Keybridge Capital Limited

Media Releases

2009 Results
31 August 2009

Result for the full year was a loss of $129 million
Underlying operating profit of $35 million offset by investment writedowns
New banking terms agreed: Company able to pursue orderly realisation of assets
Major focus is on reducing level of outstanding borrowings

Keybridge Capital reported a loss of $129 million for the year to 30 June 2009.

An operating profit of $35 million was offset by impairment provisions of $151 million. Of these provisions, $126 million were taken as at 30 June. A breakdown of the 2009 result, compared with that for 2008, is provided in Attachment 1.

The Managing Director of Keybridge, Mark Phillips, said: “The past 12 months have been testing for the Company. As the year unfolded, the knock-on effects from the US housing downturn affected adversely virtually all the markets in which Keybridge participates.”

“The new debt terms agreed with our banks enable us to move forward in the ordinary course. We are focused on achieving realisations of investments to reduce our borrowings significantly. In time, this will allow us to resume distributions to shareholders.”

“Challenges remain, however, because the asset markets in which the Company operates continue to be characterised by illiquidity and depressed trading conditions.”

As at 30 June 2009, the written-down value of the Company’s investments by asset class was as follows:



The Company’s investments are denominated in US Dollars, Euros and Australian Dollars. The foreign currency investments are hedged as to almost 70% by borrowings in the same currencies. Keybridge’s profitability and shareholders’ funds, therefore, are subject to variability as movements in the value of the Australian Dollar impact the unhedged component of foreign currency investments. The Company’s simplified balance sheet as at 30 June 2009 is as follows:


Currency Composition
Cash & Other
EUR 23m
AUD 69m
EUR 12m
AUD 39m
Shareholders’ Funds

This level of shareholders’ funds is equal to net assets of $0.71 per share.

Investment Performance

The new impairment provisions taken as at 30 June reflect market conditions across Keybridge’s asset classes. A progress report on each of the Company’s current investments is provided in Attachment 3. We can summarise the performance of the various segments of the investment portfolio as follows:

Property: Keybridge’s property investments consist mainly of mezzanine loans secured by development projects in eastern Australia and the United States. These investments have become impaired due principally to the slowdown in sales activity and the fall in prices in residential markets in these locations. Keybridge has raised provisions against its property investments equal to 62% of original asset values.

Aviation: The Company’s aviation transactions predominantly involve preferred equity and mezzanine loan investments in passenger jet aircraft. The aviation industry has been impacted by reduced airline profitability and falls in the secondary market prices of aircraft. The airlines underpinning Keybridge’s investments have, in the main, performed soundly. Only one aircraft within the portfolio has been repossessed due to the default of the lessee airline. Keybridge has raised provisions equal to 5% of the aggregate aviation portfolio.

Shipping: Keybridge’s shipping transactions are ordinary and preferred equity investments in vessels that carry wet or dry cargoes. Short-term charter rates and secondary market prices of vessels have fallen over the past 12 months. The shipping transactions in the Company’s portfolio have senior debt facilities with loan-to-valuation covenants that have already been, or may in the future be, breached. Thus, the continuing support of the non-recourse senior lenders is important. A factor that provides confidence that this should occur is that all the charterparties in Keybridge’s portfolio continue to meet their payment obligations on time. Reflecting the depressed conditions in shipping markets, the Company has raised provisions equal to 45% of the aggregate shipping portfolio.

Infrastructure: The Company has five infrastructure investments: Two loans which should be repaid during 2010 and three equity investments in renewable electricity facilities in Europe. The secondary market prices for renewable investments have fallen due to a reduction in the number of buyers and an increase in the required return that is being sought. The Company intends to progress sales of its renewable investments and, as a result, has raised provisions equal to 28% of the aggregate infrastructure portfolio.

Lending: These investments consist of six senior and subordinated loans to entities in a variety of industries. Three of these loans are up-to-date with their interest payments. The other three transactions have stopped paying interest to Keybridge at the present time. The Company has initiated actions in two of these transactions to have the loans repaid. Provisions equal to 15% of total lending assets have been raised.


Over the course of the year, a range of investments stopped paying cash income to Keybridge. This was due to a variety of factors emanating from the global financial crisis, including the need within some transactions for cashflow to be directed to repaying non-recourse senior debt. In the second half of 2009, cash income fell to 34% of total income, compared with 60% in the first half of the year. In the second half, the Company also classified some investments as non-income accruing, which lowered operating profit in this period.

In the 12 months to 30 June 2009, $41 million of investments were repaid, mainly in the Property and Lending portfolios.

New Corporate Debt Terms

The writedown in asset values at 30 June 2009 led to a breach of covenants in Keybridge’s corporate debt facility. The Company has now reached agreement with its banks to have this breach waived and to amend the terms of the loan facility to ensure Keybridge can continue an orderly realisation of assets. The new debt terms, compared with those already existing, are summarised in Attachment 2.

The final maturity date of 2 June 2011 has not changed. The major changes in the debt terms are as follows:

- The majority of the financial covenants have been removed;
- The required interim repayments ahead of the final maturity date have been reduced but with more regular milestones;
- Non-achievement of these interim repayments is now a review event, rather than an event of default; and
- There is no change in the borrowing margin of 3.75% per annum but there is a new additional risk fee of 1.75% per annum which accrues monthly and is payable on the maturity date of June 2011.

The new debt terms continue the requirement for all surplus cashflow to be applied to repaying debt. Thus, it is not anticipated that shareholders will receive dividends over the medium term.


For the time being, the Company is not looking to make new investments. The priority is to achieve realisations of investments to repay our debt facility. It is only after we have been able to reduce our outstanding borrowings significantly that we can contemplate resuming distributions to shareholders.

In the meantime, our strategies will revolve around:

Keeping our operating costs as low as practicable;

Bringing forward investment repayments wherever possible; and in those transactions where market liquidity and pricing do not permit a realisation in the short to medium term, pursuing strategies to preserve as much value for Keybridge as possible.

This last point is particularly relevant for the Company’s aviation and shipping investments. In these asset classes, realisations are impractical in current market conditions due to the unavailability of reasonably priced senior debt and the generally subdued trading conditions.

Over the period to December 2010, the Company requires investment realisations of approximately $70 million to meet its debt repayment, interest and operating cost obligations. This is equivalent to 22% of the current book value of investments. Whilst this will be challenging, the Company has strategies under way across its investment portfolio that would enable this level of realisations to be achieved.

Over the medium to longer term, it is likely that repayment of the Company’s debt facility will take approximately three years to achieve. Cash distributions to shareholders would likely occur thereafter.

Beyond the strategies described above, which address the current investment portfolio, there remains a challenge for the Company in how to respond to, and take advantage of, some of the opportunities that will be available in the market as a result of the changes brought on by the events of the past two years. To address this challenge, we are exploring a variety of options that can be implemented as the Company’s debt repayment program gains momentum.

Attachment 1

2009 Profitability

$ million
$ million
Borrowing Costs
Operating Costs
Operating Profit
Foreign Exchange Loss
Impairment Provisions
Income Tax
Net Profit After Tax

With some investments being treated as non-income accruing, the average return on investments in the second half of 2009 was 9% per annum, compared with 17% per annum in the first half of the year and 19% per annum in 2008.

The average level of borrowings in 2009 was $206 million, compared with $123 million in 2008. The average cost of borrowings was relatively stable at just under 9% per annum.

The foreign exchange loss in 2009 reflects the fact that, in May 2009, Keybridge closed-out its remaining foreign exchange hedging contracts. Of the Company’s total assets, 79% are denominated in either US Dollars or Euro. Of these foreign currency assets, approximately 68% are hedged by corporate borrowings in the same currency. For the remaining, unhedged component of foreign currency assets, Keybridge’s profitability is subject to variability from changes in the value of the Australian Dollar against the US Dollar and Euro. Since closing out the foreign exchange contracts, the Australian Dollar has appreciated against those two currencies, leading to a loss in value of the unhedged foreign currency assets.

The Company has booked only a small tax credit in 2009, despite the large accounting loss, because of the uncertainty of being able to utilise the substantial tax benefits that would be available should the impairment provisions be crystallised as real losses in due course.

Attachment 2

Amount USD 26.5m
No change
Lenders CBA, Bankwest, St.George, NAB No change
Final Maturity Date 2 June 2011 No change
Borrowing Rate 3.75% pa over LIBOR, EURIBOR or Bank Bill Rate No change
Additional Fee Nil A monthly accruing fee, payable on the final maturity date equal to 1.75% pa of the outstanding facility amount.
Financial Covenants Tests for:
 -Minimum SHF
 -Minimum interest cover
 -Maximum provisions
These covenants have been removed. There is a new review event requiring rolling 6 monthly cash investment income received by Keybridge to be a minimum of $4m in the first 12 months and $4.5m thereafter.
Interim Repayment Requirements USD
2 June 2010 25m
2 December 2010 45m

Failure to achieve is an event of default.
31 October 2009 5m
31 December 2009 2m
31 March 2010 13m
30 June 2010 10.5m
30 September 2010 5m
31 December 2010 25m
31 March 2011 10m

Failure to achieve is a review event.

Attachment 3

Investment Portfolio

In the tables below, the figures in the column “Investment Amount” are the book value of the relevant investment before any provisioning. The Company does not believe it is in its commercial interests to disclose publicly the written-down value of individual transactions.

A. Property

Transaction Number
Investment Amount
1 A$32m Subordinated loan, secured and cross-collateralised by seven different residential and mixed use projects in eastern Australia. The borrower has appointed a voluntary administrator and realisation of the underlying projects is under way.
2 A$8m Preferred equity investment in a residential and retail development in Zetland in Sydney. >The fundamentals of this project are sound but needs an extension of the senior debt to permit the time for the project value to be realised.
3 A$24m Two cross-collateralised senior loans backed, in turn, by two mezzanine loans secured by Queensland development properties. Parties associated with the manager of the loans have provided a first loss of $7m to support KBC’s investment. A receiver has been appointed by the senior lender to one of the underlying properties and recovery of the relevant mezzanine loan is now materially uncertain. The other property has been affected by a significant slowdown in sales activity. A range of strategies are being pursued to achieve an extension of time from the senior lender to permit an orderly realisation of unsold apartments.
4 A$1m Subordinated loan secured by an industrial property in Botany in Sydney. The value of the property continues to support KBC’s loan amount.
5 A$7m Subordinated loan secured by a pool of Australian commercial mortgages. Pool is gradually being reduced via the refinancing of the underlying loans, with the senior lender being repaid first. All the loans in the pool were senior ranking and the initial loan-to-valuation ratio was an average of less than 65%. Despite this, there have been an increased number of problem loans as the pool reduces in size.
6 A$1m Senior loan to an Australian wine company. Borrower entered voluntary administration in 2008 with KBC receiving ongoing repayments since then. Recovery of the remaining loan balance is being pursued against residual assets.
7 US$11m Subordinated loan secured by a condominium project in Chicago. An extension of the underlying senior debt is being sought. If achieved, we anticipate material realisations from this investment.
8 US$7m Subordinated loan secured by condominium project in Manhattan and by an additional New York property. The Manhattan project has entered provisional receivership. Most of KBC’s focus is on realising value from the secondary security.

B. Aviation

Transaction Number
Investment Amount
1 US$56m Loan secured by an equity share in four aircraft portfolios containing a total of 50 narrow body and three wide body passenger aircraft leased for an average remaining term of approximately five years to 25 international airlines. Average age of the fleet is approximately six years. A party associated with the manager of the portfolio has invested US$35m to provide KBC with a first loss buffer. The portfolio, in the main, contains newer generation aircraft and lessee airlines of higher credit quality. Whilst a small number of airlines have been late in meeting lease payments, these have, in the majority, been recovered in due course.
2 A$15m Senior loan secured by a portfolio of turbo prop aircraft, further supported by a corporate guarantee from an Australian-listed company. Loan term has been extended due to delays in the borrower selling aircraft. Asset coverage provides comfort as to ultimate repayment.
3 US$61m Three mezzanine loans secured by five wide body passenger aircraft leased for an average remaining term of over two years to three international airlines. The mezzanine loans are cross-collateralised. The aircraft are managed by KBC transaction partner, Republic Financial Corporation of Denver, USA, which also owns the equity in the aircraft. The base values of these aircraft continue to substantially support KBC’s investment. One lessee airline has defaulted on its lease payments and enforcement action is being progressed.

C. Shipping

Transaction Number
Investment Amount
1 US$26m Two investments (one being equity and the other preferred equity) in a company that owns 17 handysize bulker vessels, chartered for an average remaining term of approximately two years to seven major shipping companies. The significant softening in the bulk shipping market over the past 12 months has resulted in the loan-to-valuation tests within the senior debt financings for these vessels being breached. All senior loans, however, are being fully serviced and the quality of the vessels, their young average age, the strength of the charter parties and the experience of the company’s management are positive supporting factors in the current market environment. New senior debt terms are being sought to overcome the covenant breach. Agreement has not yet been reached with all banks.
2 US$16m Two equity investments in four ships leased to two shipping companies for an average remaining term of approximately four years. The ships are employed in the chemical/palm oil and petroleum products sectors. Despite depressed markets, these investments continue to perform soundly, with all payments being up-to-date. It is possible that loan-to-valuation breaches may occur, in which case a waiver from the relevant senior financier would be required.
3 US$31m Equity investment in two ships chartered for a remaining term of 2.5 years to an investment-grade rated company listed on the NY Stock Exchange. These vessels are able to carry wet, as well as dry, cargoes. Both wet and dry markets, however, remain under pressure due to the softening in global trade. The charter party continues to meet all its payment obligations. The costs of managing the vessels have been higher than budgeted. A satisfactory outcome for this investment will require a recovery in shipping markets.

D. Infrastructure

Transaction Number
Investment Amount
1 A$3m Subordinated loan to an Australian company that operates an ethane pipeline. Loan should be repaid by December 2009.
2 US$3m Senior loan secured by a water operations and maintenance business in the US. Loan should be repaid during 2010.
3 EUR11m Equity investment in an operating wind farm in Germany. Electricity production was lower than forecast in the March 2009 quarter. Other than this, production has tracked broadly according to expectations since acquisition of the asset in January 2007. Electricity is sold to an investment-grade power utility at a tariff which is fixed for a further 11 years. Sale of this asset is currently being pursued.
4 EUR21m Equity investments in two solar parks in south eastern Spain. Both parks were completed in the second half of 2008. Electricity is sold to an investment-grade rated power utility at a tariff which is fixed, but subject to CPI escalation, for 20 years. Returns from these investments will be lower than originally anticipated due to higher than budgeted development costs. Sale of one of these assets is currently being pursued.

E. Lending

Transaction Number
Investment Amount
1 A$8m Senior loan secured by computer and other IT leases to small and medium-sized Australian businesses. Loan is performing soundly, with all principal and interest payments up-to-date.
2 US$13m Senior loan to a retailing business in China. KBC and its Chinese co-lender have enforced security to accelerate recovery of the loan.
3 US$5m Senior loan to a copper production company, with operations principally in Chile. Receiver has been appointed. Company’s assets are being sold. Recoveries thus far have been consistent with our expectations.
4 A$15m Subordinated loan to an Australian motor vehicle leasing business. Borrower is in the 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 and KBC’s subordinated loan repaid from cashflow over time.
5 A$3m Senior loan secured and cross-collateralised by ownership interests in a number of listed and unlisted Australian companies. Loan is performing soundly, with all servicing up-to-date. The loan should be repaid during calendar year 2010.
6 US$7m Loan secured and cross-collateralised by controlling interests in five unlisted US companies. Investments managed by transaction partner, Republic Financial Corporation of Denver, USA. Most of the underlying businesses are performing at levels less than forecast, although KBC’s investment continues to be covered by updated business valuations.

Keybridge Capital is a financial services company that has invested in, or lent to, transactions which predominantly are in the core asset classes of property, aviation, shipping and infrastructure.

For further information, please contact:

Mark Phillips
Managing Director
Tel: +61 2 9321 9000
Karen Penrose
Chief Financial Officer
Tel: +61 2 9321 9006