REG - Hipgnosis Songs Fund - Annual Financial Report
13/07/2023 07:15
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RNS Number : 8661F Hipgnosis Songs Fund Limited 13 July 2023
LEI: 213800XJIPNDVKXMOC11
Hipgnosis Songs Fund Limited ("Hipgnosis" or the "Company")
Final Results for the year ended 31 March 2023
13 July 2023
The Board of Hipgnosis Songs Fund Limited, the first UK listed investment
company offering investors a pure-play exposure to songs and associated
intellectual property rights, and its Investment Adviser, Hipgnosis Song
Management Limited, are pleased to announce the Company's final results for
the year ended 31 March 2023.
Financial Highlights
· Operative NAV per share increased 3.6% year-on-year to $1.9153 (31
March 2022: $1.8491), driven primarily by a 4.0% increase in the Fair Value of
the Portfolio with the Portfolio Independent Valuer determining their discount
rate should remain unchanged at 8.5%
o As at 31 March 2023, Operative NAV per share in Sterling was 154.91p
(Sterling: Dollar exchange rate 1.236);
o As at 11 July 2023, Operative NAV per share in Sterling was 148.51p
(Sterling: Dollar exchange rate 1.2897).
· Total $ NAV Return to Shareholders at period end, including 27.9 cent
per share of dividends declared, has been 69.0% since the IPO on 11 July 2018.
· Gross revenue $177.3 million (Year ending 31 March 2022: $200.4
million); Net revenue $147.2 million (Year ending 31 March 2022: $168.3
million)
o Reduction in IFRS revenue due to the initial recognition of the Usage
accrual ($36.0 million) and FY22 non-recurring RTI ($14.1 million) in the
prior year, partly offset by the CRB III retroactive accrual ($16.1 million)
in the current year;
o Excluding the impact of these adjustments, Net revenue grew by 10.9%
year-on-year.
· Pro-forma Annual Revenue (PFAR), which shows the royalty revenue
earned by Catalogues in a calendar year largely based on royalty statements,
for the twelve months to 31 December 2022 grew 12.1% year-on-year to $130.2
million from $116.1 million despite currency headwinds
o Continued growth in streaming income, up 14.8% to $52.1 million from $45.4
million, and synchronisation income, up 24.7% to $19.4 million from $15.6
million;
o 9% increase in performance revenues to $30.8 million from $28.3 million,
as a small H1 decline was more than off-set by a 41% increase in H2, strongly
suggesting revenue from post-Covid-19 lockdown recovery is now being paid
through;
o Classic iconic songs deliver strong performance with >10 years
catalogues income up 11.4% year-on-year. Income from younger catalogues
(<10 years) up 13% year-on-year, providing further evidence younger
catalogues are reaching the end of their natural decay curve.
· Ongoing Charges fell to 1.21%, from 1.54%.
· Total dividends declared of 5.25p per ordinary share were fully
covered 1.08x by leveraged free cash flow.
· Net debt of $562.0 million as at 31 March 2023 (31 March 2022: $569.9
million) represents 24.3% of Operative NAV (31 March 2022: 25.4%).
Operational Highlights
· New Revolving Credit Facility agreed and interest rate swaps
implemented providing certainty over interest payment, a lower margin cost
than the previous facility and greater operational flexibility.
· US Dollar to Sterling foreign exchange hedges put in place in October
2022 providing $50 million of forward contracts.
· High profile synchs include Blink-182's All the Small Things as the
soundtrack to the iconic John Lewis Christmas Advert; Rihanna performing four
Hipgnosis Songs in the Super Bowl half time show; Journey's Separate Ways
(Worlds Apart) in Stranger Things; Nile Rodgers and Bernard Edwards' Spacer in
the new Renault Space commercial and a Hipgnosis created cover of Bon Jovi's
Wanted Dead or Alive on the global trailer for the new Transformers:
Reactivate video game.
· Nicki Minaj's Super Freaky Girl, which interpolates Rick James's hit
Super Freak, went to Number 1 on the Billboard Hot 100 in the US as well as
being a top five hit in the UK.
· Administration partnerships with Sacem and peermusic, which reduced
third party administration and collection costs by 6.6% and reduced payment to
as little as four months on the 6,200 Songs reverted to date.
· Trials of multi-territory live performance direct revenue collection
services delivering faster payments and substantially lower third party
costs.
· US Copyright Royalty Board (CRB) confirmed substantial CRB III
increases for mechanical streaming rates and accepted industry proposal
supported by Hipgnosis' advocacy for additional increases for 2023-2027
period.
Commenting on the results, Merck Mercuriadis, CEO and Founder of Hipgnosis
Song Management and Founder of Hipgnosis Songs Fund said:
"Today's results are an important validation of Hipgnosis Songs Fund's
investment thesis delivering the best like-for-like income growth in our short
5-year history. Streaming revenues have grown strongly; the success of active
Song Management is clearly visible in our Synch successes; Performance
revenues were very strong with 41% second half growth demonstrating their
return following Covid lockdowns; and, our over ten year old classic iconic
catalogues are behaving exactly how you would expect with 11.4% PFAR growth,
whilst our younger catalogues, now reaching the end of their natural decay
curves, grew even more quickly, enabling us to take full advantage of growth
in the market.
"Despite our strong numbers, I am aligned with Shareholders in believing that
the fundamental value and opportunity of the Company fails to be reflected in
the current share price. As a result, we have been working with the Board,
following consultation with many of our largest Shareholders, on a number of
options to enhance Shareholder value. We look forward to updating the market
prior to the AGM and the Continuation Vote.
"Today's financial results, being released two days after the 5(th)
anniversary of our IPO, offer the perfect milestone to re-consider Hipgnosis'
investment case and its ongoing opportunity.
"Five years ago, we predicted that the recovery of the music industry from the
previous 16 years of technological disruption would be driven by the
convenience and meteoric growth of streaming. In addition, we considered that
we could deliver an exceptional return to shareholders by acquiring iconic
Songs while they were still attractively priced.
"Against this backdrop, we curated a Portfolio of Songs that is unrivalled for
its extraordinary success and cultural importance. Each of these Catalogues is
iconic and, significantly, was selected specifically to benefit from the
growth in music streaming.
"Since then our thesis has become reality and we have transitioned from an era
where almost all consumption of music was unpaid to one where almost all
consumption of music is being paid for. This has enabled us to deliver a 69%
Total $ NAV Return since IPO.
"Looking forward, I believe there is continued reason for optimism. Despite
the global economic challenges, our markets continue to grow with strong
earnings being reported by the administrators that sit ahead of us in the
payment chain. In addition, the increasing adoption of streaming not only
continues strongly but has also demonstrated its pricing power with price
rises introduced by several DSPs in the year signifying the excellent value
that music streaming delivers to the consumer, even in a high inflation
environment. As a result, Goldman Sachs, in their recent 2023 Music in the Air
report, increased global music publishing market annual growth expectations to
7.6% from 5.9% through to 2030.
"Hipgnosis Songs Fund, with its portfolio of iconic, culturally significant
Songs, is uniquely placed to benefit from this backdrop and deliver superior
Shareholder returns and substantial Net Asset Value growth. Both the Board and
I are determined to deliver this."
Results presentation
The Investment Adviser will be hosting a webinar for analysts and investors
today, 13 July, at 1000 BST.
Registration for the live webcast is available at:
https://www.lsegissuerservices.com/spark/HipgnosisSongsFundLtd/events/17896f4e-5aa3-44ce-8303-1d15f263d1af
(https://www.lsegissuerservices.com/spark/HipgnosisSongsFundLtd/events/17896f4e-5aa3-44ce-8303-1d15f263d1af)
.
A video recording of the event will be made available on the Company's website
(www.hipgnosissongs.com) after the event and the slides are available at
https://www.hipgnosissongs.com/results-center/
(https://www.hipgnosissongs.com/results-center/) .
For more information:
For further information please contact:
Hipgnosis Song Management
Merck Mercuriadis
Chris Helm
Giles Croot (Media) +44 (0)20 4542 1511
Rufina Pavry (Investors) +44 (0)20 4542 1530
Singer Capital Markets - Joint Corporate Broker
James Moat / James Maxwell / Alex Emslie (Corporate Finance) +44 (0)20 7496 3000
Alan Geeves / James Waterlow / Sam Greatrex (Sales)
J.P. Morgan Cazenove - Joint Corporate Broker
William Simmonds / Jérémie Birnbaum (Corporate Finance) +44 (0)20 7742 4000
James Bouverat (Sales)
RBC Capital Markets - Joint Corporate Broker
Elliot Thomas / Max Avison (Corporate Finance) +44 (0)20 7635 4000
Lisa Tugwell / Natalia Lipecka (Sales)
Ocorian - Company Secretary & Administrator
Lorna Zimny +44 (0) 28 9693 0222
The Outside Organisation
Alan Edwards / Nick Caley +44 (0)7711 081 843
Headland Consultancy
Susanna Voyle / Del Jones / Charlie Twigg +44 (0) 20 3805 4822
All US music publicity enquiries
Fran Defeo +1 917 767 5255
Notes to Editors
About Hipgnosis Songs Fund
Hipgnosis, which was founded by Merck Mercuriadis, is a Guernsey registered
investment company established to offer investors a pure-play exposure to
songs and associated musical intellectual property rights. The Company has
raised a total of almost £1.3 billion (gross equity capital) through its
Initial Public Offering on 11 July 2018, and subsequent issues in April
2019, August 2019, October 2019, July 2020, September 2020, February
2021 and July 2021. In September 2019, Hipgnosis transferred its entire
issued share capital to the Premium listing segment of the Official List of
the FCA and to the London Stock Exchange's Premium segment of the Main
Market, and in March 2020 became a constituent of the FTSE 250
Index. Since April 2021, the Company has been resident in the UK for tax
purposes and is recognised as an investment trust under applicable HMRC
regulations.
About Hipgnosis Song Management Limited
The Hipgnosis Songs Fund's Investment Adviser is Hipgnosis Song Management
Limited, which was founded by Merck Mercuriadis, former manager of globally
successful recording artists, such as Elton John, Guns N' Roses, Morrissey,
Iron Maiden and Beyoncé, and hit songwriters such as Diane Warren, Justin
Tranter and The-Dream, and former CEO of The Sanctuary Group plc. The
Investment Adviser has assembled an Advisory Board of highly successful
music industry experts which include award winning members of the artist,
songwriter, publishing, legal, financial, recorded music and music management
communities, all with in-depth knowledge of music publishing. Members
of Hipgnosis Song Management Limited Advisory Board include Nile Rodgers,
The-Dream, Giorgio Tuinfort, Starrah, David A. Stewart, Poo Bear, Bill
Leibowitz, Ian Montone and Rodney Jerkins.
Introduction from Merck Mercuriadis
These financial results are an important validation of Hipgnosis Songs Fund's
investment thesis, delivering the best like-for-like income growth in our
short history.
These results demonstrate the value of our strategy, with Operative NAV per
share growth of 3.6% year-on-year to $1.9153, underpinned by strong increases
in royalty statement income. Taken together with dividends declared since
launch until 31 March 2023, of 21.6p (27.9¢), we have delivered a 69% Total $
NAV Return to Shareholders since IPO on 11 July 2018, as we continue to
benefit from the growth in streaming and higher Synch revenues generated by
the Company's unparalleled Portfolio of Songs.
Five years ago we predicted that the recovery of the music industry from the
previous 16 years of technological disruption would be driven by the
convenience and transformational growth of streaming. In addition, we
considered that we could deliver an exceptional return by acquiring iconic
Songs while they were still attractively priced.
Since then our thesis has become reality and we have transitioned from an era
where almost all consumption of music was unpaid to one where almost all
consumption of music is being paid for. This set of results is an early
indication of what's to come in the future.
People listen to iconic Songs whatever the macroeconomic conditions; the
change in the way in which we consume music means that, increasingly, when we
hear a song, a payment is being generated; music streaming continues to grow
with its utility-like revenues, with the number of paid subscribers globally
growing by 13% year-on-year to around 600 million, according to the IFPI,
including over 100 million paying subscribers in the US.
Importantly, around the world the true value of Songs and Songwriters is
increasingly being recognised.
Nevertheless, the current share price does not reflect the success of our
investment strategy and I know all Shareholders share my frustration and
disappointment that this is the case. When we launched the Company, we created
a new asset class with Songs. It is therefore perhaps not a surprise, that in
a world of incredible turmoil following a global pandemic, the largest war in
Europe in nearly 80 years and increasing inflation and interest rates, that
some investors have turned to "risk free" safe havens over exposure to new
asset classes. However, despite these unique macroeconomic conditions, the
strong growth in paid consumption for music continues. The Music industry is
rapidly growing and thriving while others contract and as a result, Song
catalogues continue to be a highly attractive asset.
We are aligned with Shareholders in believing that the fundamental value and
opportunity of the Company fails to be reflected in the current share price.
As a result, we have been working with the Board, following consultation with
many of the Company's largest Shareholders, on a number of options to enhance
Shareholder value.
We intend to update the market prior to the Annual General Meeting (AGM) and
the Continuation Vote.
Strong underlying growth
IFRS Net Revenue, which is based on the Group's accounting policies (including
accruals), was $147.2 million and decreased from $168.3 million due to a
number of non-recurring elements identified and called out in the prior and
current period. These include non-recurring Right to Income (RTI), the initial
recognition of the Usage Accrual and the impact of the retroactive CRB III
revenue due. Excluding the impact of these adjustments, IFRS Net Revenue grew
by 10.9% year-on-year.
In order to provide Shareholders with an understanding of the like-for-like
performance of the Company's revenues, by removing the current year impact of
non-recurring items, we provide our Pro forma Annual Revenue (PFAR) data which
is primarily based on actual royalty statements. In 2022, PFAR increased 12.1%
year-on-year to $130.2 million (2021: $116.2 million). This is despite the US
Dollar's very strong performance against almost all other major currencies
during the year.
Streaming is a key driver of income growth and grew by 14.8% year-on-year in
2022, making up just over 40% of our PFAR income. Income from Synch revenue
continues to show strong growth of 24.7% year-on-year in 2022. Significantly,
Performance income, which had been suppressed since the Covid-19 lockdowns is
now demonstrably coming back as consumption returns to even greater than
pandemic levels. A small year-on-year decline in the first half of 2022 was
more than off-set by a 41% increase in the second half. Taking into
consideration the time lag inherent in the payment of performance income, this
is a very positive indicator for the future and gives us a 9% year-on-year
increase for 2022.
I believe that there are two reasons why the Company's income has outperformed
this year:
Firstly, the Songs in our Portfolio.
• We have bought carefully and we bought well by investing in Songs which
we believe will stand the test of time and will be listened to for
generations. The Company's Portfolio of Songs is unrivalled for its
extraordinary success and cultural importance. We have a relatively small
portfolio with a very high ratio of success, which makes it efficient to
manage as the Songs are in high demand. Significantly, we selected catalogues
which we believed were well placed to benefit from the growth in music
streaming. The Company owns nearly 25% of all Songs played over a billion
times on Spotify ("Spotify's Billions Club"), over 10% of Rolling Stone's The
500 Greatest Songs of All Time and Songs on 16 out of the Top 40 UK
best-selling albums of the first six months of 2023.
Secondly, our active Song Management.
• We drive consumption and value through Song management of the Catalogue
to individual listeners, music creators and business music users, as well as
harnessing consumer platforms through which the Catalogue can be showcased and
consumed.
• We optimize revenue generation, revenue collection and value by ensuring
accurate registration and rights enforcement of the Songs in the Catalogue,
then collect revenues as efficiently and cost-effectively as we can.
• We campaign to change the position of Songwriters in the economic
equation by working with politicians, NGOs and the wider music community to
build support for increased fairness in payments for Songwriters. For the
Songs which we've purchased, the Company stands in the shoes of the
Songwriters, so our interests are perfectly aligned.
Looking at the wider picture, the US Recorded Music revenues collected by the
RIAA show that revenues are now back above the historic highs at the start of
the millennium. Despite the general economic slowdown caused by rising
interest rates, music and the Songs that underpin it is prospering.
Particularly notable is the continued growth of music streaming with its
utility-like revenues. The best days of the music industry and rights
ownership are ahead of us and we believe that the capital appreciation in our
portfolio is still in its infancy as we grow towards 2 billion paid premium
streaming subscribers over the next 10 years. In this context, it's not
surprising that the market analysts at Goldman Sachs and J.P. Morgan, amongst
others, expect music industry revenue growth to continue for the foreseeable
future.
The net increase in the Fair Value of the Portfolio of 4.0% year-on-year to
$2.80 billion and the increase in the Operative NAV per share of 3.6%
year-on-year to $1.9153 was driven by revenue in excess of the Portfolio
Independent Valuer's forecast.
Active management of our Portfolio
Whilst we benefit from the wider market growth, we continually add value
through our active Song Management of the Company's portfolio. These
activities increase the value of our Songs both by bringing them to new
audiences and ensuring we are paid what we are due as quickly as possible.
Examples for the year include:
• Placing a remix of Journey's 1983 song Separate Ways (Worlds Apart) in
season 4 of Netflix's hit Stranger Things. The Company owns rights for both
Jonathan Cain's 50% share of the publishing and 66% of the master recording.
The synch generated a six figure fee and also drove a significant increase in
streaming consumption, encouraged further synchs of the Song and a new cover
version.
• Placing Nile Rodgers as the face of Chanel Eyewear as well as the first
and only "Artist In Residence" at Apple Music. We have also presented CHIC's
first five albums and Sister Sledge's We Are Family in Spatial Audio on the
service, as well as securing a significant six figure synch for the song
Spacer with Renault in Europe. These initiatives have introduced our iconic
songs, co-written by Bernard Edwards, to a new generation of fans and are
driving increased streaming consumption.
• Placing a cover version of Blink-182's All The Small Things, co-written
by Tom Delonge whose catalogue we purchased in 2019, as the soundtrack for
John Lewis's 2022 Christmas advert - one of the most coveted Synchs in the
World.
• Rihanna performing four Hipgnosis Songs Fund co-owned Songs during her
set at the 2023 Superbowl: Birthday Cake (The-Dream), All Of The Lights (Jeff
Bhasker / The-Dream), Run This Town (Jeff Bhasker / No I.D.) and
Umbrella (The-Dream / Tricky Stewart). Close to 119 million viewers tuned
in for her performance on television and streaming services, with each of the
Songs recording gains on streaming platforms of up to 280% in the week
following her performance. Four months on, Umbrella's US weekly
Streaming-on-Demand figures are still 1.3 times that pre the Superbowl; Run
This Town is showing 1.5x the demand and this has led to further synch
placements.
• Our new recording of Bon Jovi's Wanted Dead or Alive, by Empara Mi was
commissioned to specifically to appeal to the Synch market. It was
successfully placed, as the global trailer for Transformers: Reactivate, a
major forthcoming video game. It generated six figure fees for both the
publishing and the new recording which we participate in.
• Placing Richie Sambora as a contestant on the UK version of The Masked
Singer. Four of the six Songs that he performed on the series were from the
Company's portfolio. When he was revealed in the semi-final, his profile
reached a recent all-time high. There was an increased streaming consumption
of the Bon Jovi songs as well as the four songs held by the Company that he
performed on the series including Go Your Own Way and Smooth.
• Nicki Minaj interpolated our iconic Rick James song Super Freak into
Super Freaky Girl making it a Number 1 single in the US and Top 5 in the UK
and around the world, driving over 1 billion new streams across all digital
service. It also increased streaming consumption on the original Super Freak
and U Can't Touch This by MC Hammer which is another iconic Super Freak
interpolaton.
• Entering a direct licensing and administration partnership for digital
royalties of reverted catalogues with Sacem, a world-leading Collection
Management Organisation. This is materially cutting collection times, reducing
collection costs and is delivering an increase in revenues.
Artificial Intelligence
Recent developments in Artificial Intelligence (AI) tools offer new
opportunities which we are already looking to use in support of our iconic
Songs. The enduring success of our Songs is down to the strong emotional
connection they have with millions of consumers all over the world and they
are therefore always in demand. AI enables us and other creators to quickly
and cost effectively deliver new versions of these Songs, create
interpolations or otherwise introduce our music to new audiences. Global
copyright laws provide a significant degree of protection for our Intellectual
Property. Nonetheless we are working with legislators who are actively looking
at how to fill any gaps which are created by this new technology and we will
support measures which prevent AI from learning from in-copyright music and
recordings to the detriment of artists and Songwriters.
Our activities within the Songwriter community
Songs are the currency of the music business; without the Song there simply is
no music industry. Yet Songwriters - who deliver the most important component
to the success of a record company, digital service provider, music
merchandiser or live promoter - are still the lowest paid people in the
economic equation.
We have always been clear that our motive is to establish Songs as an asset
class and to provide a great return for our investors. Concurrently, our
"ulterior" motive has always been to use our success to help take the
Songwriter from the bottom to the top of the economic equation. This is in
complete alignment with our Shareholders' best interest.
Over the last five years we have made demonstrable progress. We advocated for
and welcomed the moves by the US Copyright Royalty Board (CRB) and the wider
music industry in the US to increase the rates paid to Songwriters and
publishers.
CRB III provided for a 44% increase in the headline rate of Digital Service
Providers (DSP) revenues paid to Songwriters and Publishers in the US,
reaching 15.1% in 2022. It was disappointing that some streaming services
appealed the original ruling, delaying much needed payments to Songwriters,
many of whom rely on royalty payments for everyday living expenses. The appeal
was rejected during 2022 and the industry is now working to ensure that the
higher rate payments due for the CRB III period reach rights holders. The
Company has accrued $21.7 million to account for the CRB III monies due to
date.
We were pleased to support a joint industry proposal for CRB IV which saw the
proportion of DSP revenue paid to Songwriters further rise, incrementally, to
15.35% in 2027, while the royalty payable on a physical sale or download is
rising from 9.1 cents to 12 cents with additional inflationary increases.
Whilst there is still a long way to go before Songwriters are fairly
remunerated, these are important steps in the right direction.
The joint CRB IV proposals, which have now been confirmed, show there is
increasing acceptance across the music industry that Songwriters should be
fairly rewarded for their work. Whilst the increase is more modest than the
CRB III rises, we support it as it will provide a background of stability at
the highest streaming rates ever paid in the context of which we can continue
our advocacy efforts for an even bigger share of the pie.
In the UK, the Competition and Markets Authority (CMA) concluded their market
study and recommended that the Intellectual Property Office (IPO) take forward
a number of workstreams. After the year end, the IPO announced an agreement on
how the music industry and the Government will work together to deliver
consistent high-quality metadata. We welcome this first step, however, we
believe that far greater reform is needed and we continue to engage with the
relevant organisations to achieve this change. The UK Government has also
recently announced it has accepted a recommendation from the Culture, Media
and Sport Select Committee (to whom Hipgnosis gave evidence) to establish an
industry working group to explore issues around fair pay for creators in the
music streaming industry. Our ultimate goal is for Songwriters' pay to be
determined by the free market, not legislation.
We also supported BMI in its Live Concert rate victory, which set a new rate
138% higher than the previous one, reflecting the importance of Songs in the
live concert experience. As we've stated before, live concerts would not exist
without Songs.
Outlook
These results highlight the continuing validity of our investment thesis. Our
markets are buoyant and continue to grow. Streaming, increasingly, provides a
utility-style income for holders of Song royalties and the increasing demand
for Song Catalogues from Private Equity funds and the major record labels
demonstrates the attractiveness of this asset class. Hipgnosis Songs Fund,
with its portfolio of iconic, culturally significant Songs, is uniquely placed
to benefit its Shareholders and deliver superior Shareholder returns over the
medium term and we are committed to taking whatever action is necessary to
deliver this.
With year-end results delivered, our focus is on re-rating the shares, passing
the Continuation Vote at the forthcoming Annual General Meeting and delivering
a great 2024 and beyond.
I take my responsibility to our Shareholders very seriously. From the 42
institutional investors that we started with in 2018 to the many hundreds of
institutional and retail Shareholders we have today, I have always stated
that, while iconic Songs with high quality long term cashflows provide great
income for investors, the real purpose of this Company is for our Shareholders
to be the beneficiaries of the substantial Net Asset Value growth which we
believe will come over the next 10 years as the market in which we operate in
grows to as many as 2 billion paid streaming subscribers around the world, who
will in turn increase the consumption of our already extraordinarily
successful Songs. I strongly believe we are well on our way to achieving that.
Finally I would like to thank each and every one of you who have supported us
in establishing Songs as an asset class as well as the great Songwriters who
have entrusted us with being custodians of their special Songs and Catalogues.
Merck Mercuriadis
Founder, Hipgnosis Songs Fund Ltd and
Founder/CEO, Hipgnosis Song Management Ltd.
12 July 2023
The Chair's Statement
I am pleased to present the Company's Annual Report and Accounts covering the
12 months ended 31 March 2023.
It is now five years since your Company was launched in July 2018 and its
shares were listed on the London Stock Exchange. We are proud to have been a
FTSE 250 company since March 2020. Our objective at launch was to create a
Company which provided investors with exposure to Songs and associated
intellectual property rights. We believed then, and have demonstrated since,
that music royalties provide long-term, stable income streams. Equally
importantly, when the Company was launched, we believed that these long-term
revenue streams were at an inflection point and would increase significantly
as a result of the strong growth expected in paid for music streaming. Since
IPO, this growth has seen music industry revenues return to levels not seen in
20 years and we and our Investment Adviser fully expect that this growth will
continue for the foreseeable future.
The Company's first five years have not been without their challenges: the
lockdowns put in place by Governments around the world to combat the spread of
Covid-19 had a material impact as clubs, gyms, restaurants and shopping
centres were forced to close and touring stopped, leading to a decline in
performance royalty revenues. Due to the time lag inherent in publishing
industry payments, it is only now that the Company is experiencing these
revenue streams recovering.
Equally, the increase in global interest rates over the last 24 months, as
central banks seek to control inflation, caused in large part by Covid-19 and
the energy crisis attributable to the war in Ukraine, has been a challenge
both directly and indirectly. Directly, the increase in the cost of the
Company's debt has had to be managed and last year the Company refinanced its
Revolving Credit Facility (RCF). Indirectly, increased yields on government
securities have provided income-focused investors opportunities to invest risk
free at yields approaching the yield on the Net Asset Value of the Company's
shares. Whilst government securities may currently provide a similar current
income yield, they do not offer the opportunity for the significant capital
growth that we believe your Company will also provide. Furthermore, the
underlying strength of the business model has enabled the Board to maintain
its target annual dividend at 5.25p per Ordinary Share.
While these results published demonstrate the strength of the Company's
business, the Board shares your disappointment that the Company's share price
is substantially below its Operative Net Asset Value, particularly given the
quality of the Company's assets and the ability of the Investment Adviser to
drive additional value through active Song Management.
Although the majority of London listed investment trusts are currently trading
at a discount, we recognise that this is of no comfort to our Shareholders.
Therefore, following a consultation, with many of our larger Shareholders, the
Board has been working with the Investment Adviser on a number of options to
enhance Shareholder value.
The ultimate decision on which options will be progressed, if any, will be
taken in consultation with our Shareholders. We look forward to updating you
further in due course, and well in advance of the Company's AGM this September
at which the Company will table its scheduled five-year Continuation Vote.
The Company has always believed, as reflected in its Investment Policy, that
the best way to maximise Shareholder value has been to buy and hold great
assets, to enable Shareholders to benefit from the income and capital growth
that we expect these assets to deliver over time.
Given the options the Board is considering, the current share price and the
upcoming Continuation Vote, the Board is publishing an estimate of the
potential tax charge, based on certain assumptions, in the event that a sale
of all assets should occur. Full details are provided in Note 12.
Despite the disappointing share price performance over the last year the Board
continues to be confident in our core investment case: the continuing
long-term growth of revenue in the music industry and the ability of the
Investment Adviser to drive additional value through active Song Management of
our incredible portfolio of iconic Songs.
We continue to be confident that your Company will provide superior returns
over the medium term and we encourage all Shareholders to support the
continuation of the Company.
Performance
The IFRS Net Asset Value (NAV) per share as at 31 March 2023 was $1.1863 which
is a 9.2% decrease from $1.3065 as at 31 March 2022, largely reflecting the
amortisation of the Company's Catalogues in accordance with applicable
accounting protocols and ignoring their current fair value.
The Board considers that the most relevant financial indicator for
Shareholders is the Operative NAV, which reflects the Fair Value of the
Company's Catalogues as valued by the Portfolio Independent Valuer and adds
back the amortisation charge applicable under IFRS.
The Operative NAV per share increased by 3.6% to $1.9153 during the year (31
March 2022: $1.8491). This, together with total dividends, of 21.6p (27.9¢),
takes Total $ NAV Return to Shareholders since the IPO on 11 July 2018 to
69.01%.
Based on the Sterling to US Dollar exchange rate on 31 March 2023 of 1.236,
the Operative NAV presented in Sterling would be 154.91p per share (31 March
2022: 140.79p based on Sterling to US Dollar exchange rate of 1.3134).
As a result of the strong performance of certain Catalogues, a Catalogue bonus
provision was recognised. This is based on actual and expected future
Catalogue performance that is highly probable. Whilst these liabilities are
recognised in the current year, the Company doesn't anticipate that these
liabilities will be incurred at a material level in future years.
Our approach to valuation
Although the Board is ultimately and solely responsible for overseeing the
valuation of the Company's investments in music Catalogues it has appointed
the Portfolio Independent Valuer to perform this specialist work.
The Fair Value of the Portfolio increased by 4.0% to $2.80 billion (31 March
2022: $2.69 billion), mainly as a result of royalty statements received
exceeding expectations, especially those related to performance income and
streaming income from older vintage catalogues. This also drove the increase
in the Operative NAV in Dollar terms over the period.
The Board recognises that there are a range of views on the assumptions that
could be applied in the valuation of the Company's investment portfolio.
In advance of the last Interim Report published in December 2022, the Board
appointed Kroll Advisory Limited ("Kroll"), an independent valuation firm, to
consider and advise on the reasonableness of certain assumptions commonly
employed in the valuation of music catalogues based on data provided by the
Company.
Following year end, in addition to considering the discount rate and growth
assumptions applied by the Company's peers as well as observing transaction
comparables, the Board has continued its engagement of Kroll solely in
connection with the ongoing review of the assumptions used in and calculation
of a discount rate applied in the valuation of the investment portfolio. We
note that Kroll did not review or opine on the projected cash flows or on a
valuation conclusion using their determined discount rate.
Different valuation practitioners use differing methodologies, approaches and
assumptions to calculate their discount rates. In particular, valuation
practitioners may select different input assumptions based on their
professional judgement, including, but not limited to the appropriate set of
peer groups, the length of calculation period for market data when estimating
the equity risk premium, the beta and the risk-free rate. As a result, there
may be variation amongst valuers, providing the Board with complementary
insights.
The period since 30 September 2022 has seen significant volatility, as global
investors grappled with the impact of inflationary pressures and the continued
hike of policy interest rates by major central banks. The resulting equity
market uncertainty contributed to a higher equity risk premium and an increase
in the Company's shares' correlation to market indices. Meanwhile, risk-free
rate inputs, particularly 10- and 20-year US Treasury yields, experienced
significant volatility during this period, initially rising and then declining
to levels somewhat lower than in September 2022.
The Board notes that for the period ending 30 September 2022, the discount
rate of 8.5% applied by the Portfolio Independent Valuer was within the range
identified by Kroll at the interim results. For the most recent period ending
31 March 2023, whilst the Portfolio Independent Valuer maintained its discount
rate of 8.5%, the Kroll calculation reflected a 50 basis points increase in
the Equity risk premium applied to 6.0% and an increase in the relative
volatility of share prices in the Company's music peer group relative to the
overall market.
The Board has continued to engage Kroll subsequent to the year end and note
that Kroll has since (as of the end of June 2023) lowered its Equity risk
premium assumption to the previous level of 5.5%, although their view still
remains slightly higher than the Citrin Cooperman rate.
The Board will continue to keep all assumptions in its valuation methodology
under review. Having considered all the available information, the Board
believes that the assumptions applied by the Portfolio Independent Valuer
remain appropriate and that this represents a reasonable assessment as to the
value of the Portfolio.
Revenue
IFRS Net Revenue, which is based on the Group's accounting policies (including
accruals), was $147.2 million and decreased from $168.3 million due to a
number of non-recurring elements identified and called out in the prior and
current period. These include non-recurring Right to Income (RTI), the initial
recognition of the Usage Accrual and the impact of the retroactive CRB III
revenue due. When excluding the impact of these adjustments, it grew by 10.9%
year-on-year.
However, our Pro Forma Annual Revenue (PFAR), a like-for-like revenue analysis
per calendar year, based primarily on royalty statements, grew 12.1% in 2022
to $130.2 million (2021: $116.2 million). This reflects strong growth in
Streaming (+14.8% year-on-year) and Synch (+24.7% year-on-year) income as well
as a recovery from the impact of Covid-19 lock-down in Performance (+9%
year-on-year) income.
Revolving Credit Facility
On 30 September 2022, the Company entered into a new Revolving Credit Facility
(RCF) which runs for five years until 30 September 2027, with a commitment of
$700 million. The facility was used to refinance, in full, the Company's
pre-existing RCF and provide flexibility for additional working capital where
necessary. In accordance with the Investment Policy, any borrowings by the
Company will not exceed 30% of the value of the net assets of the Company. As
at 31 March 2023, the Company had $600 million drawn down under the RCF. Net
debt as a percentage of Operative NAV decreased to 24.3% (31 March 2022:
25.4%).
The Board's objectives in the refinancing were to reduce interest rate risk
and control variable costs. To deliver on these objectives, the Company also
entered into interest rate swap agreements. As a result, until 2 January 2023,
interest on all the drawn debt was fixed at 5.71% (including debt margin).
Since 3 January 2023, $340 million has been hedged for the duration of the RCF
(until 30 September 2027) at a fixed rate of 5.67% (including debt margin); a
further $200 million is hedged until 3 January 2026 at a fixed rate of 5.89%
(including debt margin). The balance remains unhedged to provide flexibility
in the operation of the RCF.
Share buybacks
The Board considers that it is not in Shareholders' interests for the Ordinary
Shares of the Company to trade at a significant discount to the prevailing NAV
in normal market conditions. The Board considers that normal market conditions
have not prevailed in the last few years. Discounts of investment trusts,
particularly those investing in illiquid assets, have generally widened over
the last year.
The Board believes that the most effective means of minimising any discount at
which the Ordinary Shares may trade is for the Company to deliver strong,
consistent, long-term performance from the investment Portfolio. However,
wider market conditions and other considerations inevitably affect the rating
of the Ordinary Shares from time to time.
In determining whether a share purchase would enhance shareholder value, the
Board will take into account market conditions, the Company's performance, any
known third-party investors or sellers, the impact on liquidity and total
expense ratios and of course the level of discount to net asset value at which
the shares are trading. Any purchases will only be made at prices below the
prevailing net asset value and where the Board believes that such purchases
will enhance shareholder value. On 14 October 2022, the Board announced a
share buyback programme funded out of free cash flow.
During the financial year under review, a total of 2 million Shares were
purchased into treasury with an aggregate value of £1.7 million. Ordinary
Shares held in treasury may only be reissued by the Company at prices
representing a premium to NAV per Ordinary Share as at the date of re-issue.
The Board recognises its modest buyback activities to date showed intent
rather than having a material impact on the share price discount. We expect
more material share buybacks may play an important part of the Company's
strategy as we move forward.
Dividends
As set out in last year's annual report, dividend payment dates have been
adjusted so that payments are made on or around the last working day of
January, April, July and October, in order to better align dividend payments
with revenue receipts. Dividends will be declared ex dividend in the month
prior to payment wherever practicable.
Dividends paid in the year of $56.3 million were covered 1.44x by
Distributable Revenues recognised during the year. Dividends declared in the
year amount to $75.9 million, which were covered 1.07x by Distributable
Revenues recognised during the year.
In addition, the Company was covered 1.45x on a Leveraged Free Cashflow basis,
demonstrating the funds necessary to meet those dividend payments paid in the
year, and 1.08x on a Levered Free Cashflow necessary to meet those dividends
declared in the year.
On 12 October 2022, the Company entered into a series of US Dollar to Sterling
foreign exchange forward contracts in order to limit its exposure to foreign
exchange rate risk and to provide certainty on the US Dollar value of future
Sterling dividend payments. This passive rolling hedging strategy ensures that
there are £50 million of forward contracts in place at any time, broadly
equivalent to the Company's quarterly Sterling dividend obligation. The
foreign exchange forward contracts were initially in place until April 2024
and have, subsequent to the year end, been rolled forward to October 2024.
The Board
Following the year end, Vania Schlogel stepped down as a Non-executive
Director on 30 April 2023 in order to focus on her executive role at Atwater
Capital, which she founded in 2017 and which has recently demanded a
significant increase in her commitment. I thank Vania for her work and
contribution to the Company while she was a Director.
We have recently announced the appointment of an additional director, Cindy
Rampersaud, with effect from 1 August 2023, and are delighted to welcome Cindy
to the Board.
I would like to thank my fellow Directors for their diligence and dedication
on your behalf over the last year. With the exception of Vania, all Directors
who have held office throughout the financial year are offering themselves for
re-election at the forthcoming Annual General Meeting.
Additionally, I extend my thanks to Merck Mercuriadis and the team that works
with him at our Investment Adviser. Over the last five years I have seen a
transformation in the sophistication of their operations, but one thing which
has never changed is Merck's passion, and his team's hard work, to deliver
value for the Company's Shareholders. This has been particularly demonstrated
over the last 12 months where they have continued to invest and improve their
capabilities and the service they provide your Company.
Annual General Meeting
The Company's Annual General Meeting will be held before the end of September.
Notice of the Annual General Meeting, containing full details of the business
to be conducted at the meeting, will be published to Shareholders in due
course.
Outlook
Despite the inflationary pressures in the global economy and the accompanying
interest rate rises, consumers continue to enjoy and, crucially, spend money
on music.
Performance revenues, which were severely impacted by Covid-19 lockdown
measures, are returning.
Ongoing growth in paid-for music streaming supports our belief that this form
of entertainment is increasingly seen as a utility purchase, recognising the
exceptional value for money music streaming services provide their customers.
Regulatory changes in the US, with the Copyright Royalty Board affirming their
CRB III ruling and an agreement across the industry on further increases for
the CRB IV period, help to support revenue growth.
Active Song Management, demonstrable by the Investment Adviser, creates
additional value from your Portfolio of iconic, culturally significant Songs.
As a result, the Board is confident that your Company will deliver superior
returns over the medium term.
The Board continues to engage with Shareholders and is working hard to
demonstrate the value of the Company's assets and enhance Shareholder value.
Andrew Sutch Chair
12 July 2023
Investment Adviser's Report
It is now five years since Hipgnosis Songs Fund was launched in July 2018 and
its shares were listed on the London Stock Exchange, before graduating to the
FTSE 250 in March 2020. Our objective was to provide investors with exposure
to iconic Songs. In that time we have demonstrated that music royalties
provide long term cashflows that benefit from the ever growing consumption of
music which has become more convenient in the streaming paradigm. The growth
of streaming has seen music revenues return to historic highs after the decade
and a half of technological disruption and as with the last 8 years we expect
that this growth will continue for many years to come.
Our investment case for the Company is anchored in the belief that long-term,
predictable and reliable income streams delivered by our high-quality
portfolio of Songs, underpinned by the wider growth in global music
consumption and by boosting income and realising additional value as a result
of our active Song Management activities.
The Company owns a portfolio of iconic and culturally important Songs. The
strength of the portfolio is demonstrated by the year-on-year increase in the
Operative NAV per share, up 3.6% to $1.9153 (31 March 2022: $1.8491). This
increase is primarily due to a 4.0% increase in the Fair Value of the
Portfolio as our carefully selected Songs outperform the expectations of the
Portfolio Independent Valuer. In Sterling terms, this equates to 154.91p per
share (GBP: USD exchange rate 1.236).
IFRS Net Revenue, which is based on the Group's accounting policies (including
accruals), was $147.2 million and decreased from $168.3 million due to a
number of non-recurring elements identified and called out in the prior and
current period. These include non-recurring Right to Income (RTI), the initial
recognition of the Usage Accrual and the impact of the retroactive CRB III
revenue due. When excluding the impact of these adjustments, it grew by 10.9%
year-on-year.
Given the multiple non-recurring elements captured with the IFRS revenue line
and the application of accruals for revenue required under IFRS, we also
provide PFAR, a like-for-like revenue analysis per calendar year, which is
based primarily on royalties received (i.e. reflecting royalties collected).
In 2022, PFAR grew by 12.1% year-on-year, to $130.2 million (2021: $116.2
million). This growth is despite strong currency headwinds as a result of the
strength of the US Dollar impacting the value of non-US Dollar denominated
source income. Although the Company receives 85% of its revenues in US
Dollars, the original source for around half of revenues is non-US-Dollar
denominated. Since third parties in the collection chain are converting
currency, a precise constant currency calculation is not possible. However,
based on average FX movements of the US Dollar in the year against Sterling,
Euro and Yen, we estimate that the impact of the strong Dollar in 2022 was the
equivalent of approximately 6 percentage points of increased differential
compared to 2021, further emphasising the strong underlying growth.
Music demonstrates continued growth
Despite the macroeconomic slowdown caused by Covid-19, the war in Ukraine and
central banks efforts to deal with inflation, the music industry continues to
demonstrate its resilience. In particular, streaming remains a highly
attractive consumer proposition.
In their first quarter 2023 results, published in April, Spotify reported 14%
year-on-year revenue growth and 15% annual increase in Premium subscribers. As
we have previously noted, music streaming services probably offer the best
value entertainment product available, therefore we are not surprised by its
resilience. During the year, we saw the first increase in premium streaming
prices for a number of streaming services including Apple Music, Amazon Music,
Deezer and Tidal moving beyond the £/$/€ 9.99 per month price point for an
individual plan. Despite these price rises, they are still seeing subscriber
growth and it is expected Spotify and other streaming platforms will follow
suit.
Due in part to our advocacy on behalf of Songwriters and Artists, the major
record labels are increasingly recognising the value of the content that they
allow streaming platforms to use. Rightsholders and DSPs are questioning the
current streaming business model, which pays the same per stream for
high-quality songs as is paid for unknown songs. Additionally, there is an
increased focus on solving the problem of digital trappers, stream farms &
bots, which are believed to be distorting the distribution of streaming
revenues. Given the quality of the Company's Catalogue, we are confident that
the Company's Shareholders will eventually further benefit from improvements
in the economic equation for Songwriters.
Welcome return of Performance Revenues
The lockdowns to combat the Covid-19 pandemic forced the closure of shops,
bars, gyms and many other venues where music was played. Additionally, it
resulted in a hiatus for touring. For the music industry, the combined impact
was seen in a marked decline in Performance income.
The inherent lags in payments, as they migrate through the revenue collection
system alongside the fact that the summer concert seasons in 2020 and 2021
were curtailed or cancelled resulted in a slow recovery in performance income.
In 2022, the PFAR Performance income increased by 41% in the second half of
the year. The summer of 2022 saw successful tours by Blondie, Red Hot Chili
Peppers, Lindsey Buckingham, Nile Rodgers & CHIC, Journey and many others.
Live Nation Entertainment, the leading live entertainment company, reported
record attendance at events in 2022 - with concert attendances up 24% versus
2019 (pre-pandemic). Encouragingly, they reported in May 2023 that, for the
first time in three years, all their markets are open and they were seeing
further record levels of activity in their concerts business.
We successfully trialled fast track collections services for both the Blondie
and Red Hot Chili Peppers tours. The objective was to cut out middlemen,
reduce costs and accelerate payments. As a result, increased income was
received from both tours and paid through faster than normal. On one tour, in
just one country, the Company saved around $100,000 in costs. Whilst this is
unlikely to be replicated in all territories, it demonstrates the value that
can be created by this proactive approach.
Strong industry performance is already being seen by the major music
publishers, with Universal Music Publishing reporting a 13.3% year-on-year
growth in publishing revenues for the three months ended 31 March 2023 and
Warner Chappell Music reporting a 11.7% year-on-year growth for the three
months ended 31 March 2023. These administrators sit ahead of the Company in
the payment chain and thus together these indicators give us confidence of
further publishing revenue growth in the coming years.
We continue to see a buoyant live performance market as highlighted by sellout
summer tours from Beyoncé, Taylor Swift, Red Hot Chili Peppers, Blink-182,
Neil Young, Nile Rodgers & CHIC, Blondie, The Pretenders and many others
all performing songs from our portfolio.
Impact of Artificial Intelligence
Over the centuries music has adapted to and benefitted from many developments
in technology. In the 20(th) century distribution moved from sheet music to
recorded music, physically distributed via vinyl or CDs, to any Songs being
available at the touch of a button via streaming; production of music has gone
from hand crafted whistles to electronic instruments recorded in 48-track
studios to being able to produce global hit songs entirely on a laptop. Some
of these technological changes have challenged the industry - illegal
downloads being the most existential. We expect Artificial Intelligence (AI)
will have both benefits and drawbacks for the songwriting community in the
21(st) century.
Specifically, we anticipate that AI will provide competition for new songs and
artists. However, AI cannot replace the excitement of attending a stadium
concert with a star artist. More importantly, given the Company's iconic and
culturally significant portfolio, AI will never replace the emotional
connection that consumers all over the globe have to our Songs. These Songs
are part of the fabric of our lives and part of the fabric of our society.
They will be passed down, as is already the case, for generations to come.
We expect AI to both interpolate and sample our iconic Songs and generate new
versions of these Songs that will create new IP and additional revenues
streams for the Company. These revenue streams are expected to be protected by
existing copyright legislation around the world. If necessary, we will
advocate for additional regulations and protections. As such we look forward
to having a constructive relationship with AI music developers and sharing in
the benefits of another new technology.
The Company's Portfolio
The Portfolio as at 31 March 2023 comprised of 146 Catalogues containing the
rights to 65,413 Songs. The overall Fair Value of the Portfolio, as determined
by the Portfolio Independent Valuer, increased by 4.0% to $2.80 billion (31
March 2022: $2.69 billion), mainly as a result of royalty statements received
exceeding expectations, especially performance income and streaming income
from older vintage catalogues.
This valuation reflects a multiple of 20.89x historical annual net Publisher
Share income, compared to the blended acquisition multiple of 15.93x.
The Company's Portfolio of Songs is, we believe, unrivalled in its
concentration of quality, as demonstrated by Songs in the Portfolio being:
• 97 of 419 of Spotify's Billions Club - Songs which have been played more
than a billion times on the service;
• Over 10% of Rolling Stone's The 500 Greatest Songs
of All Time (52/500);
• Almost half of YouTube's Most Viewed Music Videos
of all time (13/30); and
• Songs on 16 out of the Top 40 UK best selling albums
of the first six months of 2023.
Portfolio as at 31 March 2023
Catalogue Acquisition Total
Date
Songs
The-Dream 13 Jul 2018 302
Poo Bear 21 Nov 2018 214
Bernard Edwards 28 Nov 2018 290
TMS 17 Dec 2018 121
Tricky Stewart 17 Dec 2018 121
Giorgio Tuinfort 21 Dec 2018 182
Rainbow 15 Jan 2019 15
Itaal Shur 31 Jan 2019 209
Rico Love 26 Feb 2019 245
Sean Garrett 21 Mar 2019 588
Johnta Austin 22 Mar 2019 249
Sam Hollander 31 Mar 2019 499
Ari Levine 31 Mar 2019 76
Teddy Geiger 12 Apr 2019 6
Starrah 25 Apr 2019 73
Dave Stewart 7 May 2019 1,068
Al Jackson Jr 8 May 2019 185
Jamie Scott 15 May 2019 144
Michael Knox 28 May 2019 110
Brian Kennedy 14 Jun 2019 101
John Bellion 14 Jun 2019 180
Lyric Catalogue 17 Jun 2019 571
Neal Schon 20 Jun 2019 357
Jason Ingram 10 Jul 2019 462
Eric Bellinger 12 Jul 2019 242
Andy Marvel 23 Jul 2019 740
Benny Blanco 2 Aug 2019 93
The Chainsmokers 22 Aug 2019 42
Timbaland 10 Oct 2019 108
10cc 17 Oct 2019 29
Journey (Publishing) 21 Oct 2019 103
John Newman 5 Nov 2019 47
Jaron Boyer 5 Nov 2019 109
Arthouse 15 Nov 2019 44
Fraser T Smith 5 Dec 2019 298
Jack Antonoff 5 Dec 2019 188
Ammar Malik 5 Dec 2019 90
Ed Drewett 9 Dec 2019 109
Kaiser Chiefs (Masters) 9 Dec 2019 48
Jeff Bhasker 11 Dec 2019 436
Johnny McDaid 11 Dec 2019 164
Emile Haynie 13 Dec 2019 122
Brendan O'Brien 13 Dec 2019 1,855
Savan Kotecha 18 Dec 2019 49
Tom Delonge 23 Dec 2019 157
Journey (Masters) 10 Jan 2020 389
Rebel One 10 Jan 2020 157
Scott Harris 10 Jan 2020 129
Brian Higgins 22 Jan 2020 362
Gregg Wells 10 Feb 2020 11
Jonathan Cain 28 Feb 2020 216
Jonny Coffer 28 Feb 2020 85
Mark Ronson 28 Feb 2020 315
Richie Sambora 4 Mar 2020 186
Rodney Jerkins 16 Jul 2020 982
Barry Manilow 16 Jul 2020 917
RedOne 16 Jul 2020 334
Eliot Kennedy 16 Jul 2020 217
NO I.D. 24 Jul 2020 273
Pusha T 24 Jul 2020 238
Closer (J King & I Slade) 27 Jul 2020 2
Ian Kirkpatrick 29 Jul 2020 137
Blondie 30 Jul 2020 197
Chris Cornell 10 Aug 2020 241
Robert Diggs "RZA" 12 Aug 2020 814
Ivor Raymonde 13 Aug 2020 505
Nikki Sixx 3 Sep 2020 305
Big Deal Music "BDM" 10 Sep 2020 4,212
Julian Bunetta 10 Sep 2020 188
Chrissie Hynde 10 Sep 2020 162
Steve Robson 17 Sep 2020 1,034
Rick James 18 Sep 2020 97
Kevin Godley 23 Sep 2020 358
Scott Cutler 24 Sep 2020 111
Nate Ruess 30 Sep 2020 59
LA Reid 30 Sep 2020 162
50 Cent 30 Sep 2020 388
Aristotracks 30 Sep 2020 152
B-52's 30 Sep 2020 96
Bonnie McKee 30 Sep 2020 78
Brill Building 30 Sep 2020 234
Christina Perri 30 Sep 2020 68
Dierks Bentley 30 Sep 2020 113
Editors 30 Sep 2020 64
Eman 30 Sep 2020 97
Enrique Iglesias 30 Sep 2020 157
Evan Bogart 30 Sep 2020 229
George Benson 30 Sep 2020 107
George Thorogood 30 Sep 2020 40
Good Soldier 30 Sep 2020 760
Holy Ghost 30 Sep 2020 62
J-Kash 30 Sep 2020 90
John Rich 30 Sep 2020 7
Kojak 30 Sep 2020 148
Lateral 30 Sep 2020 248
Lindsey Buckingham (Kobalt) 30 Sep 2020 174
LunchMoney Lewis 30 Sep 2020 116
Lyrica Anderson 30 Sep 2020 96
Madcon 30 Sep 2020 173
Mark Batson 30 Sep 2020 210
Mobens 30 Sep 2020 1,034
Nelly (Kobalt) 30 Sep 2020 145
Nettwerk 30 Sep 2020 25,259
PRMD 30 Sep 2020 335
Rob Hatch 30 Sep 2020 167
Rock Mafia 30 Sep 2020 393
Savan Kotecha (Kobalt) 30 Sep 2020 354
SK Music 30 Sep 2020 23
Skrillex 30 Sep 2020 153
Stereoscope 30 Sep 2020 456
Steve Winwood 30 Sep 2020 215
Tequila 30 Sep 2020 1
Third Day 30 Sep 2020 212
TImeflies (Masters) 30 Sep 2020 80
Walter Afanasieff 30 Sep 2020 213
Wayne Wilkins 30 Sep 2020 113
Yaslina 30 Sep 2020 73
Sacha Skarbek 20 Nov 2020 303
Tricky Stewart (Masters) 27 Nov 2020 95
Eric Stewart 2 Dec 2020 255
Bob Rock 4 Dec 2020 43
Caroline Ailin ("New Rules") 10 Dec 2020 2
Nelly 15 Dec 2020 240
Lindsey Buckingham 24 Dec 2020 161
Joel Little 24 Dec 2020 178
Jimmy Iovine 24 Dec 2020 259
Neil Young 31 Dec 2020 590
Shakira 31 Dec 2020 145
Brian Kennedy (Writer Share) 31 Dec 2020 139
Andrew Watt 17 Feb 2021 105
Christian Karlsson 2 Mar 2021 255
Carole Bayer Sager 17 Mar 2021 983
Paul Barry 18 Mar 2021 510
Espionage 26 Mar 2021 151
Martin Bresso 31 Mar 2021 51
Andy Wallace 31 Mar 2021 1,242
David Sitek 31 Mar 2021 230
Happy Perez 31 Mar 2021 192
Red Hot Chili Peppers 14 Jul 2021 220
Kaiser Chiefs 15 Jul 2021 136
Christine McVie 21 Jul 2021 115
Jordan Johnson 22 Jul 2021 58
Stefan Johnson* 22 Jul 2021 58
Rhett Akins 23 Jul 2021 564
Ann Wilson 29 Jul 2021 152
Elliot Lurie 24 Aug 2021 70
Total Songs 65,413
* Not counted in total song count
Active Song Management
Due to their iconic nature, the Songs in the Portfolio can be relied upon to
deliver long-term, stable returns, whilst benefitting from market growth.
However, our ethos has always been that active Song Management can and will
deliver significant additional benefits to the Company's Shareholders. We view
Song Management as having three pillars:
· Optimising revenue generation, revenue collection and value by
ensuring accurate registration and rights enforcement of the Songs in the
Catalogue, ensuring we collect revenues as efficiently and cost-effectively as
we can.
· Driving consumption and value through active marketing and
pitching of the Catalogue to individual listeners, music creators and business
music users, as well as harnessing consumer platforms through which the
Catalogue can be showcased and consumed.
· Campaigning to change the position of Songwriters in the economic
equation by working with politicians, NGOs and the wider music community to
build support for increased fairness in payments for Songwriters. As our
Shareholders stand in the shoes of the Songwriters, what's in the best
interest of Songwriters is also what's in the best interest of our
Shareholders and there is complete alignment.
Optimising revenue generation
We have continued to implement its strategy of working with partners who
reduce administration costs, collect more money, collect it faster and pay it
through faster. At the earliest possible opportunity we look to revert (i.e.
move) Catalogues to these partners, or renegotiate administration rates where
there are compelling reasons to maintain the current relationships.
Through the Company's wholly owned subsidiary, Hipgnosis Songs Group's (HSG)
administration capabilities, the Company benefits from its own in-house
administration function in the US.
Furthermore, in July 2022, we announced that the Company had entered into a
direct licensing and administration partnership with Sacem, a world-leading
Collective Management Organisation (CMO), to collect digital rights for the
Writers' Share and the Company's own Publisher Share, primarily in the UK and
the European Union, starting in 2023.
Additionally, the Company entered into a sub-publishing partnership with
peermusic, the world's largest independent music publishing and neighbouring
rights administration company, for them to administer specific Catalogues.
Peermusic will collect royalties in territories not administered by HSG or
Sacem, primarily Latin America and Asia.
Combined, the partnerships with Sacem and peermusic have resulted in an
annualised uplift of relevant earnings of 6.6%. Further benefits of the move
to Sacem include collection times for some streaming revenues having been cut
to as little as four months from the point of use.
So far, a total of 43 Catalogues or part Catalogues, covering over 6,200
Songs, accounting for c.11% of PFAR have now reverted to these three
partnerships.
The transition of Catalogues to Sacem and peermusic required significant
preparation work by the Copyright team, including scaling up certain
administrative processes, such as becoming Common Works Registrations (CWR)
compliant. Working with our own in-house administrator in the US, HSG, we
ensured accurate delivery of the data to enable a smooth transition.
The music industry is notorious for the fragility and inaccuracy of data.
Therefore, it is notable that Sacem reported that there were no rejections in
the 6,200 Songs which were transferred to them, highlighting the success and
accuracy of the work that our rights administration team has been carrying
out. In practice, this means that Songs transferred are properly coded so that
all due payments are received and Sacem can immediately focus on maximising
collections for Hipgnosis Songs Fund.
We will continue to consider Catalogues for reversion to HSG, Sacem and
peermusic as existing administration agreements expire. Alongside these, we
continue to have a significant administration business with Kobalt as well as
with Sony Music Publishing, Warner Chappell Music and Universal Music
Publishing.
Driving consumption through Synch
The Company's Portfolio of iconic and culturally important Songs are naturally
in high and constant demand from producers to feature in their movies, TV
shows, advertisements, video games and online marketing.
Our global in-house '24/7' Synch licensing operation actively manages our
Songs with responsibility. The Hipgnosis Song Management team focuses on
creating opportunities which add value to both the Song and the Songwriter's
legacy, while also responding to incoming enquiries within a matter of
minutes.
The success of our approach is demonstrated by the 24.7% year-on-year increase
in synch PFAR income in calendar 2022 compared to 2021.
Another highlight of the year was our placement of All The Small Things,
co-written by Tom Delonge, whose Catalogue the Company bought in December
2019, as the sound track for the highly coveted John Lewis 2022 Christmas
Advert. The original Blink-182 version of the Song reached Number six in the
Billboard Hot 100 and Number two in the UK on release in 2000. Our Synch team
saw the potential of a slowed down version of this track and presented it to
John Lewis, who chose it to soundtrack their seasonal Christmas advert.
Following the John Lewis advert, and the Blink-182 reunion world tour
announced in October 2022, streaming consumption has notably increased,
particularly in the UK. In addition, there have been several interpolations
and samples agreed. These, in turn, will drive further consumption when they
are released as well as create new IP and revenue streams.
Alongside the John Lewis Christmas advert as one of the most prestigious
placements for Synchs, stands the Superbowl half time show. This year, Rihanna
performed four of the Company's co-owned Songs during her set: Birthday Cake
(The-Dream), All Of The Lights (Jeff Bhasker/The-Dream), Run This Town (Jeff
Bhasker/No I.D.) and Umbrella (The-Dream/Tricky Stewart). Close to 119 million
viewers tuned in for her performance on television and streaming services,
with each of the Songs recording gains on streaming platforms of up to 280% in
the week following her performance. Four months on, Umbrella's US weekly
Streaming-on-Demand figures are still 1.3 times that pre the Superbowl; Run
This Town is showing 1.5x the demand.
During the year, our Synch team enhanced their Publishing Partner engagement
program in order to further increase the access to and visibility of our
Songs. This proactive approach aims to encourage greater collaboration with
our publishing partners with the aim to maximise synch activity. In addition,
we create bespoke approval processes, ensuring that we remain a low friction
partner for quickly licensing repertoire.
In addition, the Synch team has taken advantage of a number of technology
solutions that trawl the global entertainment industry and automatically alert
the team every time a significant synch deal goes on air. Combining this
technological approach with our proprietary in-house synch and royalties
databases enables us to have an integrated system where a synch can be
followed from its pitching stage, through its usage and ultimately its
collection.
Bringing Songs to new audiences
Putting the spotlight on creating interpolations of our Songs, having our
Songs sampled and nurturing cover versions of our Songs results in new IP for
the Company as well as new and enhanced revenue streams.
This year, Nicki Minaj delivered another enormous global hit based on Rick
James's hit Super Freak. Nicki's Song Super Freaky Girl went to Number 1 on
the Billboard Hot 100 in the US as well as being a top five hit in the UK. The
original Song was released in 1981 and has been a seminal Song ever since. In
1990, it was interpolated as U Can't Touch This by MC Hammer for the enormous
global Grammy award winning hit. All three Songs have pride of place in the
Company's portfolio and Nicki Minaj's recording is not only the highest
charting, having reached Number 1, but also, once again, helps to revive both
the original and the MC Hammer version. As a result of all this activity we
have already seen a 45% uplift year-on-year for the combined earnings of Super
Freak and Super Freaky Girl, when comparing the first nine months of 2022 to
the first nine months of 2021.
The three versions have more than 5 billion streams across all services with
approximately half of them under the Company's ownership. Super Freaky Girl
has also been awarded an ASCAP POP Award as one of the most played songs on US
radio in the past 12 months. Through ownership of the Rick James Catalogue,
the Company receives its 50% share of Rick James' 55% of the publishing share
of Super Freaky Girl.
In addition, we continue to focus on creating new master recordings of
selected Songs within the Catalogue designed to be attractive for synch
opportunities.
This approach has already proved successful, with a new version of Bon Jovi's
Wanted Dead Or Alive. We partnered with Empara Mi and created a new recording
of this Song, specifically designed for the current trend in movie and video
game trailers of atmospheric, ethereal recreations of iconic songs. In this
case, the Company owns 50% of the Publishing copyright via the Richie Sambora
Catalogue acquisition and 100% of the master recording of the new version. We
placed the Song for the trailer of the forthcoming video game Transformers:
Reactivate - earning a six-figure synch fee. In addition, we released the Song
on Streaming services to establish a base for the record where it has achieved
over 1.6 million streams on Spotify alone, and should continue to grow and
generate further income once the game is released. The trailer has already
been viewed 2 million times on YouTube.
Another example is when we placed Richie Sambora as a contestant on the UK
version of The Masked Singer. Four of the six songs that he performed on the
series were from the Company's Portfolio. When he was revealed in the
semi-final, his profile reached a recent all-time high and there was an
increased streaming consumption of the Bon Jovi songs held by the Company.
Another initiative aimed at introducing our iconic songs to a new generation
of fans in order to drive increased streaming consumption is making Nile
Rodgers the face of Chanel Eyewear as well as the first and only "Artist In
Residence" at Apple Music. We have also presented CHIC's first five albums and
Sister Sledge's We Are Family in Spatial Audio on the service, as well as
securing a significant six figure synch for the song Spacer with Renault in
Europe.
Progress made towards ensuring that Songwriters are fairly remunerated
The 2022-23 financial year saw significant progress in our campaign for
Songwriters to be more fairly rewarded for their contribution to the success
of the music industry. Without Songwriters there is no music industry and all
Songwriters deserve to go from the bottom of the economic equation to the top.
It cannot be said often enough that where the Company has purchased a
Catalogue we stand in the shoes of the Songwriter, so our Shareholders'
interests are entirely aligned with those of Songwriters. If we can get
Songwriters paid more, our Shareholders benefit equally.
We advocated for, and welcome moves by the US Copyright Royalty Board (CRB)
which, during the year, disallowed an appeal from certain streaming services
against their CRB III ruling as well as the joint industry proposal approved
by the CRB which provides for further increases during the CRB IV period.
CRB III provided for a 44% increase in the headline rate of Digital Service
Providers (DSP) revenues paid to Songwriters and Publishers, reaching 15.1% in
2022. As a result of the appeal by certain streaming services, some revenues
were not paid contemporaneously. Following the rejection of the appeal the
music industry and the Mechanical Licencing Collective (MLC) has started the
process to distribute those revenues. We have accrued a total of $16.1 million
for the CRB III retroactive revenue and a further $5.6 million for CRB III
uplift during the financial year.
The joint industry proposals - which have been confirmed, for CRB IV saw the
proportion of DSP revenue paid to Songwriters further rise incrementally to
15.35% in 2027, as well as the royalty payable on a physical sale or download
rising from 9.1 cents to 12 cents with additional inflationary increases.
Whilst there is still a long way to go before Songwriters are fairly
remunerated, these are important steps in the right direction.
The joint CRB IV proposals show there is increasing acceptance across the
music industry that Songwriters should be fairly rewarded for their work.
Although the increase is more modest than the CRB III rises, we support it as
it will provide a background of stability at the highest streaming rates ever
paid in the context of which we can continue our advocacy efforts.
In the UK, the Competition and Markets Authority (CMA) concluded their market
study and recommended that the Intellectual Property Office (IPO) take forward
a number of workstreams. After the year end, the IPO announced an agreement on
how the music industry and the Government will work together to deliver
consistent high-quality metadata and the Government has announced a joint
industry working party on music industry remuneration. We welcome these steps,
however, we believe that far greater reform is needed and we continue to
engage with the relevant organisations to achieve this change. Our ultimate
goal is for Songwriters' pay to be determined by the free market, not
legislation.
We also supported BMI in its Live Concert rate victory, which set a new rate
138% higher than the previous one, reflecting the importance of Songs in the
live concert experience. As we've stated before, live concerts would not exist
without Songs.
Hipgnosis Songs Group (HSG) and new Songs
Prior to being acquired by the Company in September 2020, HSG had two main
divisions: Song Creation, which accounted for 78% of revenues at the time, and
third-party administration which accounted for 22% of revenues.
The chief purpose of acquiring HSG was the ability to self-administer our
acquired Catalogues in the US. This would reduce third party administration
costs, allow us to collect revenue quicker, reduce revenue leakage, give us
greater visibility over revenue and give us a seat at the table to negotiate
better rates for our Catalogue, as well as advocate on behalf of Songwriters.
It was an established platform at acquisition and in the intervening time we
have improved its capabilities as we have shifted its focus to administration.
In total, the Company has reverted 43 Catalogues to HSG, enabling the Company
to benefit from this in-house capability.
In addition to administering Songs in-house for the Company, HSG continues as
a third-party administrator. In this capacity, HSG administers Catalogues such
as Beggars Banquet, which includes Glass Animals, who claimed the longest run
in Billboard 100 history with Heat Waves. The Song has gone 5x Platinum in the
US, was the second most streamed Song in 2022 in the US and is ranked among
the Top 15 "most streamed Songs of all-time on Spotify".
Song Creation remains a small part of Hipgnosis Songs Fund's overall business,
at less than 2% of net revenue. Highlights from the period include continued
important placements by Stefan and Jordan Johnson (the Monsters &
Strangerz) with Selena Gomez; the Jonas Brothers and Miley Cyrus; as well as
Julian Bunetta and John Ryan with Katy Perry, Shawn Mendes and Sabrina
Carpenter. The expansion of our joint ventures with NO I.D., including key
signings with both Saba and Sonny Nitez, as well as Hippo Campus are also
expected to deliver hit songs.
During the period, the Company has evolved HSG's Song Creation business and in
addition to delivering original hits, its roster of Songwriters are also
focused on interpolating the Company's iconic Songs into new hits. This
focused strategy will enable more stable returns off a reduced fixed cost
base. As a result, there was a restructuring of the team, with a $1 million
one-time cost which is expected to deliver an estimated annual fixed cost
savings of $0.8 million.
Following the successful implementation of our strategy to use HSG for
self-administration and the subsequent growth in third party administration,
this business is well balanced and gross revenues are now split evenly across
fund administration, third party administration and Song Creation.
Recognition through awards
Grammys
The Company's Songwriters were included in 16 Grammy nominations for 2022 and
won the following:
• Best Dance/Electronic Album: Beyonce's RENAISSANCE co-written by Travis
Garland and Diplo's Diplo, co-written by Phil Scully and David Karbal.
• Best Folk Album: Revealer by Madison Cunningham co-written by Dan Wilson
• Producer Of The Year (Non Classical): Jack Antonoff
PRO Performance Awards
• Song of the Year SESAC Music Awards 2022: Heatwaves, by Glass Animals,
written by Dave Bayley
• Winners at the ASCAP Pop Awards 2023:
• Ghost by Justin Bieber, co-written by Stefan Johnson and Jordan Johnson
• Super Freaky Girl by Nicki Minaj, co-written by Rick James
• ASCAP Most Performed Songs of the Year:
Just About Over You performed by Priscilla Block and co-written by Emily Kroll
• ASCAP Country Awards 2022:
Just About Over You performed by Priscilla Block and written by Emily Kroll
• BMI Most Performed Songs of The Year:
• It's Cause I Am performed by Callista Clark and
co-written by Cameron Jaymes
• Baila Conmigo performed by Selena Gomez and Rauw Alejandro written by
Albert Hype
• Winner in the BMI Pop Awards 2023 for most performed Song: Ghost by
Justin Bieber, co-written by Stefan Johnson
• Winner in the BMI Country Awards 2022: Tequila Little Time by Jon Pardi,
written by Rhett Akins
• Winner in the BMI Latin Awards 2022: Telepatia by Kali Uchis, co-written
by Albert Hype
Upgraded capabilities
The strategic investment by Blackstone LLP into Hipgnosis Song Management
during 2021 has enabled us to continue investing in capabilities and expertise
despite the reduction in the management fee received from the Company as a
result of the decline in the share price.
Notably, Ben Katovsky joined on 1 October 2022 as our new President and Chief
Operating Officer. Ben, who has almost two decades' experience in the music
industry, most recently as COO at BMG, leads the operations of Hipgnosis Song
Management. He has particular expertise in the scaling of music companies,
building value from growing Catalogues, digital business development and using
technology and data to enable this.
Ben's appointment was part of our on-going commitment to ensure that we
continue to evolve with the right people in the right roles to maximise
opportunities and value for the Company. As such we have made a number of
additional appointments, most notably in our Song Management organization to
focus on further driving audience development and licence revenue for our
Songs.
Danny Bennett has been appointed EVP responsible for Marketing and Audience
Development. Danny has been a leading manager in the music industry for more
than 30 years. He's widely respected for using his progressive marketing
skills. He famously redefined the career of his father, Tony Bennett,
including through iconic collaborations with Lady Gaga and Amy Winehouse.
Based in New York, Danny will support an increased focus on the United States,
the largest music market.
Patrick Joest has been promoted to Head of Synch leading the IA's global synch
marketing and licensing operation. Patrick has over two decades' global
experience and a network in Film & TV/synch licensing on both the
supervision and rights owners' side. Prior to Hipgnosis, Patrick spent 11
years at BMG, where he built the global synch business from scratch to a
multi-million dollar operation, leading a team across 15 offices.
Sara Lord has been appointed EVP Content Creation. Sara is an entertainment
industry executive with over 25 years of experience in the music, film and
advertising industries. Sara joined from Concord Music, where she had been SVP
International Synch and Project Development. Sara is leading Hipgnosis'
collaborative work with companies looking to create audio-visual, theatrical,
non-traditional physical and experiential content showcasing Hipgnosis
catalogues.
As part of the ongoing investment and expansion of the Investment Adviser,
additional appointments are underway including the appointment of an in-house
General Council to be announced in due course.
Last September, we said goodbye to Amy Thomson and we will shortly be saying
goodbye to Ted Cockle. We would like to thank both of them for their efforts
and wish them all the best for the future.
During the year a particular operational focus for the Investment Adviser has
been the build out of its proprietary technology and data platform, the
implementation of work processes associated with this platform and the
population of data into new systems. The platform now includes systems that
enable rights administration, Synch sales, audience development and royalty
collection and assurance and is therefore designed to optimise the end-to-end
value creation process.
Significant investment has been made into the development of a proprietary
cloud-based royalty platform. This platform enables the Investment Adviser to
ingest and verify royalty statements received from publishers, labels, CMOs
and other sources rapidly and to a high level of granularity. The platform
will allow significantly improved royalty analysis and verification and will
power improved insights to drive catalogue revenue generation. We see
technology and data science as a key priority and will continue to invest
significantly in these areas.
Financial Review
NAV
The Company reports two net asset values: an IFRS NAV which is prepared in
accordance with IFRS, under which the Company's investments in Catalogues are
held at cost less amortisation and impairment, and an Operative NAV which
adjusts the IFRS NAV to reflect the Fair Value of the Company's Catalogues, as
determined by the Portfolio Independent Valuer. The IFRS Net Asset Value (NAV)
per share as at 31 March 2023 was $1.1863 which is a 9.2% decrease from
$1.3065 as at 31 March 2022, reflecting the amortisation of the Company's
Catalogues in accordance with applicable accounting protocols and ignoring
their current fair value.
The Board and the Investment Adviser consider that the most relevant NAV for
Shareholders is the Operative NAV.
The Operative NAV per share increased by 3.58% to $1.9153 during the year (31
March 2022: $1.8491), driven primarily by a 4.0% increase in the Fair Value of
the Portfolio. This, together with the dividends, of 21.6p (27.9¢), takes
Total $ NAV Return to Shareholders to 69% since the IPO on 11 July 2018.
Operative NAV per share Bridge
From 1 April 2022 to 31 March 2023
$
Opening Operative NAV per share 1.8491
Loss for the year (0.0741)
Amortisation and Impairment during the year 0.0955
Dividends paid during the year (0.0465)
Repurchase of shares into treasury 0.0013
Increase in Fair Value of Catalogues 0.0900
Closing Operative NAV per share 1.9153
Based on the Sterling to Dollar exchange rate at 31 March 2023 of 1.236, the
Operative NAV per share presented in Sterling is 154.91p per share (31 March
2022: 140.79p based on Sterling to Dollar exchange rate of 1.3134). As at 11
July 2023, the Operative NAV per share presented in Sterling would be 148.51p
per Share (GBP: USD 1.2897).
Fair Value of the Portfolio
The Fair Value of the Portfolio increased by 4.0% to $2.80 billion (31 March
2022: $2.69 billion), mainly as a result of royalty statements received
exceeding expectations, especially related to performance income and streaming
income from older vintage catalogues. This also drove the increase in the
Operative NAV in Dollar terms over the period.
The Fair Value is determined by the Portfolio Independent Valuer, Citrin
Cooperman, whose valuation approach is described in detail further on in this
report.
In advance of the last Interim Report published in December 2022, Kroll
Advisory Limited ("Kroll"), an independent valuation firm, was appointed to
consider and advise on the reasonableness of certain assumptions commonly
employed in the valuation of music catalogues based on data provided by the
Company.
The Board continues to engage and consult with Kroll in order to obtain a
range of views with respect to the development of inputs that impact the
Group's valuation methodology, as applied by the Portfolio Independent Valuer.
Details of this are discussed in the Chair's Statement.
Tax considerations
The Company is a UK tax resident with Investment Trust Company (ITC) status.
For UK corporation tax purposes, the Group's music assets are considered
intangible fixed assets and therefore the Company may be unable to benefit
from an exemption for tax on chargeable gains due to its ITC status on any
potential sale of Catalogues.
Given the options the Board is considering, the current share price and the
upcoming Continuation Vote, the Company has estimated that in the event that
the Group sells all of its assets, that the Group's potential tax charge on
these disposals, based on certain assumptions, could be approximately $245
million.
This potential tax charge reflects both the impact of the historic
amortisation of such assets, where the Group has already received a tax
benefit to the extent available in each year of ownership and the uplift in
value since purchase. This estimate does not include any assumptions as to the
structure of any disposal, the utilisation of any brought forward tax losses
potentially available to the Group or from any potential opportunities to
optimise the structure of any sale of assets, which could both result in a
materially lower tax charge on any future sale of the Group's assets.
Revenue
Both in the current and prior period, the Company recognised a number of
non-recurring elements impacting IFRS revenue, resulting in Total revenue and
Net revenue decreasing to $177.3 million (31 March 2022: $200.4 million) and
$147.2 million (31 March 2022: $168.3 million) respectively. As can be seen
below, the decrease in Net revenue was primarily the result of the initial
recognition of the Usage Accrual in the prior period ($36.0 million) as well
as the non-recurring element of RTI ($14.1 million) in the prior period,
partly offset by the CRB III retroactive accrual ($16.1 million) in the
current year.
The CRB III retroactive accrual was made in the first half of the year
following the confirmation of the CRB III rate increase to 15.1% for the
Songwriters' mechanical portion of US Streaming income by 2023. The accrual
estimates the retroactive payment due to the Company as a result of revenues
in previous accounting periods not having been recognised at the full CRB III
rates.
Excluding these non-recurring elements, the Company saw an increase in IFRS
Net revenues of $12.9 million or 10.9% year-on-year. This is as a result of an
increase in royalty statements and accruals of $2.4 million, a movement of
$6.2 million related to the Usage Accrual,
a $5.6 million accrual reflecting the revenue attributable to Hipgnosis in the
current year due to the CRB III ruling, an increase in royalty costs of $1.5
million and an increase in interest income of $0.2 million.
Pro Forma Annual Revenue (PFAR)
Given the multiple non-recurring elements captured with the IFRS revenue line,
to provide Shareholders with an understanding of the like-for-like performance
of the Company's revenues, by removing the impact of new Catalogue
acquisitions and these non-recurring elements, the Company presents the Pro
Forma Annual Revenue (PFAR) performance measure. This shows the royalty
revenue earned by Catalogues in a calendar year largely based on royalty
statements received, irrespective of whether the Songs were owned by the
Company over the period analysed and does not include any revenue accruals
under IFRS. Although not directly reconcilable with IFRS revenue, the Company
believes this provides a relevant like-for-like full year income comparison of
the Group's Catalogues of Songs held as at the period end.
PFAR is reported for both the <10 year vintage, i.e. those newer Catalogues
where there is typically an expectation of some natural decay (or loss of
revenues) over time, and for the >10 year vintage, i.e. those Catalogues
which have reached the end of their natural decay curve.
The table below shows PFAR for Catalogues owned as at 31 March 2023 over time.
Pro Forma Annual Revenue for Catalogues owned
12 months to Dec 22 12 months* 12 months* 12 months to Jun 21
$m to Jun 22 to Dec 21 $m
$m $m
Total PFAR for Catalogues owned as at 31 March 2023 130.2 122.2 116.2 115.9
Vintage <10 years 56.5 52.6 50.0 51.0
Vintage >10 years 73.7 69.6 66.2 64.9
* Restated. Note: Age of a Catalogue is calculated as the average release year
of a Catalogue as at 1 January 2023 weighted on earnings, at time of
acquisition. For the avoidance of doubt, the >10 years now includes some
Catalogues that previously were considered in <10 years
PFAR for the 12 months to December 2022 increased by 12.1% year-on-year to
$130.2 million, a significant acceleration on growth seen in previous years.
PFAR grew strongly in both categories: by 13.0% year-on-year in the <10
year to $56.5 million (2021: $50.0 million) and 11.3% year-on-year in the
>10 year vintage to $73.7 million (2021: $66.2 million). Previously, the
Company has highlighted the stabilisation of the <10 year vintage PFAR. The
significant growth now being seen in this category highlights that those
Catalogues continue to approach the end of their decay curve and any remaining
decay within certain income streams is being significantly outpaced by growth.
PFAR does not include any income due to the Company as a result of the
increased royalty rates due from CRB III ($5.6 million in the financial year)
or income from Hipgnosis Songs Group LLC (HSG) ($5.1 million in the financial
year).
PFAR is set out by income type for calendar year 2022 against the comparative
previous calendar year below.
2022 vs 2021 PFAR split by income type
12 months to Dec 22 12 months Change %
$m to Dec 21
$m
Streaming 52.11 45.40 +14.8
Synchronisation 19.44 15.59 +24.7
Performance 30.81 28.27 +9.0
Mechanical 4.87 5.01 -2.8
Digital Downloads 2.50 3.59 -30.4
Settlement and Other 3.88 2.20 +76.4
Total Publishing Income 113.61 100.06 +13.5
Masters* 16.63 16.10 +3.3
Total PFAR 130.23 116.16 +12.1
*Masters income includes Artist Royalties, Producer Royalties and Neighbouring
Rights.
Streaming income continues to grow strongly, up 14.8% year-on-year and
represented 40.0% of the Portfolio's PFAR income for the 12 months to December
2022 (2021: 39.1%). This validates how the Company's strategy of acquiring
Catalogues with high levels of streaming consumption benefits from the
structural growth in global paid-for streaming.
Synchronisation income, which includes both fees for the use of Songs on
traditional media outlets as well as digital licences for social media, gaming
and fitness platforms, grew by 24.7% year-on-year. This reflects the
Investment Adviser's focus on maximising revenue through pitching, promoting
and procuring synch deals. In addition, the Company is starting to receive
income from digital licences.
As anticipated in the Interim Report, the Company received increased
performance income in the second half of the year as recovery from Covid-19
restriction related declines worked its way through the music industry payment
cycle. This, together with successful tours from the Red Hot Chili Peppers,
Nile Rodgers & CHIC, Journey and Blondie, amongst many others, resulted in
performance income increasing by 9.0% year-on-year to $30.8 million, with the
second half up 41% on H1 2022. With all markets now fully open and major
concert tours for all four of the previously mentioned artists taking place
this year, we anticipate that performance income will continue to recover.
Additionally, Blink-182 are touring and both Beyoncé and Taylor Swift are
performing to sell-out stadiums with their shows featuring a number of songs
in which Hipgnosis Songs Fund has an interest.
Masters income, which includes income from Artist Royalties, Producer
Royalties and Neighbouring Rights, increased by 3.3% year-on-year, from $16.1
million to $16.6 million. This growth was subdued as a result of a relatively
high proportion of younger catalogues within this income stream continuing to
experience some natural decay.
The Company considers that the PFAR metric will remain a relevant measure of
underlying Portfolio performance for Shareholders until IFRS revenue reaches a
'steady state' and becomes a comparable measure useful for the Board and
Shareholders.
Costs
Adjusted operating costs, which exclude interest costs and Catalogue
performance bonuses decreased by 21.2% year-on-year to $29.5 million (31 March
2022: $37.5 million). This is driven by a reduction in Advisory fees as a
function of the Company's lower share price during the year, reduced
administration, legal and professional fees as well as lower aborted deal
costs.
As a result, Ongoing Charges as a percentage of the average Operative NAV
decreased to 1.21% for the year ended 31 March 2023 (31 March 2022: 1.54%).
Whilst a significant Catalogue bonus provision is recognised in the current
year, we do not anticipate this provision to occur at a material level in
future years.
Given continuing outperformance on certain Catalogues, the Company has
recognised an additional Catalogue performance bonus provision of $43.8
million (31 March 2022: $0.9 million). These relate to payments to Songwriters
where the recognition of a performance bonus is contingent on certain
performance hurdles defined in the catalogue acquisition agreements, based on
actual and expected future performance that is highly probable.
Overall operating expenses have increased by 26.4% year-on-year to $233.9
million (31 March 2022: $185.0 million) due to increased interest costs, as
detailed below, and the increase in Catalogue bonus provisions, discussed
above.
EBITDA
EBITDA for the year ended 31 March 2023 decreased by 10.1% year-on-year to
$117.7 million (31 March 2022: $130.9 million), reflecting the reduction in
net revenue only partly offset by a reduction in the Advisory fees.
Cash flow and net debt
Net debt decreased to $562.0 million at 31 March 2023 (31 March 2022: $569.9
million) assisted by strong cash receipts from royalty statements and the
change of dividend timetable, which meant only three dividends were paid out
during the period.
Net cash generated from operating activities increased to $102.1 million (31
March 2022: $84.9 million).
In addition to the reduction in net debt, due to the increase in the Operative
NAV, net debt as a percentage of Operative NAV has decreased to 24.3% as at 31
March 2023 (31 March 2022: 25.4%).
Leverage
For the period 1 April 2022 to 29 September 2022 the Company had a Revolving
Credit Facility, led by J.P. Morgan (the "J.P. Morgan RCF"), which was exposed
to London Inter Bank Overnight Rate (LIBOR) with a margin of 3.25%.
On 30 September 2022 the Company entered into a new RCF (the "New RCF") with a
commitment of $700 million which runs for five years until 30 September 2027.
The New RCF, arranged by CNB, bears interest at a floating rate of interest
based on the Secured Overnight Financing Rate (SOFR), plus an initial fixed
margin of 2%. Not only do the terms of the New RCF carry a lower margin cost,
there is also greater operational flexibility within the facility.
In order to mitigate interest rate risk and provide certainty over interest
payments, the Company completed interest rate swap agreements. From 30
September 2022 until 2 January 2023, the interest on all the drawn debt was
fixed at 5.71% (including debt margin).
Since 3 January 2023, $340 million has been hedged for the duration of the RCF
(until 30 September 2027) at a fixed rate of 5.67% (including debt margin); a
further $200 million is hedged until 3 January 2026 at a fixed rate of 5.89%
(including debt margin). The balance remains unhedged to provide flexibility.
In total, the Company completed interest rate swap agreements to hedge a total
of $540 million at a blended rate of 5.75%, including debt margin, for a
weighted average life of 4.26 years, starting from 3 January 2023.
These interest rate hedging contracts are not subject to margin calls in the
event of movements in underlying interest rates.
Loan interest expense increased to $33.7 million (31 March 2022: $20.4
million) due to the rise in LIBOR related to the J.P. Morgan RCF which was in
place until 29 September 2022.
On derecognition of the pre-existing J.P. Morgan RCF, $5.0 million was
recognised as a borrowing cost extinguishment charge and represents the
unamortised capitalised borrowing costs on the J.P. Morgan RCF.
Post year end, there was a cash benefit of $1.2 million received relating to
the short-term fair value gain on the prior quarter's interest rate swap due
to underlying rates being favourable for that period. As at 31 March 2023, the
fair value of the Held for Trading financial liability was $3.4 million.
Foreign Exchange Hedge
On 12 October 2022, the Company entered into a series of US Dollar to Sterling
foreign exchange forward contracts to limit its exposure to foreign exchange
rate risk and to provide certainty on the US Dollar value of future Sterling
dividend payments. This rolling hedging strategy implemented by the Board
ensures there are £50 million of forward contracts in place at any time. The
foreign exchange forward contracts were in place until April 2024 and have
subsequently been extended to October 2024.
As at 31 March 2023, the Held for Trading financial asset relating to the
foreign exchange forward contract is $4.9 million and a fair value gain of
$6.0 million is recognised in the Consolidated Statement of Profit and Loss.
Dividends
Dividends paid in the year of $56.3 million related to the periods ending
March 2022 (paid 15 June 2022), June 2022 (paid 28 October 2022) and September
2022 (paid 31 January 2023). An interim dividend for the period ending
December 2022 was declared on 16 March 2023 and paid post year end on 28 April
2023. The fourth interim dividend in relation to the March 2023 financial year
of 1.3125p was declared on 23 June 2023 with a payment date of 28 July 2023.
All dividends were in line with the Company's annual target of 5.25p in
interim dividends per Ordinary Share.
Dividends paid, of which there were three in the year of $56.3 million were
covered 1.44x by Distributable Revenues recognised during the year. Dividends
declared, of which there were four in the year, amount to $75.9 million, which
were covered 1.07x by Distributable Revenues recognised during the year.
In addition, the Company was covered 1.45x on a Leveraged Free Cashflow
measure, necessary to meet the three dividend payments paid in the year, and
1.08x the Leveraged Free Cashflow necessary to meet the four dividends
declared in the year.
EPS
EPS for the year ended 31 March 2023 is (7.41¢) (31 March 2022: (1.65¢));
the reduction to EPS is set out in the below table:
EPS Bridge Cents
Opening EPS at 1 April 2022 (1.65)
Reduction in Net Revenue (1.74)
Reduction in Operating Expenses (excluding the below) 0.36
1. Reduction in Advisory and Performance Fee 0.34
2. Increase in Catalogue bonus Provision (3.62)
3. Increase in Interest Expenses (1.10)
Closing EPS at 31 March 2023 (7.41)
As set out previously, the reduction in Total Revenue is primarily due to the
result of the recognition of both the Usage Accrual ($36.0 million) and the
non-recurring RTI ($14.1 million) in the prior year, partly offset by the CRB
III retroactive accrual ($16.1 million) in the current year.
Adjusted EPS, as defined within the Alternative Performance Measures, which
primarily removes the impact of Catalogue amortisation and other non-operating
costs is 4.12 cents (31 March 2022: 7.18 cents). Catalogue bonus provision has
been included in the calculation in the current year as the Company does not
anticipate this provision to occur at a material level in future years. The
Group amortises Catalogues over a useful life, using a straight-line method of
20 years, which is in line with the industry standard.
Accruals and Receivables
Royalty receivables at 31 March 2023 were $7.1 million (31 March 2022: $6.6
million), representing royalty statements received by March 2023 with payment
received subsequent to year end.
Accrued income as at 31 March 2023 was $126.2 million on a gross basis (31
March 2022: $105.3 million) primarily due to the recognition of a CRB III
accrual. When removing the accruals relating to the time lag in royalty
reporting, CRB III and Usage accrual, the underlying accrual has reduced by
$7.4 million to $47.2 million (31 March 2022: $54.6 million) which reflects
the efforts of the Investment Adviser to reduce the working capital cycle to
ensure all prior period revenue has been received.
A breakdown of these accruals is set out below:
• $47.2 million for earnings where, due to the time lag in royalty
reporting, statements are not expected to be received until calendar Q2 2023
onwards (31 March 2022: $54.6 million);
• $7.8 million income accrual relating to time-lagged international
reporting on PRO earnings. International PRO reporting has a significant time
lag due to the additional collection time taken for PROs to distribute income
from territories. The lag is due to the nature of processing royalties
locally, then distributing them to the domestic PRO, which will in turn
process and distribute these royalties to the Group. Six months of
international PRO earnings are accrued, although PRO processing delays can
typically result in an earnings lag of up to 24 months (31 March 2022:
$7.3 million);
• $21.7 million CRB III accruals (31 March 2022: $Nil). This is as a
result of the confirmation of the CRB III rate increases in July 2022 for the
Songwriters' mechanical portion of US Streaming income. Of this, $5.6 million
is the impact of the higher 15.1% rate on the revenue earned by the Company
during the year and
$16.1 million has been recognised as an estimate of the retroactive payment
due as a result of revenues historically not having been recognised at the
full
CRB III rates;
• $42.2 million Usage Accrual, which recognises revenues that have
triggered a contractual payment but have not been paid to, or processed by,
collection societies, publishers and administrators
(31 March 2022: $36.0 million); and
• $7.3 million HSG gross revenue accrual, (31 March 2022: $7.4 million).
Merck Mercuriadis
Founder, Hipgnosis Songs Fund Ltd and
Founder/CEO, Hipgnosis Song Management Ltd.
12 July 2023
Consolidated Statement of Profit and Loss
For the year ended 31 March 2023
Notes 1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
Income
Total revenue 13 177,312 200,384
Interest income 237 5
Royalty costs (30,316) (32,041)
Net revenue 147,233 168,348
Expenses
Advisory and performance fees 19 (12,472) (16,548)
Administration fees (608) (1,152)
Legal and professional fees (3,794) (5,999)
Audit fees 21 (753) (600)
Brokers' fees (554) (274)
Directors' remuneration 18 (643) (696)
Listing fees (84) (34)
Subscriptions and licences (607) (526)
Public relations fees (780) (702)
Catalogue bonus provision 10 (43,757) (936)
Movement in ECL provision for HSG advances (2,196) (1,570)
Other operating expenses 14 (10,354) (10,105)
Amortisation of Catalogues of Songs 6 (111,583) (105,787)
Impairment of Catalogues of Songs 6 (3,901) (1,490)
Amortisation of borrowing expenses (1,618) (1,635)
Borrowing cost extinguishment 9 (5,007) -
Fixed asset depreciation (653) (712)
Loan interest 9 (33,700) (20,377)
Fair value gain on held for trading derivative financial instruments 22 2,622 -
Finance charges for deferred consideration - (212)
Net loss from joint ventures (264) (836)
Foreign exchange losses 15 (3,157) (14,857)
Operating expenses (233,863) (185,048)
Operating loss for the year before taxation (86,630) (16,700)
Taxation 5 (3,008) (2,743)
Loss for the year after tax (89,638) (19,443)
Basic Earnings per Share (cents) 20 (7.41) (1.65)
Diluted Earnings per Share (cents) 20 (7.41) (1.65)
All activities derive from continuing operations.
The accompanying notes form an integral part of these Consolidated Financial
Statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 March 2023
Notes 1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
Loss for the year after tax (89,638) (19,443)
Other comprehensive income:
Movement in foreign currency translation reserve (6) (1,816)
(6) (1,816)
Total comprehensive loss for the year (89,644) (21,259)
The accompanying notes form an integral part of these Consolidated Financial
Statements.
Consolidated Statement of Financial Position
As at 31 March 2023
Notes 31 March 2023 31 March 2022
$'000 $'000
Assets
Catalogues of Songs 6 1,921,248 2,036,732
Other assets 917 568
Goodwill 3 272 272
Non-current receivables 8 13,210 640
Non-current assets 1,935,647 2,038,212
Trade and other receivables 8 139,999 144,450
Held for trading derivative financial asset 22 4,914 -
Cash and cash equivalents 7 37,965 30,067
Current assets 182,878 174,517
Total assets 2,118,525 2,212,729
Liabilities
Loans and borrowings 9 594,428 593,992
Catalogue bonus provision 10 33,080 925
Non-current liabilities 627,508 594,917
Held for trading derivative financial liability 22 3,395 -
Other payables and accrued expenses 10 53,088 35,413
Current liabilities 56,483 35,413
Total liabilities 683,991 630,330
Net assets 1,434,534 1,582,399
Equity
Share capital 11 1,692,198 1,692,198
Foreign currency translation reserve (2,241) (2,235)
Treasury share reserve 11 (1,961) -
Retained earnings (253,462) (107,564)
Total equity attributable to the owners of the Company 1,434,534 1,582,399
Number of Ordinary Shares in issue at year end (excluding Treasury Shares) 1,209,214,286 1,211,214,286
IFRS Net Asset Value per Ordinary Share (cents) 12 118.63 130.65
Operative Net Asset Value per Ordinary Share (cents) 12 191.53 184.91
Approved and authorised for issue by the Board of Directors on 12 July 2023
and signed on their behalf by:
Andrew Sutch
Chair
Andrew Wilkinson Director
The accompanying notes form an integral part of these Consolidated Financial
Statements.
Consolidated Statement of Changes in Equity
For the year ended 31 March 2023
Notes Number of Share Other Foreign currency translation reserve Treasury Retained Total
Ordinary Shares
capital
reserves
reserve
earnings*
equity
$'000
$'000 $'000 $'000 $'000 $'000
As at 1 April 2022 1,211,214,286 1,692,198 - (2,235) - (107,564) 1,582,399
Dividends paid 16 - - - - - (56,260) (56,260)
Repurchase of ordinary shares into treasury 11 (2,000,000) - - - (1,961) - (1,961)
Loss for the year - - - - - (89,638) (89,638)
Foreign currency translation reserve movement - - - (6) - - (6)
As at 31 March 2023 1,209,214,286 1,692,198 - (2,241) (1,961) (253,462) 1,434,534
* Distributable Revenues (as defined in the Alternative Performance Measures)
arising during the year were $81.0 million which, taken together with the
$18.7 million of Distributable Revenue reserves carried forward from the
previous financial year ended 31 March 2022, result in Distributable Revenue
Reserves of $43.4 million as at 31 March 2023.
For the year ended 31 March 2022
Notes Number of Share Other Foreign currency translation reserve Treasury Retained Total
Ordinary Shares
capital
reserves
reserve
earnings
equity
$'000
$'000 $'000 $'000 $'000 $'000
As at 1 April 2021 1,073,440,268 1,466,851 234 (419) - (3,821) 1,462,845
Shares issued 11 137,774,018 229,702 (234) - - - 229,468
Share issue costs 11 - (4,355) - - - - (4,355)
Dividends paid 16 - - - - - (84,300) (84,300)
Loss for the year - - - - - (19,443) (19,443)
Foreign currency translation reserve movement - - - (1,816) - - (1,816)
As at 31 March 2022 1,211,214,286 1,692,198 - (2,235) - (107,564) 1,582,399
The accompanying notes form an integral part of these Consolidated Financial
Statements.
Consolidated Statement of Cash Flows
For the year ended 31 March 2023
Notes 31 March 2023 31 March 2022
$'000 $'000
Cash flows generated from operating activities
Operating loss for the year before taxation (86,630) (16,700)
Adjustments for:
Movement in trade and other receivables (14,018) (37,274)
Movement in other payables and accrued expenses 3,890 (1,545)
Lease liability interest 369 -
Loan interest 9 33,700 20,377
Movement in ECL provision for HSG advances 2,196 1,570
HSG restructuring provision 1,028 -
Catalogue bonus provision 43,719 -
Depreciation of fixed assets 653 712
Amortisation of Catalogues of Songs and borrowing costs 113,201 107,422
Impairment of Catalogue of Songs 6 3,901 1,490
Borrowing cost extinguishment 9 5,007 -
Fair value gain on held for trading derivative financial assets (2,622) -
Foreign exchange losses 15 3,157 14,857
Taxation paid (5,422) (6,040)
Net cash generated from operating activities 102,129 84,869
Cash flows used in investing activities
Purchase of Catalogues of Songs - (300,455)
Purchase of other assets (51) (173)
Writer advances paid (4,040) (8,509)
Deferred consideration paid (2,500) -
Net cash used in investing activities (6,591) (309,137)
Cash flows generated from financing activities
Proceeds from issue of shares - 229,468
Repurchase of ordinary shares into treasury 11 (1,961) -
Issue costs paid - (4,355)
Dividends paid 16 (56,260) (84,300)
Lease interest paid (592) -
Interest paid (23,433) (20,775)
Borrowing costs 9 (960) (1,274)
Bank loan repaid 9 (7,000) (50,000)
Bank loan drawn down 9 1,771 72,708
Net cash (used)/generated from financing activities (88,435) 141,472
Net movement in cash and cash equivalents 7,103 (82,796)
Cash and cash equivalents at the start of the year 30,067 112,635
Effect of foreign exchange rate changes on cash and cash equivalents 795 228
Cash and cash equivalents at the end of the year 37,965 30,067
The accompanying notes form an integral part of these Consolidated Financial
Statements.
Notes to the Consolidated Financial Statements
For the year ended 31 March 2023
1. General information
Hipgnosis Songs Fund Limited was incorporated and registered in Guernsey on 8
June 2018 with registered number 65158 and is governed in accordance with the
provisions of the Companies Law. The registered office address is Floor 2,
Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY.
The Company is registered with the Guernsey Financial Services Commission
under the Registered Collective Investment Scheme Rules 2015, and the
Protection of Investors (Bailiwick of Guernsey) Law, 2020. The Company is not
authorised or regulated by the Financial Conduct Authority.
The Company's Ordinary Shares were admitted to trading on the Specialist Fund
Segment of the London Stock Exchange on 11 July 2018 and migrated to a Premium
Listing on the Main Market of the London Stock Exchange on 25 September 2019.
The Company was added as a constituent of the FTSE 250 Index effective from
after the market close on 20 March 2020.
The Company makes and manages its investments through its subsidiaries, which
are registered in the UK and US as limited companies. The Consolidated
Financial Statements present the results of the Group for the year ended 31
March 2023, rounded to the nearest US Dollar. The Group is principally engaged
in investing in and managing music copyrights and associated musical
intellectual property.
There has been a presentational change in the comparative period in the
Consolidated Statement of Profit and Loss, as set out in Note 23.
2. Accounting policies
The principal accounting policies applied in the preparation of these
Consolidated Financial Statements are set out below. These policies have been
consistently applied, unless otherwise stated.
New and amended standards and interpretations applied
On incorporation, the Company adopted all of the IFRS standards and
interpretations that were in effect at that date and are applicable to the
Group. No new standards during the year ended 31 March 2023 had a material
impact on the Consolidated Financial Statements.
Amended standards and interpretations not applied
The following are amended standards and interpretations in issue effective
from years beginning on or after 1 January 2023:
Amended standards and interpretations Effective date
IFRS 17 Insurance Contracts 1 January 2023
IAS 1 Presentation of Financial Statements (Amendments regarding financial 1 January 2023
statements' on classification of liabilities and disclosure of accounting
policies)
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Definition of 1 January 2023
Accounting Estimates)
IAS 12 Income Taxes (Deferred Tax related to Assets and Liabilities arising from a 1 January 2023
Single Transaction)
The Group has considered the IFRS standards and interpretations that have been
issued but are not yet effective.
None of these standards or interpretations are likely to have a material
effect on the Group, as it is the belief of the Board that the activities of
the Group are unlikely to be affected by the changes to these standards,
although any disclosures recommended by these standards, where applicable,
will be provided as required.
a) Group information
As at 31 March 2023, the details of the Company's subsidiaries are as follows:
Name of the subsidiary Place of incorporation and operation % of voting rights % interest Consolidation method Functional Currency
Hipgnosis Holdings UK Limited UK 100 100 Full USD
Hipgnosis SFH I Limited UK 100 100 Full USD
Hipgnosis SFH XIII Limited UK 100 100 Full USD
Hipgnosis SFH XIX Limited UK 100 100 Full USD
Hipgnosis SFH XX Limited UK 100 100 Full GBP
RubyRuby (London) Limited 1 UK 100 100 Full GBP
Hipgnosis Songs Group LLC 2 US 100 100 Full USD
Hipgnosis Acquisition Corp 2 US 100 100 Full USD
Kennedy Publishing & Productions Limited 1 UK 100 100 Full GBP
Robot of the Century Music Publishing Company Inc US 100 100 Full USD
Deamon Limited 1 UK 100 100 Full GBP
PB Songs Ltd 1 UK 100 100 Full GBP
1 These companies are subsidiaries of Hipgnosis SFH XX Limited and therefore
an indirect subsidiary of Hipgnosis Songs Fund Limited.
2 On 10 September 2020 the Company acquired the entire share capital of Big
Deal Music Group (rebranded to Hipgnosis Songs Group) which includes BDM
Acquisition Corp (rebranded to Hipgnosis Acquisition Corp) and Big Deal Music
LLC (rebranded to Hipgnosis Songs Group LLC) both incorporated in the US. Big
Deal Music LLC is part of a joint venture with Big Family LLC, a publishing
company which was formed in June 2018 and is equity accounted for in the
Consolidated Financial Statements.
All subsidiaries undertake the same activities as the Group. In addition,
Hipgnosis Songs Group LLC undertakes publishing administration.
The majority of subsidiaries of the Company are considered tax resident in the
UK and are subject to UK corporation tax. Robot of the Century Music
Publishing Inc is registered in New York, Hipgnosis Songs Group LLC and
Hipgnosis Acquisition Corp. are registered in Delaware and all are subject to
applicable State and Federal Taxes.
b) Going concern
The Directors monitor the capital and liquidity requirements of the Company on
a regular basis. They have also reviewed cash flow forecasts prepared by the
Investment Adviser which are based in part on assumptions about the future
purchase and returns from existing Catalogues of Songs and the annual
operating cost.
Based on these sources of information and their judgement, the Directors
believe it is appropriate to prepare the Consolidated Financial Statements of
the Group on a going concern basis.
Although the Board is confident that the Company will have sufficient
financial resources to meet their obligations due within 12 months of the
reporting date, the outcome of the Continuation Vote which is due to be held
before the end of September 2023 in accordance with Part I, Section 9 of the
latest Company prospectus creates a material uncertainty that may cast
significant doubt on the Group's ability to continue as a going concern or in
its current form and, therefore, that it may be unable to realize its assets
and discharge its liabilities in line with the current normal course of
business.
c) Basis of preparation
Basis of accounting
The Consolidated Financial Statements have been prepared in accordance with
IFRS and applicable company law. The Consolidated Financial Statements have
been prepared on a historical cost basis as amended from time to time by the
fair valuing of certain financial assets and liabilities where applicable.
Consolidation
In accordance with section 244 of the Companies Law, the Directors have
elected to prepare only consolidated accounts for the financial year for the
Group. Therefore, there is no requirement to present individual accounts for
the Company within the Consolidated Financial Statements.
The Company is not considered to be an Investment Entity, as defined by IFRS
10. Whilst the Company evaluates the Portfolio on a fair value basis as
demonstrated by the Operating NAV provided as an alternate performance
measure, the Company also actively manages the Songs to add further value and
has no defined exit strategy for any of its investments.
All companies in which the Company has a controlling interest, namely those in
which it has the power to govern financial and operational policies in order
to obtain benefits from their operations, are fully consolidated. Control as
defined by IFRS 10 is based on the following three criteria to be fulfilled
simultaneously to conclude that the parent company exercises control:
• a parent company has power over a subsidiary when the parent company has
existing rights that give it the current ability to direct the relevant
activities of the subsidiary, i.e. the activities that significantly affect
the subsidiary's returns. Power may arise from existing or potential voting
rights, or contractual arrangements. Voting rights must be substantial, i.e.
they shall be exercisable at any time without limitation, particularly during
decision making related to significant activities. The assessment of the
exercise of power depends on the nature of the subsidiary's relevant
activities, the internal decision-making process, and the allocation of rights
among the subsidiary's other shareowners;
• the parent company is exposed, or has rights, to variable returns from
its involvement with the subsidiary which may vary as a result of the
subsidiary's performance. The concept of returns is broadly defined and
includes, among other things, dividends and other economic benefit
distributions, changes in the value of the investment in the subsidiary,
economies of scale, and business synergies; and
• the parent company has the ability to use its power to affect the
returns. Exercising power without having any impact on returns does not
qualify as control.
Consolidated Financial Statements of a group are presented as if the Group
were a single economic entity. The Group does not include any non-controlling
interest.
Segmental reporting
The chief operating decision maker is the Board of Directors. All of the
Company's income is global but received from sources within US, Europe and UK.
While the Company's income is derived internationally, the Directors are of
the opinion that the Group is engaged in a single segment of business, being
the investment of the Company's capital in a Portfolio of Song copyrights,
together with the potential for capital growth.
d) Revenue recognition
Bank interest income
Interest income from cash deposits is recognised as it accrues by reference to
the effective interest rate applicable.
Revenue from operations and associated costs
Revenues from operations are recorded when it is probable that future economic
benefits will be obtained by the Group and when they can be reliably measured.
The revenue earned by the Group is recognised in accordance with IFRS 15 and
solely consists of royalty income, which is divided into these main revenue
categories:
i) Mechanical royalties - these are collected by PROs worldwide which
represent Songwriters and other copyright owners. Mechanical royalties are
also collected by royalty collection agents or the portfolio administrators
with whom the Group contracts. This includes mechanical income, an element of
streaming income and publishing admin income and digital downloads income;
ii) Performance royalties - these are collected by various PROs worldwide
which represent Songwriters and other copyright owners. This includes
performance income, an element of streaming income and publishing admin income
and writer share income;
iii) Synchronisation fees - these are typically paid directly to the owner of
the relevant copyright or its publisher, on the terms and in the amounts
agreed with the relevant film or television production company, advertising
agency or end customer. This includes synchronization income and an element of
publishing admin income; and
iv) Masters royalties - these are royalties collected on our masters rights.
These are collected by record companies and collection agencies and paid to
master rights owners based on their contractual rates. This revenue category
includes masters income, neighbouring rights income and producer royalties.
These revenue categories are further disaggregated into individual revenue
streams which are disclosed in detail in Note 13. The Group follows the same
accounting policies in respect of all revenue streams, unless otherwise
disclosed.
As royalty income is typically reported by the royalty collection
agents/performance rights organisations on an arrears basis via statement and
where statements have not been received at the year end, the Group accrues for
revenue relating to processing delays (outstanding royalty statements/time lag
in royalty reporting) and for the period between consumption and reporting.
This is done by assessing historic and forecasted earnings over the equivalent
reporting period based on evidenced historic revenue reporting, seasonality
and industry consumption and growth rates since the last statement date.
Licence arrangements for all income types which include publishing income
(mechanical, performance, downloads, Streaming, Synchronisation and writer
share income), income derived from master recordings and producer royalties.
The Group enters into licence arrangements in respect of Catalogues of Songs
with third-party collection agents. Licences granted to collection agents are
deemed to constitute usage based, right of use licences as per IFRS 15.
Revenue arising from licences entered into with collection agents is therefore
recognised in the period. Payment is received once the royalty statement is
delivered, the royalty statement includes amounts covered by both the usage
and processing accrual.
This revenue, which is net of the administration fee retained by the
collection agent, is disaggregated to be reviewed by song usage period, source
of income, work title, reporting period and any third-party royalty
entitlements where necessary.
The contractual basis of the licence arrangements are such that the agents are
deemed as 'principals' for tax purposes, therefore the Group recognises its
revenue net of administration fees.
Where available at the end of each month or at an earlier interval to which
the revenue relates, revenue is recorded on the basis of royalty statements
received from collection agents.
Where notification has not yet been received from collection agents, an
estimate is made of the revenue due to the Group at the end of the month to
which the usage of the music copyright relates. Estimates are made on the
basis of the historical track record of music Catalogues, ad hoc data provided
by collection agents, industry forecasts and expected seasonal variations.
Non-recourse fixed fee arrangements are recognised at the point at which
control of the licence passes to the collection agents. Variable consideration
is recognised in the period when the usage of the Catalogues of Songs occurs.
e) Royalty costs
Royalty costs are contractual royalties due to Songwriters, calculated on a
quarterly or semi-annual basis, and these are deducted from gross revenue when
calculating net revenue. Royalty costs are paid when the Songwriter is in a
recouped position. These royalty costs are associated with Songwriters that
are published or administered by Kobalt or HSG.
f) Expenses
Expenses are accounted for on an accruals basis. Expenses are charged through
the Consolidated Statement of Profit and Loss.
g) Dividends to Shareholders
Dividends are accounted for in the year in which they are paid. The Company,
being a Guernsey regulated entity,
is able to pay dividends out of capital, subject to the assessment of solvency
in accordance with the Companies Law and subject to a levered free cashflow
test as required by the Revolving Credit Facility. Nonetheless, the Board of
Directors carefully consider any dividend payments made to ensure the
Company's capital is maintained in the longer term. Careful consideration is
also given to ensuring sufficient cash is available to meet the Company's
liabilities as they fall due.
h) Assets
Catalogues of Songs
Catalogues of Songs include music Catalogues, artists' contracts and music
publishing rights and are recognised as intangible assets measured initially
at the fair value of the consideration paid. Catalogues of Songs are
subsequently amortised in expenses over the useful life of the asset and shown
net of any impairment considered. This amortisation is shown in the
Consolidated Statement of Profit and Loss as 'Amortisation of Catalogues of
Songs'. An assessment of the useful life of each Catalogue is considered at
each reporting period, which is 20 years, in line with what the Board of
Directors and Investment Adviser deem to be industry standard.
Useful life of intangible assets
In order to calculate the amortised cost of the intangible assets it is
necessary to assess the useful economic life of the copyright interests in
Songs. This requires forecasts of the expected future revenue from the
copyright interests, which contains uncertainties as the ongoing popularity of
a song can fluctuate unexpectedly. An assessment of the useful life of
Catalogues is considered initially at acquisition, which is 20 years, and
assessed for continued applicability at each reporting period. A useful life
of 20 years is what the Board of Directors and the Investment Adviser deem to
be industry standard. Although an estimate, the Board do not believe that
there is significant judgement applied and as a result no sensitivity has been
performed.
Asset impairment
Intangible assets are subject to a bi-annual review to identify any indicators
of impairment; this review can also be performed when events or the economic
environment indicate a risk of impairment. When there are indicators of
impairment, the recoverable amount of the asset is compared to the carrying
value of the asset. The recoverable amount is determined as the higher of: (i)
the value in use; or (ii) the fair value as described hereafter, for each
individual asset.
The Fair Value of the Catalogues as calculated by the Independent Portfolio
Valuer is used to identify any indicators
of impairment. The Independent Portfolio Valuer adopts a DCF valuation
approach and applies a number of significant assumptions to the projected
future earnings for all Catalogues including:
• Market factors impacting revenues;
• Discount rate, currently 8.5% (31 March 2022: 8.5%); and
• Terminal value at 16 years.
The fair value uses an IFRS 13 approach that a market participant might apply
and does not factor in the impact of any future active management by the
Investment Adviser or other planned activities to increase the revenue of
those Catalogues. Any Catalogues which have a carrying value higher than their
Fair Value are at risk of impairment.
As part of the bi-annual impairment review, the Company then considers whether
there are mitigating factors relevant to the Catalogues which have a carrying
value higher than their Fair Value to assess if there is a residual risk of
impairment in the Catalogues. These factors include a requirement that the
Catalogue's Fair Value has been lower than its carrying value for a period of
at least 2 years and any future planned activities by the artist which are not
factored into the fair value model but could reasonably be expected to
increase the future earnings of the Catalogue.
After the above mitigating factors have been applied, a Value-In-Use is
calculated for any Catalogues with a residual risk of impairment. The
Value-In-Use is calculated by using the original projected cash flows used
during the Fair Value calculation by the Independent Portfolio Valuer, with a
0.5% reduction to the discount rate. The reduction in the discount rate
reflects the Company's ability to drive additional value through active
management of a Catalogue and addresses the passive nature of the Company's
cash flows. If the Value-In-Use calculation for the Catalogue is lower than
the carrying value of the Catalogue, an impairment loss equal to the
difference between the Value-In-Use calculated and the carrying value is
recognised in the Consolidated Statement of Profit and Loss. The impairment
losses recognised in respect of intangible assets may be reversed in a later
period if the recoverable amount becomes greater than the carrying value,
within the limit of impairment losses previously recognised.
The impairment review is performed at an individual Catalogue level with the
exception of Kobalt. The Kobalt portfolio contains a number of Catalogues; the
Company identifies a number of these Catalogues as 'key Catalogues'. The
Company has performed a purchase price allocation within the Kobalt portfolio
between the key Catalogues and the other Catalogues. The key Catalogues
represent 91% of the carrying value of the Kobalt portfolio. The Portfolio
Independent Valuer values both the key Catalogues and the remaining Catalogues
within the Kobalt portfolio under the same methodology as the other Catalogues
held by the Company. The impairment review for both the key Catalogues and the
remaining Catalogues within the Kobalt portfolio follow the same process as
the other Catalogues held by the Company.
Loans and receivables
Trade receivables, loans, and other receivables that have fixed or
determinable payments that are not quoted in an active market are initially
measured at fair value plus transaction costs directly attributable to the
acquisition and subsequently measured at amortised cost using the effective
interest method, less allowance for Expected Credit Loss (Note 4). Interest
income is recognised by applying the effective interest rate, except for short
term receivables when the recognition of interest would be immaterial.
Held for trading derivative financial assets
Derivative financial assets that are held for trading and whose performance is
evaluated on a fair value basis are measured at fair value through profit and
loss (FVTPL). Net unrealised and realised gains and net unrealised and
realised losses (including any interest expense if applicable) are recognised
in the Consolidated Statement of Profit and Loss.
Derecognition of assets
The Group derecognises an asset only when the contractual rights to the cash
flows from the asset expire, or when it transfers the asset and substantially
all the risks and rewards of ownership of the asset to another entity.
If the Group neither transfers nor retains substantially all the risks and
rewards of ownership and continues to control the transferred asset, the Group
recognises its retained interest in the asset and an associated liability for
amounts it may have to pay.
On derecognition of an asset in its entirety, the difference between the
asset's carrying amount and the sum of the consideration received is
recognised in the Consolidated Statement of Profit and Loss.
i) Catalogue bonus provision
Under the terms of the acquisition agreements for Catalogues, the Group
recognises a financial liability for consideration that may be payable in line
with the acquisition agreements that are dependent on the performance of the
respective Catalogues. Such financial liabilities are initially recognised at
fair value and subsequently carried at amortised cost. Management consider
both the revenue forecasts used in the independent valuation and their
expectation of revenue expected to be received within the specified
performance time frame of acquiring the Catalogues when assessing the initial
recognition of this financial liability. At 31 March 2023 a provision for the
financial liability of $45.0 million was recognised as a Catalogue bonus
provision given the likelihood of economic outflow being triggered through
respective Catalogue performance (31 March 2022: $1.3 million).
j) Deferred consideration
In such cases where payment is deferred and capitalised under the terms of the
acquisition agreements for Catalogues, a liability will be recognised at net
present value with any associated finance charge to be accrued over the
respective deferral period.
k) Financial liabilities and equity
Financial liabilities are classified as either financial liabilities or as
equity in accordance with the substance of the contractual arrangement.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities. Equity instruments
issued by the Company are recognised at the value of proceeds received, net of
direct issue costs.
Repurchase of the Company's own equity instruments is recognised and deducted
directly in equity. No gain or loss is recognised in the Consolidated
Statement of Profit and Loss on the purchase, sale, issue or cancellation of
the Company's own equity instruments.
Loans and borrowings
Loans and borrowings are initially measured at fair value, net of transaction
costs.
Financial liabilities are subsequently measured at amortised cost using the
effective interest method, with interest expense recognised on an effective
yield basis.
Held for trading derivative financial liabilities
Held for trading derivative financial liabilities are classified as measured
at fair value through profit and loss (FVTPL). Financial liabilities at FVTPL
are measured at fair value. Net unrealised and realised gains and net
unrealised and realised losses (including any interest expense if applicable)
are recognised in the Consolidated Statement of Profit and Loss.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group's
obligations are discharged, cancelled or they expire. On derecognition of a
financial liability, the difference between the carrying amount extinguished
and the consideration paid (including any non-cash assets transferred or
liabilities assumed) is recognised in the Consolidated Statement of Profit and
Loss.
l) Share-based payments
Investment Adviser's performance fee
The Group recognises the variable fee for the services received in a
share-based payment transaction as the Group becomes liable to the variable
fee on an accruals basis.
The fair value of the performance fee, as defined in the Investment Advisory
Agreement, which is payable to the Investment Adviser in Shares is recognised
as an expense when the fees are earned with a corresponding increase in
equity.
m) Cash and cash equivalents
Cash at bank and short-term deposits which are held to maturity are carried at
cost. Cash and cash equivalents are defined as call deposits, short term
deposits with a term of no more than 3 months from the start of the deposit
and highly liquid investments readily convertible to known amounts of cash and
subject to insignificant risk of changes in value. Cash and cash equivalents
consist of cash in hand and short-term deposits in banks with an original
maturity
of 3 months or less.
n) Functional and foreign currency
Determination of functional currency
Whilst the functional currency of the Company is Dollars, some subsidiaries
have a functional currency of Sterling which is translated into the
presentation currency. The entities which continue to have a functional
currency of Sterling are shown in Note 2(a).
Items included in the Consolidated Financial Statements of each of the Group's
entities are measured using the currency of the primary economic environment
in which each entity operates ("the functional currency"). The Consolidated
Financial Statements are presented in Dollars, which is the Group's functional
and presentation currency of the Company and each of its subsidiaries.
Treatment of foreign currency
At the balance sheet date, monetary assets and liabilities that are
denominated in foreign currencies are translated at the rates prevailing at
that date. Non-monetary items carried at fair value that are denominated in
foreign currencies are translated at the rates prevailing at the date when the
fair value was determined. Non-monetary items that are measured in terms of
historical cost in a foreign currency are not retranslated. Exchange
differences are recognised in the Consolidated Statement of Profit and Loss in
the year in which they arise. Transactions denominated in foreign currencies
are translated into Dollars at the rate of exchange ruling at the date of the
transaction.
3. Business combinations
The acquisition method of accounting is used to account for all business
combinations, regardless of whether equity instruments or other assets are
acquired. The consideration transferred for the acquisition of a subsidiary
comprises the:
• fair values of the assets transferred;
• liabilities incurred to the former owners of the acquired business;
• equity interests issued by the Group;
• fair value of any asset or liability resulting from a contingent
consideration arrangement; and
• fair value of any pre-existing equity interest in the subsidiary.
Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are, with limited exceptions, measured
initially at their fair values at the acquisition date.
The excess of the:
• consideration transferred; and
• acquisition-date fair value of any previous equity interest in the
acquired entity over the fair value of the net identifiable assets acquired is
recorded as goodwill. If those amounts are less than the fair value of the net
identifiable assets of the business acquired, the difference is recognised
directly in Consolidated Statement of Profit and Loss as a bargain purchase.
Where settlement of any part of cash consideration is deferred, the amounts
payable in the future are discounted to their present value as at the date of
exchange. Contingent consideration is classified either as equity or a
financial liability. Amounts classified as a financial liability are
subsequently remeasured to fair value, with changes in fair value recognised
in the Consolidated Statement of Profit and Loss.
4. Significant accounting judgments, estimates and assumptions
The preparation of the Group's Consolidated Financial Statements requires the
application of estimates and assumptions which may affect the results reported
in the Consolidated Financial Statements. Uncertainty about these estimates
and assumptions could result in outcomes that require a material adjustment to
the carrying amount of the asset or liability affected in future periods.
Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The key assumptions concerning the future and other key sources of estimation
uncertainty at the reporting date, that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets and liabilities
within the next financial year, are discussed below. The Group based its
assumptions and made estimates based on the information available when the
Consolidated Financial Statements were prepared. However, these assumptions
and estimates may change based on market changes or circumstances beyond the
control of the Group.
Critical estimates in applying the Group's accounting policies - revenue
recognition and royalty costs
Accrued income as at 31 March 2023 was $126.2 million (31 March 2022: $105.3
million), a breakdown of which is set out below:
• $62.3 million for earnings where, due to the time lag in royalty
reporting. Statements are not expected to be received until calendar Q2 2023
onwards. This includes international PRO reporting and HSG (31 March 2022:
$69.3 million).
• $21.7 million CRB III accruals (31 March 2022: $Nil) as discussed below.
• $42.2 million Usage Accrual, which recognises revenues that have
triggered a contractual payment but have not been paid to, and processed by,
collection societies, publishers and administrators (31 March 2022: $36.0
million).
In calculating accruals, the Company makes judgments around seasonality, over
or under performance, and commercial factors based on historical performance,
and its knowledge of each Catalogue through its regular correspondence with
the various administrators, record labels and international societies. The
Company also makes an estimate of revenue from consumption to reporting.
Estimated royalty revenue receivable is accrued for on the basis of historical
earnings for each Catalogue, which incorporates an element of uncertainty. The
estimated revenue accrual may not therefore directly equal the actual cash
received in respect of each accounting period and adjustments may therefore be
required throughout the financial period when the actual revenue received is
known, and these adjustments may be material.
Net revenues also include an accrual for performance income, to account for
the writer's share of Performance royalties which are subject to a significant
time lag in reporting in the industry, but which the Group is entitled to
receive in due course. In recommending the estimate of this accrual to the
Board of Directors the Investment Adviser used its analysis of each
Catalogue's revenue history as well its knowledge of the respective Catalogue
performance trends to recommend the estimated accruals.
Net revenue is subject to a royalty cost accrual applied to gross revenue
receipts primarily within the Hipgnosis Songs Group ("HSG") subsidiaries.
Royalty cost accruals represent contractual royalties due to Songwriters and
other rights holders that are payable on a 6-monthly basis for writers under
publishing contracts and quarterly for clients under administration contracts.
Royalty rates vary by writer (negotiated by contract) and by revenue stream.
In July 2022, after a lengthy process, the 2018-22 rate increases on the
Songwriter's and publisher's mechanical portion of US Streaming income, known
as CRB III, were finally agreed. The Group has reflected accruals of $21.7
million for the year ended 31 March 2023 as a result of the confirmation of
the CRB III rate increases for the Songwriters' mechanical portion of US
Streaming income. Of this, $5.6 million is the impact of the higher 15.1% rate
on the income earned by the Company during the year and $16.1 million has been
recognised for the retro-active payment due as a result of revenues
historically not having been recognised at the full CRB III rates. The amount
recognised in relation to the retro-active payment will not recur in future
years. As the ruling was made final in July 2022 there was no CRB III revenue
recognised in the prior year.
Both the CRB III retroactive and uplift accruals are based off historical
earnings paid through to the Company by Publishers. In order to calculate the
accrual, the US mechanical portion of those earnings were analysed and
uplifted accordingly based on the CRB III rates over the five year period from
2018 to 2022.
Whilst some Publishers had different policies regarding the distribution of
the higher rates received from DSPs up to when the CRB III ruling was
appealed, the Company has applied a consistent approach and has not considered
any Publisher specific policies given the lack of clarity from the various
payors.
In order to provide additional rigour on the calculation, the CRB III
retroactive and uplift accrual estimates were compared and benchmarked against
the estimates provided by the Portfolio Independent Valuer and the fair value
appraiser for the CNB Revolving Credit Facility.
A sensitivity of the significant estimates used in calculating accrued income
and the impact of the sensitivities on the balance is performed below:
Name of the subsidiary 31 March 2023 Sensitivity Sensitivity
+10%
-10%
Accruals due to the time lag in royalty reporting $62.3 million $6.2 million ($6.2) million
CRB III accruals* $21.7 million $2.2 million ($2.2) million
One quarter increase One quarter reduction
Usage accrual 42.2 million $10.8 million ($10.1 million)
* The CRB III sensitivity represents the variability of the historical US
streaming mechanical revenue that the contractual rates are applied to.
Expected Credit Loss (ECL) in relation to revenue receivables
Royalty earnings for accruals and receivables recognised in the year ended 31
March 2023 are distributed by PROs, Publishers and Record Labels who collect
royalties at the source of usage and distribute those earnings directly to
Hipgnosis.
The probability of future default has been deemed close to nil, due to the
long-standing history of PROs, Publishers and Record Labels within the music
industry and the existing framework of cash collection amongst the Company's
stakeholders. Whilst there are smaller/newer organisations that have
relatively unproven credit resilience these account for a small minority of
the Group's receivables.
The Company's current risk assessment includes analysis of the exposure to
commercial risk by PROs, Publishers and Record Labels, and the likely impact
of their credit risk on Hipgnosis' revenue streams. This impact is considered
immaterial and a sensitivity analysis on this is performed in Note 8.
Expected Credit Loss (ECL) in relation to HSG advances
Hipgnosis Songs Group LLC advances royalty payments to Songwriters. Management
are required to assess the recoverability of these advances bi-annually in
accordance with IFRS 9 Financial Instruments. Management will consider market
conditions and historic trading patterns affecting the relevant assets.
Management adopts a simplified approach, has analysed their historical loss
ratio data and applied this using a risk based methodology as there are no
defined terms of repayment related to advances. The risk categories against
which the historical loss ratios are assessed and expected credit losses are
calculated are:
• low risk advances where the advance is expected to be recouped in full
under the terms of the writer's agreement (because of the writer's reputation,
previous success etc);
• medium risk advances where there is reasonable expectation that a level
of the advances will be recouped; and
• high risk advances, where management believe that either because of the
writer's unknown potential or other factors, a large level of recoverability
may not be achieved.
At 31 March 2023 HSG gross recoupable advances are $32.0 million (31 March
2022: $31.6 million) with an expected credit loss provision of $15.5 million
(31 March 2022: $13.0 million) recognised against the advances. A sensitivity
analysis on this provision is performed in Note 8.
Assessment of impairment and the calculation of Operative NAV
As disclosed in Note 2(h) intangible assets are subject to a bi-annual review
to identify any indicators of impairment.
The Fair Value of the Catalogues as calculated by the Independent Portfolio
Valuer is used to identify any indicators of impairment. The Portfolio
Independent Valuer adopts a DCF valuation approach and applies a number of
significant assumptions to the projected future earnings for all Catalogues
including:
• Market factors impacting revenues;
• Discount rate, currently 8.5% (31 March 2022: 8.5%); and
• Terminal value at 16 years.
As disclosed in Note 2(h) a Value-In-Use is calculated for any Catalogues with
a residual risk of impairment. The Value-In-Use is calculated by using the
original projected cash flows used during the Fair Value calculation by the
Independent Portfolio Valuer, with a 0.5% reduction to the discount rate. The
reduction in the discount rate reflects the Company's ability to drive
additional value through active management of a Catalogue and addresses the
passive nature of the Company's cash flows within the Portfolio Independent
Valuer's fair value analysis.
If the Value-In-Use calculation for the Catalogue is lower than the carrying
value of the Catalogue, an impairment loss equal to the difference is
recognised in the Consolidated Statement of Profit and Loss. The impairment
losses recognised in respect of intangible assets may be reversed in a later
period if the recoverable amount becomes greater than the carrying value,
within the limit of impairment losses previously recognised.
Management's impairment review as at 31 March 2023 concluded that an
impairment of $3.9 million (31 March 2022: $1.5 million) was required to the
Group's Catalogues. A sensitivity analysis on the Value-In-Use calculation and
impact on the impairment charge is performed in Note 6.
5. Taxation
The major components of income tax expense for the years ended 31 March 2023
and 31 March 2022 are:
Current tax 1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
United Kingdom corporation tax based on the loss for the year at 19% (31 March - 123
2022: 19%)
Adjustments in respect of prior periods 2,837 2,369
Non-reclaimable withholding tax on royalty payments received 171 251
Total current tax 3,008 2,743
Deferred tax
Origination and reversal of timings differences 656 -
Deferred tax asset recognised to extent of liability on timing difference (656) -
Total deferred tax - -
Total tax 3,008 2,743
Prior to 1 April 2021 the Company was Guernsey tax resident but exempt from
taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 1989.
From 1 April 2021 the Company was granted investment trust company status by
HMRC and is UK tax resident from that date.
Whilst the Company is incorporated in Guernsey, the majority of the Company's
subsidiaries are incorporated and tax resident in the UK and the majority of
the Group's income and expenditure in incurred in these UK entities. Therefore
is it considered most appropriate to prepare the tax reconciliation below at
the standard UK tax rate of 19% (31 March 2022: 19%).
The March 2021 UK Budget announced an increase to the main rate of UK
corporation tax to 25% from April 2023. This rate was substantively enacted
prior to the balance sheet date and consequently this rate has been considered
when assessing items of deferred tax.
The actual tax charge differs from the standard rate for the reasons set out
in the following reconciliation:
1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
Loss on the Group's ordinary activities before tax (86,630) (16,700)
Tax on the loss on the Group's ordinary activity at the standard UK rate of (16,460) (3,173)
19%
Factors affecting charge for the year:
Expenses not deductible for tax purposes 3,405 887
Adjustment in respect of previous periods 2,837 2,369
Effect of overseas tax rate (649) (760)
Deferred tax not recognised - US 2,704 3,169
Deferred tax not recognised - UK 11,000 -
Net non-reclaimable withholding tax on royalty payments received 171 251
Total actual amount of current tax 3,008 2,743
Deferred tax 1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
Short term timing differences related to hedging arrangements 656 -
Deferred tax asset recognised in relation to UK tax losses (656) -
Total deferred tax - -
The following potential deferred tax assets have not been recognised as it is
not considered suitably probable that such assets will be utilised based on
forecasts.
Deferred tax 31 March 2023 31 March 2022
$'000 $'000
Unrecognised deferred tax asset in relation to UK tax losses (14,474) -
Unrecognised deferred tax asset in relation to US tax losses (5,873) (3,169)
There is currently no expiry date for the utilisation of UK tax losses.
The unrecognised deferred tax asset in relation to UK and US losses arise on
the following tax losses:
31 March 2023 31 March 2022
$'000 $'000
UK tax losses (57,895) -
US tax losses (23,490) (12,676)
Disposals of Catalogues may give rise to potential tax charges depending on
the availability of tax attributes (tax losses) to offset any taxable gains
otherwise arising. There were no such disposals of Catalogues in the year (or
prior year) and so no such tax liabilities arose.
6. Catalogues of Songs
$'000
Cost
At 1 April 2022 2,237,284
Additions -
At 31 March 2023 2,237,284
Amortisation and impairment
At 1 April 2022 200,552
Amortisation 111,583
Impairment 3,901
At 31 March 2023 316,036
Net book value
At 1 April 2022 2,036,732
At 31 March 2023 1,921,248
Fair value as at 31 March 2023 2,802,762
Cost
At 1 April 2021 1,972,199
Additions 265,085
At 31 March 2022 2,237,284
Amortisation and impairment
At 1 April 2021 93,275
Amortisation 105,787
Impairment 1,490
At 31 March 2022 200,552
Net book value
At 1 April 2021 1,878,924
At 31 March 2022 2,036,732
Fair value as at 31 March 2022 2,693,974
The Group amortises Catalogues of Songs with a limited useful life using the
straight-line method of 20 years (other than in exceptional circumstances for
specific Catalogues of Songs). An assessment of the useful life of Catalogues
is considered at each reporting period, which is 20 years, in line with what
the Board of Directors and the Investment Adviser deem to be industry
standard. The Company performs an impairment review as disclosed in Note 2(h).
At 31 March 2023 accumulated amortisation for Catalogues of Songs is $310.6
million (31 March 2022: $199.1 million) and the accumulated impairment
to date is $5.4 million (31 March 2022: $1.5 million).
The Board engaged Portfolio Independent Valuer, Citrin Cooperman Advisors LLC,
to value the Catalogues as at 31 March 2023. The Board has approved and
adopted the valuations prepared by the Portfolio Independent Valuer which are
used as an input into the impairment review process and for the Operative NAV.
The sensitivity of the discount rate to the fair value of the Portfolio is as
follows:
Discount Rate 8.00% 8.50% 9.00%
Portfolio Value ($'000) 3,065,753 2,802,762 2,580,725
Variance to Fair Value ($'000) 262,991 - (222,037)
Variance to Fair Value (%) 9.4% - (7.9%)
The sensitivity of the terminal value growth rate to the fair value of the
Portfolio is as follows:
Sensitivity to the Terminal Value Growth Rate -1.00% Current +1.00%
Portfolio Value ($'000) 2,637,623 2,802,762 3,035,424
Variance to Fair Value ($'000) (165,139) - 232,662
Variance to Fair Value (%) (5.9%) - 8.3%
The sensitivity of the applied growth rate to the fair value of the Portfolio
is as follows:
Growth Rate -1.00% Current +1.00%
Portfolio Value ($'000) 2,573,221 2,802,762 3,048,641
Variance to Fair Value ($'000) (229,541) - 245,879
Variance to Fair Value (%) (8.2%) - 8.8%
A Value-In-Use is calculated for any Catalogue with a residual risk of
impairment following the impairment review. The Value-In-Use is calculated by
using the original projected cash flows used during the Fair Value calculation
by the Portfolio Independent Valuer, with a 0.5% reduction to the discount
rate.
The sensitivity of the Value-In-Use calculation to the impairment charge is as
follows:
Discount Rate used in the Value-In-Use calculation -0.50% Current +0.50%
Impairment of Catalogues of Songs ($'000) 1,378 3,901 11,934
7. Cash and cash equivalents
31 March 2023 31 March 2022
$'000 $'000
Cash available on demand 37,965 30,067
37,965 30,067
8. Trade and other receivables
31 March 2023 31 March 2022
$'000 $'000
Non-current receivables
Accrued income 13,210 640
13,210 640
Current receivables
Accrued income 112,943 104,658
Royalties receivable 7,078 6,605
HSG net recoupable advances 16,436 18,604
Prepayments and other debtors 3,542 7,274
VAT Receivable - 7,309
139,999 144,450
In the current year, an accrual for $21.7 million has been recognised as a
result of the confirmation of the CRB III rate increases for the Songwriters'
mechanical portion of US Streaming income. Of this, $5.6 million is the impact
of the higher 15.1% rate on the income earned by the Company during this
financial year and $16.1 million has been recognised for the retro-active
payment due as a result of revenues historically not having been recognised at
the full CRB III rates.
At 31 March 2023, the aging of the Company's trade and other receivables are:
Less than 1-3 3-12 Between Between Over Total contractual cash flows
1 month
months
months
1 and
2 and
5 years
2 years
5 years
$'000
$'000 $'000 $'000
$'000
$'000 $'000
Accrued income 4,430 34,593 73,920 13,210 - - 126,153
Royalties receivable 2,960 2,701 1,417 - - - 7,078
HSG net recoupable advances 99 119 16,218 - - - 16,436
Prepayments and other debtors 86 142 3,314 - - - 3,542
Total 7,575 37,555 94,869 13,210 - - 153,209
Credit Risk and Provision for Expected Credit Losses
The Group has applied IFRS 9, Financial Instruments, during the year, which
includes the requirements for calculating a provision for expected credit
losses on financial assets. As disclosed in Note 4, the probability of future
default against revenue receivable balances has been deemed close to nil. At
31 March 2023, an ECL provision is recognised against the HSG recoupable
advances as below:
At 31 March 2023 High Risk Medium Risk Low Risk Total
$'000 $'000 $'000 $'000
Expected loss rates -100.0% -24.0% 0.0% -48.6%
Gross carrying amounts 13,000 10,520 8,436 31,956
Provision for expected credit losses (13,000) (2,520) - (15,520)
Net carrying amounts - 8,000 8,436 16,436
At 31 March 2022 High Risk Medium Risk Low Risk Total
$'000 $'000 $'000 $'000
Expected loss rates -100.0% -41.1% 0.0% -41.1%
Gross carrying amounts 6,712 15,324 9,576 31,612
Provision for expected credit losses (6,712) (6,296) - (13,008)
Net carrying amounts - 9,028 9,576 18,604
If the probability of future default against the revenue receivable balances
was 5% higher, this would result in a $0.4 million increase to the ECL
provision on revenue receivables. If the probability of future default against
the medium risk HSG recoupable advances was 41.1%, which is consistent with
the prior year, this would result in a $1.8 million increase to the ECL
provision on HSG recoupable advances.
9. Loans and borrowings
On 30 September 2022 the Company entered into a new Revolving Credit Facility
(RCF) with a commitment of $700 million which runs for five years until 30
September 2027. City National Bank is lead arranger and sole bookrunner for
the new debt facility with Truist Securities, Inc., MUFG Union Bank, N.A. and
Fifth Third Bank as co-leads. On the same day the Company drew down $607
million, as part of the arrangement City National Bank repaid in full the
Company's pre-existing J.P. Morgan RCF of $600 million directly to J.P. Morgan
and paid $5.2 million of fees on behalf of the Company. The remaining $1.8
million was received as cash by the Company. During the year $6.2 million of
costs relating to the set-up of the new RCF were capitalised, to be amortised
over the five year length of the agreement. On derecognition of the
pre-existing J.P. Morgan RCF, $5.0 million was recognised as a borrowing cost
extinguishment charge and represents the unamortised capitalised borrowing
costs on the pre-existing J.P. Morgan RCF.
On 31 March 2023 the Company repaid $7 million of the new RCF. $100 million
remains available under the new RCF which provides the Company with
flexibility to fund investments and provide additional working capital.
Interest on the new facility charged is based on the Secured Overnight
Financing Rate (SOFR), published by the New York Federal Reserve, plus a
margin of either 2.00% or 2.25% depending on the gross drawn debt. The current
margin is 2.00%. As disclosed in Note 17, the Company has entered into an
interest rate swap agreement to manage its exposure to interest rate risk.
The RCF's key covenants are set out in the below table:
Key financial covenant 31 March 2023 Actual Lender Covenants
i) Total debt to Catalogue value as determined by the lender 31.5% Must not exceed 40%
ii) Total debt leverage 5.5:1.0 Not greater than 7:1
iii) Fixed charge coverage 1.3:1.0 Not less than 1:1
The Catalogue value as determined by the lender is specifically prepared for
the banking syndicate based on a set of assumptions that reflect an immediate
sale of the portfolio in order to provide maximum loan security.
The covenants are reviewed quarterly and are secured by, inter alia, a charge
over the shares in all the subsidiaries of the Company, a charge over all of
their assets including all Catalogues of Songs of the Company held through
these subsidiaries and a charge over the bank accounts of the Company and its
subsidiaries. The Company has also provided a parent company guarantee. In
accordance with the Investment Policy, any borrowings by the Company will not
exceed 30% of the Operative NAV which is $694.8 million.
31 March 2023 31 March 2022
$'000 $'000
Opening balance 600,000 577,292
Amounts drawn down during the period 607,000 72,708
Amounts repaid during the year - pre-existing RCF (600,000) (50,000)
Amounts repaid during the year - new RCF (7,000) -
Total loan drawn down 600,000 600,000
Cumulative borrowing costs (5,572) (6,008)
Closing balance 594,428 593,992
During the year ended 31 March 2023 $33.7 million (31 March 2022: $20.4
million) was charged as interest on the amounts drawn down.
10. Liabilities and accrued expenses
31 March 2023 31 March 2022
$'000 $'000
Non-current liabilities
Catalogue bonus provision 33,080 925
33,080 925
Current liabilities
Amounts owed to Songwriters 18,799 16,957
Catalogue bonus provision 11,962 398
Deferred investment payable - 10,799
Loan interest payable 9,891 500
Trade creditors and accruals 5,846 4,106
PRO Advances 3,178 -
Corporation tax payable 67 2,570
VAT 1,789 -
Lease liability 735 -
Directors fees payable 27 83
Other creditors 794 -
53,088 35,413
The Group has a number of Catalogue bonuses which are dependent on the
individual Catalogues meeting certain defined performance hurdles as defined
in the Catalogue acquisition agreements which the Group consider when
assessing the recognition of the Catalogue bonus provision as a financial
liability. As at 31 March 2023, the Group recognised a financial liability of
$45.0 million relating to the bonuses on 6 Catalogues (31 March 2022: $1.3
million relating to 2 Catalogues). Management consider that the carrying value
of this financial liability would not differ significantly from its fair
value. The last performance hurdle period to be assessed across the remaining
Catalogues is 29 January 2029.
11. Share capital and capital management
Ordinary Share Capital
The share capital of the Company may consist of an unlimited number of:
i) Ordinary Shares of no par value which upon issue the Directors may classify
as Ordinary Shares;
ii) C Shares denominated in such currencies as the Directors may determine;
and
iii) Ordinary Shares purchased by the Company through share repurchases and
held as Treasury Shares.
Ordinary Shares of no par value
No. of Units outstanding Share Capital Treasury Reserve
$'000 $'000
Issued and fully paid:
Shares as at 1 April 2022 1,211,214,286 1,692,198 -
Repurchase of ordinary shares into treasury (2,000,000) - (1,961)
Shares as at 31 March 2023 1,209,214,286 1,692,198 (1,961)
No. of Units outstanding Share Capital Treasury Reserve
$'000 $'000
Issued and fully paid:
Shares as at 1 April 2021 1,073,440,268 1,466,851 -
Shares issued on 29 April 2021 9,000,000 14,938 -
Shares issued on 9 July 2021 128,774,018 214,764 -
Share issue costs - (4,355) -
Shares as at 31 March 2022 1,211,214,286 1,692,198 -
As at 31 March 2023 the Company's authorised and issued share capital
consisted of 1,211,214,286 ordinary shares,
of which 2,000,000 were held In treasury.
On 29 April 2021 the Company issued 9,000,000 new Ordinary Shares at a price
of 119.5p per Ordinary Share and on 9 July 2021 the Company issued 128,774,018
new Ordinary Shares at a price of 121p per Ordinary Share. These shares rank
pari passu with the existing Ordinary Shares in issue. The net proceeds have
been used to fund an investment in accordance with the Company's Investment
Policy.
Under the Company's Articles of Incorporation, each Shareholder present in
person or by proxy has the right to one vote at general meetings. On a poll,
each Shareholder is entitled to one vote for every Ordinary Share held.
Shareholders are entitled to all dividends paid by the Company and, on a
winding up, provided the Company has satisfied all of its liabilities, the
Shareholders are entitled to all of the residual assets of the Company.
Treasury Share Reserve
During the year, the Company launched a Share Repurchase Program to repurchase
Ordinary Shares. The repurchased shares are not cancelled but held as Treasury
Shares by the Company. Treasury shares hold no voting rights, are not entitled
to a dividend and are excluded from the EPS, IFRS and Operative net asset
value per share calculation. The consideration for the shares repurchased are
detailed below:
No. of Shares repurchased Consideration per Share Amount
£ $'000
Shares repurchased on 18 October 2022 250,000 0.85850 240
Shares repurchased on 19 October 2022 250,000 0.84320 235
Shares repurchased on 28 October 2022 250,000 0.88000 252
Shares repurchased on 31 October 2022 250,000 0.88000 252
Shares repurchased on 1 November 2022 250,000 0.87200 250
Shares repurchased on 2 November 2022 250,000 0.85826 246
Shares repurchased on 17 November 2022 250,000 0.82890 238
Shares repurchased on 2 December 2022 250,000 0.83400 248
Treasury Shares as at 31 March 2023 2,000,000 1,961
12. Net Asset Value per share and Operative Net Asset Value per share
31 March 2023 31 March 2022
Number of Ordinary Shares outstanding 1,209,214,286 1,211,214,286
IFRS NAV per share (cents) 118.63 130.65
Operative NAV per share (cents) 191.53 184.91
The IFRS NAV per share and the Operative NAV per share are arrived at by
dividing the IFRS Net Assets and Operative Net Assets (respectively) by the
number of Ordinary Shares outstanding.
Catalogues of Songs are classified as intangible assets and measured at
amortised cost or cost less impairment in accordance with IFRS.
The Directors are of the opinion that an Operative NAV provides a meaningful
alternative performance measure and the values of Catalogues of Songs are
based on fair values produced by the Portfolio Independent Valuer.
Reconciliation of IFRS NAV to Operative NAV
31 March 2023 31 March 2022
$'000 $'000
IFRS NAV 1,434,534 1,582,399
Adjustments for revaluations of Catalogues of Songs to fair value 565,478 457,441
Reversal of accumulated amortisation and impairment 316,036 199,800
Operative NAV 2,316,048 2,239,640
Tax considerations
As noted in the Chair's Statement, the Board are considering a number of
options to enhance Shareholder value which may include the potential strategic
sale of Catalogues of Songs. The Company's Investment Trust Company (ITC)
status may allow for the Company to make disposals of shares or certain other
capital assets on a tax-exempt basis for UK corporation tax purposes. However,
a disposal of music Catalogues, considered intangible fixed assets for UK
corporation tax purposes, would not qualify for exemption in the same way.
A disposal of music Catalogues by way of a sale of shares of a Group
subsidiary company by the Company, in order to take advantage of its ITC
tax-exempt status, would not necessarily result in greater value for the
Group, depending on the attractiveness of such a transaction structure to the
prospective purchaser and their other potential tax considerations on future
sales of the acquired shares.
If the Group were to dispose of all of its Catalogues, an indicative tax
calculation (subject to a number of assumptions in its preparation - see
below) estimates that a potential corporation tax charge (or equivalent in the
US) could be incurred by the Group subsidiary companies, of approximately $245
million. This has been calculated based on comparing the Fair Value determined
by the Portfolio Independent Valuer (as a representation of indicative sales
proceeds) to the Catalogues' carrying value as at 31 March 2023.
The calculations assumes a 25% tax rate as: (a) the prevailing rate of UK
corporation tax from 1 April 2023 and (b) a proxy for US Federal and State
corporate income tax. This indicative tax calculation does not take into
account attributes such as UK tax losses, which could be used to offset some
of the taxable gains, or where the tax treatment of an element of sale
proceeds may be considered to be the sale of a receivable aligned with a
Catalogue rather than part of the disposal value of that Catalogue, which
could result in a materially lower tax charge.
As the Company has not disposed of any catalogues to date, no such tax
liability currently exists.
13. Revenue
1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
Mechanical income 5,465 10,657
Performance income 17,972 22,291
Digital downloads income 3,635 4,405
Streaming income 83,886 72,850
Synchronization income 19,381 22,530
Publishing admin income 406 300
Masters income 7,582 8,448
Writer share income 26,076 45,103
Neighbouring rights income 4,120 -
Other income 715 6,037
Producer royalties 8,074 7,763
177,312 200,384
There is an inherent time lag with royalties between the time a song is
performed, and the revenue being received by the copyright owner. The revenue
accruals are disclosed in Note 8 Trade and other receivables.
14. Other operating expenses
1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
Aborted deal expenses 468 1,951
Bank charges 50 34
Record label costs 98 -
Charitable donations 293 208
Directors' and officers' insurance 347 366
Disbursements 411 355
Postage, stationery and printing 153 41
Lease liability interest 369 -
HSG staff payroll and expenses 6,244 6,598
HSG restructuring provision 1,028 -
Travel and accommodation fees 499 162
HSG travel and accommodation fees 362 389
Sundry 32 1
10,354 10,105
15. Foreign exchange
1 April 2022 to 1 April 2021 to
31 March 2023
31 March 2022
$'000 $'000
Foreign exchange losses 3,157 14,857
3,157 14,857
The foreign exchange impact reflects the effect of movements in foreign
currency exchange rates throughout the year. Currency risk is discussed
further in Note 17.
16. Dividends
A summary of the dividends paid are set out below:
Dividend per share Total Dividend
Pence $'000
1 April 2022 to 31 March 2023
Interim dividend in respect of quarter ended 31 March 2022 1.3125 19,313
Interim dividend in respect of quarter ended 30 June 2022 1.3125 17,744
Interim dividend in respect of quarter ended 30 September 2022 1.3125 19,203
3.9375 56,260
On 16 March 2023, the Company announced an interim dividend for the quarter
from 1 October 2022 to 31 December 2022 of 1.3125p per Ordinary Share, paid on
28 April 2023.
Dividend per share Total Dividend
Pence $'000
1 April 2021 to 31 March 2022
Interim dividend in respect of quarter ended 31 March 2021 1.3125 20,093
Interim dividend in respect of quarter ended 30 June 2021 1.3125 21,807
Interim dividend in respect of quarter ended 30 September 2021 1.3125 21,214
Interim dividend in respect of quarter ended 31 December 2021 1.3125 21,186
5.250 84,300
The Company, being a Guernsey regulated entity, is able to pay dividends out
of capital, subject to the assessment
of solvency in accordance with the Companies Law and subject to a levered free
cashflow test as required by the Revolving Credit Facility.
17. Financial risk management objectives
Financial risk management objectives
The Group's activities expose it to various types of financial risk,
principally market risk, credit risk, and liquidity risk. The Board has
overall responsibility for the Group's risk management and sets policies to
manage those risks at an acceptable level.
Fair values
Management assessed that the fair values of cash and cash equivalents, current
trade and other receivables and current trade and other payables approximate
their carrying amount largely due to the short-term maturities and high credit
quality of these instruments. The carrying value of the non-current accrued
income and non-current Catalogue bonus provision reflect their fair value.
Capital risk management
The Group manages its capital to ensure that it will be able to continue as a
going concern while maximising the capital return to Shareholders. The capital
structure of the Group consists of issued share capital and retained earnings,
as stated in the Consolidated Statement of Financial Position. In order to
maintain or adjust the capital structure, the Group may repurchase shares or
issue new shares. There are no external capital requirements imposed on the
Group.
As detailed in Note 9, on 30 September 2022 the Company entered into a new
Revolving Credit Facility (RCF) with a commitment of $700 million which runs
for five years until 30 September 2027. On the same day the Company drew down
$607 million to repay in full the Company's pre-existing J.P. Morgan RCF ($600
million). On 31 March 2023 the Company repaid $7 million of the new RCF.
The Group's investment policy is set out in the Investment Objective and
Policy section of the Annual Report.
Market risk
Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate as a result of changes in market prices.
The Group is exposed to currency risk and interest rate risk.
a) Currency risk
Currency risk is the risk that the fair values of future cashflows will
fluctuate because of changes in foreign exchange rates. The revenue earned
from the Catalogue of Songs may be subject to foreign currency fluctuations.
Royalties are earned globally and paid in a number of currencies, therefore
the Group may be impacted by adverse currency movements. The Group will
convert the majority of overseas currency receipts into US Dollars by agreeing
to currency exchange arrangements with collection agents, or otherwise itself
undertaking foreign exchange conversions.
Dividend payments are denominated in Sterling and also may be impacted by
adverse currency movements. In order to mitigate currency risk and provide
certainty over the US Dollar value of future Sterling dividend payments the
Company entered into US Dollar to Sterling foreign exchange forward contracts
as discussed in Note 22.
Settlement Date Contract Value Outstanding Contracts Mark to Market equivalent Unrealised (losses)/gains
£'000 $'000 $'000 $'000
17 April 2023 11,250 12,501 13,883 1,382
17 July 2023 11,250 12,477 13,906 1,429
16 October 2023 7,500 8,305 9,278 973
16 January 2024 5,000 5,528 6,189 661
15 April 2024 3,750 4,139 4,640 501
16 October 2024 3,750 4,644 4,639 (5)
16 January 2025 2,500 3,101 3,094 (7)
15 April 2025 1,250 1,552 1,546 (6)
15 July 2025 3,750 4,656 4,642 (14)
50,000 56,903 61,817 4,914
The currencies in which financial assets and liabilities are denominated are
shown below:
As at 31 March 2023 USD GBP converted to USD* EUR converted to USD** Other converted to Total
USD
$'000 $'000 $'000
$'000
$'000
Non current and current receivables 147,955 4,987 205 62 153,209
Held for trading derivative financial asset 4,914 - - - 4,914
Cash and cash equivalents 32,530 4,074 1,361 - 37,965
Total financial assets 185,399 9,061 1,566 62 196,088
Revolving Credit Facility 600,000 - - - 600,000
Held for trading derivative financial liability 3,395 - - - 3,395
Non current and current payables 81,958 3,736 232 241 86,167
Total financial liabilities 685,353 3,736 232 241 689,562
Net asset/(liability) position (499,954) 5,325 1,334 (179) (493,474)
*At the reporting date 31 March 2023, if Sterling had strengthened/weakened by
10% against the Dollar with all other variables held constant, the impact on
post tax loss and components of equity would have been $0.5 million
higher/lower.
**At the reporting date 31 March 2023, if the EUR had strengthened/weakened by
10% against the Dollar with all other variables held constant, the impact on
post tax loss and components of equity would have been $0.1 million
higher/lower.
As at 31 March 2022 USD GBP converted to USD* EUR converted to USD** Other converted to USD Total
$'000 $'000 $'000 $'000 $'000
Non current and current receivables 132,276 10,503 1,745 566 145,090
Cash and cash equivalents 25,454 4,314 299 - 30,067
Total financial assets 157,730 14,817 2,044 566 175,157
Revolving Credit Facility 600,000 - - - 600,000
Non current and current payables 31,448 4,883 7 - 36,338
Total financial liabilities 631,448 4,883 7 - 636,338
Net asset/(liability) position (473,718) 9,934 2,037 566 (461,181)
*At the reporting date 31 March 2022, if Sterling had strengthened/weakened by
10% against the Dollar with all other variables held constant, the impact on
post tax loss and components of equity would have been $1.0 million
higher/lower.
**At the reporting date 31 March 2022, if the EUR had strengthened/weakened by
10% against the Dollar with all other variables held constant, the impact on
post tax loss and components of equity would have been $0.2 million
higher/lower.
b) Cash flow and fair value interest rate risk
The Group is exposed to cash flow interest rate risk on cash and cash
equivalents and also on the interest bearing RCF. The RCF bears a fixed rate
of interest plus a floating rate of interest based on Secured Overnight
Financing Rate (SOFR). In order to mitigate interest rate risk and provide
certainty over interest payments, the Company entered into interest rate swap
agreements as detailed below:
• From 3 October 2022 until 2 January 2023, interest on all the drawn debt
is based on a three-month fixed SOFR of 5.71% (including debt margin); and
• From 3 January 2023, the Company has agreed to enter into interest rate
swaps to hedge $540 million. Of this, $340 million is hedged for the duration
of the RCF (until 30 September 2027) at a fixed rate of 5.67% (including debt
margin); a further $200 million is hedged until 3 January 2026 at a fixed rate
of 5.89% (including debt margin). The balance remains unhedged to provide
flexibility in the operation of the RCF facility.
At 31 March 2023, the unhedged RCF balance exposed to interest rate risk was
$60 million.
The average interest rate during the year was 5.58%. If interest rates had
been 100 basis points higher and all other variables were held constant, the
Company's loan interest expense would have been $6.0 million higher.
Credit Risk
Credit risk is the risk of loss due to failure of a counterparty to fulfil its
contractual obligations. The Group is exposed to credit risk in respect of its
contracts with PROs and other collection societies. This exposure is minimised
by dealing with reputable PROs whose credit risk is deemed to be low given
their respective position in the industry.
As reported in Note 4, there is no impairment of the receivables balance,
credit risk of third parties has been taken into account when calculating
accruals and expected credit loss charge for the year on HSG advances was $2.2
million (31 March 2022: $1.6 million). The Group is exposed to credit risk
through its balances with banks and its indirect holdings of money market
instruments through those money market funds which are classified as cash
equivalents for the purposes of these Consolidated Financial Statements.
The table below shows the Group's material cash balances and the short-term
issuer credit rating or money-market fund credit rating as at the year-end
date:
Location Rating* 31 March 2023 31 March 2022
$'000 $'000
Barclays Bank UK plc Guernsey/UK A-1 25,063 27,367
BlackRock US AA- 8,435 -
City National Bank US A-2 3,950 2,599
* Rated by Standard & Poor's
Liquidity Risk
Liquidity risk is the risk that the Group will encounter in realising assets
or otherwise raising funds to meet financial commitments. The Group's
liquidity risk is managed by the Investment Adviser and Directors on a monthly
basis.
Liquidity risk is also the risk that the Group may not be able to meet their
financial obligations as they fall due. The Group maintains a prudent approach
to liquidity management by maintaining sufficient cash reserves to meet
foreseeable working capital requirements.
The Group prepares a 3 year rolling cash forecast, which is reviewed by the
Board. The cash flow forecast includes a sensitivity analysis with downside
scenarios on income streams, foreign exchange rate movements and interest rate
movements. Cash is delivered with royalty statements, and the majority are
delivered quarterly or semi-annually. A small number of collections are
delivered monthly. Cash is collected and processed throughout the year by the
administrators.
At the reporting date, the Group's financial liabilities are:
Carrying amount Less than 1-3 3-12 Between Between Over Total contractual cash flows
1 month
months
months
1 and
2 and
5 years
$'000
2 years
5 years
$'000
$'000 $'000 $'000
$'000
$'000 $'000
Bank loan and future interest payments (600,000) - - (30,684) (40,912) (712,507) - (784,103)
Held for trading financial liability (3,395) 1,139 - (4,534) - - - (3,395)
Amounts owed to Songwriters (18,799) - (640) (18,159) - - - (18,799)
Catalogue bonus provision (45,042) - (3,450) (8,512) (16,540) (16,540) - (45,042)
Trade creditors and accruals (5,846) (4,168) (1,040) (638) - - - (5,846)
Loan interest payable (9,891) (9,891) - - - - - (9,891)
PRO Advances (3,178) - (3,178) - - - - (3,178)
VAT (1,789) (1,789) - - - - - (1,789)
Other creditors (794) (415) - (379) - - - (794)
Lease liability (735) (28) (61) (646) - - - (735)
Corporation tax payable (67) - (67) - - - - (67)
Directors fees payable (27) (27) - - - - - (27)
(689,563) (15,179) (8,436) (63,552) (57,452) (729,047) - (873,666)
18. Related party transactions and Directors' remuneration
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the party in making
financial or operational decisions.
All Directors are non-executive. The Directors' remuneration, excluding
disbursements, for the year ended 31 March 2023 amounted to £473,000/$576,355
with no outstanding fees due to the Directors at 31 March 2023 (31 March 2022:
£458,360/$613,720, with outstanding fees of £18,750/$24,745). There were no
supplementary fees paid to Directors in the year ended 31 March 2023.
Directors are reimbursed for out-of-pocket expenses incurred in fulfilling
their roles, including costs of travel and accommodation (as required).
Directors' transactions in or holdings in shares of the Company are not
disclosed as related party transactions as they do not receive shares as part
of their remuneration. Any shares held or transacted are acquired or disposed
of in their own right as Shareholders and as result, it is management's
assessment that the Company has not transacted with the Directors as related
parties in this regard.
19. Material Agreements
Investment Adviser
The Company has entered into an Investment Advisory Agreement with the
Investment Adviser pursuant to which the Investment Adviser will source Songs
and provide recommendations to the Board on acquisition and disposal
strategies, manage and monitor royalty and/or fee income due to the Company
from its copyrights and collection agents, and develop strategies to maximise
the earning potential of the Songs in the portfolio through improved placement
and coverage of Songs.
During the year responsibility for the maintenance of the Group's accounting
books and records, systems of internal control and financial reporting
transferred from the Administrator to the Investment Adviser.
The Investment Adviser is entitled to receive an advisory fee (payable in
cash) and a performance fee (usually payable predominantly in Shares subject
to an 18 month lock up arrangement). The full terms and conditions of the
calculation of the advisory and performance fees are disclosed in the
Company's prospectus, which is available on the Company's website
(https://www.hipgnosissongs.com/). However in summary:
Advisory fee
The advisory fee is calculated at the rate of:
1% per annum of the Average Market Capitalisation up to, and including, £250
million;
ii) 0.90% per annum of the Average Market Capitalisation in excess of £250
million and up to and including £500 million; and
iii) 0.80% per annum of the Average Market Capitalisation in excess of £500
million.
Advisory fees for the year were $12.5 million (31 March 2022: $16.5 million)
with $0.4 million outstanding at 31 March 2023 (31 March 2022: $Nil).
Performance Fee
In respect of each accounting period, the Investment Adviser (or, where the
Investment Adviser so directs, any member of the Investment Adviser's team) is
entitled to receive a performance fee (the "Performance Fee") equal to 10% of
the Excess Total Return relating to that accounting period provided that the
Performance Fee shall be capped such that the sum of the advisory fee (payable
in respect of the Average Market Capitalisation of Ordinary Shares only) and
the Performance Fee paid in respect of that accounting period is no more than
5% of the lower of: (i) Net Asset Value; or (ii) Closing Market Capitalisation
at the end of that accounting period.
The Excess Total Return for an accounting period is calculated by reference
to: (i) the difference between the Performance Share Price at the end of that
Accounting Period and the higher of: (a) the Performance Hurdle (being issue
price compounded by 10% per annum from initial Admission subject to
appropriate adjustments in certain situations); and (b) high watermark (being
the Performance Share Price at the end of the last Accounting Period where a
Performance Fee was payable); multiplied by (ii) the weighted average of the
number of Ordinary Shares in issue (excluding any shares held in treasury) at
the end of each day during that accounting period.
For the purposes of calculating the Performance Fee:
"Performance Share Price" means, in relation to each accounting period, the
average of the middle market quotations of the Ordinary Shares for the 1 month
period ending on the last business day of that accounting period (which shall
be adjusted as appropriate: (i) to include any dividend declared but not paid
where the Ordinary Shares are quoted ex such dividend at any time during that
month; (ii) to exclude any dividend paid in respect of the shares during that
month; and (iii) for the PSP Adjustments). During the year, the average of the
middle market quotations was 81.0p; and
"Performance Share Price Adjustments" means adjustments to the Performance
Share Price to (i) include the gross amount of any dividends and/or
distributions paid in respect of an Ordinary Share since initial Admission;
and (ii) make such adjustments to take account of C Shares as were agreed
between the Company and the Investment Adviser, acting reasonably and in good
faith, at the time of issuance of such C Shares.
The amount of Performance Fee payable to the Investment Adviser shall be paid
in the form of a combination of: a) cash equal to all taxes or charges payable
with respect to the Performance Fee by the Investment Adviser or member(s) of
the Investment Adviser's Team; and b) Ordinary Shares ("Performance Shares")
which are either issued by the Company where the Ordinary Shares are on
average trading at par or at a premium to the last reported Operative NAV per
Ordinary Share at the relevant time or purchased from the secondary market
where the Ordinary Shares are on average trading at a discount to the last
reported Operative NAV per Ordinary Share at the relevant time and transferred
to, the Investment Adviser or member(s) of the Investment Adviser's Team.
The Performance Shares are subject to 18-month lock-up arrangements. The
performance fee for the year ended 31 March 2023 was $Nil (31 March 2022:
$Nil).
Administration Agreement
Pursuant to the Administration Agreements: (i) Ocorian Administration
(Guernsey) Limited has been appointed as Administrator of the Company; and
(ii) Ocorian Administration (UK) Limited has been appointed as administrator
to the subsidiaries. The Administrator or Ocorian Administration (UK) Limited
(as applicable) are responsible for the day-to-day administration of the
Company and its subsidiaries subject to the relevant Administration Agreement
and general secretarial functions required by the Companies Law. During the
year responsibility for the maintenance of the Group's accounting books and
records, systems of internal control and financial reporting transferred from
the Administrator to the Investment Adviser. For the purposes of the RCIS
Rules, the Administrator is the designated manager of the Company.
Under the terms of the Administration Agreement between the Administrator and
the Company, the Administrator is entitled to a fixed fee as at 31 March 2023
of £193,000 ($231,600) (31 March 2022: £187,500, $246,259) per annum for
services such as administration, corporate secretarial, corporate governance,
regulatory compliance and stock exchange continuing obligations. Additional ad
hoc fees are payable in respect of certain additional services as determined
by the Administration Agreement. Administration fees for the year to 31 March
2023 amounted to £209,873 ($251,848) (31 March 2022: £364,612, $478,875) of
which nil (31 March 2022: £43,125, $56,639) was outstanding at the year end.
Under the terms of the Administration Agreement between Ocorian Administration
(UK) Limited and the subsidiaries the Administrator is entitled to a fixed fee
as at 31 March 2023 of £3,500 ($4,200) (31 March 2022: £14,000, $18,387) per
subsidiary and a variable incremental fee per annum per additional Catalogue
held by a subsidiary for services such as administration and corporate
secretarial. Administration fees for the subsidiaries for the year amounted to
£296,595 ($355,914) (31 March 2022: £489,683, $673,007) of which nil (31
March 2022: £237,490, $311,916) was outstanding at the year end.
20. Earnings per share
31 March 2023 31 March 2023
Basic Diluted
Loss for the year ($'000) (89,638) (89,638)
Weighted average number of Ordinary Shares outstanding 1,210,360,176 1,210,360,176
Earnings per share (cents) (7.41) (7.41)
31 March 2022 31 March 2022
Basic Diluted
Loss for the year ($'000) (19,443) (19,443)
Weighted average number of Ordinary Shares outstanding 1,175,596,128 1,175,596,128
Earnings per share (cents) (1.65) (1.65)
The earnings per share is based on the loss of the Group for the year and on
the weighted average number of Ordinary Shares outstanding for the year ended
31 March 2023. As disclosed in Note 11, the Company repurchased Ordinary
Shares during the year which are held as Treasury Shares at year end and these
shares are not included the EPS calculation.
21. Auditor's remuneration
Audit and non-audit fees payable to the Auditors can be analysed as follows:
1 April 2022 to 1 April 2021 to 31 March 2022
31 March 2023
$'000
$'000
PricewaterhouseCoopers CI LLP annual audit fees 753 600
PricewaterhouseCoopers CI LLP annual audit fees 753 600
Pricewaterhouse Coopers CI LLP Interim review fees 53 53
PricewaterhouseCoopers CI LLP non audit fees 53 53
22. Fair value gain on held for trading derivative financial instruments
The Company has the following derivative financial instruments in the
following line items in the Consolidated Balance Sheet:
31 March 2023 31 March 2022
$'000 $'000
Held for trading financial assets
Foreign exchange forward contracts 4,914 -
Held for trading financial liabilities
Interest rate swap arrangements (3,395) -
The carrying value of the held for trading financial instruments represent
their fair value at year end.
The fair value gain on the held for trading derivative financial instruments
are set out in the below table:
1 April 2022 to 31 March 2023 1 April 2021 to 31 March 2022
$'000 $'000
Fair value gain on foreign exchange forward contracts 6,017 -
Fair value loss on interest rate swap arrangements (3,395) -
2,622 -
23. Presentation Change
The Company has made immaterial changes to the presentation of the
Consolidated Statement of Profit and Loss and accompanying notes during the
year. This has resulted in the following changes of the comparative figures.
Consolidated Statement of Profit and Loss
As reported in 31 March 2022 Annual Report Presentation change As reported in
31 March 2023 Annual Report
1 April 2021 to 31 March 2022 $'000
1 April 2021 to 31 March 2022
$'000
$'000
Income
Total revenue 200,384 - 200,384
Interest income 5 - 5
Royalty costs (32,041) - (32,041)
Net revenue 168,348 - 168,348
Expenses
Advisory and performance fees (16,548) - (16,548)
Administration fees (1,152) - (1,152)
Legal and professional fees (5,999) - (5,999)
Audit fees (600) - (600)
Brokers' fees (274) - (274)
Directors' remuneration (696) - (696)
Listing fees (34) - (34)
Subscriptions and licences (526) - (526)
Public relations fees (702) - (702)
Catalogue bonus provision - (936) (936)
Charitable donations (208) 208 -
Movement in ECL provision for HSG advances - (1,570) (1,570)
Other operating expenses (12,403) 2,298 (10,105)
Amortisation of Catalogues of Songs (105,787) - (105,787)
Impairment of Catalogues of Songs (1,490) - (1,490)
Amortisation of borrowing expenses (1,635) - (1,635)
Borrowing cost extinguishment - - -
Fixed asset depreciation (712) - (712)
Loan interest (20,377) - (20,377)
Fair value gain on held for trading derivative financial assets - - -
Finance charges for deferred consideration (212) - (212)
Net loss from joint ventures (836) - (836)
Foreign exchange losses (14,857) - (14,857)
Operating expenses (185,048) - (185,048)
Operating loss for the year before taxation (16,700) - (16,700)
Taxation (2,743) - (2,743)
Loss for the year after tax (19,443) - (19,443)
24. Subsequent Events
On 28 April 2023 the Company's interim dividend of 1.3125 pence per Ordinary
Share in respect of the period from 1 October 2022 to 31 December 2022 was
paid.
On 23 June 2023 the Company's interim dividend of 1.3125 pence per Ordinary
Share in respect of the period from 1 January 2023 to 31 March 2023 was
declared.
Alternative Performance Measures
For the year ended 31 March 2023
Adjusted EPS
Definition
Loss after tax excluding Total Amortisation, Impairment, Depreciation,
Catalogue Bonus Provision, Restructuring Costs, Foreign Exchange Losses and
Provision for HSG Advances divided by weighted average number of Ordinary
Shares outstanding.
Reason for Use
Adjusted EPS is a strong indicator of Company performance and profitability
after adjusting for non cash and financing items. Catalogue Bonus Provision
has been included in the calculation in the current year as the Company does
not anticipate this provision to occur at a material level in future years.
Calculation 31 March 31 March
2023
2022*
$'000
$'000
Loss after tax (89,638) (19,443)
Total Amortisation 113,201 107,633
Impairment of Catalogues of Songs 3,901 1,490
Borrowing cost extinguishment 5,007 -
Depreciation 653 712
Lease liability interest 369 -
Catalogue bonus provision 43,757 936
HSG restructuring costs 1,028 -
Foreign exchange losses 3,157 14,857
Fair value gain on held for trading financial instruments (2,622) -
Movement in ECL provision for HSG advances 2,196 1,570
Adjusted earnings 81,009 107,755
Tax arising on above adjusting items (†) (31,169) (23,348)
49,840 84,407
Weighted Average number of Ordinary Shares outstanding (number) 1,210,360,176 1,175,596,128
Adjusted Earnings per Share (cents) 4.12 7.18
† This figure is the sum of the tax effects of individual adjusting items
other than permanent differences, calculated using the prevailing 19%
corporation tax rate for the periods for UK items and 21% rate of US Federal
corporate income tax for US items.
Adjusted Operating Costs less Interest Expense
Definition
Operational expenses less Total Amortisation, Impairment, Depreciation,
Catalogue Bonus Provision, Restructuring Costs, Foreign Exchange Losses,
Provision for HSG Advances and Interest Expense.
Reason for Use
An indicator to Shareholders of the Company's underlying operational
expenditure excluding non cash and financing items. Catalogue Bonus Provision
has been included in the calculation in the current year as the Company does
not anticipate this provision to occur at a material level in future years.
Calculation 31 March 31 March
2023
2022*
$'000
$'000
Operational expenses 233,863 185,048
Total Amortisation (113,201) (107,633)
Impairment of Catalogues of Songs (3,901) (1,490)
Borrowing cost extinguishment (5,007) -
Depreciation (653) (712)
Lease liability interest (369) -
Catalogue bonus provision (43,757) (936)
HSG restructuring costs (1,028) -
Foreign exchange losses (3,157) (14,857)
Fair value gain on held for trading financial instruments 2,622 -
Provision for HSG advances (2,196) (1,570)
Interest expense (33,700) (20,377)
29,516 37,473
* Refer to change in definitions on Alternative Performance Measures
Annualised Ongoing Charges
Definition
Adjusted Operating Costs less Interest Expense and non-recurring
administrative expenses over a 12-month period.
Reason for Use
Ongoing Charges are a good indicator to Shareholders of the Company's
continuing operating expenses excluding the cost
of financing. These operating expenses are likely to recur in the foreseeable
future.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Adjusted Operating Costs less Interest Expense* 29,516 37,474
Non Recurring Administrative Expenses (2,195) (6,063)
27,321 31,411
* Refer to change in Adjusted Operating Costs definition on Alternative
Performance Measures
Distributable Revenues
Definition
Distributable Revenues are the Loss after Tax excluding Total Amortisation,
Impairment, Depreciation, Catalogue Bonus Provision, Restructuring Costs,
Foreign Exchange Losses and Provision for HSG Advances.
Reason for Use
Distributable Revenues are the adjusted profits attributable to the Company's
revenue activities and are an indicator of the Company's ongoing ability to
pay its dividends, thereby excluding the impact of IFRS accounting matters,
liabilities and costs not expected to occur at levels of current year.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Loss after tax (89,638) (19,443)
Total Amortisation 113,201 107,633
Impairment of Catalogues of Songs 3,901 1,490
Borrowing cost extinguishment 5,007 -
Depreciation 653 712
Lease liability interest 369 -
Catalogue bonus provision 43,757 936
HSG restructuring costs 1,028 -
Foreign exchange losses 3,157 14,857
Fair value gain on held for trading financial instruments (2,622) -
Movement in ECL provision for HSG advances 2,196 1,570
81,009 107,755
Dividend Cover
Definition
Distributable Revenues divided by the dividend paid during the year.
Reason for Use
A strong indicator to Shareholders of the Company's ability to pay a dividend
from retained earnings.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Distributable Revenues 81,009 107,755
Dividend Paid 56,260 84,300
1.44 1.28
EBITDA
Definition
The Operating loss before Tax plus Total Amortisation, Impairment,
Depreciation, Catalogue Bonus Provision, Restructuring Costs, Foreign Exchange
Losses, Provision for HSG Advances and Interest Expense.
Reason for Use
A strong indicator to Shareholders of Company performance and profitability
after adjusting for non cash and financing items. Catalogue Bonus Provision
has been included in the calculation in the current year as the Company does
not anticipate this provision to occur at a material level in future years.
Calculation 31 March 31 March
2023
2022*
$'000
$'000
Operating loss (86,630) (16,700)
Total Amortisation 113,201 107,633
Impairment of Catalogues of Songs 3,901 1,490
Borrowing cost extinguishment 5,007 -
Depreciation 653 712
Lease liability interest 369 -
Catalogue bonus provision 43,757 936
Restructuring costs 1,028 -
Foreign exchange losses 3,157 14,857
Fair value gain on held for trading financial instruments (2,622) -
Movement in ECL provision for HSG advances 2,196 1,570
Interest expense 33,700 20,377
117,717 130,875
* Refer to change in definitions on Alternative Performance Measures
Leveraged Free Cash Flow
Definition
Net Cash from operating activities less interest paid, acquisition related
balances and foreign exchange losses.
Reason for Use
A good indicator to Shareholders of the cash position of the Company and the
availability of cash flows to fund dividend payments.
Calculation 31 March 31 March
2023
2022•
$'000
$'000
Net Cash from operating activities 102,129 84,869
Acquisition related balances - 9,505
Foreign exchange losses 3,157 11,098
Interest paid (23,433) (20,775)
81,853 84,697
* Refer to change in definitions on Alternative Performance Measures
Net Debt
Definition
Loan facility amount utilised less cash held at bank.
Reason for Use
Liquidity metric used to determine how well a company can pay all of its debts
if they were due immediately.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Loan facility amount 600,000 600,000
Cash at bank (37,965) (30,067)
562,035 569,933
Non recurring administrative expenses
Definition
Non recurring expenditure included within operating expense.
Reason for Use
A good indicator to Shareholders of expenses not likely to recur in the
foreseeable future.
Calculation 31 March 31 March
2023
2022*
$'000
$'000
Non recurring expenses included within:
Legal and professional fees 546 2,099
Brokers' fees 122 18
Public relations fees 100 145
Advisory and performance fees - 43
Other operating expenses 1,427 3,758
2,195 6,063
* Refer to change in definitions on Alternative Performance Measures
Ongoing Charges %
Definition
Annualised ongoing charges divided by Average Operative NAV.
Reason for Use
To monitor the expenses, which are likely to recur, relative to the fund size
over time.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Annualised Ongoing Charges* 27,321 31,411
Average Operative NAV 2,257,887 2,044,831
1.21% 1.54%
* Refer to change in Adjusted Operating Costs definition on Alternative
Performance Measures
Operative NAV
Definition
The IFRS NAV adjusted for the Fair Value of the Catalogues of Songs.
Reason for Use
The Operative NAV reflects the values of the Catalogues of Songs based on fair
values produced by the Portfolio Independent Valuer.
31 March 2023 31 March 2022
$'000
$'000
IFRS NAV 1,434,534 1,582,399
Adjustments for revaluations of Catalogues of Songs to fair value 565,478 457,441
Reversal of accumulated amortisation and impairment 316,036 199,800
Operative NAV 2,316,048 2,239,640
Total Amortisation
Definition
Amortisation of Catalogues of Songs plus amortisation of capitalised borrowing
costs plus finance charges for deferred consideration.
Reason for Use
Total amortisation is the measure of the non-cash items arising from
accounting treatment and includes the amortisation of borrowing costs, and is
used to evaluate the performance without any amortisation.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Amortisation of Catalogues of Songs 111,583 105,787
Amortisation of capitalised borrowing costs 1,618 1,635
Finance charges for deferred consideration - 212
113,201 107,634
NAV Total Return
Definition
Operative NAV per share plus cumulative dividends paid up to year end less the
Operative NAV per share as at 11 July 2018, divided by the Operative NAV as at
11 July 2018.
Reason for Use
To show how the assets have performed since IPO to Shareholders.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Operative NAV per share 1.9153 1.8491
Cumulative dividends paid to year end 0.2789 0.2159
Operative NAV at IPO (1.2983) (1.2983)
0.8959 0.7667
Operative NAV at IPO 1.2983 1.2983
69.01% 59.05%
12 Month NAV Total Return
Definition
Operative NAV per share as at year end plus dividend paid during the 12-month
to year end less the Operative NAV per share as at the beginning of the year
divided by the Operative NAV per share as at the beginning of the year.
Reason for Use
To show how the assets have performed over the past 12 months to Shareholders.
Calculation 31 March 31 March
2023
2022
$'000
$'000
Operative NAV per share at year end 1.9153 1.8491
Dividend paid during the 12-month period to year end 0.0631 0.0726
1.9784 1.9217
Operative NAV per share at beginning of year 1.8491 1.6829
6.99% 14.19%
Change in definitions on Alternative Performance Measures
Performance Measure Definition as reported in Definition as reported in Reason for change
March 2023 Annual Report
March 2022 Annual Report
Adjusted EPS Loss after tax excluding Total Amortisation, Impairment of Catalogues of Loss after tax excluding Total Amortisation, Impairment of Catalogues of Catalogue Bonus Provision and Restructuring Costs are now included in the
Songs, Depreciation, Catalogue Bonus Provision, Restructuring Costs, Foreign Songs, Depreciation, Foreign Exchange Losses and Provision for HSG Advances Adjusted EPS calculation as they are liabilities recognised based on Catalogue
Exchange Losses and Provision for HSG Advances divided by weighted average divided by weighted average number of Ordinary Shares outstanding. performance in the current year which the Company doesn't anticipate will
number of Ordinary Shares outstanding. incur at a material level in future years.
Adjusted Operating Costs less Interest Expense Operational expenses less Total Amortisation, Impairment, Depreciation, Operational expenses less Total Amortisation, Depreciation, Impairment, Catalogue Bonus Provision and Restructuring Costs are now included in the
Catalogue Bonus Provision, Restructuring Costs, Foreign Exchange Losses, Foreign Exchange Losses and Provision for HSG Advances less Interest Expense. Adjusted Operating Costs less interest calculation as they are liabilities,
Provision for HSG Advances and Interest Expense. and costs not expected to occur to current year's levels, in the current year
which the Company doesn't anticipate will incur at a material level in future
years.
EBITDA The Operating loss before Tax plus Total Amortisation, Impairment, The Operating loss before Tax plus Total Amortisation, Impairment, Loan Catalogue Bonus Provision and Restructuring Costs are now excluded from the
Depreciation, Catalogue Bonus Provision, Restructuring Costs, Foreign Exchange Interest, Depreciation, Foreign Exchange Losses and Provision for HSG Advances EBITDA calculation as they are liabilities recognised based on Catalogue
Losses, Provision for HSG Advances and Interest Expense. performance outside of the operating activities of the Company which the
Company doesn't anticipate will incur at
a material level in future years.
Leveraged Free Net Cash from Operating Activities less interest paid, acquisition related Net Cash from Operating Activities less Purchase of Fixed Assets. To provide increased clarity to investors that interest is considered to be a
Cash Flow balances and foreign exchange losses. levered payment. The purchase of fixed assets is not significant to the
calculation and was removed. The calculation disclosure has been expanded to
include Acquisition related balances and the impact of Foreign Exchange to
provide clarity to investors on the Company's calculation methodology of
Leveraged Free Cash Flow.
Non recurring administrative expenses Non recurring expenditure included within operating expenses. Exceptional costs included within legal and professional and listing fees plus Non recurring expenditure in the current year is included throughout operating
Aborted deal expenses plus interest costs. expenses and is not isolated to legal and professional and listing fees.
Interest costs have been removed from the calculation as this calculation
seeks to present the leveraged free non-recurring administrative expenses.
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