Keybridge Capital Limited

Media Releases

Half Yearly Results
14 February 2012

Net loss for the six month period of $4.1 million
Positive operating result of $2 million offset by impairment charges in shipping portfolio
Net tangible assets equal to 26 cents per share
Material reduction of $56.5 million in debt facility achieved in past six months
Discussions underway with Company's lenders to extend term of debt facility

Keybridge Capital reported a net loss of $4.1 million for the half-year to 31 December 2011. The positive operating result of $2.0 million was negatively impacted by a $6.5 million provision against one of the Company's shipping investments.

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

During the last half year, $62.3 million of investment realisations were achieved. The majority of this capital inflow has been used to significantly reduce the Company's borrowings.

The Managing Director of Keybridge, Mark Worrall, said: "The Company has achieved several significant milestones over the past six months. Two of its major assets have been sold, resulting in a material reduction in the level of corporate borrowings. As a consequence, the Company has surpassed its required interim debt repayment milestones and significantly reduced its ongoing interest and operating costs. Additionally, for the first time in the past three years, Keybridge is now in a cash flow positive position, with its forecast cash income for the remainder of the financial year exceeding its aggregate operating costs and interest expenses.

Keybridge's objective is the continued orderly realisation of assets to enable the retirement of the Company's debt in full as quickly as practically possible. This will then allow the Company the liberty to make decisions about its future - be it to continue an orderly wind down process or to determine a new investment strategy to regrow the business.

It has however been necessary to take a further impairment on one of the Company's remaining Shipping investments, given the continued decline in, and poor outlook for, the global shipping industry, and the recent circumstances surrounding the particular investment".


As at 31 December 2011, the written-down value of the Company's investments by asset class was as follows:

% of total

The only variance compared with that advised in the Quarterly Update issued on 6 January 2012 is in the Company's Shipping portfolio, which has been reduced by $6.5 million.

It is important however to note that Keybridge's assets represent the present value to the Company, at the contractually agreed investment rate, of all cash flows that are expected to be realised on that particular asset over the assumed investment period. Some of these cash flows deliver the cash earnings reported by the Company, however the majority of the future income inherent in the current carrying values is yet to be received. For example, the carrying value of investments in the aircraft portfolio take into account Keybridge's cash component of rents received from the underlying lessee of that asset, together with Keybridge's contractual share of the net residual value of that aircraft (as independently appraised by aircraft valuation experts).

These carrying values, and hence all income expectations in determining these values, are continuously reviewed and analysed having regard to the positive and negative impacts on the income expectations (e.g. extended lease terms, lessee solvency etc) and residual values of each of the assets in the Company's portfolio.

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 31 December 2011:

Cash & Other Assets
Shareholders' Funds

This level of shareholders' funds equates to net tangible assets of approximately 26 cents per share.

As at 31 December 2011, approximately 63% of the Company's total assets were denominated in US Dollars and approximately 8% was denominated in Euros. The balance is in Australian dollars. The terms of Keybridge's present debt facility do not allow the Company to hedge these foreign currency assets. The Company has partially mitigated this situation by denominating its corporate borrowings in US Dollars; however the Company is still long in USD and Euros.

Because there is this unhedged component of foreign currency assets, Keybridge's profitability and shareholders' funds will vary with changes in the value of the Australian Dollar against the US Dollar and, to a lesser extent, the Euro. For example, over the past six month period, the Australian Dollar depreciated in value against the US Dollar but appreciated against the Euro, leading to a small overall net increase in value to the Company. As at 31 December 2011, exchange rates were: AUD1.00 = USD1.0154 and EUR0.7850.

The following is the net position in each currency of the Company's balance sheet as at 31 December 2011:

US Dollars
Australian Dollars


Over the last three years, many 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.

For the first time since the Company's asset realisation strategy was implemented three years ago, as a result of the material reduction in debt achieved via the significant investment realisations of the past six months, Keybridge was able to achieve a positive cashflow over the past six months from operating income together with an above book value realisation of one lending investment.

Corporate Debt Facility

The outstanding principal amount under Keybridge's corporate debt facility as at 31 December 2011 was $43.2 million. Over the last six months, the debt facility has been reduced by $56.5 million. All interim repayment milestones under the current debt facility have been met, including satisfaction of repayment targets that resulted in the removal of an additional fee that would otherwise have been payable to the Company's lenders. A further amount of USD1.9millon has been repaid since 1 January 2012, resulting in a current outstanding debt of USD42.0million.

The current debt facility matures in June 2012. The Company has commenced discussions with its banks to extend the maturity date of its debt facility.

As has been the case since June 2009, the Company continues to operate under a cash sweep with its lenders, whereby all cash flow surplus to certain minimum working capital requirements, is applied to debt reduction. For so long as this sweep persists, the Company is unable to make new investments or pay dividends to shareholders.


As stated above, for the time being, the Company is not making new investments. Its priority is to achieve investment realisations to allow it to repay its debt facility in full.

Improvements initially seen in key markets in which the Company operates have been clouded somewhat by the delicate situation in European financial markets. Overall, secondary markets for the assets remaining in the Company's portfolio continue to be characterised by relatively low levels of liquidity and lending. Thus, realising Keybridge's outstanding investments in the shorter term at acceptable prices remains challenging. Expectation is that realisation of remaining investments will occur over a period of approximately two to three years, however all efforts will continue to be made to accelerate this process.

A key objective for the Company in the current half year will be extending the term of its corporate debt on reasonable terms from its lenders that enable it to continue realising assets in the ordinary course. The Company is in constructive discussions with its banks to achieve this.

In due course, the objective is to position Keybridge to rebuild a long-term viable and valuable business or to permit a return of capital to shareholders. Whilst the Company is focused for now on debt repayment, it continues to look for ways in which it may create a profitable and growth orientated business. Implementation of any such strategy will only be possible after further progress has been made with regards to repayment, or refinancing of the outstanding debt.

Attachment 1


6 Months To
31 Dec 2011
6 Months To
31 Dec 2010
Borrowing Costs(2)
Operating Costs
Pre Tax Operating Profit/(Loss)
Foreign Exchange(3)
Net Impairments
Income Tax(3)
Net Profit/(Loss) after Tax

All income recorded in the six months to 31 December 2011 was received as cash.


The average level of borrowings in the six months to 31 December 2011 was $83 million, compared with $128 million in the prior corresponding period. The average cost of borrowings during the past six months was 4% per annum compared with 10.4% per annum in the prior corresponding period. This decrease in the average cost of borrowings reflects the:

* the removal of an additional 1.75% per annum fee by the Company's banks as a result of debt repayment progress; and

* absence of borrowings covered by interest rate swaps that were entered into at a time of high interest rates. These interest rate swaps matured during the half year to June 2011.


The majority of the Company's total assets are denominated in US Dollars and, to a lesser extent, in Euros. Of these foreign currency assets, approximately 80% are hedged by US Dollar corporate borrowings. 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 six months to December 2011, the Australian Dollar depreciated against the US Dollar but appreciated against the Euro resulting in a small net increase in value of the unhedged foreign currency assets. This contrasts with the corresponding period last year where a significant loss occurred as a result of this exposure.

Attachment 2

Performance By Asset Class

Aviation (Total book value $44.6 million)

The Group's aviation portfolio predominantly involves a cross collateralised mezzanine loan to four Airbus A330-300 passenger jet aircraft, built between 1993 and 1996 and managed by Republic Financial Corporation of Denver, Colorado. All four aircraft are leased to major European airlines, with 3 aircraft leased to December 2018, and the fourth leased to November 2012. All aircraft and lease transactions have to date performed as expected and contracted.

Aviation markets have however remained flat in the past six months with aircraft valuations either declining or showing little improvement, especially in older aircraft assets. The aviation industry continues to be impacted by reduced airline profitability, lower secondary market prices of aircraft, opportunistic buyers and a restricted availability of senior bank debt. Selective realisations do however occur with patience and persistence, as evidenced by the fact that in the past six months, the Group received USD45.1 million from its largest aviation asset in October 2011. This repayment arose as a result of the sale of the underlying aviation leasing business into which Keybridge had provided a preferred loan. A further $1.8m was derived from the Republic portfolio via a sell down to Republic of a portion of Keybridge's mezzanine loan to that portfolio.

Keybridge receives monthly distributions of principal and interest from these remaining aviation transactions; however the portfolio is under constant monitoring to seek an early realisation at acceptable values. Keybridge also holds some 5.8 million shares in a small listed general aviation company called PTB Group Limited.

Lending (Total book value $20.7 million)

Keybridge's investments today consist of two material transactions. Over the past six months, Keybridge received $15.2 million from another of its lending transactions.

The first of the remaining investments is a subordinated loan to an Australian motor vehicle leasing business. This transaction has performed as expected since inception and currently repays principal and interest to Keybridge each month. This loan matures at the end of March 2012. The book value of this investment as at 31 December 2011 is $13.5m.

The second of the transactions is a preferred equity investment backed by substantial equity interests in five unlisted US manufacturing companies. This investment is managed by our transaction partner, Republic Financial Corporation, which owns the ordinary equity in the portfolio. While the fund does not presently distribute any income to Keybridge, it has done so in the past and the performance of the underlying businesses in which the fund has invested has improved over the past six months. These businesses however are generally performing at levels at or below what was originally forecast, and recovery of Keybridge's investment has been delayed as a result. The portfolio is regularly reviewed by both the manager and Keybridge with the aim to seek to realise on one or more of the underlying assets so as to enable distribution of income and capital to recommence as soon as practical. Keybridge's carrying value on this investment as at 31 December 2011 is $7.2m.

Property (Total book value $9.6 million)

Keybridge has two material property investments remaining for which it retains a carrying value. One is a subordinated loan backed by a multi staged residential development project in Zetland, Sydney. This development is progressively meeting its required staged milestones but the later stages have been delayed from original timing expectations for a variety of reasons. Thus it is likely to take at least a further 18 months for Keybridge to be repaid once the underlying developments are completed and sold. Each stage requires substantial pre-sale commitments so that the developer is able to secure senior development finance for that stage and to date, all three stages have achieved or bettered their expected sale outcomes once the relevant stage has been completed. Keybridge has no reason to believe that the remaining two stages that require completion from which Keybridge will be repaid will not be financed and completed as expected.

The other property investment is a subordinated mezzanine 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 as all underlying income and capital realisations are swept first to the senior lender. Once this party is repaid in full, Keybridge will then start collecting ongoing income and realisations from the residual portfolio.

Keybridge did not receive any repayments from its investments in this sector over the six months to 31 December 2011.

Infrastructure (Total book value $7 million)

The Company has one remaining infrastructure transaction, being an equity and loan investment in a 1 MW solar electricity facility in Spain. This investment has no senior debt at the asset level.

The decision by the Spanish government in December 2010 to alter legislation to reduce the income able to be earned by solar facilities in Spain has caused secondary market prices for infrastructure investments to fall, primarily through a reduction in income earned but also due to investor confidence surrounding the asset class.

The Company has also advised previously that there have been some production issues at this plant as a result of sub-standard solar panels having been installed during the construction process in late 2008. The head contractor and manager of the plant, being a large global engineering and construction company, is progressively replacing the faulty panels, with all work expected to be completed within the next few months. The plant however now is achieving its required performance targets due to additional work done to improve performance by the contractor, but income has been limited through to 2013 due to the legislative changes in December 2010.

This transaction generates monthly cash income for Keybridge. On rectification of the sub-standard PV panels, Keybridge will seek to sell this asset by way of a limited tender.

Shipping (Total book value $2.6 million)

The book value of the Company's shipping transactions has been reduced following the material provisioning one of the Company's remaining shipping investments.

The demand for vessels in certain sectors, particularly tankers, is failing to keep pace with the number of new ships being built. Most shipping markets have seen a steady decline of charter rates and asset values during the last six months, leading to the cash flow position of many ship owners becoming severely stressed This has resulted in a material increase, over the pat few months, of the number of foreclosures by banks, and bankruptcy filings by shipping companies.

While Keybridge has investments in six vessels, all of which require active management, only one material shipping transaction remains on the balance sheet. This remaining asset is a minority equity investment in and loan to associates that own three ships chartered to a successful, private Singaporean shipping company for a remaining term of 15 months. The ships are employed in the chemical/palm oil and petroleum products sectors, and the Charter is performing according to its terms. Keybridge received a repayment of approximately $0.7 million during the six months to 31 December 2011 from this investment.

Another charterer in an underlying shipping investment has recently requested to terminate its bareboat charter obligations 20 months prior to maturity of the underlying 5-year charter term due to the distressed state of the markets resulting in this party suffering significant losses. Keybridge is currently working with its investment partner, Tufton Oceanic Limited, to reach an acceptable early termination outcome with the charterer, and then to source new employment for the vessel in the short term to maximise its ongoing long term value. While at this date, no acceptable early termination agreement has been reached, the Company has reduced its carrying value for this investment to zero, in light of the continuing worsening shipping market and the likely losses to be incurred arising from exposing the vessel and hence its investors to a depressed trading market consequent on any agreement to early terminate the present charter arrangement.

Keybridge also retains a subordinated loan to a further two large 103,000 DWT oil, bulk, ore carriers (known as OBOs). This loan has been previously provisioned in full, as both vessels have now been returned from charter and are trading in the open voyage charter market under provisional consent from both Keybridge and the assets' senior lender. This arrangement is monitored weekly, and provided the vessels continue to obtain employment which covers their operating costs and the senior lender's interest, with some repayment of principal, Keybridge is endeavouring to retain option value in the future possible recovery of some of its material investment in these vessels. Any such recovery will not possible however until the senior lender has been repaid in full.

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

For further information, please contact:

Mark Worrall
Managing Director
Tel: +61 2 9321 9000