- Environment remains uncertain: Potential delays in repayments and future earnings difficult to forecast
- Fall in Australian Dollar has led to growth in investments portfolio
- Company expects to report small profit in six months to December 2008
- Debt to be paid down ahead of capital being returned to shareholders over longer term
Investments
The Company’s total investments increased by 9% to $462 million over the 3 months to 31 December 2008. The growth in investments arose principally because of the fall in the Australian Dollar. The split of investments by asset class was as follows:
| |
30 Sept ‘08
$m |
31 Dec ‘08
$m |
% of
Total |
| Property |
103 |
94 |
20% |
| Aviation |
120 |
141 |
31% |
Shipping
|
65 |
98 |
21% |
Infrastructure
|
56 |
65 |
14% |
| Other |
78 |
64 |
14% |
| |
422 |
462 |
100% |
A majority of the Company’s investments are denominated in a foreign currency, predominantly US Dollars. These investments are hedged against movements in the value of the Australian Dollar via the use of forward foreign exchange contracts. The value of the Australian Dollar fell materially in October 2008. As our foreign exchange hedges were renewed throughout the December quarter, the amount invested in each relevant transaction increased.
Only one new investment was made during the December quarter. This was in shipping for an amount of $14 million and had been a commitment made in the September quarter.
Given the discount which the market is attaching to the valuation of the Company’s shares, we have taken the step of providing, in the Attachment, a description and status report for each of the Company’s investments.
Earnings
At its 2008 annual general meeting in October, the Company provided guidance that, in the absence of further significant deterioration in conditions, earnings per share in the 12 months to June 2009 should be around 10 cents.
We have remained comfortable, within materiality tolerances, with this guidance, however the short to medium term outlook for asset and credit markets remains uncertain and there is a risk that further asset write-downs may be required in the future.
Whilst it is still to finalise its half year accounts, the Company expects to make a small profit for the six months to December 2008. This notwithstanding, given the risks that prevail in the global economic outlook and the difficulties these present for forecasting, we believe it is best to remove, for the time being, our earnings guidance for the full 2009 financial year.
In the current environment, the Directors will not be declaring an interim dividend for the December half year. Despite this, we remain committed to the ongoing payment of dividends. The level of such dividends will be reviewed but is expected to be equal to approximately 50% of earnings.
Debt Facility
The Company’s debt facility totals $215 million. It matures in June 2011 and is provided by Commonwealth Bank, BankWest, St.George and NAB.
The key financial undertakings within the facility are being satisfied:
| Covenant |
Actual |
Minimum SHF $225m |
Approx. $250m |
Minimum interest cover 2.25 times |
>3 times |
Maximum debt to assets 50% |
Approx. 46% |
Maximum provisions 10% of assets |
Approx. 3% |
Cash and undrawn debt as at 31 December 2008 was $11 million.
In current conditions, there is the potential for cashflow receipts from investments to be delayed beyond their originally expected dates. Taking this into account, we currently anticipate at least $20 million of investment repayments in the half year to June 2009.
Given the impact of the use of forward foreign exchange contracts on the Company’s liquidity management, we are exploring with our banks the practicality of switching our Australian Dollar-denominated corporate debt facility to one denominated in US Dollars and Euro. This would provide benefits in removing the short to medium term variability in cashflow. Such a restructure would result in KBC’s lending margin increasing.
Capital Management Initiatives
Given the prevailing economic environment, the Board of KBC has resolved to manage the Company’s capital as follows:
- Surplus repayments from investments will be applied to reducing the balance of the corporate debt facility; and
- Once debt has been reduced, the Company anticipates returning capital to shareholders as cash becomes available.
In assessing when returns of capital to shareholders may occur, the following factors are relevant:
- The Company’s debt facility will need to be reduced substantially before any returns of capital could occur.
- The repayment of KBC’s investments would, in the normal course, be spread relatively evenly over the next 6 to 7 years.
- In the current environment, however, delays in investment repayments should be anticipated.
As a result of these factors, returns of capital to shareholders are most likely to begin in 2 to 3 years’ time and be spread over the subsequent 3 to 4 years.
The Company will update the market should this strategy be altered by changes in market conditions.
Operating Costs
Given the current environment and these capital management initiatives, the Company has acted to reduce operating costs. Our original budget for the 2009 financial year was for total operating costs of approximately $10 million. We now anticipate that the Company’s operating costs in the next 12 months will be less than $6 million, achieved in part by a reduction in staff numbers.
Half Year Results
The Company will be releasing its half year results on 10 February 2009.
Keybridge Capital is a financial services company that invests, or lends to, transactions backed by real assets, financial assets or cashflow. Its core asset classes are property, aviation, shipping and infrastructure.
Investment Portfolio
A. Property Investments
Transaction Number |
Book
Value |
Is Book Value
Discounted? (1) |
Scheduled Repayment Date(s) (2) |
Description |
Status |
1 |
A$31.0m |
See Note below. |
2010 |
Subordinated loan, secured & cross-collateralised by 8 different residential & mixed use projects in Eastern Australia, as well as by parental guarantee. LVR approx 74%. |
Loan performing as expected. |
2 |
A$7.7m |
See Note below. |
2009 |
Preferred equity investment in a residential & retail development in Zetland in Sydney. |
Two-thirds of residences have sold in the past 4 months;retail shops yet to be fully leased-up. Some cost over-runshave caused us to increase the collective property provision. |
3 |
A$24.1m |
See Note below. |
2010 |
Two cross-collateralised senior loans backed, in turn, by two mezzanine loans, one secured by an existing property on Gold Coast & one secured by a residential development on the Sunshine Coast, Queensland. Parties associated with the originator & manager of the loans provide a first loss of $7m to support KBC’s loans. LVR approx 85%. |
The Gold Coast loan is past due & the property will be sold orrefinanced. The combination of the first loss amount & thequality of the Sunshine Coast development (including solidpre-sales) should underpin the performance of this transaction. |
4 |
A$1.2m |
See Note below. |
2009 |
Subordinated loan secured by an industrial property in Botany in Sydney. LVR approx 80% |
We expect this loan to be repaid in full. |
5 |
A$7.5m |
See Note below. |
2010 |
Subordinated loan secured by a pool of Australian commercial mortgages. |
Pool is gradually being wound down via the refinancing of theunderlying loans. The senior financier is being repaid first.One problem loan in the pool has caused us to increase the collective property provision. Otherwise, the pool is performing soundly. |
6 |
A$6.2m |
See Note below. |
2009 |
Senior loan to an Australian wine company. |
Loan now secured, in the main, by cash and assets due to settle in January 2009. We have written back half of the $2m provision taken as at June 2008. |
7 |
US$11.0m |
No |
2009 |
Subordinated loan secured by a condominium project in Chicago, USA. Loan is overseen by KBC transaction partner, Terra Capital. LVR 74%. |
Project has reached its settlement phase. Senior debt is being repaid in line with expectations. We expect our loan will start being repaid from March/April 2009. Pre-salescover the senior and KBC loans. |
8 |
US$6.9m |
No |
2009 |
Subordinated loan secured by condominium project in Chelsea district of Manhattan & by property in Brooklyn. Loan is overseen by Terra Capital. LVR 65%. |
Sales of Chelsea condominiums are slow but overall LVR sufficiently sound to provide comfort as to repayment.
|
- This identifies whether KBC carries the investment at a book value less than its original investment amount plus accrued return.
- Actual investment repayments may not coincide with these scheduled dates due to normal fluctuations in the term of an investment and also to the anticipated delays in repayments arising from the current environment. On average, we would expect investments to repay slower than the dates shown.
NOTE: We have raised a collective provision against our Australian property transactions equal to approximately A$7m to cater for possible diminution in the security coverage of the investments.
B. Aviation Investments
Transaction Number |
Book
Value |
Is Book Value
Discounted? (1) |
Scheduled Repayment Date(s) (2) |
Description |
Status |
1 |
US$52.9m |
No |
2013 |
Loan secured by an equity share in four aircraft portfolios containing a total of 50 narrow body & 3 wide body passenger aircraft leased for an average remaining term of over 5 years to 25 international airlines. Average age of the fleet is 5.5 years. The owner of the manager of the aircraft has a US$35m first loss protecting KBC’s loan. |
The individual aircraft are predominantly newer generation & the lessee airlines generally are of higher credit quality.These factors, along with the first loss buffer, provide solid support for this transaction. |
2 |
A$14.2m |
No |
2009 |
Senior loan secured by a portfolio of turbo prop aircraft, further supported by a corporate guarantee from an Australian-listed company. LVR 53%. |
Loan term has been extended due to delays in the borrower selling aircraft. Asset coverage for loan provides comfort as to ultimate repayment. |
3 |
US$54.1m |
No |
2011-13 |
Three mezzanine loans secured by 5 wide body passenger aircraft leased for an average remaining term of 2.8 years to 3 international airlines. The three mezzanine loans are cross-collateralised. LVR 84%. The aircraft are managed by KBC transaction partner, Republic Financial Corporation of Denver, USA, which also owns the equity in the aircraft. |
The values of these aircraft have held up in the current environment & KBC’s profit share in these transactions (over & above the amount of its loans) is materially positive. |
- This identifies whether KBC carries the investment at a book value less than its original investment amount plus accrued return.
- Actual investment repayments may not coincide with these scheduled dates due to normal fluctuations in the term of an investment and also to the anticipated delays in repayments arising from the current environment. On average, we would expect investments to repay slower than the dates shown.
C. Shipping Investments
Transaction Number |
Book
Value |
Is Book Value
Discounted? (1) |
Scheduled Repayment
Date(s) (2) |
Description |
Status |
1 |
US$26.8m |
No |
2012 |
Two investments in a company that owns 17 handysize bulker vessels, chartered for an average term of 2.4 years to 7 major shipping companies. One investment (US$19m) is a loan secured by equity in the company, with a US$5.4m first loss supporting the loan. The other investment (US$8m) is directly in the equity of the company, with no first loss protection. |
The significant softening in the bulk shipping market over thepast 4 months has removed the materially positive valuation buffer that supported these investments. The quality of the vessels, their young average age, the strength of the charter parties & the experience of the company’s management support this investment. |
2 |
US$16.3m |
No |
2013 |
Two equity investments in 4 ships leased to 2 credit worthy shipping companies for an average remaining term of 4.5 years. Three ships are employed in the chemical/palm oil sector and & one is in the petroleum products sector. |
These investments continue to perform soundly in the current environment. |
3 |
US$26.3m |
Yes |
2015 |
Equity investment in two ships leased to an investment-grade rated company listed on the NY Stock Exchange. Remaining term of leases 3 years. The ships have been built to be able to carry wet or dry cargoes. |
The ability of the vessels to carry wet, as well as dry, cargoes,along with the strength & term of the charter, provide a good underpinning for this investment. Anticipated returns are now lower than originally expected, due to higher than budgeted dry docking costs. This has caused us to lower the carrying value of the investment. |
- This identifies whether KBC carries the investment at a book value less than its original investment amount plus accrued return.
- Actual investment repayments may not coincide with these scheduled dates due to normal fluctuations in the term of an investment and also to the anticipated delays in repayments arising from the current environment. On average, we would expect investments to repay slower than the dates shown.
D. Infrastructure Investments
Transaction Number |
Book
Value |
Is Book Value
Discounted? (1) |
Scheduled Repayment
Date(s) (2) |
Description |
Status |
1 |
A$5.0m |
No |
2009 |
Subordinated loan underpinned by an Australian income producing ethane pipeline. LVR below 20%. |
Loan is performing as expected. |
2 |
US$3.0m |
No |
2009 |
Senior loan secured by a well performing water operations & maintenance business in the US, supported by a put to the ultimate parent company. |
Loan is performing as expected. |
3 |
EUR11.0m |
No |
2014 |
Equity investment in an operating wind farm in Midlum, Germany. |
Electricity production has tracked according to expectations since acquisition of the asset in January 2007. Electricity is sold to an investment-grade rated power utility at a tariff which is fixed, subject to CPI escalation, for a further 11years. |
4 |
EUR19.5m |
Yes |
2014 |
Equity investments in two new solar parks in south eastern Spain. |
Both parks are completed. Electricity is sold to an investment-grade rated power utility at a tariff which is fixed, subject to CPI escalation, for 20 years. Anticipated returns are lower than originally expected due to higher than budgeted costs. This has caused us to lower the carrying value of the investment marginally. |
- This identifies whether KBC carries the investment at a book value less than its original investment amount plus accrued return.
- Actual investment repayments may not coincide with these scheduled dates due to normal fluctuations in the term of an investment and also to the anticipated delays in repayments arising from the current environment. On average, we would expect investments to repay slower than the dates shown.
E. Other Investments
Transaction Number |
Book
Value |
Is Book Value
Discounted? (1) |
Scheduled Repayment
Date(s) (2) |
Description |
Status |
1 |
A$10.3m |
No |
2009-11 |
Senior loan secured by IT leases to small & medium-sized Australian businesses. |
Loan performing as expected. |
2 |
US$14.3m |
No |
2009-11 |
Senior loan to a retailing business in China. LVR approx 25%. |
Loan interest up-to-date. The transaction is being restructured & more than half of the loan due to be repaid by August 2009. |
3 |
US$5.4m |
Yes |
2009 |
Senior loan to a copper production company, with operations principally in Chile. |
Receiver has been appointed. Company’s assets are being offered for sale. KBC has written down the book value of this loan to approx. 30% of the legally due amount. The estimated range of recoveries underpins this book value. |
4 |
A$15.0m |
No |
2010 |
Subordinated loan to an Australian motor vehicle leasing business. |
Borrower is in process of renegotiating an extension of its senior loan facility. Provided this is achieved satisfactorily, ongoing performance of the business should see the senior loan & KBC’s subordinated loan repaid from cash flow overtime. |
5 |
A$3.0m |
No |
2009-10 |
Senior loan secured & cross-collateralised by ownership interests in a number of listed & unlisted Australian companies. |
Loan performing as expected. |
6 |
US$6.4m |
No |
2010 |
Loan secured & cross-collateralised by controlling interests in 5 unlisted US companies. Investments managed by transaction partner, Republic Financial Corporation of Denver, USA. |
KBC’s investment is covered by up-to-date business values. |
- This identifies whether KBC carries the investment at a book value less than its original investment amount plus accrued return.
- Actual investment repayments may not coincide with these scheduled dates due to normal fluctuations in the term of an investment and also to the anticipated delays in repayments arising from the current environment. On average, we would expect investments to repay slower than the dates shown.
|
