The estimated transaction expenses appear to be excessive and are close to 90% of the market capitalisation of Ascendis Health. How can you justify these costs in relation to the size of the company?
We acknowledge that the quantum of the transaction expenses is very high in relation to the market capitalisation of the company, however they represent less than 5% of the total enterprise value of Ascendis including the total debt, which is in line with similar restructuring transactions of this scale and complexity.
The group recapitalisation is a particularly complex transaction from a legal and regulatory perspective. It involves multiple legal entities across several jurisdictions and will have taken approximately nine months to implementation. The board has also ensured that the company only engages with top tier professionals to ensure the success of the transaction.
Almost 50% of the transaction costs are for the legal fees for the lenders. Why is Ascendis burdened with costs that should be covered by the lenders?
The legal fees do comprise a high percentage of the total transaction expenses. However, in terms of the senior facilities agreement (concluded in June 2020) and the restructuring support agreement (concluded in May 2021) between Ascendis Health and the senior lenders, the costs of legal advisers to the creditors are borne by the company.
This is in line with market practice for debt transactions, such as the group recapitalisation transaction. Unfortunately, since the majority of the debt is in Europe and the majority of the assets that are part of the recapitalisation are also in Europe, it is necessary to use European based law firms with recapitalisation expertise, that charge considerably more than South African firms.
Are any of the transaction advisers or professional service providers being incentivised with a success fee for the transaction?
The advisers are being paid fees either based on the service provided or on time spent, whichever is customary for the relevant service.
The transaction advisor, Rothschild & Co South Africa, will qualify for an incentive fee for the successful completion and implementation of the group recapitalisation. This fee is included in the estimated transaction expenses detailed in the circular to shareholders.
Why has it taken the parties more than three months to finalise the terms of the recapitalisation when the initial terms of the transaction were announced in mid-May?
While the initial details of the recapitalisation were announced in May, these were essentially the principal terms agreed between the parties. You will recall that shareholders were advised in the 12 May announcement that the parties had concluded a restructuring support agreement which provided a framework for the implementation of the group recapitalisation. The parties have subsequently been preparing the definitive agreements to give effect to the transaction.
The timeline is normal for a transaction of this nature and complexity. The process has been particularly challenging owing to the geographic spread of the group’s assets across Europe and South Africa and the disposal processes that have been executed in parallel with the restructuring. The group appointed a professional team to advise on the strategic, commercial, legal, regulatory, tax and exchange control aspects of the recapitalisation. This included time-consuming processes such as the preparation by management of the historical financial information for the disposal assets and the pro forma financial effects of the transaction for the company (both of which must be included in the circular) and the review thereof by the group’s reporting accountants and auditor.
There was an expectation among shareholders that the considerable time delay in announcing the final terms of the recapitalisation meant that the Ascendis board and management were negotiating a better deal with the lenders, yet the final terms are no different to the May 12 SENS announcement. Please comment.
The details contained in the SENS announcement of 12 May 2021 were the principal terms agreed between the parties and there was no further negotiation on the terms of the recapitalisation. All the negotiations and agreement on the key features of the recapitalisation took place prior to the 12 May announcement. There was certainly no indication from the company that the principal terms of the transaction would differ from the terms disclosed on 12 May 2021. The “final terms” comprised the detailed steps that need to be taken in order to implement the transaction, having regard for the regulatory environment in each relevant jurisdiction and the location of the debt and the assets affected by the transaction, and merely supplemented the terms that had already been agreed.
Owing to the complex nature of the transaction and the level of detailed disclosure contained in the circular, particularly in relation to the pro forma financial information, it was decided to only seek shareholder support once the circular was available to all parties.
No shareholders have declined to support the transaction. Following the release of the circular, management and the transaction advisers will now engage with the major shareholders to seek their support for the recapitalisation.
Ascendis solicited letters of support for the recapitalisation so why is there no reference to these in the circular?
The letters of support provided an opportunity for shareholders to indicate their broad support for the transaction, ahead of the publication of the circular, and for the company to gauge the level of support, particularly from retail shareholders. As these letters were non-binding and the support expressed was given without access to the detailed information contained in the circular, it would be inappropriate to include the details in the circular. The company received letters of support from 151 investors holding 53.7 million shares or 11.7% of the issued shares.
Ascendis has stated that the company has received expressions of interest in its remaining assets. Why has this not been communicated to shareholders via SENS?
Management continues to receive informal expressions of interest for certain of the remaining South African assets. At this stage these are exploratory and the company has not entered into any formal process for the disposal of any of its assets. If any proposal received from an interested party were to lead to formal negotiations which may result in a disposal, the company would consider the merits of an announcement at that time, having regard for its regulatory obligations, particularly those prohibiting the publication of misleading information.
In summary, the recapitalisation aims to restore balance sheet stability by
- reducing the group’s unsustainably high debt levels
- addressing the need for short-term funding
- maximising the long-term strategic value of the business.
Did the lenders dictate that the company initiate the recapitalisation or was this undertaken by mutual agreement?
This was dictated by Blantyre and L1 Health. However, the board and management of Ascendis were supportive and receptive to the recapitalisation owing to the company’s rising debt levels, with the repayment due by 31 December 2021, and considering the lack of progress that had been made to date on the lender-driven asset disposal process.
In addition to Blantyre and L1 Health, who collectively hold over 75% of the debt, there are two other members in the consortium. Unfortunately, we are not able to disclose the identity of the other lenders due to client confidentiality agreements.
Was a rights offer considered as part of the recapitalisation and, if so, why is the company not going ahead with any capital raising?
Owing to the low share price, a rights issue would have a significant dilutionary impact on shareholders. A further key consideration was that Ascendis has over 7 000 shareholders who own less than 1 000 shares and it would have been highly unlikely that many of these retail shareholders would have been able to participate in a rights issue. Therefore, in the early stages of the negotiations on the recapitalisation it was agreed not to pursue a rights issue.
Retail investors account for approximately 42% of the company’s shares.
Management is committed to engaging with all shareholders and the CEO has engaged with this lobby group as they represent the interests of an increasing number of retail investors. Management would welcome engagement with other lobby groups too. Retail investors account for approximately 42% of Ascendis Health’s total shareholding.
Yes, shareholders are entitled to view the share register and may request to receive a copy from the company secretary.
Yes, the MOI is available to shareholders and can be accessed on the group’s website at the following link: https://ascendishealth.com/about-us/governance/memorandum-of-incorporation/
No, the minutes of board proceedings are privileged and confidential, and shareholders have no legal right to these documents.
In this scenario, Ascendis will enter a business rescue process. The board of Ascendis will appoint a business rescue practitioner who will initiate an orderly sale of assets to settle the outstanding debt with creditors. In such a business rescue process, shareholders rank behind all other creditors.
The largest shareholders are the International Finance Corporation (12.6% shareholding) and Kefolile Health Investments (11.7% holding).
In a business rescue process, shareholders rank behind all other creditors. Following an accelerated business rescue asset disposal process, it is possible that the outstanding debt may exceed the proceeds from a distress sale of assets. In this worst case scenario, shareholders are likely to receive minimal to zero value.
Why have management been incentivised to complete the Group Recapitalisation and the asset disposals? Is this not part of the responsibilities of the CEO and CFO for which they are already well remunerated?
Following the proposal of a long-term incentive (LTI) scheme to shareholders in the 2020 remuneration report, there was a shift in the organisation’s medium to long-term objectives as a result of the implementation of the Group Recapitalisation. This dictated that the approach to incentivising management had to be aligned with the new direction agreed by the board and the senior lenders.
In adapting to the changed environment driven by the Group Recapitalisation, the remuneration committee acknowledged that the successful conclusion of the recapitalisation would require a stable and engaged management team during this high intensity period. It therefore became apparent that the LTI proposed to shareholders was no longer appropriate and a new incentive programme, comprising a retention scheme together with an incentive element, needed to be proposed.
The remuneration committee believes that the compensation approach needs to be relevant and competitive while aligning the required outcomes of the business with strategic value creation. The objectives of this alignment are:
- to ensure a continued focus on operational performance
- drive successful completion of the Group Recapitalisation
- unlock optimal shareholder value post the Group Recapitalisation
- continue to attract and retain key talent within the group.
Why has the management incentive plan been structured around cash incentives rather than the allocation of shares which would have aligned management’s interests with those of shareholders. Currently management stand to be paid these large cash bonuses regardless of the value that accrues to shareholders post the transaction.
The board believes that the successful conclusion of the Group Recapitalisation and completion of the identified disposals will ultimately provide upside value for shareholders. While the Group Recapitalisation circular provides information on one element of remuneration, the management team is incentivised on the following basis:
- Short term value optimisation through the short-term incentive scheme that is structured to ensure a continued focus on operational performance
- Mid term value optimisation through:
- ensuring the successful implementation of the Group Recapitalisation
- ensuring that optimal value is derived by the shareholders from the New Ascendis Health, post the Group Recapitalisation.
The awards are subject to rigid performance criteria, which have been disclosed in the circular.
Issuing shares to management at the currently discounted share price, dilutes returns for shareholders and provides potentially excessive upside remuneration in the event the share prices rises post completion of the Group Recapitalisation.
Was the management incentive plan proposed by the lenders or by the board of directors of Ascendis Health?
It is in the interests of the lenders to retain the services of the CEO and CFO and to ensure continuity through the recapitalisation process and beyond. However, the lenders did not propose the specific plan. The incentive plan was structured by the Ascendis Health board human capital committee and approved by the board of directors.
Why are shareholders not being given the opportunity to vote separately on the management remuneration at the general meeting? If we are not in favour of the management bonuses, we will be forced to vote against the transaction which could result in value destruction for all stakeholders.
If a separate resolution was proposed on the management incentive plan and shareholders did not vote in favour of the incentive plan, the company could be at risk of not retaining its key executives and not being able to effectively implement the recapitalisation which would be detrimental to all stakeholders and could result in the erosion of shareholder value.
The executive remuneration policy and its implementation are subject to separate non-binding advisory votes at the AGM each year, in accordance with the recommendations of King lV. In line with the requirements of King lV, should either the remuneration policy or the implementation report receive 25% or more dissenting votes, management will engage directly with these shareholders to determine the reasons for the dissenting votes and take reasonable measures to address legitimate concerns. The steps taken to address legitimate and reasonable concerns will be disclosed in the following year’s integrated report.
The following concerns were raised in the previous year, which the board has sought to remedy as part of the current incentive structure:
|Key shareholder concerns||Company response|
|The awards granted under the LTI scheme will vest in less than three years||This was structured to align with the strategy of the business, which was focused on disposals of the business units. A similar approach has been adopted with the proposed 2022 retention plan with payment being made in three tranches: 50% on the conclusion of a consensual group recapitalisation, 25% 12 months thereafter and 25% 24 months thereafter.
The two-year phasing is a way to secure a longer-term commitment from the management team to ensure that further retention incentives are not required.
|Performance hurdles need to be an integral part of the LTI scheme||The new retention plan includes strict performance hurdles, penalties for delays in achieving the vesting milestones relating to the group recapitalisation and clawbacks for bad leaver circumstances.|
Yes, other incentive structures were considered but the board believed that a cash-based incentive plan with rigid performance criteria and potential payouts phased over two years was the most appropriate means to retain and incentive the CEO and CFO. As indicated above, the two-year phasing is a mechanism to secure a longer-term commitment from the management team to ensure that further retention incentives are not required. It also ensures that the team have sufficient time to maximise the value in the New Ascendis Health.