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BH Macro Limited - Proposed Changes to the Management Agreement

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·12-min read
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BH MACRO LIMITED (the “Company”)

(a closed-ended investment company incorporated in Guernsey with registration number 46235)

LEI: 549300ZOFF0Z2CM87C29

12 March 2021

Proposed Changes to the Management Agreement

Following its announcements on 22 January 2021 and 16 February 2021, the Company has today published a Circular seeking Shareholder approval to amend the management agreement between the Company and Brevan Howard Capital Management LP (the “Manager”) (the “Management Agreement”) to reflect the changes requested by the Manager, as set out in the letter received by the Company dated 21 January 2021 (the “Manager Letter”) (the “Proposed Changes”). The Circular includes a recommendation by the Company’s board of directors to vote in favour of the Proposed Changes.

Capitalised terms used in this announcement and not otherwise defined shall have the meanings given to them in the Circular.

The purpose of the Circular and the accompanying notice is to convene an extraordinary general meeting (the “Meeting”) of the Company to be held at the offices of Northern Trust International Fund Administration Services (Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey at 9.30 a.m. on 29 March 2021 to consider, and if considered appropriate, approve the Proposed Changes, which are described in more detail below and in the Circular.

Background

The Manager Letter stated that the Manager would serve notice of termination of the Management Agreement and the Company’s investment in Brevan Howard Master Fund Limited (the “Master Fund”) would be redeemed unless the Company sought the approval of Shareholders to the Proposed Changes.

Since receiving the Manager’s Letter, the Company has been in dialogue with the Manager and with numerous Shareholders about the Proposed Changes and the future of the Company. As a result of these discussions, the Company believes that the Proposed Changes represent the most favourable basis on which the Manager is prepared to continue as manager of the Company and consequently the best terms on which the Company can remain invested in the Master Fund.

As a feeder fund into the Master Fund, the Company is required by its investment policy to invest substantially all of its assets (net of short-term working capital) in the Master Fund. The Company’s investment in the Master Fund is dependent on the continuation of the Management Agreement with the Manager.

Until changes were made starting in October 2016, the Company paid the Manager a management fee equal to 2% per annum of its prevailing NAV and an operational services fee at the level of its investment in the Master Fund equal to 0.5% per annum of its prevailing NAV. Further, until April 2019, the notice period for both the Company and the Manager under the Management Agreement was 24 months. The Proposed Changes seek, in large part, to amend the Management Agreement so that it is closer to its original terms, albeit that the combined management fee and operational services fee would, at a combined 2% per annum, be 0.5% lower than from February 2008 to October 2016, when it was a combined 2.5% per annum.

Further, the Company and the Manager have agreed that if the Proposed Changes are approved by Shareholders, the Company will undertake a tender offer on terms described in more detail below and in the Circular.

Assuming the Proposed Changes are implemented, the Company and the Manager have agreed to promote the growth of the Company through the issue of new Shares or the sale of Shares from treasury if they are trading above NAV with the proceeds being used to increase the Company’s investment in the Master Fund. While the capacity of the Master Fund to accept new investment may vary from time to time, the Manager has agreed to procure that the Master Fund will accept new investment by the Company in an amount equal to the proceeds of new issues or sales of shares from treasury in an aggregate number of shares equal to 10% of the Company’s shares in issue at the date of this announcement and the Manager shall use its reasonable endeavours to procure capacity for any investment by the Company in the Master Fund in excess of that amount, subject to any limitations on Master Fund capacity as may be generally applied from time to time.

If Shareholders approve the resolution to be proposed at the Meeting (the “Resolution”), the Management Agreement will be amended and restated to include the Proposed Changes (including the increase in the Management Fee) with effect from 1 July 2021 and the Company will remain invested in the Master Fund.

If Shareholders do not approve the Resolution, the Manager has confirmed to the Company that it will serve notice of termination of the Management Agreement so that the Management Agreement will terminate on 1 July 2021 and the Company’s investment in the Master Fund will be redeemed in full by 31 July 2021.

If this were the case, the Company is aware that, while some Shareholders will want to liquidate their investment, other Shareholders may want to stay invested, albeit on the basis of a new investment policy. Accordingly, the Company would consider potential new investment managers for its assets.

Any change in the Company’s investment policy and appointment of a new manager would be subject to Shareholder approval. Further, any Shareholders wishing instead to liquidate their investment would be provided the opportunity to exit at or around the prevailing NAV per Share of the relevant class less an amount to cover the Company’s then outstanding costs and expenses.

In the event that a suitable new manager were not identified, or the appointment of a new manager were not approved by Shareholders, the Company anticipates that, subject to Shareholder approval to be sought at the time, it would return the vast majority of the proceeds of redemption of its investment in the Master Fund (less an amount equal to the Company’s actual and estimated outstanding costs and expenses, including the costs of liquidation) by tender offer, following which the Board would propose placing the Company in liquidation.

Although it is not possible to be exact regarding the amount that would be returned to Shareholders in these circumstances, nor the precise timing of any payments, the Board estimates that Shareholders would receive a total amount per Share of the relevant class based on the prevailing NAV per Share of that class on the date of termination of the Management Agreement less an amount to cover the Company’s costs and expenses, including the costs of liquidation.

Description of the Proposed Changes

The Proposed Changes are as follows:

1. Increase in Management Fee

The monthly management fee (the “Management Fee”) payable by the Company (excluding the operational services fee payable at the level of the Master Fund) will be increased to an amount equal to one-twelfth of one and a half (1.5)% of the prevailing NAV of each class of Shares.

The monthly Management Fee is currently equal to one-twelfth of one-half (0.5)% of the lower of (a) the prevailing NAV of each class of Shares and (b) the NAV of that class of Shares as at 1 April 2017, on the basis that all Shares redeemed pursuant to the Company’s 2017 own share tender offer had been redeemed on that date (subject to certain other adjustments, including to take account of conversions between Share classes).

This change would reverse, in part, the reduction in the Management Fee from one-twelfth of two (2)% per month of the NAV of each class of Shares effective from 1 April 2017 and would reverse in full the agreement by the Manager not to charge the Management Fee on performance-related growth of the Company which first applied from October 2016.

In addition, the waiver since October 2016 of operational services fees in respect of performance-related growth of the Company will be discontinued so that those fees revert to being charged on the entire amount of the Company’s investment in the Master Fund.

2. Extension of notice period

The notice period for termination of the Management Agreement without cause by the Company or the Manager will be increased to 12 months from three months (which is the notice period that has been effective from 1 April 2019 when it was reduced from 24 months).

3. Introduction of fee relating to certain share redemptions and repurchases

If, in any calendar year, the Company makes repurchases or redemptions of any class of its Shares above a number equal to 5% of the shares in issue of the relevant class as at 31 December in the prior year (the “Annual Buy Back Allowance”), the Company would be required to pay the Manager a fee equal to 2% of the price paid by the Company to repurchase or redeem those additional Shares. The purpose of this fee is to compensate the Manager in respect of the Management Fee that would otherwise have been payable by the Company in respect of the relevant Shares had they not been repurchased or redeemed. The fee would be payable in respect of all Shares which are repurchased or redeemed by the Company in excess of the Annual Buy Back Allowance in any year, including by way of market purchases, tender offer, annual partial capital return or the class closure provisions included in the Company’s articles of incorporation.

4. Introduction of liquidation vote trigger

In the event that the Company’s aggregate NAV at the end of any calendar quarter for all share classes combined is lower than US$300 million (on the basis of the then prevailing exchange rate), the Board would be required to propose a vote to Shareholders for the liquidation of the Company. If the vote were to be passed by Shareholders and the Company placed into liquidation, the Management Agreement would be terminated and the Company would be required to pay the Manager a payment equal to 2% of the Company’s NAV (net of any Annual Buy Back Allowance for the relevant calendar year that remains unused), in lieu of the Management Fee that would otherwise have been payable if the Management Agreement had been terminated on 12 months’ notice, in addition to any other fees owing to the Manager at the time of termination of the Management Agreement. These arrangements effectively replicate the existing position under the Management Agreement if the Management Agreement were to be terminated without notice having been served as a result of Shareholders voting to wind up the Company. Further, there would be no obligation on Shareholders to vote in favour of the liquidation in these circumstances.

No changes are proposed to the annual performance fee payable by the Company to the Manager, which will remain at 20% of the appreciation in the NAV per Share of each class of the Shares during the relevant year above any prior high water mark. The other terms of the Management Agreement will also remain unchanged.

Tender Offer

If Shareholders approve the Resolution, the Company has agreed with the Manager that the Company will make a tender offer (the “Tender Offer”) for up to 40% of each class of its issued Shares at a price equal to 98% of the prevailing NAV per Share of the applicable class at the time of completion of the Tender Offer less an amount per share in respect of the costs of the Tender Offer. The difference between the tender price and the prevailing NAV per Share will be retained by the Company for the benefit of remaining Shareholders. The Tender Offer will be funded by the redemption of such portion of the Company’s investment in the Master Fund as required to pay for the Shares validly tendered in the Tender Offer.

All Shareholders (other than Shareholders located in certain non-UK jurisdictions) will be permitted to tender all, part or none of their respective shareholdings in the Tender Offer. All valid tenders in respect of up 40% of each Shareholder’s shareholding will be accepted in full. Tenders in excess of 40% of a Shareholder’s shareholding will be accepted to the extent that other Shareholders tender less than 40% of their respective shareholdings, with such excess tenders being satisfied pro rata in proportion to the amount tendered by each relevant Shareholder in excess of 40% of its shareholding.

Completion of the Tender Offer will be subject to Shareholder approval at an extraordinary general meeting to held after the Tender Offer has been made.

The Tender Offer would complete, and the relevant portion of the Company’s investment in the Master Fund would be redeemed, before 1 July 2021, when the Proposed Changes to the Management Agreement would become effective, although the proceeds of the Tender Offer may be paid to Shareholders after that date.

Further details of the Tender Offer, including the specific timetable, will be announced, and a circular sent to Shareholders, following the Meeting if the Resolution is approved.

Extraordinary General Meeting

The States of Guernsey has reimposed lockdown measures in Guernsey to reduce the transmission of COVID-19. Border restrictions have been put in place and all arrivals from outside Guernsey are required to observe an extended quarantine period. If restrictions to address the COVID-19 pandemic remain in place at the relevant time, physical attendance at the Meeting may not be possible or feasible.

The Company therefore urges Shareholders to vote by proxy and to appoint the chairman of the meeting as their proxy. If a Shareholder appoints someone else as their proxy, that proxy may not be able to attend the Meeting in person nor cast the Shareholder’s vote. All votes on the resolutions contained in the notice of the Meeting will be held by poll, so that all proxy votes are counted.

The situation regarding COVID-19 continues to change and the States of Guernsey may relax current restrictions or implement further measures relating to the holding of general meetings during the affected period. Any changes to the arrangements for the Meeting (including any change to the location of the Meeting) which the Board considers appropriate will be communicated to Shareholders before the meeting through the Company’s website at https://www.bhmacro.com and, where appropriate, by regulatory information service announcement.

Posting of Circular

The Circular is being posted to Shareholders. A copy of the Circular will shortly be available to view on the Company's website at www.bhmacro.com

Enquiries

Richard Horlick
Chairman

William Simmonds
J.P. Morgan Cazenove
020 7742 4000

Edward Berry / Tom Blackwell
FTI Consulting
07703 330 199 / 07747 113 919