Keybridge Capital Limited

Media Releases

Half Yearly Results
04 February 2010

Loss for the half year of $39 million
Net tangible assets equal to 50 cents per share
Bank debt repayments ahead of schedule
Operating environment remains uncertain

Keybridge Capital reported a loss of $39 million for the six months to 31 December 2009. An operating profit of $4 million was offset by new impairment provisions of $18 million, a net write-down of $14 million in the value of deferred tax assets and foreign currency losses of $11 million.

A breakdown of the half year result is provided in Attachment 1.

From June 2009 up to the date of this release, $40 million of investment repayments have been received. With the Company not making new investments, the bulk of this cashflow has been, or will be, used to pay down the Company's corporate borrowings.

The Managing Director of Keybridge, Mark Phillips, said: "Conditions remain challenging in our markets for achieving investment repayments and maintaining equity value for shareholders. We are pleased to have made headway in reducing our borrowings and, for now, this remains our key objective."


As at 31 December 2009, the written-down value of the Company's investments by asset class was as follows:


Since the end of the half year, $16 million of additional repayments have been received: Approximately $10 million from an Aviation investment and $6 million from a Lending transaction.

At 31 December 2009, the Company took additional impairment provisions against its investments of $18 million. These provisions arose, in part, because Keybridge had either agreed to accept, or was considering accepting, accelerated repayment of some investments at a discount to its book value. Another factor was the continuing difficult operating environment for many of the Company's investments.

Since June 2009, Keybridge has received repayments from nine separate investments. A majority of the repayments were in the Infrastructure asset class, with the remainder being in Aviation, Lending and Property.

Over the past 12 to 18 months, a range of the Company's investments have stopped paying cash income to Keybridge. This has been 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 December half of 2009, Keybridge received cash income of approximately $8.5 million, representing 59% of total income.

Attachment 2 includes a description of Keybridge's remaining portfolio of investments.

Attachment 3 includes a summary of the performance of the Company's investments by asset class.

Balance Sheet

The Company's investments are denominated in US Dollars, Euros and Australian Dollars. The foreign currency investments are hedged, on average, as to approximately 60% by borrowings in the same currencies. Because there is an unhedged component, Keybridge's profitability and shareholders' funds are subject to variability with changes in the value of the Australian Dollar. Over the six months to December 2009, the Australian Dollar appreciated in value, rising from 81 to 90 US cents. As a result, the Company incurred foreign currency losses in this period, with the majority being unrealised.

At 30 June 2009, Keybridge held an intangible asset in the form of a Deferred Tax Asset (DTA). With market conditions, and the Company's future profitability, being uncertain, it was decided to write-down the DTA by a net $14 million, reducing its value to zero.

A simplified balance sheet for the Company as at 31 December 2009 was as follows:

Shareholders' Funds

This level of shareholders' funds equates to net tangible assets of 50 cents per share.

Corporate Debt Facility

Keybridge had $189 million of outstanding corporate borrowings as at 31 December 2009. This level of borrowings includes $9 million of revaluation losses on interest rate swaps undertaken in prior periods to lock-in the bank bill cost of the Company's debt.

Since the end of the half year, borrowings have been reduced by a further $10 million in January and another amount of approximately $6 million should be repaid in February. This would bring total debt repayments since June 2009 to $37 million.

The debt facility matures in June 2011. Ahead of that, the Company has to meet a schedule of prepayment obligations. The repayments anticipated by the end of February 2010 satisfy this schedule through to September 2010. By December 2010, a further $25 million of repayments have to be made. The Company is confident of achieving this requirement.


The Company has a management team of six executives. The Keybridge Board is conscious that retaining and motivating these executives is important for the ongoing recovery of the Company.

In the 2009 financial year, key performance criteria were not met and no incentive payments were made to the management team.

Given the changed operating conditions for the Company as a result of the financial crisis, the Board has determined that new remuneration arrangements for executives should be introduced for the 2010 and 2011 financial years. These new arrangements reflect the importance of retaining and motivating staff, whilst ensuring that the key objectives of the Company are met and that cash payments are kept to a minimum.

Subject to key performance criteria being satisfied, the new arrangements allow for incentive payments to be made to executives in addition to their base salaries. These payments are to be split broadly 50/50 between a cash component and an allocation of shares in the Company. In aggregate for all executives, the cash payments in each year would be up to approximately $600,000, or 37.5% of total base salaries. The share component is for a broadly equivalent aggregate value and could see up to 5.6 million shares issued in 2010 and up to 4.6 million shares issued in 2011. On a fully diluted basis, these maximum shares across the two years would equal 5.6% of the Company's total shares on issue. Once allocated, the shares would be subject to a sales restriction under which the executive would not be able to sell or otherwise deal with the shares for a period of one year, at which point the executive would be able to deal with half of the shares. The executive would not be able to sell or otherwise deal with the remaining half of the allocated shares for a further one year period.

The key performance criteria applying to these incentive payments relate to the Company's profitability, the reduction of outstanding borrowings, development of a longer-term business plan and stakeholder management.


For the time being, the Company is not looking to make new investments. Its priority is to achieve realisations of investments to repay its debt facility. It is only after outstanding borrowings have been reduced significantly that a resumption of distributions to shareholders can be contemplated.

Keybridge's strategies for the next 6 to 12 months remain as follows:

  • To keep operating costs as low as practicable;
  • To bring forward investment realisations wherever possible; and
  • For those transactions where this is not practicable, to preserve as much value for the Company and its shareholders as possible.

This last point is particularly relevant for the Company's aviation and shipping investments. In these asset classes, significant realisations are impractical in current market conditions.

It is likely that repayment of the Company's debt facility will take approximately a further three years to achieve.

Attachment 1

First Half Profitability

December Half
December Half
Borrowing Costs(2)
Operating Costs
Pre Tax Operating Profit
Foreign Exchange(3)
Impairment Provisions
Income Tax(4)
Net Profit After Tax

With the majority of investments being treated as non-income accruing, the average return on investments in the latest half was approximately 10% per annum, compared with 16% per annum in the corresponding period last year.


The average level of borrowings in the December half 2009 was $197 million, compared with $187 million in the corresponding period in 2008. The average cost of borrowings in the latest half was approximately 8% per annum, compared with approximately 9% per annum in the corresponding period last year.


The foreign exchange loss in the latest half year reflects the fact that, in May 2009, Keybridge closed-out its remaining foreign exchange hedging contracts. Of the Company's total assets, the majority are denominated in either US Dollars or Euro. Of these foreign currency assets, approximately 60% 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. Over the course of the latest half, the Australian Dollar has appreciated against those two currencies, leading to a loss in value of the unhedged foreign currency assets.


In the latest period, the Company wrote-off the value of its Deferred Tax Assets, leading to this negative income tax outcome.

Attachment 2

Investment Portfolio

A. Property: Total book value $29 million
Transaction Number
1 Subordinated loan, secured by seven different residential and mixed use projects in eastern Australia. The borrower has appointed voluntary administrators.
2 Preferred equity investment in a residential and retail development in Zetland in Sydney. This project requires additional capital to achieve completion.
3 Two cross-collateralised senior loans backed, in turn, by mezzanine loans secured by two Queensland development properties. Parties associated with the manager of the loans have provided a first loss of $7m to support KBC's investment. Of the two properties, a receiver has been appointed to one, and the other has been affected by a significant slowdown in sales activity.
4 Subordinated loan secured by an industrial property in Botany in Sydney.
5 Subordinated loan secured by a pool of Australian commercial mortgages. The pool is being reduced gradually via the refinancing of the underlying loans, with the senior lender being repaid first.
6 Subordinated loan secured by a condominium project in Chicago. Sales activity has picked-up, albeit at reduced prices.
7 Subordinated loan secured by a condominium project in Manhattan. This project has entered provisional receivership and there is currently little or no sales activity.

B. Aviation: Total book value $140 million
Transaction Number
1 Loan secured by an equity share in four aircraft portfolios containing a total of 47 narrow body and three wide body passenger aircraft leased for an average remaining term of approximately four years to 24 international airlines. Average age of the fleet is approximately seven and a half 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, and all but a small minority of lease payments have been paid on time.
2 Three mezzanine loans secured by five wide body passenger aircraft leased for an average remaining term of approximately four years to three international airlines. One lessee airline defaulted on its lease payments and enforcement action under a corporate guarantee is being progressed. The aircraft has been redeployed under a new lease to a different airline. The other lessees in the portfolio are meeting their obligations on time.
3 Loan to an ASX listed aviation company. This loan was repaid in January 2010.

C. Shipping: Total book value $36 million
Transaction Number
1 Equity and preferred equity investments in a company that owns 15 handysize bulker vessels, chartered to 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. The young average age of the vessels is a positive supporting factor in the current environment. Despite this, the longer-term support of the banks is yet to be obtained.
2 Two equity investments in four ships leased to two shipping companies for an average remaining term of approximately 3.5 years. The ships are employed in the chemical/palm oil and petroleum products sectors. All charter payments are up-to-date. A loan-to-valuation breach has occurred in one investment, with the relevant financier agreeing to waive the breach.
3 Two equity investments in four ships leased to two shipping companies for an average remaining term of approximately 3.5 years. The ships are employed in the chemical/palm oil and petroleum products sectors. All charter payments are up-to-date. A loan-to-valuation breach has occurred in one investment, with the relevant financier agreeing to waive the breach.

D. Infrastructure: Total book value $22 million
Transaction Number
1 Equity investment in a wind generation facility in Germany. Electricity production was lower than forecast in the six months to December 2009. Electricity is sold to an investment-grade power utility at a tariff which is fixed for a further 10 years.
2 Equity investment in a solar generation facility in Spain. Electricity is sold to an investment-grade rated power utility at a tariff which is fixed, but subject to CPI escalation, for 20 years. The facility was completed in 2008. Early production issues are on track to being resolved.

E. Lending: Total book value $41 million
Transaction Number
1 Senior loan secured by computer and other IT leases to small and medium-sized Australian businesses. All principal and interest payments up-to-date.
2 Senior loan to a retailing business in China. KBC and its Chinese co-lender have enforced their security.
3 Senior loan to a copper production company, with operations principally in Chile. Receiver has been appointed and the Company's assets are being sold. Since June 2009, Keybridge has received repayments of approximately $8 million from this investment.
4 Subordinated loan to an Australian motor vehicle leasing business. All interest up-to-date. Loan matures in 2010.
5 Senior loan secured and cross-collateralised by ownership interests in a number of listed and unlisted Australian companies. All servicing of the loan is up-to-date. Loan matures in 2010.
6 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.

Attachment 3

Performance By Asset Class

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 a slowdown in sales activity and the fall in prices in residential markets in these locations. Whilst conditions in the property markets have shown signs of improvement, sales and prices are yet to improve significantly. Keybridge realised only $900,000 from its property investments in the six months to December 2009. There is the potential for increased realisations in the current half.


The Company's aviation transactions predominantly are preferred equity or 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 leasing the aircraft in Keybridge's investments have, in the main, performed soundly. Liquidity and prices in aircraft markets, however, are yet to improve sufficiently for the Company to have a realistic opportunity of realising most of its aviation investments. Despite this, the Company negotiated the early repayment of one of its investments in this asset class, albeit at a discount to book value, with this repayment occurring in early January 2010.


Keybridge's shipping transactions are ordinary and preferred equity investments in cargo-carrying vessels. Short-term charter rates and secondary market prices of vessels have fallen materially over the past 12 to 18 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 for Keybridge to maintain its carrying values. All the charterparties in Keybridge's portfolio continue to meet their payment obligations on time and there has been some improvement in charter rates and ship prices in recent times. This notwithstanding, markets will need to continue to improve materially before Keybridge will be able to realise its investments.


The Company has two remaining investments, being equity investments in wind and solar 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. In the past six months, the Company has had two infrastructure loans repaid and has sold one Spanish solar investment. It is pursuing opportunities to sell its remaining two investments.


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. The Company has received some repayments in this asset class over the past six months and anticipates further repayments in the current half.

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