strategy. The proposals to be put to Shareholders, the key elements of which are summarised below, are designed to address both groups without disadvantaging either.

-- Business to be conducted at the AGM comprises both ordinary business and special business. The special business will include resolutions to restructure the Company to create a share class to enable a managed wind down and return of capital to those shareholders who wish to have their shares redeemed ("Run-Off Shares"), whilst providing the alternative of a continuation class for those investors who prefer to remain invested ("Ordinary Shares").

-- The new investment objective and policy in relation to the Ordinary Shares will be to generate a gross internal rate of return of at least 20 per cent. per annum over the life of the Ordinary Shares by acquiring and actively managing secondary hedge fund positions, both of a credit and distressed orientated nature as well as illiquid and unquoted equity positions.

-- If the Proposals are approved, the Board expects to make an initial distribution of approximately 40% of the Company's capital attributable to the Run-Off Shares in November 2012.

-- Proposed equity fund raising to be conducted in the autumn to ensure that the net asset value attributable to the Ordinary Shares is at least GBP35m. All of the Ordinary Shares will be re-designated as Run-Off Shares and the entire Company wound down if the equity fundraise is not completed by 31 December 2012 or fewer than 40% of existing Shareholders elect to participate in the continuation class.

-- The Board intends to change the basis of valuation of the portfolio to reflect the amended investment objectives of the Company. It will engage independent third party valuation agents (instead of relying on valuations by underlying managers) to assess fair market values and recovery expectations of the Company's investments. Whilst the adoption of such a policy is not expected to have a material impact on the carrying value of that element of the Company's portfolio which has known redemption dates, it is more likely to lead to a significant reduction in the carrying value of the Company's Long Lock Funds and Liquidating Share Classes.

-- The Board intends to seek admission of the Ordinary Shares to trading on the Specialist Fund Market and to delist them from listing under Chapter 14 of the Listing Rules on the Official List. The Run-Off Shares will be unlisted to reduce costs.

-- If the Proposals are approved, a continuation vote will be held in respect of the continuation class at the time of the second annual general meeting following the AGM (requiring at least 50% to vote in favour for the Company to continue) and thereafter every year (requiring at least 75% to vote in favour).

For further information please contact:

Jon Macintosh

Saltus Partners LLP

[phone]

Ed Gascoigne-Pees

FTI Consulting Group Ltd

[phone]

Posting of circular convening 2012 annual general meeting including recommended proposals for a restructuring of the Company

A circular has been posted today convening the annual general meeting ("AGM") of Saltus European Debt Strategies Limited (the "Company") to be held at the Company's offices, 2(nd) Floor Regency Court, Glategny Esplanade, St Peter Port Guernsey GY1 3NQ at 10am on 13 July 2012.

As announced in outline by the Company on 23 May 2012, the business to be conducted at the AGM comprises both ordinary business, such as the approval of theannual accounts and the reappointment of directors and auditors and also special business, including resolutions to restructure the Company to enable a managed wind down and return of capital to those shareholders who would like this option whilst providing the alternative of a continuation class, subject to the Company being able to raise fresh equity to give it sufficient critical mass (together, the "Proposals"). If these proposals are not approved by the requisite majority of shareholders of the Company ("Shareholders"), Shareholders will also be afforded the opportunity to vote on a managed wind-down of the Company with no continuation class alternative.

   1.      Background to the Proposals 

In August 2009, in view of the Company's poor performance during the financial crisis of 2008-9 and theilliquidity of the investment portfolio and following consultation with Shareholders at the time, the directors of the Company (the "Directors" or the "Board") agreed to put to Shareholders at the 2012 AGM a resolution relating to the termination of the Company. In the Company's accounts for the year ended 31 December 2011, the Board confirmed its intention to:

"present a vote at the forthcoming Annual General Meeting to consider the Company's future. Accordingly, a special resolution will be proposed at the Annual General Meeting to this effect."

However, since the publication of those accounts, as the Company announced on 23 May 2012, the Boardwas approached by a major unconnected investor, Hatteras Master Fund LP, who indicated its desire to purchase a significant stake in the Company and that it would be supportive of a continuing share class which would have an amended investment objective focused on acquiring and actively managing secondary hedge fund positions, both of a credit and distressed orientated nature as well as illiquid and unquoted equity positions. Since the date of that announcement, Hatteras Funds has purchased Shares carrying approximately 10 per cent of the voting rights in the capital of the Company.

In light of the views expressed by Hatteras Funds and certain other Shareholders to whom Saltus Partners LLP (the Sub-Manager) has spoken, the Board recognises that there is potentially significant demand for a continuation class. At the same time, the Board acknowledges that there is also a significant pool of Shareholders who would like their capital returned. The Board is therefore seeking to put proposals to Shareholders which address both of these positions and which are intended to put those Shareholders who would like their capital returned in no worse a position than if Shareholders had voted for a managed winding-down of the Company.

   2.      Summary of the Proposals 

The key elements of the Proposals, which provide for a managed wind down for those shareholders who wishto have their shares redeemed and for a continuation class for those who prefer to remain invested, comprise:

-- amendments to the investment objective of the existing share class (the "Ordinary Shares"), conditionally upon the completion of an equity fundraise, to focus on acquiring and actively managing a diversified portfolio of assets purchased at a discount to their fair value both in the credit and distressed securities arena and illiquid and unquoted equity positions;

-- an equity fundraise by way of issue of Ordinary Shares to ensure that the net asset value attributable to the Ordinary Shares following completion of the fundraise is at least GBP35 million (the "Equity Fundraise");

-- the de-listing of the Ordinary Shares from the Official List of the UK Listing Authority (the "Official List") and the main market (the "Main Market") of London Stock Exchange plc (the "LSE") and their admission to trading on the Specialist Fund Market (the "SFM"), a market of the LSE;

-- the creation (by way of re-designation) of a new unlisted class of Shares (the "Run-Off Shares") with the objective of achieving a managed wind-down of the assets attributable to that class; and

-- an opportunity for Shareholders to elect whether to continue to hold Ordinary Shares or have their Ordinary Shares re-designated as Run-Off Shares at the time of the Equity Fundraise (the "Share Re-designations").

If either:

-- the Equity Fundraise is not completed in accordance with its terms on or before 31 December 2012; or

-- the Directors announce publicly that there is no realistic prospect of the Equity Fundraise being completed by 31 December 2012,

all of the Ordinary Shares will (subject to applicable law and regulation) be automatically re-designated as Run-Off Shares and the Ordinary Shares' listing will be cancelled.

If the Proposals are not approved by Shareholders, a special resolution to effect a managed winding down will be put to Shareholders. The Proposals are further described in paragraphs 3-9 below.

   3.      Further details of the Ordinary Shares under the Proposals 

The opportunity

The credit boom during the years leading up to the market turmoil of 2007 and 2008 saw the launch of many hedge funds and funds of funds whose mandate was to invest in credit instruments, including corporate, credit, structured credit and real estate credit markets.

The ensuing market turmoil saw prices fall to record lows in many cases and was combined with a significant reduction in market liquidity. This caused many investors to submit redemption requests for these funds, which were often unable to be honoured because of the reduced demand for illiquid assets and the poor performance of the underlying companies and vehicles.

More than three years later, many of these hedge funds still own significant positions in such assets andinvestors who had not previously expected to find themselves locked up in illiquid investments have experienced poor returns in many cases, as well as frustration that they are unable to monetise their investments. A secondary market for these assets has developed which has seen prices of these instruments frequently trading at significant discounts to the stated value of the investments and, in the opinion of the Sub-Manager, to the fair value of these investments. As time has gone by, the value of these investments has continued to diminish. With liquidation processes taking longer than expected, investors are increasingly becoming frustrated and looking to sell their holdings at prices which the Sub-Manager believes represent compelling value for patient investors who are able to hold such illiquid assets.

Investment objective and investment policy

Upon the Share Re-designations becoming effective (as described more fully in paragraph 5 below):

-- the investment objective in relation to the assets and liabilities attributable to the Ordinary Shares (the "Ordinary Shares Pool") will be to generate a gross internal rate of return of at least 20 per cent. per annum over the life of the Ordinary Shares class from that date; and

-- the investment policy in relation to the Ordinary Shares Pool will be to invest in a diversified portfolio of assets purchased at a discount to fair value. The portfolio is expected to comprise interests in funds of hedge funds, hedge funds, structured products and individual assets and portfolios of assets, both in the credit and distressed securities arena and illiquid and unquoted equity positions. The Company may also invest in longer lock-up funds purchased at discounts to fair value in the secondary market. The Directors intend to maintain a diversified pool of assets in the Ordinary Shares Pool and no individual underlying asset will account for more than 10 per cent. of the Ordinary Shares Pool at the point of purchase.

Dividend policy

The Board has no current intention of paying any dividend on the Ordinary Shares. This policy will be subject to regular review by the Directors.

Discount management provisions

As a listed closed-ended share class, there is always the possibility of the Ordinary Shares on occasion trading at a discount to their net asset value. However, the Directors have given detailed consideration to the discount risk and how this can be managed.

Basis of valuation

The Company will adopt a revised basis of valuation, as is explained in further detail in paragraph 7 below. The Directors believe this revised basis is likely to result in the Company's share price more closely following the stated NAV than has previously been the case.

Continuation vote

Holders of Ordinary Shares ("Ordinary Shareholders") will be afforded the opportunity to vote to continue as an investment class at the time of the second annual general meeting of the Company following implementation of the Proposals and at each subsequent annual general meeting. At the time of the second annual general meeting of the Company following the AGM, not less than 50 per cent of Ordinary Shareholders voting on the resolution will be required to vote in favour of the resolution in order for the Company to continue as an investment class. That percentage will increase to 75 per cent at each subsequent annual general meeting.

If Ordinary Shareholders do not vote in favour of continuation at the relevant time, the investment policy of the Ordinary Share class will be amended so as to achieve a managed wind-down of the Ordinary Share Pool.

Purchases of Ordinary Shares by the Company

A special resolution will be put to Shareholders at the AGM to grant the Directors authority to make market purchases, subject to the Equity Fundraise being completed in accordance with its terms, of up to 14.99 per cent. of the Company's issued Ordinary Shares. A renewal of the authority to make purchases of Ordinary Shares will be sought from Shareholders at each subsequent annual general meeting of the Company. For the avoidance of doubt, no Ordinary Shares will be repurchased using this authority prior to the completion of the Equity Fundraise in accordance with its terms.

Notwithstanding the above discount management provisions, Ordinary Shareholders should not expect that they will necessarily be able to realise, within a period which they would otherwise regard as reasonable, their investment in the Company, nor can they be certain that they will be able to realise their investment on a basis that necessarily reflects the value of the Ordinary Share Pool.

Specialist Fund Market (SFM) Admission

Conditional upon (and immediately following) completion of the Equity Fundraise in accordance with its terms, the Company intends to cancel the listing of the Ordinary Shares on the Official List and the Main Market and seek admission to trading of those shares on the SFM.

Since the UK Listing Authority abolished secondary listings under Chapter 14 of the Listing Rules for investment entities in 2008 (except for those entities with securities already listed under that Chapter) the Company's listing under Chapter 14 has been something of an anomaly. Accordingly, the Directors believe that the Proposals present an opportune time to seek admission of the Ordinary Shares to trading on a different market.

The Board currently believes that the SFM is the most appropriate exchange on which the Ordinary Shares should be traded. The Board believes that given the size, nature and potential ownership structure of the Company, admission to the SFM will enable the Company to fulfil its investment policy in an efficient manner, reducing costs, and in particular without the costs and delays associated with corporate transaction rules which a premium listing under Chapter 15 of the Listing Rules would be likely to bring.

The SFM is an EU-regulated market operated by the LSE. The continuing obligations of the SFM are broadly similar to those of Chapter 14 of the Official List.

   4.      Further details of the Run-Off Shares 

Investment objective and investment policy

Upon the Share Re-designations becoming effective, the investment objective and policy of the Companyin relation to the assets and liabilities attributable to the Run-Off Shares (the "Run-Off Shares Pool") is to realise the Run-Off Shares Pool's existing investments in an orderly and timely manner, with a view to distributing cash to holders of Run-Off Shares ("Run-Off Shareholders") pro rata to their holdings of Run-Off Shares at appropriate times as sufficient investments are realised. The Company will not make any new investments in the Run-Off Pool other than to meet pre-existing commitments or in cash or cash equivalents pending distribution of cash to Run-Off Shareholders. The Company may, however, make follow-on investments which it believes are necessary to protect the value of existing investments.

Unlisted shares

As the costs of maintaining a listing are significant and Run-Off Shareholders are likely to derive little benefit from it due to the expected illiquidity of trading in the Run-Off Shares (which would be likely to become even more pronounced as the size of the class reduced) it is not proposed to list the Run-Off Shares.

Compulsory redemption mechanism

Under the Proposals, the return of cash to Run-Off Shareholders will be effected through the compulsory redemption of Run-Off Shares on a pro rata basis to all Run-Off Shareholders. All Run-Off Shareholders will be treated equally under the compulsory redemptions. Under current UK taxation law and practice, redemptions of shares should constitute a disposal for the purposes of UK capital gains tax. As part of the Proposals, Shareholders are being requested to approve an amendment to the Company's Articles of Incorporation in order to permit the Directors to compulsorily redeem a percentage of the Company's Run-Off-Shares on an ongoing basis in their absolute discretion as a means of returning cash to Shareholders through the wind-down process.

Return of cash to shareholders and liquidity profile

The Company's gross assets currently comprise cash and limited partnership interests in a variety of credit hedge funds. The liquidity of these funds varies from being redeemable at certain fixed frequency intervals, to funds which were established as closed ended entities with capital returned when the underlying investments of those funds are realised ("Long Lock Funds"), to funds which were originally open-ended but have subsequently closed to redemption and have gone into run-off, again with capital returned when the underlying investments are realised and capital distributed ("Liquidating Share Classes").

The Company has outstanding capital commitments to three Long Lock Funds, totalling EUR1,473,148 and $93,735, and which may be called at any time.

Based on the various liquidity terms of Company's holdings and taking into account redemptions alreadyplaced and outstanding capital commitments, the Board believes that the timeframe for the cumulative realisation of the Company's assets is likely to be as follow:

By 30 September 2012 27.0%

By 31 December 2012 42.2%

By 31 March 2013 46.7%

By 30 June 2013 50.1%

By 30 September 2013 56.3%

Longer 100.0%

The above analysis is based on the Company's allocations and prevailing exchange rates as at 30 May 2012and the Company's net assets at that date and takes into account all information available at the date of this circular relating to the redemption terms applicable to the Company's assets including notice periods, gate events, redemption restrictions and anticipated settlement periods, so that the figures shown reflect anticipated distributable cash at each date. Shareholders should note that it is not based on formal valuations and is therefore subject to change.

Following the Share Re-designations, the Board and the Manager will seek to distribute to the Run-Off Shares as much of the available cash in the Run-Off Shares Pool as quickly as reasonably practicable having regard to cost efficiency and working capital requirements. Accordingly, it is expected that overall, in order to minimise the administrative burden, three or four distributions should be made over the course of the next two years and thereafter dependent upon the timing and quantum of realisations received from the Company's Long Lock Funds and Liquidating Share Classes. Subject to the Proposals being approved by Shareholders, the Board expects to make an initial distribution of approximately 40 per cent in November 2012 for those shareholders electing for the Run-Off Shares.

It is currently anticipated that approximately 55 per cent of the Company's capital attributable to the Run-Off Shares will be distributed within twelve months. The majority of the balance is unknown because it comprises Long Lock Funds (44 per cent.) and Liquidating Share Classes (11 per cent.) where the timing of the return of capital to the Company is at the behest of the underlying managers. Most of this amount is tied up in Long Lock Funds whose general performance has been positive and whose prospects the Board believes remain attractive.

   5.      Further details of the Share Re-designations 

Shareholders will be offered the opportunity to elect to have all or some of their Ordinary Shares re-designated as Run-Off Shares at or around the same time as the publication of the prospectus in connection with the Equity Fundraise, provided that (so as not to disadvantage those Shareholders who would like their capital returned promptly) Shareholders will be offered an opportunity to elect with re-designations taking place by no later than mid-October whether or not such prospectus is published.

At the relevant time, the Directors will announce further details and the mechanics of the Share Re-designations (including how to make the election) and circulate forms of election to Shareholders.

If either:

-- the Equity Fundraise is not completed in accordance with its terms on or before 31 December 2012; or

-- the Directors announce publicly that there is no realistic prospect of the Equity Fundraise being completed by 31 December 2012,

subject to applicable law and regulation, all of the Ordinary Shares will be automatically re-designated asRun-Off Shares.

   6.      Further details of the Equity Fundraise 

The Directors have determined that the Ordinary Share class should only be maintained if the Companycan raise sufficient capital so as to ensure that the class has an appropriate total expense ratio.

It is therefore proposed that the Company undertake an equity fundraise prior to 31 December 2012 by way of a placing of Ordinary Shares. Although the full terms of the Equity Fundraise will need to be set out in the terms of a Prospectus Directive compliant prospectus, the Directors anticipate its principal terms to be as follows:

   --        a placing of up to 250 million Ordinary Shares at a placing price to be determined; 
   --      the Equity Fundraise will be conditional upon (inter alia): 

-- at least 40 per cent of existing Shareholders (by value) not electing to have their Ordinary Shares re-designated as Run-Off Shares at the time of the Equity Fundraise; and

-- the Ordinary Shares Net Asset Value post the Equity Fundraise being at least GBP35 million (after the costs and expenses of the Equity Fundraise).

The Directors will seek to ensure that the placing price for the Equity Fundraise is as close to the net asset value per Ordinary Share as possible.

The Directors currently anticipate that a prospectus in relation to the Equity Fundraise will be published in August 2012, with the Equity Fundraise being completed in September 2012.

   7.      Changes in the basis of valuation 

The Board intends, as part of the Proposals, to change the basis upon which the Company's investment portfolio is valued. The Board may apply discretion in the application of the revised basis of valuation at its sole authority.

The Company's portfolio currently comprises assets which, under IFRS 7, have been categorised as Level 2 assets, being assets which do not have quoted prices but have inputs (in this instance prices provided by the underlying funds as notified to the Company by the relevant fund manager or the relevant administrator) that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). Whilst these valuations may be appropriate in relation to the underlying managers' investment objectives and time horizons for their funds and the current investment strategy of the Company, the Board considers that, in the context of the proposed revised strategy for the Company, it is appropriate to apply a policy that reflects fair market values and recovery expectations. This incorporates a methodology that utilises, among other factors, the present value of expected future recoveries, discounted at a rate appropriate for the level of uncertainty over quantum and timeframe. Whilst the adoption of such a policy is not expected to have a material impact on the carrying value of that element of the Company's portfolio which has known redemption dates, it is more likely to lead to a significant reduction in the carrying value of the Company's Long Lock Funds and Liquidating Share Classes.

The Board intends to utilise independent third party valuation agents to create qualitative analytic reports on each underlying investment as well as a quantitative valuation to capture the time horizon and recovery value of all underlying investments. The methodology used will involve the following principles:

-- where available, recent transactions by third parties in the same securities or fund interests;

-- qualitative analytic reports on each underlying fund that seek to identify materially negative effects and reasons for impairment;

-- the present value of expected future cash recoveries from investments, discounted at a rate which the independent valuation agent believes sufficiently compensates investors for the illiquidity and risk associated with the uncertainty of timing and quantum. The discount rate used will be reviewed from time to time by the independent valuation agent, and may vary from investment to investment; and

   --       the nominal value where fair market value is deemed consistent with the stated NAV. 

Using this valuation methodology the Board intends to publish a quarterly NAV. It will also publish theNAV based on the underlying manager's valuations (i.e. in accordance with the historic accounting policy) for purposes of comparison. The Board intends to publish the NAV for 30 June 2012 on the revised basis.

Whilst there can be no assurances that actual recovery values will approximate estimated values nor anyassurances given that recoveries will occur more quickly or more slowly than estimated, the Board believes that as a result of the adoption of this basis of portfolio valuation methodology the reported NAV of the Company will more closely represent its present recovery value.

   8.      Changes to Management Fees 

The management fee on the Run-off Shares will remain at 1 per cent. of Run-Off Shares Net Asset Value.In view of the revised basis of valuation, this is anticipated to lead to a material reduction in the management fees charged to the Run-Off Shares.

The Board expects that the management and performance fee for the Ordinary Shares will be higher thancurrently charged to reflect the active management of the portfolio that will be required. Any performance fee will be subject to reset high water mark (set from the date of the reorganisation of the fund) and performance provisions and will only be paid on realised cash returns over cost generated for shareholders. Full details of these fees are to be agreed by the Board; will be published within the prospectus to be published in conjunction with the proposed Equity Fundraise; and would only take effect at that time.

   9.      Change of name 

In view of the proposed change of Company's investment objective for the Ordinary Shares and the factthat the Company will no longer be focused upon investing solely in European credit hedge funds, it is proposed that the Company's name is changed to Alternative Liquidity Solutions Limited which the Board considers better reflects the intended future investment activities of the Company.

   10.   Consequences of the Proposals not being passed and the Managed Winding-down Resolution 

If the Proposals Implementation Resolution is not approved by Shareholders, a special resolution to effect a managed winding down of the Company will be put to Shareholders (the "Managed Winding-down Resolution").

If the Managed Winding-down Resolution is passed, then the rights attaching to the existing Ordinary Shares of the Company and the investment policy of the Company will each be amended such that Ordinary Shareholders are treated in the same manner as Run-Off Shareholders would have been treated had the Proposals Implementation Resolution been passed.

   11.   Indications of voting intention 

Each of Saltus Partners and Sandalwood Securities have indicated that they currently intend to vote in favour of the Proposals Resolutions in respect of their entire beneficial shareholdings of shares, being in aggregate 11,767,834 shares, representing 32.86 per cent of the total shares in issue.

12. Recommendation

The Board considers that the Proposals and the other resolutions (in the case of the Managed Winding--down Resolution, only if the Proposals are not approved) are in the best interests of the Company and of Shareholders as a whole. Accordingly, the Board unanimously recommends Shareholders to vote in favour of the Proposals as well as the other resolutions (in the case of the Managed Winding-down Resolution, only if the Proposals are not approved) at the AGM, as the Directors intend to do in respect of their entire beneficial shareholdings of 334,414 shares, representing 1.21 per cent. of the total number of issued Shares of the Company.

Enquiries:

Jon Macintosh

Saltus Partners LLP

[phone]

Ed Gascoigne-Pees

FTI Consulting Group Ltd

[phone]

This information is provided by RNS

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