Circular Announcement
(Thomson Reuters ONE) - Alternative Asset Opportunities PCC Limited28 July 2009Proposed Conversion to a UK Investment Trust, Proposed Change to theLife of the Company, Proposed Adoption of New Memorandum ofIncorporation and New Articles of IncorporationFurther to the announcement on 17 June 2009, the Company haspublished a Circular to Shareholders in connection with certainproposals for the Company:- to amend its Articles in order to move from having a fixedlife in respect of the Company's Cell, US Traded Life Interests Fund(terminating on 31 March 2012) to offering Shareholders annualcontinuation votes from the Company's 2012 AGM onwards, and in orderto remove reference to the intention to effect capital distributionson 31 March 2010 and 31 March 2011 (the "Life of the CompanyProposal");- to convert to a UK investment trust (the "Investment TrustProposal"); and- to adopt a New Memorandum of Incorporation and NewArticles of Incorporation (the "New Articles Proposal"),to be proposed at an Extraordinary General Meeting of the Company tobe held in Guernsey on 28 August 2009.The Company was launched in April 2004, and raised £40 million beforeexpenses by means of a placing and offer for subscription. TheCompany has created one Cell known as the US Traded Life InterestsFund and that Fund's investment objective is to provide a capitalreturn by investing in a diversified portfolio of US traded lifeinterests.During the period from the launch of the Company to July 2006, adiverse portfolio of US traded life interests were acquired by theFund, achieving full investment in 160 policies secured on 134individual lives and one joint-life policy (of which approximatelytwo thirds were male and one third were female). At the timeacquired, the average remaining life expectancy of the lives assuredwas approximately 7.6 years and, in accordance with the investmentstrategy of the Fund, none of these lives were less than 78 orgreater than 92 years old at the time of acquisition.Over the past five years, there have been 19 policy maturities(secured on 15 individual lives) generating approximately $27.0million of cash and realising an aggregate profit (net of acquisitioncosts and premiums paid) on these maturities of approximately $15million. The internal rate of return on the policies that havematured to date is approximately 47 per cent.As at 30 June 2009 (the date of the most recent valuation), theportfolio consisted of 140 policies secured on 119 individual lives(of which 76 were male and 43 were female). The face value of thesepolicies was approximately $229 million, compared to a currentvaluation of approximately $95 million.Background to and Reasons for the ProposalsConversion to UK Investment TrustThe Company's interim management statement, announced on 19 May 2009,highlighted the fact that the Board, together with the Company'sprofessional advisers and its manager, RCM (UK) have been informed bythe Company's US legal counsel, Locke Lord Bissell & Liddell ("LLB")of a recent US Internal Revenue Service Revenue Ruling 2009-14 (the"IRS Ruling") which could potentially have an adverse impact on theCompany.The Company has been advised by LLB that the effect of the IRS Rulingis that death benefits arising from US term life insurance policiespurchased by non-US persons in the secondary market will be treatedby the US Internal Revenue Service as US source income and may be"fixed or determinable, annual or periodic" income in nature. In theevent that the predominantly universal life insurance policies heldin the Fund's portfolio are deemed to be treated similarly, a USwithholding tax of 30 per cent. may be levied by the US InternalRevenue Service on any profit arising on any death benefits on futureportfolio maturities at the point when the proceeds are remitted tothe Company's payment agent in the US.In light of the IRS Ruling, the Board has concluded that it willbenefit the Company if it becomes UK tax resident and is approved byHMRC as a UK investment trust. The Board has discussed thispossibility with legal and tax counsel in the UK, a jurisdiction thathas a double tax treaty with the United States. The Board believesthat the Investment Trust Proposal would enable the Company to availitself of treaty protection and thus mitigate the impact of USwithholding taxes on future payments of death benefits as a result ofthe IRS Ruling.Once the Company becomes resident in the UK for tax purposes, it willbe able to apply for treaty relief under the UK-US double tax treaty,provided that its Shares continue to be regularly traded on theLondon Stock Exchange. Treaty relief will enable the maturityproceeds of the policies to be remitted to the Company without theimposition of any US withholding tax. In December 2008 the UKintroduced a new regime for non-resident funds which might haveadverse consequences for UK-based investors in the Company's Shares.The adoption of UK residence as an investment trust would thus havethe added advantage that the Company would not be classified as an'offshore fund', as defined under this new regime.It is not clear, and could be subject to legal challenge, whether theIRS Ruling would, in practice, be applied retrospectively to deathbenefits previously remitted to the Company. In the event that anysuch retrospective tax charge were sought to be levied on theCompany's historic maturities, its payment agent in the US, WellsFargo Bank, N.A. ("WF") would be liable for the tax to the IRS, butunder its agreements with WF, the Company would be liable toreimburse WF for any withholding tax assessed by the IRS against WFfor these prior maturities. It is estimated that the potentialliability could be approximately $3.3 million or 5p per share(excluding any penalties and interest which could be applied by theIRS).Life of the CompanyIndependently of the above developments, your Board has beenconsidering the planned life of the Company. The Articles containprovisions which oblige the Directors to put forward proposals toliquidate the Fund not later than 31 March 2012. The Directors mayalso consider, at their sole discretion and subject to prevailingmarket conditions, capital redemption opportunities for Shareholdersprior to this date. The prospectus of the Company published at thetime of its launch (the "Prospectus"), referred to the expectationthat the Board would exercise this discretion by redeeming 25 percent. of the aggregate number of Shares in issue, pro rata to eachShareholder's holding of Shares, on both 31 March 2010 and 31 March2011.The Board believes that the Investment Manager has constructed adiversified portfolio of TLIs. However, the pace of policy maturitieshas fallen short of expectations. The slow pace of maturities couldbe attributed to numerous factors. In particular, as referred to inprevious annual and interim reports, the Board has noted, amongstother factors, the likelihood that, compared to a random sample ofthe population, the Company's portfolio may exhibit "select"characteristics and also the inherent uncertainty in extrapolatinglife expectancy estimates to a relatively small portfolio of TLIs.Since the launch of the Company, the Board has always expected thatthe Fund would have a residual portfolio of policies that had notmatured by March 2012 and that it would be necessary to sell thisresidual portfolio on or before that date. Projections, such as thoseshown in Table 1 below, have always allowed for a range ofassumptions in this respect, covering both the percentage of thelives assured which might survive and the range of possible pricesthat might be obtained for the residual portfolio. The centralassumption of this table is that life expectancies match thoseassumed in the Company's valuation model and that prices for theresidual portfolio also correspond to those used for valuation. Table1 below illustrates the range of illustrative predicted yields,depending on the assumptions used, over the remaining life of theFund to 31 March 2012, with reference to the valuation as at 30 June2009.Table 1 - Illustrative predicted yields to 31 March 2012 Impact 80yr old on Valuation IRRbasedonexitpricerange5: male of -10c -5c 0c +5c +10cVariation in non Proportion survivingmortality1 smoker2 surviving3 policies4125% -1.09 60% 41.3c +10.2% +13.9% +17.4% +20.7% +23.8%110% -0.48 63% 41.6c +6.4% +10.4% +14.2% +17.7% +21.1%100% 0.00 66% 41.8c +3.8% +8.1% +12.0% +15.8% +19.3%80% +1.20 71% 42.3c -1.7% +3.2% +7.6% +11.8% +15.7%50% +4.12 81% 43.0c -11.9% -5.5% +0.2% +5.4% +10.2%30% +8.00 88% 43.5c -21.2% -13.0% -5.9% +0.4% +6.0%IgnoreMedicalUnderwriting 80% 43.8c -10.2% -4.0% +1.5% +6.6% +11.2%& Use FullVBT Table6Source: Surrenda-link LimitedNotes1. The central case (100 per cent.) assumes that claims experiencematches the valuation basis in force at 30 June 2009. The otherscenarios assume mortality experience is higher (e.g. 110 per cent.)or lower (e.g. 80 per cent.).2. This shows the effect of the selected mortality experiences on thelife expectation (in years) for an otherwise normal 80 year old malenon-smoker.3. This shows the percentage of the lives assured which are assumedto survive to 31 March 2012.4. This shows the assumed average realisation values (per $1 of TLIpolicy face value) for the surviving lives at 31 March 2012. Thethird row in this column (41.8c) corresponds to the valuationassumptions used in arriving at the 30 June 2009 NAV.5. This shows how returns might be expected to vary shouldrealisation values differ from those shown in column 4 by the marginsshown.6. This shows the returns using the full VBT Select Table without anyadjustments for the life expectancy assessments.If policy maturities continue to fall below expectations, theconsequence is that the size of the residual portfolio will besubstantially larger than expected. For example, if actual mortalityexperience were 80 per cent. of the valuation basis then the averagelife expectancy would increase by 1.2 years (corresponding to a 15.8per cent. increase in life expectancy), and the residual portfoliowould increase from approximately 66 per cent. of the currentportfolio to approximately 71 per cent. Such an increase in lifeexpectancy would not only reduce returns, but it would result inincreased reliance on the actual price which could be obtained forthe residual portfolio.Table 2 below shows the potential size of the residual portfolio(based on the valuation of the current portfolio as at 30 June 2009)at the dates shown, both on the basis of actual maturities occurringin line with expectations set out in the valuation model ("100%") andon the basis of actual maturities being half those expected in thevaluation model ("50%").Table 2 - Illustrative size and valuation of the residual portfolio Proportion of Proportion of policies Number of lives policies surviving surviving by number of alive by valuation policiesDate 100% 50% 100% 50% 100% 50%31/03/2012 93 113 66.6% 83.8% 66.2% 80.8%31/03/2013 78 103 56.2% 77.2% 56.0% 73.9%31/03/2014 65 93 46.5% 69.9% 46.8% 66.8%31/03/2015 54 84 37.8% 62.5% 38.6% 60.2%31/03/2016 44 75 30.1% 54.6% 31.5% 53.7%Source: Surrenda-link LimitedTrading conditions in the secondary market for TLIs havedeteriorated, with transactions by value significantly reducedcompared to prior years. While these conditions partly reflect theilliquid conditions currently evident in many financial markets,which may not still apply in 2011 and 2012, the Board is concerned atthe possibility of having to make a substantial disposal of policiessimply to meet the date originally set at the launch of the Company,especially as the rate of return on the portfolio may be materiallyaffected by the sale price achieved.The existence of this residual portfolio and the requirement for itsdisposal by a specified date would be a matter of public record. Thisfactor could prejudice the Company's prospects of achieving salesprices at or close to reasonable values for the benefit ofShareholders. Table 3 below illustrates how the NAV as at 30 June2009 would be affected if a premium or discount were applied to thevaluation of the residual portfolio in existence as at 31 March 2012.Table 3 - Illustrative NAV as at 30 June 2009 Premium (+)/discount (-) applied to the valuation of the residual portfolio +10% 0% -10% -20% -30% -40%NAV as at 30June 2009 100.2 93.4p 86.6p 79.8p 73.0p 66.3pSource: Surrenda-Link LimitedIt is a requirement of the Company's borrowing facilities that theproceeds of TLIs which mature are (after the deduction of expenses)utilised to reduce borrowings.The Board believes that there is no longer any realistic possibilityof the Company being in a position to meet this requirement and alsoto offer Shareholders the opportunity to redeem part of theirholdings in 2010 or 2011 without materially reducing the value of theFund's portfolio. In addition, the Board believes that it is nolonger in Shareholders' best interests to continue with the plannedliquidation of the Fund on a fixed date in March 2012.In light of the above, in the Board's view it is important that theCompany address this issue now, rather than at a later date.Companies (Guernsey) Law, 2008 (as amended)On 1 July 2008, the Companies (Guernsey) Law, 2008 (as amended) (the"Companies Law") came into force in Guernsey. Guernsey companies arerequired by the Companies Law to amend their articles to comply withthe Companies Law by 1 July 2011.The Board is proposing that the Company adopt a New Memorandum ofIncorporation and New Articles of Incorporation to reflect changesintroduced by the Companies Law. The Board believes that this willenable the Company to comply with the new provisions introduced bythe Companies Law.The ProposalsConversion to UK Investment TrustTo effect the Investment Trust Proposal, the Board will passappropriate board resolutions approving the conversion of the Companyto a UK investment trust and the move to UK tax residency. As aresult, the Directors also propose to change the composition of theBoard. As a minimum, it is proposed that Christopher Sherwell resignas a director of the Company once the proposals become effective andthat he is replaced by a new UK-resident Director to be appointedwhen the Company's UK tax residency becomes effective.The Company will also need to amend its Articles of Association toeffect the Investment Trust Proposal. The Board therefore proposesthat the New Memorandum of Incorporation and the New Articles ofIncorporation include amendments appropriate to reflect the Company'sproposed status as a UK investment trust, and its UK tax residency,should the Investment Trust Proposal be approved by Shareholders.Once the Company has become resident in the UK for tax purposes, itis intended that the Company will be managed in such a way as to meetthe conditions for investment trust status in Section 842 of theIncome and Corporation Taxes Act 1988 in respect of the accountingperiod which will commence when it becomes resident in the UK for taxpurposes and subsequent periods.Assuming that the Company obtains investment trust status, it will beexempt from United Kingdom corporation tax on chargeable gains, ascomputed for tax purposes, in respect of each accounting period forwhich such approval is granted. It is expected that any maturity ordisposal proceeds from the policies should therefore be exempt fromcorporation tax.The Company will be liable to UK corporation tax on any income in thenormal way. However, the Board is satisfied that the Company shouldhave sufficient administrative and other expenses such that it shouldnot have any meaningful exposure to UK corporation tax in the future.The Company's UK tax accounting period will commence on the date theCompany becomes UK resident. The Board proposes to change theCompany's accounting reference date to ensure that the commencementof the Company's UK tax accounting period is aligned with a financialaccounting period. It is therefore proposed that the Company'saccounting reference date be changed to 31 August in the currentyear, reverting to 30 June thereafter. As a result, the currentfinancial accounting period will be the 14 months ending 31 August2009, to be followed by a 10 month financial accounting period ending30 June 2010.Life of the CompanyIn order to effect the Life of the Company Proposal, it is proposedthat the Articles be amended so that they no longer include anobligation for the Directors to bring forward liquidation proceedingsin respect of the Fund in March 2012, nor any reference to theintention to effect capital distributions on 31 March 2010 and 31March 2011, as stated in the Prospectus. It is also proposed that theArticles be amended in order to offer Shareholders the opportunity tovote on the continuation of the Fund at the annual general meeting in2012 and annually thereafter.The Board remains firmly committed to returning capital toShareholders in the Fund at the earliest practical opportunity havingregard to the desire to maintain a commercially viable portfolio. Tothat end the Board has resolved, in accordance with the investmentpolicy and strategy of the Fund, that once future net cash flows ofthe Company have been used to repay the Company's borrowings theywill subsequently, after allowance for the estimated future premiumpayments and operational expenses required for a minimum of one year,be used to provide capital distributions for Shareholders (to beeffected at the Directors' discretion) from time to time. Inaddition, the Board may pursue opportunistic secondary market policysales where deemed appropriate, with a view to accelerating thereturn of capital to Shareholders.Management and other Costs and ExpensesIt is proposed that, with effect from 1 September 2009, the currentannual fee of 0.5 per cent. of the Net Asset Value, payable to eachof the Investment Manager and the Manager, be reduced to 0.475 percent. and 0.425 per cent. respectively of the Net Asset Value fromtime to time and, with effect from 1 April 2012, be further reducedin respect of both the Investment Manager and the Manager to 0.4 percent. of the Net Asset Value from time to time. The existingcontracts with the Investment Manager and the Manager will nototherwise be affected by the Proposals.The costs and expenses incurred in relation to the Proposals will beborne by the Company and are estimated to amount to approximately£200,000.Current TradingAs at 30 June 2009, the Net Asset Value per Share in the Fund was93.4p. Since 31 March 2009, there have been two maturities secured ontwo lives. The benefit of these maturities amounts to approximately5.9 pence per share, and has been included in the Company's NAV as at30 June 2009. In addition, on 12 May 2009, the Company completed thedisposal of a policy to a third party for $552,994, a discount of 11per cent. to the valuation as at 29 May 2009.As at 30 June 2009, $32 million of the $38 million borrowing facilityprovided by Allied Irish Banks had been drawn down (which does nottake account of the $6.5 million face value due to be received inrelation to the two recent maturities).Table 4 below sets out the illustrative annual cost of premiums to 31March 2016, on the basis of: actual maturities occurring in line withexpectations set out in the valuation model ("100%"); actualmaturities being half those expected in the valuation model ("50%");and no further maturities occurring ("0%"):Table 4 - Illustrative annual cost of premiums 12 months to 31 March$'m 2010 2011 2012 2013 2014 2015 2016Maturity assumption100% 6.22 8.06 7.47 6.87 6.18 5.59 4.9950% 6.41 9.00 9.18 9.20 8.95 8.71 8.540% 6.62 10.11 11.47 12.77 13.72 14.52 16.12Source: Surrenda-Link LimitedExpected TimetableLatest time and date for receipt of Proxy 11.30 a.m. on 26 AugustForms for the Extraordinary General Meeting 2009Extraordinary General Meeting of the Company 11.30 a.m. on 28 August 2009Enquiries:Simon White Tel: +44 (0) 20 7859RCM (UK) Limited 9000Gary Gould Tel: +44 (0) 20 7678RBS Hoare Govett Limited 8000Sharon Wrench Tel: +44 (0) 1481 752Kleinwort Benson (Channel Islands) Fund 591Services LimitedTerms used in this announcement shall, unless the context otherwiserequires, bear the meanings given to them in the Circular dated 27July 2009.A copy of the Circular will shortly be available for publicinspection at the Document Viewing Facility, the Financial ServicesAuthority, 25 North Colonnade, Canary Wharf, London E14 5HS.---END OF MESSAGE---This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.
Datum: 28.07.2009 - 08:01 Uhr
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