Hipgnosis Songs Fund (SONG ) will not pay a dividend before April 2024 as artists’ bonus payments have increased and Numis analysts predict there could be more unpleasant surprises ahead for shareholders. 

The board – which is depleted after a dramatic annual general meeting in October saw the chair ousted and shareholders vote against the company’s continuation – said it had reviewed the company’s financial position and determined it needs to retain cash in order to fund bonus payments.

Sylvia Coleman, senior independent director of SONG, said in the announcement that the bonus provision had been increased by $23m (£18.5m) to $68m as four more catalogues are due to meet performance hurdles.

The $68m is payable over three years up to September 2026, with $40m due within 12 months, $24m due within 1-2 years and $4m due within 2-3 years.

The company said 19 other catalogues have active bonus provisions worth $75m, but they are ‘unlikely’ to meet their performance hurdles. These will be disclosed in the company’s interim results as contingent liabilities.

Coleman also reported that the investment adviser, Merck Mercuriadis’ Hipgnosis Song Management Limited, is recommending adjustments to SONG’s revenue accrual. This would see its revenue earned but not received reduce by 10%.  

According to Numis analysts Ewan Lovett-Turner and Ash Nandi, a new chief financial officer has been appointed to the fund manager to review the accounts following the failed continuation vote. 

The analysts, who estimate that 2023 net revenue of $147m has been reduced by 30%, said they would ‘not be surprised if there are further “gremlins” discovered over time’. 

‘This appears to a be particularly strange combination of adjustments with provisions increasing, for costs expected to artists for strong performance of catalogues bought, whilst also reducing (historic) revenue recognised,’ the analysts said. ‘Given significant uncertainty over the accounting and little headroom on its debt covenants there appears (with the limited visibility we have) to have been
little choice but to stop paying dividends.’

In October the board scrapped its upcoming dividend because it risked issues with its lenders over how much cash it has to cover fixed charges, such as debt payments, following a drop in its expected retroactive payments.

SONG had anticipated a $21.7m windfall in retroactive payments as part of the US Copyright Board’s decision to increase royalties owed to artists over the 2018-2022 period. However, independent portfolio valuer Citrin Cooperman reduced the industry-wide expectations, leading the board to lower its anticipated payment to $9.9m.

The board will update the company’s dividend policy as part of its strategic review. Proposals are expected to be made to shareholders by 26 April 2024.

Shares in SONG were down 5.5% in morning trading at 68.5p or a 53% discount to net asset value.