Royalty payments for Hipgnosis fell significantly below expectations, forcing the company to abandon its dividend plan.
Royalty Payments and Dividend Plans
The London-listed investment trust, which invests in music catalogue rights, revealed that paying an interim dividend of 1.31p per share to shareholders would have put the trust’s ability to meet debt covenants at risk.
The Impact of Changing Royalty Rates
In May of this year, the US Copyright Royalty Board announced that royalty rates for music streamed from 2018 to 2022 would increase from 10.5% to 15.1% for songwriters and publishers.
Citrin Cooperman, an independent portfolio valuer for Hipgnosis, disclosed that it ‘substantially reduced’ its industry-wide payment forecasts associated with the judgment on Friday.
As a result, the expected retroactive payments to the company have been reduced by over half, from $21.7 million to $9.9 million.
The company also mentioned that it was in discussions with lenders to ensure compliance with debt covenants and that any future dividend disbursements would depend on a “satisfactory resolution” to these discussions.
By mid-afternoon on Monday, Hipgnosis Songs Fund shares experienced the largest decline of any fund on the FTSE 250 Index, dropping 10% to 66.5p in response to the update. Over the past twelve months, there has been approximately a 25% decline.
Hipgnosis, an organization established by former music manager Merck Mercuriadis and Chic guitarist Nile Rodgers, has acquired the back catalogues of renowned musicians for more than £1 billion.
These acquisitions have included the Red Hot Chili Peppers, Fleetwood Mac’s Lindsey Buckingham and Christine McVie, Neil Young, Barry Manilow, and Colombian vocalist Shakira.
Share offers and borrowing have funded this purchase spree, accelerated by rising interest rates.
In September, the group reached an agreement with funds advised by asset manager Blackstone to purchase 29 music catalogues and a portfolio of non-core tracks for $465 million to reduce debts and finance a stock repurchase.
However, as reported by the Financial Times, several significant shareholders have expressed their opposition to the transaction, citing alleged low value and a lack of transparency regarding expenses.
Shareholders’ Concerns and the Future
Investors will vote later this month on the proposed transaction and the “continuation” of the fund.
If the latter motion does not receive approval, Hipgnosis’s assets may be subject to a fire sale.
Russ Mould, investment director at AJ Bell, expressed a pessimistic outlook, stating, “It is surprising that the company is not distributing dividends at this time, as its value continues to decline, and income was intended to make up a significant portion of investment returns.”
“The board of directors’ tolerance for this turmoil is questionable, and it may be time to consider replacing the management team.”