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Merchants Trust slashes debt repayment bill

Closed-end funds and OEICs
forrado
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Merchants Trust slashes debt repayment bill

#233952

Postby forrado » July 4th, 2019, 1:53 pm

News released yesterday by Merchants Trust (MRCH) at …
https://www.investegate.co.uk/merchants-trust---mrch-/rns/renegotiation-of-debt/201907031802014264E/

… announces the final phase of the dramatic reduction of interest paid on the trust’s long-term borrowings that began 18 months ago. As of 7 August 2019 the trust will be repaying early £42-million not due to be repaid until 2023, and replacing it with a likewise £42-million on a three-year revolving credit facility agreement.

As the statement indicates, the overall effect being …

This will significantly reduce the cost of debt. The board's programme of refinancing has seen the Company's weighted average interest rate on all borrowings fall from 8.5% in January 2018 to 6.0% today, and following this refinancing exercise it will be 3.5%.

This reduction in debt repayment levels is already beginning to feed through in the form of increased quarterly dividend payouts – see this dividend announcement released 2 days ago from Merchants …
https://www.investegate.co.uk/merchants-trust---mrch-/rns/dividend-declaration/201907021620322594E/

Since the start of 2018 the quarterly dividend payout has risen from 6p per share to 6.7p – an increase of 11.7%. This has not escaped investors’ attention with the discount being entirely squeezed out over the course of the past 18 months. In recent months the trust has even commenced a shares tap issue programme to meet increased investor demand. I knew the reduction of the trust's interest payments would eventually lead to increases in the dividend payouts, it's just that I didn't think it would happen this quickly.

I declare that I am a Merchants Trust shareholder.

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Re: Merchants Trust slashes debt repayment bill

#233974

Postby monabri » July 4th, 2019, 3:35 pm

Positive news. Current yield just over 5.2% with XD not far away on 11 July.

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Re: Merchants Trust slashes debt repayment bill

#233987

Postby Dod101 » July 4th, 2019, 4:46 pm

That of course is the easy bit. What has happened to the NAV over the last 3/5 years?

Dod

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Re: Merchants Trust slashes debt repayment bill

#233991

Postby forrado » July 4th, 2019, 5:06 pm

How do you know where best to go when you keep looking in the rear view mirror.

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Re: Merchants Trust slashes debt repayment bill

#233993

Postby Dod101 » July 4th, 2019, 5:11 pm

forrado wrote:How do you know where you want to go when you keep looking in the rear view mirror.


I agree but that is not relevant here. We/you are not doing the driving and the record of the manager is the best thing we have to go on, absent a good crystal ball.

Dod

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Re: Merchants Trust slashes debt repayment bill

#234005

Postby Dod101 » July 4th, 2019, 5:54 pm

The answer seems to be that it is a little behind its benchmark and is filled with the usual suspects of a HYP, so that is not altogether surprising but as I have said before it is dearly bought income when the NAV for last year was down around the same amount in percentages as the dividend yield.

Removing expensive borrowings is a good and sensible housekeeping move but it is a one off. Were it not for that it is not dissimilar to Edinburgh IT which has the same problem. I have suggested to the Edinburgh chairman that they might look at repaying their expensive Debenture and also consider paying some of the dividend from capital reserves so as to free the fund manager from the curse of high yielding UK shares, where in many cases the capital values are at best static, and in some cases, falling back. I do not expect them to pay the slightest heed to my suggestion.

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Re: Merchants Trust slashes debt repayment bill

#234007

Postby forrado » July 4th, 2019, 5:57 pm

Dod101 wrote:I agree but that is not relevant here.

Of course it's relevant here. If you look in the Merchants Trust's rear view mirror long enough then you will clearly see (well, I can see it and I've got only one good eye) that paying 8.5% for near 20% borrowings is like driving a car with hand-brake on. Slacken the hand-brake off by reducing that 8.5% to 3.5% and the vehicle will start to motor more efficiently at whatever speed, and in whatever direction, the market allows.

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Re: Merchants Trust slashes debt repayment bill

#234028

Postby Dod101 » July 4th, 2019, 8:08 pm

Of course but as I said that is only commonsense housekeeping. Fundamentally they need to be good investors not housekeepers, although it helps to be that as well. Using your analogy, as I said you are not the driver so what does it matter what your aspirations are for 'where to go' as you call it. You are not in the driving seat.

On the facts of the case, their results are not very interesting.

Dod

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Re: Merchants Trust slashes debt repayment bill

#234033

Postby forrado » July 4th, 2019, 8:36 pm

Pedantic as always!

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Re: Merchants Trust slashes debt repayment bill

#234035

Postby Dod101 » July 4th, 2019, 8:58 pm

forrado wrote:Pedantic as always!


Investing sensibly is not about being pedantic nor is it about taking one positive but looking at things in the round and then drawing a conclusion, not to say the conclusion will always be right of course. But neither is investing about seeking confirmation bias, latching on to that and being reassured that all is well.

If that is being pedantic I am sorry but that is the way it is. All the best.

Dod

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Re: Merchants Trust slashes debt repayment bill

#234048

Postby monabri » July 4th, 2019, 10:19 pm

Merchants is the largest of my IT holdings - but it was a case of selling up GSK & UU to increase my holding percentage. The "trade in" happened at the end of last year (average price £4.61 , avg yield 5.8%). The motivations for selling GSK being lack of divi cover/static dividend/accounting practice/clarity on future direction : With United Utes - there was/is potentially a political risk (Corbyn & Ofwat) but primarily I didn't like the fact that the CEO (Steve Mogford) sold a significant chunk of his holding).

Thus I bought in to MRCH for the dividend income to replace some holdings that I considered were "higher risk".

Like Dod, I also hold HFEL (4.5% of the total portfolio by value) for income (yield), divi growth rate (historical) and "not UK". The growth in NAV over the last 5 years has hardly been stellar (320p to 360p approx, read by eye from a graph).

https://www.hl.co.uk/shares/shares-sear ... td-ord-npv

My long term bets for "total return" are elsewhere but the % holding is not as high (SMT at 3.80% being the highest).

The one thing that is apparent - albeit measured over a time span of a mere 3 years, the total returns on my IT holdings are +9.8% versus -2.8% on the HYP shares : I'm now roughly 60:40 HYP : "Other" where ITs comprise 35%. The plan is to reduce the % HYP holdings "naturally" by increasing "Other", using income from the HYP and the income bearing ITs.

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Re: Merchants Trust slashes debt repayment bill

#234051

Postby monabri » July 4th, 2019, 10:44 pm

Well, the NAV is about to get a gentle kicking due to early redemption of the debenture. It's not much (0.5%).

"The Fintrust Debenture – formed of two loans – was valued at £42 million but Merchants is paying £56.2 million to repay the debt four years ahead of schedule. The cost, which includes an early redemption penalty, will knock 0.5% or 2.3p from net asset value per share, based on the fair value of the debt, or 2.2% or 11.4p per share based on its ‘book’ value."

"The board of the £548 million trust believes the expense is justified as the refinancing will slash Merchants’ annual cost of borrowing from 6% to 3.5%, saving £2.9 million a year and adding 2.6p to earnings per share"

"With dividends included, Merchants has trebled investors’ money in the past 10 years with a 204% total return. This beats the 174% return of the FTSE All-Share index but is behind the 267% average return of all UK Equity Income trusts."

https://citywire.co.uk/investment-trust ... ider+Daily

(£2.9m is ~10% of the current annual dividend)

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Re: Merchants Trust slashes debt repayment bill

#234120

Postby Dod101 » July 5th, 2019, 9:54 am

Thanks for all of that monabri. Helpful analysis. By their nature most income ITs are not going to give wonderful returns but they could well be better than the average HYP at the moment. I find myself moving over slowly to them as well.

I like HFEL because of the diversification and if the share price can do a little better than hold its own with the good yield that suits me. I honestly feel that it is only too easy to be seduced by the yield though (for any trust)

As for Merchants its NAV has not done a lot and the latest Annual Report has done nothing to whet my appetite but it is good to see the Board taking some positive action. The timing for this sort of action is of course difficult because the inevitable premium will only become realistic as the maturity date approaches.

Dod

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Re: Merchants Trust slashes debt repayment bill

#234836

Postby JuanDB » July 8th, 2019, 11:27 am

Having been on the watch list for some time I decided to make an initial purchase of MRCH this morning using the first half of my wife’s ISA contribution for the year. The combination of yield, track record, recent above average increases in div, and the reduction in debt moved this from a “watch” to a “buy”.

It joins City of London, Henderson Far East, Lowland and Murray international in our income IT portfolio. This should break through the 5 figure annualised income threshold at some point later this year. With dividends currently reinvested the income net of new contributions is growing at 10.1% y/y.

The rest of our ISA contribution for the year will likely go towards more MRCH and potentially starting a position in JP Morgan European IT (JETI) to add some European focus.

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Re: Merchants Trust slashes debt repayment bill

#234864

Postby toofast2live » July 8th, 2019, 12:19 pm

JuanDB wrote:Having been on the watch list for some time I decided to make an initial purchase of MRCH this morning using the first half of my wife’s ISA contribution for the year. The combination of yield, track record, recent above average increases in div, and the reduction in debt moved this from a “watch” to a “buy”.

It joins City of London, Henderson Far East, Lowland and Murray international in our income IT portfolio. This should break through the 5 figure annualised income threshold at some point later this year. With dividends currently reinvested the income net of new contributions is growing at 10.1% y/y.

The rest of our ISA contribution for the year will likely go towards more MRCH and potentially starting a position in JP Morgan European IT (JETI) to add some European focus.


Merchants has one of the worst records for “above average” increases in dividends. Over the last ten years dividends have increased by less than CPI, let alone RPI. It is a dividend aristocrat because it has increased its dividend every year for a few decades - however sometimes that increase has been 1%! It does however have a very tasty high dividend yield. City of London is far superior. Claverhouse has also increased dividends above inflation over the last ten years. Oh for Luni and his invaluable b7 and bi updates....

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Re: Merchants Trust slashes debt repayment bill

#234887

Postby JuanDB » July 8th, 2019, 1:26 pm

I agree that’s the picture in the rear view mirror. However Increases over the last 5 years have gone from <1% to 4.84%, so below to above inflation. With the reduction in cost of debt I expect this rate of increase to be at least maintained. Hence the decision to purchase whereas in the past only the initial yield was attractive and warranted a watching brief.

To clarify, my use of “above average” was referring to the MRCH average growth rate.

My low initial yield but faster growing IT is lowland which on an initial yield of 4% has grown the div at 10% over the last 5 years. Claverhouse and Mercantile would do a similar job.

Cheers,

Juan.

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Re: Merchants Trust slashes debt repayment bill

#234935

Postby nmdhqbc » July 8th, 2019, 4:21 pm

JuanDB wrote:I agree that’s the picture in the rear view mirror. However Increases over the last 5 years have gone from <1% to 4.84%, so below to above inflation. With the reduction in cost of debt I expect this rate of increase to be at least maintained.


I pondered the same thing when I looked at the recent bigger increases. But will the debt cost reduction not be a one off. Or a couple of one offs. Once it's most re-financed at lower rate the divi increases may go back down powered purely by dividend increases in the underlying assets.

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Re: Merchants Trust slashes debt repayment bill

#234999

Postby JuanDB » July 8th, 2019, 7:51 pm

The 1 year saving on the cost of debt would fund around 2 years divi growth at 4.8% so I would expect potential to both increase the dividend, and invest in some growthier companies to help future growth per Dod’s earlier comment.

I’m sure MRCH isn’t going to suddenly shoot the lights out. For me it’s as simple as a good div that’s gone from below inflation to above inflationary growth in a way that looks sustainable. That’ll do for me!

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Re: Merchants Trust slashes debt repayment bill

#252490

Postby JuanDB » September 18th, 2019, 12:43 am

From the RNS this morning.

The total distribution declared for the first half of 2019/20 is 13.5p, an increase of 4.7% on the same period last year (12.9p). The directors intend to at least maintain the quarterly dividend payments at 6.8p for the rest of the year, leading to a minimum annual dividend of 27.1p, an increase of 4.2%. The company's revenue reserves remain strong, and, as at 31 July 2019 were 28.8p per share (2018 - 26.9p)


The increase to 6.8p is the 4th consecutive quarter in which the dividend has been increased. I was able to top up on the recent dip at £4.51, so ~ 6% yield coupled with a 7% capital increase from the fast bounce back in share price. Pretty happy with that.

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Re: Merchants Trust slashes debt repayment bill

#252545

Postby DavidM13 » September 18th, 2019, 4:21 pm

I think it is the 3rd increase in a row?
Still great but hope you agree with my numbers?


Ex-div date Dividend amount
03/10/2019 6.800 Income
11/07/2019 6.700 Income
11/04/2019 6.600 Income
31/01/2019 6.500 Income
04/10/2018 6.500 Income


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