Keybridge Capital Limited

Media Releases

2011 Full Year Results
11 August 2011

Loss for full year of $34.0 million, with a further negative contribution from foreign exchange
Aviation repayment results in increased asset writedowns but places Keybridge in stronger financial position
Net tangible assets equal to 29 cents per share
Objective is to reduce borrowings further to enable consideration of resuming distributions to shareholders

Keybridge Capital reported a loss of $34.0 million for the year to 30 June 2011. A material portion of this loss arose from foreign exchange losses caused by the continuing appreciation in the value of the Australian Dollar.

A breakdown of the result is provided in Attachment 1. (Currency amounts in this release are denominated in Australian Dollars, unless otherwise specified.)

The Company earned a small operating profit in the second half of the year, although this was offset by foreign exchange losses and asset impairments. The impairment in asset values in the second half reflected continuing weakness in shipping markets but also a strategy of seeking to accelerate the repayment of one of the Company’s aviation investments.

The pace of repayments slowed as the year progressed. This was due to the investments remaining in the portfolio being subject to illiquid underlying markets, particularly in aviation and shipping. With the priority remaining on reducing borrowings further, the Company has been focused on achieving a repayment of at least one of its aviation investments. The carrying value of one investment was reduced, as a result, to recognise that such an accelerated realisation would likely need to be achieved at a discount to book value.

Contracts have now been entered into for the repayment of this aviation investment. This will result in Keybridge receiving a repayment amount of no less than USD45 million by mid October 2011, which is consistent with the revised carrying value for this transaction. This repayment will allow a material further reduction in outstanding borrowings and, as a result, will place the Company in a stronger financial position.

During the 2011 financial year, Keybridge realised $33 million of recoveries from its investments. With the Company not making new investments, the bulk of this cashflow was used to pay down corporate borrowings. All repayment obligations required to be met during the year under the Company’s banking facility were more than satisfied. The maturity of this facility was extended during the year to June 2012.


As at 30 June 2011, the written-down value of the Company’s investments by asset class was as follows:


Attachment 2 includes a summary of the performance of the Company’s investments by asset class.

Balance Sheet

The following is a simplified balance sheet for the Company as at 30 June 2011:

Cash-on-Hand & Other Assets
Shareholders’ Funds

This level of shareholders’ funds equates to net tangible assets of approximately 29 cents per share.

As at year end, 75% of the Company’s total assets were denominated in US Dollars with a further smaller amount in Euros. The terms of Keybridge’s debt facility do not allow access to forward contracts to hedge these foreign currency assets. The Company partially mitigated this situation by denominating the majority of its corporate borrowings in US Dollars.

During 2011, the US Dollar assets were hedged, on average, as to almost two-thirds by borrowings also in US Dollars. Because there was an unhedged component of foreign currency assets, Keybridge’s profitability and shareholders’ funds varied with changes in the value of the Australian Dollar against the US Dollar and, to a lesser extent, the Euro. In 2011, the Australian Dollar appreciated in value materially against these currencies. As a result, the Company incurred foreign currency losses.

By year-end, Keybridge had converted its remaining Australian Dollar borrowings into US Dollars. As a result, as at 30 June 2011, approximately 89% of its US Dollar assets were hedged by borrowings in the same currency. This has reduced the net currency exposure of the Company’s balance sheet to a level which is materially lower than applied during the 2010 and 2011 financial years.

The following is the net position in each currency of the Company’s balance sheet as at 30 June 2011:

US Dollars
Australian Dollars


Over the last two years, a range of the Company’s investments have stopped paying cash income to Keybridge. This has been due principally to the effects of the global financial crisis on underlying asset markets, which required cashflows from the various assets to be used to accelerate repayment of transaction-specific senior debt, rather than being paid to subordinated investors such as Keybridge.

In addition, a number of the Company’s income-producing investments have been repaid over the past 12 months. As a result of these factors, there is presently a shortfall between the Company’s cash income and its fixed commitments of bank interest and operating costs. This shortfall has been more than met by cash generated from investment realisations, as well as from cash-on-hand.

This cashflow shortfall is expected to be reduced over the course of the 2012 financial year. The key factors contributing to this improvement are as follows:

The maturity during the half year to June 2011 of the Company’s interest rate swaps, which had been adding materially to the cost of borrowings;
The further reduction in outstanding borrowings facilitated by the aviation repayment; and
An anticipated reduction in operating costs.

Corporate Debt Facility

By 30 June 2011, Keybridge had reduced its outstanding corporate borrowings to $100 million. Over the course of the year, borrowings fell by $45 million.

In April 2011, the Company and its banks agreed an extension in the maturity of Keybridge’s debt facility to 2 June 2012. The revised terms include a minimum repayment obligation of $12.5 million for the period from 31 December 2010 to 2 December 2011. By today’s date, $9.4 million of this requirement has been satisfied. The repayment of the aviation transaction will allow this banking obligation to be met in full. It will also allow satisfaction of a minimum repayment threshold of $20 million, which triggers a reduction in the effective borrowing margin under the debt facility from 5.25% per annum to 3.75% per annum.

The lending facility continues to require the Company to sweep all spare cash to the banks. This prevents the making of new investments and the payment of dividends to shareholders.


For the time being, the Company is not making new investments. Its priority is to achieve realisations of investments to repay its debt facility.

The repayment of the aviation investment that is contracted to occur no later than mid October 2011 places the Company in a materially improved financial position. The key objective for Keybridge is to continue achieving investment repayments so as to reduce borrowings even further.

If this is achieved, as the 2012 financial year progresses, the Keybridge Board can begin to consider when distributions to shareholders may be able to resume and whether the Company should commence investing again.


Attachment 1



6 Months To
31 Dec ‘10
$ millions

6 Months To
30 Jun ‘11
$ millions
Full Year
$ millions
Full Year
$ millions
Operating Expenses
Borrowing Costs2
Pre Tax Operating Profit
Foreign Exchange3
Net Impairments
Income Tax4
Net Loss After Tax



All income recognised in 2011 was received as cash. This is a change from 2010, when $10.7 million of accrued income was included in the accounts. The repayment of investments also contributed to the fall in income from the previous year.


The average level of borrowings in 2011 was $116 million, compared with $176 million in 2010. The average cost of borrowings during the 2011 financial year was 9.6% per annum, compared with 8.9% per annum in the prior year. This increase in the average cost of borrowings reflects a full year’s effect of an additional charge levied by the Company’s banks, as well as an increase in the percentage of borrowings being covered by higher cost interest rate swaps as repayments were made. These interest rate swaps have now matured.


The majority of Keybridge’s assets are denominated in US Dollars and, to a smaller extent, Euros. The terms of Keybridge’s debt facility do not allow access to forward contracts to hedge these foreign currency assets. The Company partially mitigated this situation by denominating the majority of its corporate borrowings in US Dollars. For the unhedged component of its 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 12 months to June 2011, the Australian Dollar appreciated against those two currencies, leading to a loss in value of the unhedged component of the unhedged foreign currency assets. A similar outcome occurred in 2010.


The loss from income tax in 2010 arose because the Company wrote-off the value of its Deferred Tax Assets in that year.

Attachment 2

Performance By Asset Classs


Total book value $86 million. The Company’s aviation transactions predominantly involve preferred equity and mezzanine loan investments in passenger jet aircraft. The aviation industry continues to be impacted by reduced airline profitability, reduced secondary market prices of aircraft and a reduced availability of senior bank debt. In the past year, the Company received $9.6 million in repayments from its aviation investments.

Keybridge has two key remaining aviation assets. One is a preferred equity interest in four aircraft portfolios containing a total of 46 narrow body and three wide body passenger aircraft leased for an average remaining term of over three years to 23 international airlines. This investment is now contracted to be repaid during the six months to December 2011.

This transaction has not generated any cashflow for Keybridge since 2008 and this was not expected to change over the medium term. Also, over the past 12 to 18 months, the Company has been incurring significant costs in managing this transaction.

The other aviation investment is a mezzanine loan backed by five wide body passenger aircraft leased for an average remaining term of over two years to three international airlines. During the year, one airline lessee in this portfolio defaulted on its obligations. This aircraft is being sold by the senior lender and Keybridge’s carrying value was amended as at 31 December 2010 to reflect a nil recovery for the Group from this aircraft.

Keybridge receives monthly payments of principal and interest from this aviation transaction.


Total book value $33 million. These investments consist of a senior ranking loan, a subordinated loan and a preferred equity investment across a variety of industries. One of the investments repays interest and principal each month. The other two transactions are not currently paying cash distributions to Keybridge. Over the past year, Keybridge received $10.9 million of recoveries from its lending transactions.

Keybridge’s remaining lending transactions are as follows:

A subordinated loan to an Australian motor vehicle leasing business: The borrower has recently completed an extension of its senior loan facility. It is currently anticipated that the ongoing performance of the business should see Keybridge’s subordinated loan repaid from cashflow over time.
A preferred equity investment backed by controlling interests in five unlisted US companies: This investment is managed by transaction partner, Republic Financial Corporation, which owns the ordinary equity in the portfolio. Most of the underlying businesses are performing at levels at or below what was originally forecast, and recovery of Keybridge’s investment has been delayed as a result.
A senior ranking loan secured by a Chinese retailing business: Keybridge currently anticipates that there will be a material repayment under this loan in the six months to 31 December 2011.


Total book value $10 million. In the past 12 months, Keybridge realised $11.9 million in repayments from its investments in this sector.

Keybridge has two material property investments remaining. One is a subordinated loan secured by a development in Zetland in Sydney. This development is meeting its required milestones, although it is likely to take at least a further 18 months for Keybridge to be repaid.

The other property investment is a subordinated loan secured by a pool of Australian commercial mortgages. The 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 are first ranking. It is likely to take a further 2 to 3 years for Keybridge to be repaid.


Total book value $9 million. In shipping markets, charter rates and secondary market prices of vessels have fallen materially over the past few years. 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.

Keybridge has two material shipping investments remaining. These are equity investments in four ships leased to two shipping companies for an average remaining term of just over two years. The ships are employed in the chemical/palm oil and petroleum products sectors.

These transactions are not currently making cash distributions to Keybridge. The underlying charter parties are continuing to meet their payment obligations on time and cashflow is being used to accelerate senior debt reduction.

In 2011, the Group realised $0.7 million in repayments from its shipping investments.


Total book value $7 million. The Company has one remaining infrastructure transaction, being an equity investment in a solar electricity facility in Spain. This investment is currently ungeared, having no senior debt at the asset level.

The secondary market prices for infrastructure investments have fallen over the past two years. This has been exacerbated by a decision by the Spanish Government in December 2010 to alter legislation to reduce the income able to be earned by solar facilities in Spain. In addition, there are some production issues at this plant as a result of sub-standard solar panels having been installed. The constructor and manager of the plant, being a large global engineering and construction company, is progressively replacing the faulty panels.

This transaction generates monthly cash income for Keybridge.

For further information, please contact:

Mark Phillips
Managing Director
Tel: +61 2 9321 9000