Interactive Investor

Music royalties trust dives as dividend scrapped ahead of vote on future

Alternative income trusts are under pressure as interest rates rise and investors move back into the bond market, writes Sam Benstead.

16th October 2023 13:32

by Sam Benstead from interactive investor

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Hipgnosis Songs Fund has scrapped its interim dividend, due to be paid on 27 October 2023, after its third-party valuer reduced its calculations for music royalty income.

The news sent shares tumbling 10%, taking year-to-date losses to 25%. The discount to net asset value (NAV) is now around 50%.

The trust, which launched in 2018, buys up the back catalogues of music artists in order to collect royalty payments, which it then returns to shareholders via dividends. Included in its portfolio are songs by the likes of Shakira, Blondie and the Red Hot Chili Peppers.

However, due to changes to US copyright law last year for the 2018 to 2022 period – known as Copyright Royalty Board III – Hipgnosis’ independent valuer Citrin Cooperman cut its retroactive accrual income for the year ending in March 2023, from $21.7 million (£18 million) to $9.9 million (£8 million).

The coming dividend was withdrawn to comply with rules from its bank for its ongoing borrowing deal. However, Hipgnosis said that it expects to declare and pay future dividends as targeted and will make an announcement in “due course.”

Numis, the stockbroker, calculates that the $11.8 million reduction in accrual represents 6.7% of total revenue for the year ended March 2023.

The analyst says that the dividend suspension highlights the stretched balance sheet and the need to generate cash.

The dividend announcement comes just days before a continuation vote on the trust scheduled for 26 October.

Numis expects the continuation vote to fail, meaning that the trust will be wound up and assets sold to return cash to shareholders.

It said: “It was looking highly likely that the continuation vote would fail given the vocal disapproval from investors. It will be interesting to see if today’s announcement changes the equation with the dividend suspension highlighting the stretched balance sheet and the need to generate cash.

“That said, we believe the continuation vote remains likely to fail given the dividend suspension will support the loss of faith that investors have shown towards the board and manager.”

However, the reasons for the cut in income are unclear. Liberum, an analyst, points out that the copyright ruling actually increased payments to artists for streaming from 10.5% to 15.1% of revenues.

It adds that this ruling had “been seen as a key tailwind for some time” for the trust and it said that no other song royalty funds had announced adjustments to royalty income.

This adds more “complexity” to the coming continuation vote, Liberum argues.

Another trust in the space, Round Hill Music Royalty, was taken over this year by Alchemy Copyrights at a discount to the stated NAV of its music portfolio.

The rise and fall of “alternative income” trusts is closely linked to the fall and then rise of interest rates.

With bonds paying next to nothing before rates began rising in late 2021, investors sought income from more niche parts of the investment world, which included music royalties.

However, with rates above 5% in Britain and America, investors can get income again from the bond market, and alternative trusts, which were often highly dependent on debt to fund acquisitions, are out of favour.

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