# GCP Infrastructure Investments ongoing discussions with RM Infrastructure Income

- Link: https://www.directorstalkinterviews.com/gcp-infrastructure-investments-ongoing-discussions-with-rm-infrastructure-income/4121125236
- Published: 2023-08-11T07:16:06+01:00
- Author: Ethan Davis

The Board of Directors of **GCP Infrastructure Investments Limited** (LON:GCP) has
announced that it has agreed heads of terms with the board of  GCP Asset Backed 
Income Fund Limited in respect of a proposed combination of GCP Infra with GABI.

The combination will be effected by way of a contractual scheme of reconstruction
resulting in the solvent winding-up of GABI and the transfer of its assets to the
Company in exchange for the issue of new ordinary shares in GCP Infra to GABI shareholders.
The number of GCP Infra shares issued to GABI shareholders will be determined on
a formula asset value (“**FAV**“) for FAV basis. The FAVs shall be calculated based
on the net asset value of each of the Company and GABI on an agreed calculation 
date, less each party’s transaction costs. The GABI Scheme, if completed, is expected
to conclude before the end of 2023.

The Board is also pleased to announce that it is in separate discussions with the
board of RM Infrastructure Income plc (“**RMII**“) with the intention of agreeing
a potential combination of the enlarged GCP Infra with RMII (the “**RMII Scheme**“).
It is expected that this combination will be effected by way of a scheme of reconstruction
of RMII and the associated transfer of a material proportion of its assets to GCP
Infra in exchange for the issue of new shares in GCP Infra. The Company will provide
a further update as and when appropriate. 

The Board believes that, if completed, the GABI Scheme will bring benefits to both
the existing and any new shareholders in the Company. The Board has further proposed
that, following the completion of the GABI Scheme, there will be an increased return
of capital to shareholders and the Company will reduce its leverage. GCP Infra’s
investment policy will be amended to maximise access to attractive investment opportunities,
with a focus on sustainable assets. These mechanisms further support the benefits
of the GABI Scheme to shareholders and are detailed further below.

In accordance with customary practice for such transactions involving investment
companies and investment trusts, the City Code on Takeovers and Mergers (the “**
Code**“) is not expected to apply to the GABI Scheme. However, the GABI Scheme will
be subject to other regulatory and tax requirements.  The ongoing discussions in
respect of the RM Scheme similarly do not anticipate any offer for RMII by GCP Infra,
recommended or otherwise, under the Code.

**Liquidity Commitments**

The Board remains conscious of the discount to the prevailing net asset value per
ordinary share at which the Company’s shares have been trading in recent months.
Further, the Board considers that the benefits of the Company’s leverage are reduced
given the current all-in cost of the Company’s revolving credit arrangements, which
have been impacted by increases to SONIA, the base lending cost. The Company has,
therefore, been focused on using available cash proceeds to both: (i) reduce leverage,
with the c. £50 million net proceeds of the recent biomass refinance expected to
reduce the Company’s outstanding debt to c. £100 million; and (ii) prioritise the
buy-back of shares over new investments: in the quarter ending 30 June 2023 the 
Company made new investments totalling only £1.4 million and spent £4.2 million 
in buying back shares during the quarter.

Under the terms agreed with GABI, following the implementation of the GABI Scheme(
if approved) the Company will commit to utilise £200 million of cash available to
the enlarged portfolio (including without limitation from portfolio repayments and
realisations) in the two-year period following completion of the GABI Scheme as 
follows:

–     £100 million to further reduce the Company’s leverage to a target drawn balance(
after a drawdown in respect of the GABI Scheme as detailed below) of c. £50 million;
and

–   £100 million to distribute to shareholders by way of share buy backs, special
dividends or otherwise. This commitment is in addition to the remaining commitments
under the £15 million buy-back programme announced by the Company on 14 March 2023.

(together, the “**Liquidity Commitments**“).

If the GABI Scheme is approved, GCP Infra intends to draw on its revolving credit
arrangements to fund the repayment in full of the outstanding balance under the 
GABI revolving credit facility, which currently has £40 million outstanding (the“**
GABI Debt Amount**“), in connection with the transfer of the assets from GABI to
GCP Infra under the GABI Scheme. GABI has agreed not to draw further on its revolving
credit arrangements prior to completion of the GABI Scheme or, if a further draw
down is contemplated, that it must seek the prior consent of GCP Infra. GCP Infra
has agreed to prioritise the use of its cash resources, in the first instance and
as part of the Liquidity Commitments, to repay the additional debt drawn by GCP 
Infra in respect of the GABI Debt Amount.   

The GABI Scheme would support the ability of GCP Infra to offer the Liquidity Commitments
due to the shorter duration of GABI’s investment portfolio. Across GCP Infra and
GABI, c. £140 million of loan repayments are forecast to be received in the first
six months of 2024.  

**Investment Policy**

Following implementation of the GABI Scheme (if approved), the enlarged GCP Infra
will continue to be advised by Gravis Capital Management Limited (“**Gravis**“).
As part of the GABI Scheme, the Board will propose certain amendments to the Company’s
investment policy and objectives (the “**Investment Policy Change**“) which will
be subject to customary approvals. The purpose of the proposed Investment Policy
Change is to adapt the Company’s investment approach in recognition of the evolution
that has occurred in the infrastructure landscape over the 13 years since IPO and
to maximise the pool of attractive investment opportunities available to the Company
moving forward with a focus on sustainable assets. The relevant section of the proposed
revised investment policy of the Company will be changed as follows:

“To invest at least 75% of its total assets in infrastructure and real assets that:

(a)   benefit from public-sector backed, contracted, or predictable cash flows;

(b)   have no construction risks;

(c)  that have a high standard of [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
by reference to: (i) meeting a credible minimum standard for environmental and/or
social sustainability; or (ii) align with a specified environmental and/or social
sustainability theme; and

(d)   are located in the UK.”

It will be proposed that the investment objectives of the Company will be amended
to: (i) pay shareholders a regular and sustainable dividend; (ii) invest in a diversified
portfolio of debt and/or similar assets secured against sustainable infrastructure
and real assets; and (iii) preserve the capital value of its investments over the
long-term.

The GABI Scheme and the Investment Policy Change are together referred to as the“**
Proposals**“.

**Strategic Rationale for the Proposals**

The Board believes that the Proposals, will bring multiple benefits to both the 
existing and any new shareholders in the Company. The GABI Scheme will consolidate
two listed infrastructure and real asset debt vehicles to form a sizeable investment
company that offers all shareholders of the enlarged GCP Infra the following benefits:

·    **The Liquidity Commitments:** as described above, which will utilise at least
£200 million of the Company’s cash resources to both: (i) reduce the leverage in
the enlarged vehicle over the medium-term to c. £50 million; and (ii) return c. 
£100 million of capital to shareholders.

·    **Access to a shorter duration**: GABI has a shorter average weighted average
loan life than GCP Infra, at 5 years compared to GCP Infra’s 10 years^([1]). As 
a result, allowing for the Liquidity Commitments, the enlarged GCP Infra will be
more agile and able to re-invest in accordance with the revised investment policy
and at the prevailing market rates (which are higher now than at any point during
the life of GCP Infra), at the same risk level, more quickly than it could prior
to the Proposals.

·    **Enhanced secondary market liquidity**: the Board recognises the importance
of scale from the perspective of liquidity for shareholders. Based on the market
capitalisations of both GCP and GABI as at close on 10 August 2023, the enlarged
market capitalisation would be £907 million. In the three months to 31 July 2023,
average daily value of shares traded in GCP Infra and GABI (excluding on-market 
buybacks) were c. £1.29 million and c. £0.46 million, respectively.

·     **Realigned mandate:** the proposed Investment Policy Change, including the
introduction of an explicit sustainability objective, is expected to provide a wider
universe of potential investment opportunities with attractive risk-adjusted returns.****

·    **Shareholder register**: the Proposals will allow several shareholders to 
consolidate their holdings across the two companies while also creating a more diversified
shareholder base through a combination of the two share registers.

·    **Lower costs**: certain annual fixed costs are duplicated across GCP Infra
and GABI and so the GABI Scheme will remove such costs and the Company’s fixed costs
will be spread over a larger asset base, resulting in a lower ongoing expense ratio.
The cost savings are projected to be c. £0.8 million per annum following implementation
of the GABI Scheme.

The Board expects that the RM Scheme, should it progress, will have similar benefits
to those of the GABI Scheme. The Company will announce further details of the benefits
of the RM Scheme as and when appropriate.

1.Loan durations as at 30 June 2023

**Costs of the Proposals and Gravis Contribution**

Each company shall bear its own costs incurred in relation to the development and
progression of the Proposals. Gravis is the investment adviser to GCP Infra and 
the investment manager of GABI and has agreed to pay, or otherwise make, a contribution
towards the costs of the Proposals to GCP Infra and GABI of £1 million (the “**Gravis
Contribution**“), to be apportioned between GCP Infra and GABI by reference to each
company’s total transaction costs. The expected costs to GCP Infra of the GABI Scheme(
post the Gravis Contribution) are £ c. £1.4 million.

Further, the investment advisory fee payable to Gravis by the Company on an ongoing
basis shall be revised from the current investment advisory fee of 0.9% per annum
on net assets (excluding cash) to:

(i)            in respect of net assets (excluding cash) up to £1.3 billion, a fee
of 0.9% per annum of such net assets; and

(ii)           in respect of net assets (excluding cash) above £1.3 billion, a fee
of 0.8% per annum of such net assets.

**Continuation vote**

Infrastructure debt investments are long-term investments (with the weighted average
outstanding term of GCP Infra loans being 10 years as at 30 June 2023). Reflecting
the long-term nature of the portfolio, and the need to incentivise the investment
adviser over the long-term in alignment with the portfolio, GCP Infra does not currently
have a commitment to hold a continuation vote. However, as part of the Proposals,
the Board will commit to providing shareholders with a continuation vote at the 
Company’s AGM in 2028 and every four years thereafter.

**Gravis team**

The portfolio managers of the enlarged GCP Infra will continue to be Philip Kent,
Ed Simpson and Max Gilbert, and the management of the Company will continue to be
supported by the wider Gravis business, including the Chief Investment Officer of
Gravis’ private market investment funds.  

The Board notes that Gravis is already responsible for managing the GABI assets 
and so the combination under the GABI Scheme will rely on existing personnel knowledgeable
about the GABI portfolio and its underlying assets.

**Expected timetable**

A circular to shareholders of the Company, providing further details of the Proposals
and convening a general meeting to approve the Investment Policy Change, alongside
a prospectus, is expected to be published in due course. A circular to shareholders
of GABI, providing further details of the GABI Scheme and convening a general meeting
to approve the GABI Scheme, is also expected to be published in due course. The 
GABI Scheme, if completed, is expected to conclude before the end of 2023.

> **The Chairman of GCP Infrastructure Investments, Andrew Didham, commented:**
> “There has been considerable consolidation amongst investors in investment companies
> like GCP Infra. With this comes the need for consolidation amongst investment 
> companies, to provide their investors with entities of greater scale, more liquidity
> and lower ongoing costs. GCP Infra is well placed to drive this consolidation,
> and the Board believes that the GABI Scheme and, if progressed, the RM Scheme,
> will deliver improved liquidity in the Company’s shares, a lower ongoing charges
> ratio and a wider pool of potential investors. We expect the enlarged Company 
> will be well placed to continue to deliver attractive, long-term risk adjusted
> returns to shareholders.”

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