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Grazie! Brunner borrows cheap to escape historic debt burden

Grazie! Brunner borrows cheap to escape historic debt burden

Brunner (BUT), the £338 million global investment trust, has taken advantage of this week’s turbulence in European markets to take out a record low 30-year loan with which to repay the last of the expensive mortgages under which it has laboured since the 1990s.

The £25 million fixed rate, unsecured 30-year loan will cost Brunner just 2.84% a year in interest, which is thought to be the lowest borrowing rate achieved by an investment trust over such a term.

Brunner, which is backed by the wealthy Brunner family, whose business was a forerunner to Imperial Chemical Industries (ICI), is using the money to refinance its debts and help repay a £28 million secured loan, or debenture, on which it pays 9.5% interest.

The Fintrust debenture was not due to mature until 2023 and redeeming it early will cost Brunner £39.4 million, including accrued interest. Although this will dent the investment trust’s net asset value (NAV) its board has decided the cost is worth it as it will slash annual interest costs from 7.7% to 2.9%.

This equates to an annual saving of around £1.3 million or 3p per share which Brunner can use to boost dividends or capital returns to shareholders.

It follows six months after Brunner repaid an earlier maturing £27 million debenture costing over 11% interest, which is already saving it £2 million a year and adding 1.4p to earnings per share.

Chairman Carolan Dobson said: ‘With the first one reaching maturing in January this year, the board looked closely at various options to repay or refinance this second debenture. Although there is a cost in doing so, the company will benefit over the long term from a much-reduced interest cost and improved earnings and we firmly believe that the benefits outweigh the costs.

‘Refinancing will also allow us to take advantage of the currently low interest rates to secure long-term, fixed rate finance and protect the company from future interest rate rises,’ she added.

Many investment trusts have re-financed of late to lock in low lending rates. Witan (WTAN) last year took out a 37-year loan fixed at just 2.74% while City of London (CTY) struck a 32-year loan at 2.94%. Merchants (MRCH), a UK equity income trust which like Brunner is also managed by Allianz Global Investors (AGI), secured a 35-year loan at a fixed rate of 2.96%.

Investment trusts are regarded as good borrowers for pension funds and other institutional investors looking for revenues to match long-term liabilities.

Gauging the impact of the early loan repayment on Brunner depends on which valuation of the debt is used. On a ‘fair value’ basis, the board’s preferred measure, the hit to NAV is 0.7% or 5.9p per share. However, at ‘book value’ this rises to 2.4% or 21.5p per share.

According to Morningstar data, Brunner has an estimated NAV per share at fair value of 865p. The shares closed yesterday at 793p, at an 8% discount to NAV.

Brunner was able to borrow cheaply because the loan from an unidentified institutional investor was priced at a margin of 1.15% over the yield on 30-year gilts, or UK government bonds. Yields, which move in the opposite direction of bond prices, plunged this week as investors sought safe havens in response to the political crisis in Italy pushing up the price of UK sovereign debt.

Had Brunner borrowed a week or two ago it would have paid a higher coupon of just over 3%, said Matthew Tillett, a UK fund manager at Allianz Global Investors, who works on Brunner with its lead manager Lucy Macdonald. ‘It significantly improves the P&L [profit and loss] position of the company,’ he said of the refinancing.

Macdonald, chief investment officer for global equities at Allianz, said the re-financing had no implications for the investment trust’s relationship with Aviva, the FTSE 100 investment group that owns 19% of Brunner shares. Aviva has disposed of other stakes in global trusts but is said to be content to hold on and slowly reduce its position in Brunner, which is 23% owned by the Brunner family.

Macdonald said she was not surprised by events in Europe. ‘We said earlier in the year that this was going to be a harder year with lower returns and more volatility.’

She said she had used the market falls in February to add to some of her favourite holdings in Brunner, such as Adidas, the German sports wear company.

Brunner currently ranks about half-way down the AIC Global investment trust sector with a five-year total shareholder return of 83.4%.

Figures supplied by the company show that in the five years to the end of April it generated 82.3% for shareholders, with the share price enjoying a re-rating and performing ahead of he 67.3% growth in net asset value, which beat the 62.7% return from its benchmark, a combination of the FTSE World ex UK and FTSE All-Share indices.

Brunner shares yield 2.1% having increased quarterly dividends by 4.4% last year, the 46th consecutive year in which it had raised shareholder pay-outs.



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