Keybridge Capital Limited

Media Releases


2011 Annual General Meeting
20 October 2011


Before moving to the formal business of the meeting, I would like to comment on Keybridge's performance over the past 12 months and to provide you with our thoughts on the outlook for the Company, including the consequences of the personnel changes we have announced this week.

Keybridge Capital has a portfolio of investments with a focus on the asset classes of aviation, lending, property, shipping and infrastructure.

Some of Keybridge's investments are senior loans, ranking in priority ahead of other creditors and equity; some are equity, with Keybridge being the owner, or co-owner, of the relevant asset. The majority of the Company's investments, though, are either mezzanine loans, or preference equity, ranking ahead of equity, but behind senior debt.

Over the past few years, the knock-on effects from the global financial crisis have affected adversely all the markets in which Keybridge has participated. This has resulted in the Company incurring significant impairment provisions, reducing the value of the Company's assets and its shareholders' funds. It has also meant that, under revised terms for our banking facility, we have been required to follow a cash sweep mechanism that does not permit new investments or dividends to shareholders.

During the past financial year, Keybridge agreed an extension of its debt facility with its banks, with the facility now having a maturity date of 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. This repayment obligation has now been met in full. In fact, it has been exceeded, such that the Company has triggered a reduction in its effective interest margin back-dated to 18 May 2011.

Keybridge incurred a net loss after tax for the year to 30 June 2011 of $34.0 million. An operating loss of $4.3 million was offset by unrealised and realised losses from foreign exchange of $15.5 million and asset impairments of $16.1 million.

The operating loss in 2011 was due to a much reduced level of income, which was the result of:

A lower level of income-generating transactions due to the repayment of investments that generated cash flow during 2010 and 2011; and
A decision for 2011 to recognise in the accounts only income received as cash, whereas in 2010 some accrued income was also recognised.

The level of net impairments in 2011 was materially lower than in 2010. There were two key reasons for the new impairments in 2011:

Firstly, continued weakness in shipping markets led the Company to recognise further write- downs in its shipping investments; and
Secondly, agreement for the accelerated realisation of one of Keybridge's significant aviation investments, whilst beneficial for the overall financial position of the Company, was achieved only at a discount to its previous book value.

Of the Company's total assets as at 30 June 2011, approximately 80% were denominated in either US Dollars or Euros. On average during 2011, just over 60% of these foreign currency assets were hedged by corporate borrowings in the same currency. For the remaining, unhedged component of foreign currency assets, Keybridge's profitability was subject to variability from changes in the value of the Australian Dollar against the US Dollar and Euro.

The losses from foreign exchange in 2011 reflect the appreciation of the Australian Dollar across the year by approximately 25% and 6% against the US Dollar and the Euro, respectively, which resulted in a loss in value of the unhedged foreign currency assets. Given the Company's financial constraints, it has been unable to access foreign exchange hedging contracts to protect itself from these variations.

The percentage of foreign currency assets naturally hedged by foreign currency borrowings did increase during the second half of the 2011 financial year when the Company's remaining Australian Dollar borrowings were converted to US Dollars. The Company's level of bank borrowings as at 30 June 2011 was the equivalent of approximately AUD100 million.

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 to date been more than met by cash generated from investment realisations, as well as from cash-on-hand.

For the time being, we are not able to make new investments, nor make distributions to shareholders. The key objective for the Company has been to achieve repayments of investments so as to reduce our level of borrowings materially. Only when this had been achieved would we be in a position to consider sourcing a more conventional banking facility, which would then allow us to think about resuming distributions to shareholders.


As you would be aware, post 30 June 2011, we agreed terms for the repayment of one of our major aviation transactions. The settlement of that repayment has occurred as expected this month. This has reduced our outstanding borrowings to less than USD60 million. We have another significant repayment from one of our lending transactions that we currently expect will be received by December. Once received, this will reduce our debt to below USD50 million.

This reduction in borrowings improves Keybridge's gearing materially and will result in a significant drop in interest expense.

We currently expect that the shortfall in operating cashflow that has been experienced over the past couple of years should be eliminated over the next few months. The key factors contributing to this improvement are:

Firstly, the substantial reduction in outstanding borrowings facilitated by the investment repayments;
Secondly, 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;
Thirdly, a reduction in our effective borrowing margin as a result of exceeding agreed repayment milestones; and
Fourthly, a reduction in operating costs, to which the personnel changes announced this week will contribute significantly.

Thus, with the Company's gearing and operating cashflow both improving markedly, the Board can now begin to consider options for Keybridge going forward.

In considering any such options, the Board's primary touchstone will be the net value for shareholders. All and any options will be compared with the status quo of winding down the portfolio over the next two to three years and returning capital to shareholders. The first step will be to hold discussions with Keybridge's lending banks to ascertain their views on restructuring the Company's debt facility to allow for a longer term and for a relaxation of the cash sweep to enable distributions to be made to shareholders. These discussions will proceed over the next few months.

You will have seen that Keybridge's current Managing Director, Mark Phillips, has resigned from the Company, effective from 18 November 2011.

Whilst, on the one hand, this is disappointing, the Board understands Mark's reasons for taking this decision. With the material reductions in outstanding borrowings that have been achieved or are in process, the Company is potentially entering a new phase of its recovery. In this phase, achieving further substantial reductions in the Company's operating costs is vital. Mark's decision to offer his resignation was made with this imperative in mind, and we thank him for it. We also thank Mark for his dedication to the Company through what has been a very difficult period. He has guided the Company from what was a precarious position in early 2009, to a position today in which the Company's banks have been substantially repaid and a material return of value to shareholders is in prospect.

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:

Irene Lee
Tel: +61 2 9321 9000


Mark Worrall
Executive Director
Tel: +61 2 9321 9000