Hipgnosis Songs Fund (SONG ) has avoided a suspension in its shares by issuing interim results showing a 9.2% fall in the value of its assets, but in an unusual move the board warned investors that figure may not be accurate.

In the six months to the end of September operative net asset value (NAV) of SONG fell to $1.74 per share, driven by a reduction in the fair value of the portfolio. In sterling terms this is 142.49p and it has fallen since to 136.5p as of 19 December.

The board recommended investors ‘use the fair value and the operative NAV with a higher degree of caution and less certainty than might otherwise be attached to it as an accurate reflection of the fair value of the company’s assets’.

Citrin Cooperman, the independent valuer, maintained the discount rate at 8.5%. However, the board said that if the rate was to increase to 9% this would result in $203.5m being wiped from the portfolio.

This warning comes after the relations between the board and the investment manager reached a new low.

Robert Naylor, former chair of Round Hill Music, and his board questioned investment manager Hipgnosis Song Management (HSM) on how Cooperman could value the royalties ‘at a materially higher level’ than implied by two recent sale proposals.

‘Regrettably, the investment adviser initially refused to provide an opinion,’ Naylor wrote in the results. ‘While the investment adviser did eventually provide an opinion to the board, it was heavily caveated.’

Naylor added that he wanted the correspondence between the board and Merc Mercuradis’ HSM to be published on the company’s website to ‘provide transparency for shareholders’. However, the manager refused to allow it, saying it breached confidentiality clauses.  

Naylor used the results to urge the Blackstone-backed adviser to provide their opinion on the fair value of the company, without caveats so they can provide ‘greater certainty and transparency to our shareholders’.

Winterflood’s Shavar Halberstadt said the ‘degree of acrimony’ between the two parties is ‘quite rare’.

Dividend suspension

Net revenues dropped in the first half the company’s financial year down to $54m from $76.8m in the previous year, driven by legal changes which mean lower anticipated future retroactive payments.

This had led the board to suspend the October dividend and they have declared will be no payout for the remainder of the year as liquidity concerns come to the fore.

‘Since I joined the board there has been a regular occurrence of issues raised as a result of ongoing failures in the financial reporting and control process,’ said Naylor. ‘While we consider substantial progress has been made in identifying and rectifying these issues, we have had to suspend the dividend for at least the remainder of the year in order to ensure compliance with our banking covenants.’

Total debt was $674m, or 32% of operative net asset value, exceeding the investment policy limit, meaning no further drawdowns from the $700m revolving credit facility can be made.

The company has $28m that must be paid out over the next 12 months as part of bonus provisions within contracts and the board will be ‘cognisant of the liquidity required in view of the potential payment of a termination fee to the manager’ wrote Jefferies’ Matthew Hose.

The board is also factoring in emergency cash as financial reporting issues have already led to increased liabilities.

On 15 December the board became aware of a ‘drafting error in a contract’. The company received notice of the exercise of a put option, or the option to sell, on an acquisition contract, which increased the company’s liabilities from $4m to $25m. HSM amended the contract and says the liability is between $7.5m and $8.5m.

Strategic Review

The board is continuing with its strategic review and said specialist music rights adviser, Shot Tower, has begun due-diligence.

Naylor has requested that HSM propose alternative terms for their future advisory arrangements and if the proposals are not in the best interest of shareholders he and his board will explore ‘alternative proposals’.

The chair said he had met with shareholders owning 60% of company shares and there were two major issues with HSM.

The failure of reporting and controls, which is being somewhat rectified by the appointment of Dan Pounder, who joined HSM as chief financial officer on 1 September.

Pounder, who the board back, has issued a proposed change to the revenue accrual methodology for the year end which may result in a 10% drop in annual revenue. However, Naylor  added there were ‘some positive performance’ in the underlying assets, which show like-for-like revenue growth of 10%.

The second issue is the mismanagement of conflict of interest, as presented by the failed sale of assets to Blackstone. Naylor said the issue was ‘harder to address’ but he ‘will seek to do so in the coming months’.