Distressed Patient Capital wins support of its lender

Northern Trust agrees not to enforce strict terms of Woodford Patient Capital Trust's £150 million loan facility in return for veto over new investments.

Woodford Patient Capital (WPCT) has obtained the crucial support of its lender Northern Trust while the investment trust struggles against the wave of disposals by its fund manager’s suspended Equity Income fund.

Northern Trust, the bank behind the trust’s £150 million credit facility, which expires next January, has agreed not to enforce the strict terms of its loan agreement while Patient Capital restructures its portfolio.

However, in return the lender has demanded a veto over any new investments by the trust and a new rate of interest on the £113.7 million it has drawn down at 1.5% over the Libor inter-bank lending rate.

‘The company has agreed with its lender greater flexibility around certain obligations relating to the borrowing base for a period of time while the company pursues the disposal of certain unquoted assets,’ the trust said in a stock exchange statement.

‘WPCT has agreed to make no further investments during this time without the prior consent of the lender (such consent already provided in relation to certain existing commitments). WPCT has agreed a revised interest rate with the lender of Libor + 1.5%,’ it added.

The agreement gives the board, chaired by Susan Searle and criticised for being too close to Woodford, much-needed breathing space as it grapples with the impact of forced sales of assets by its fund manager Neil Woodford's equity income fund.

Its near £1 billion wave of disposals have hit the investment trust hard because around three-quarters of its portfolio of early stage healthcare and technology stocks overlap with the £3.1 billion Woodford Equity Income Fund (WEIF).

In the three months since WEIF was gated, the trust’s net asset value (NAV) has plunged 17% in response to a series of valuation write-downs in companies such as Industrial Heat and Immunocore.

This threatened to put WPCT in breach of its loan agreement with Northern Trust, which, like all such covenants, stipulates that debts must not exceed a certain level of assets.

In extreme situations lenders can wind up investment trusts that break their loan agreements and at the very least require the sale of assets that will hurt investor returns.

The risk of a loan breach has increased as the board considers selling some of the trust’s unquoted holdings alongside WEIF. This is likely to depress its NAV further as potential buyers seek to extract hard bargains with Woodford Investment Management.

WPCT’s board had already stated its intention to repay the debt which, like other investment trusts, it uses to gear or enhance shareholder returns. This is aimed at de-risking the trust and protect it from the implosion of Woodford’s business.

The trust has shareholder approval to borrow up to 20% of NAV. Gearing currently stands at 17.1%.

WPCT shares rose 0.5p or 1.4% to 43.2p. The stock dropped out of the FTSE 250 this week having nearly halved this year and stands 42% below its estimated NAV per share of around 73p, according to Morningstar data.

The steep discount reflects investor concern that the trust's real asset value is much lower, although some contrarian investors have begun to suspect the shares may be oversold.

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