IMPACT OF FINANCIAL MARKET CONDITIONS
We are sure you are aware of the ‘global credit crunch’ which refers to what some market commentators have described as ‘turmoil in international investment markets’. Market conditions have deteriorated increasingly in recent months and reduced the value of investments in many asset classes including shares, property and credit securities. In Australia, the S&P / ASX 200 Share Index has fallen over 25% from the market peak in October last year and the S&P / ASX 200 Property Index has fallen over 40% from its peak in May.
The ‘global credit crunch’ has affected the performance, available cash and pricing of many investment products, including this Fund. In normal circumstances, a proportion of the Fund’s assets are held in cash in order to meet monthly redemption requests. Since January, the Fund has experienced an unusually high level of redemption requests and to meet the current level of redemptions, the Fund would be required to sell some assets. Due to the recent deterioration of liquidity in credit markets generally, it has become increasingly difficult to achieve assets sales and to, in the short term, reliably value certain assets held by the Fund. MFSIM together with its advisors has responded to the changing external environment and its various impacts by reviewing the investment strategy of the Fund. Our primary investment objective is now to maximise capital for investors in the Fund.
INTERIM REPORT FOR HALF YEAR ENDED 31 DECEMBER 2007
The Fund Auditor, Price Waterhouse Coopers, has completed the Fund’s interim report for the half year ended 31 December 2007.
The report notes;
• A breach of a ratio covenant of loan facility with a third party bank resulting in interest bearing liabilities of $184 million becoming repayable on demand as at 31 December 2007 (discussed further below under ‘’Loan Facility Agreement”);
• Uncertainty surrounding MFS Limited and its related entities which has impacted the recoverability of certain assets of the Fund.
As such, the Fund’s auditor is of the view that there is material uncertainty as to whether the Trust can continue as a going concern.This reflects that in the short term, there are circumstances outside the control of MFSIM Board that may potentially impact the management of the Fund and the value at which assets may be realised.To manage this situation, MFSIM has commenced implementation of a considered plan to repay the bank as soon as practicable and maximise the recovery of all Fund assets. We will update you on progress in this regard in coming weeks.
LOAN FACILITY AGREEMENT
The Fund currently has a $184m loan facility with a third party bank. As noted above MFSIM is in default of the loan agreement. As a result, the loan became repayable on demand. Recent negotiations with the bank have resulted in a standstill agreement with the bank to 31 March 2008 to suspend their rights to take action as a result of the breach of the financial ratio covenant.
Under the terms of the standstill agreement MFSIM cannot deal with the assets of the Fund, including for the purposes of making distributions or paying expenses on behalf of the Fund, without the approval of the bank. As a condition of the standstill agreement, the bank has requested that MFSIM submit a proposal for the orderly realisation of assets to repay the loan. MFSIM is currently finalising this proposal with its Advisors. MFSIM is in further discussions with the bank to obtain an extension of the standstill agreement before 31 March 2008. Any such extension remains at the discretion of the bank and is therefore uncertain. No such agreement has yet been reached. It is MFSIM’s objective to pay down the bank loan facility as soon as practicable.
FUND REDEMPTIONS AND DISTRIBUTIONS
As advised recently, the Board of MFSIM deferred the processing of all redemptions and ceased distribution payments until further notice.
Under the terms of the standstill agreement, discussed above, MFSIM irently not permitted to pay distributions to unit holders without the approval of the bank. However, at this time, MFSIM believes that the cessation of distributions and redemptions is, in any case, necessary to ensure that the Fund has sufficient liquidity to protect and maximise the long term capital value of the assets of the Fund.
MFSIM believes that to realise investments or distribute income in order to permit redemptions and distributions, given the current economic conditions affecting financial markets and short term asset prices, would not be in the interests of all unit holders. To achieve this objective, it required MFSIM to institute actions such as the deferral of redemptions payments and cessation of distributions. The MFSIM Board and its advisors are now focused on possible initiatives to provide liquidity to unit holders in the future. MFSIM will continue to closely monitor the condition of credit markets and actively manage the commercial loan sector of the Fund. MFSIM is working closely with the borrowers to ensure timely drawdown and completion of projects and to alleviate any liquidity pressure to the Fund. Confidentiality issues prevent MFSIM from detailing the commercial terms of these agreements.
The Fund’s constitution allows MFS Investment Management Limited up to 180 days to process and pay any valid redemption request. However, you should note that the Fund’s constitution also allows for this 180 day period to be extended to 360 days in certain limited circumstances including where MFSIM believes the Fund has insufficient available cash reserves to pay all redemptions on the appropriate date and all actual and contingent liabilities of the Fund on their due dates. The Fund Constitution also allows, where MFSIM considers the net value of the Fund to be less than $1.00 per unit, for MFSIM to adjust redemption prices to reflect this shortfall. As noted above, there is material uncertainty regarding the recoverability of certain of the Fund’s credit and equity exposures to related entities of MFS Limited and this may impact on the ability of the Fund to pay redemptions at $1.00 per unit.
MFS SUPPORT FACILITY
On 26 February 2008, MFSIM provided MFS Limited (‘MFS’) with an Option Notice to notify MFS of the requirement to draw-down on the MFS Support Facility. The Support Facility has a callable value of $50m. Under the terms of two of these Option Notices, MFS was, on 18 March 2008, due to pay MFSIM approximately $4.5m. MFSIM has not yet received this payment and is working with MFS to facilitate the provision of callable funds pursuant to the Support facility.
MFSIM AND FUND OPERATIONS
MFS has formally advised MFSIM that it will provide reasonable resources to ensure continuity of the ongoing operation as Responsible Entity of the Fund and to enable it to continue to satisfy the conditions of its Australian Financial Services Licence.
MFS Investment Management Limited (‘MFSIM’) (ABN 20 101 634 146) is the Responsible Entity and issuer of units in the MFS Premium Income Fund (ARSN 090 687 577) and holds an AFSL no 246 553. MFSIM is a subsidiary of MFS Limited (ACN 101 579 999). 4
FUTURE FUND DEVELOPMENTS
MFSIM, MFS and their respective advisors are currently working together to provide solutions with the objective of maximising value for all unit holders. We will continue to update you on developments as they occur. You can be assured that the Fund will continue to be managed professionally and in the interests of all investors. If you have any questions please phone our Client Services team on 131 637 or speak to your financial adviser.
MFS INVESTMENT MANAGEMENT LIMITED
CHIEF EXECUTIVE OFFICER