- Changes to debt facility successfully implemented, reducing cashflow variability from currency movements
- Market conditions difficult, affecting repayments and cash income, and heightening uncertainty
- Increasing requirement for recovery actions within investment portfolio
Debt Facility
Keybridge Capital has finalised arrangements with its banks to amend its corporate debt facility and associated foreign currency hedges.
Until now, all of the Company’s corporate borrowings have been denominated in Australian Dollars and it has used forward foreign exchange contracts to hedge the value of its foreign currency investments.
As a result of these hedges, the Company’s profitability was not affected materially by the significant fall in the value of the Australian Dollar that occurred in October 2008. However, because of the drop in the currency, as hedges have been renewed since that time, the Company has been obliged to contribute additional funds to rebalance the forward contracts. This has reduced the Company’s available liquidity.
To remove the potential for ongoing cash outflows as further hedges are renewed over the next two years, the Company has converted its AUD215 million of corporate borrowings plus outstanding foreign currency hedges into a revised set of facilities as follows:
- Borrowings will be denominated in US dollars, Euro and Australian Dollars, with the amounts of these borrowings being USD131 million, EUR12 million and AUD40 million; and
- A reduced amount of new forward foreign exchange contracts, which will mature in January 2011.
As a result of these amended facilities, the capital value of around 90% of the Company’s foreign currency assets will be hedged against changes in the value of the Australian Dollar.
The debt and hedging facilities will continue to be provided by Commonwealth Bank, Bankwest, St.George and NAB.
The final maturity of the debt facility remains June 2011. Consistent with the Board’s strategy to reduce its borrowings, the Company has agreed to make reductions in its borrowings of USD25 million by June 2010 and a further USD45 million by December 2010.
The financial covenants for the debt facility are as follows:
| |
Previous Covenant |
New Covenant |
Latest Actual Level |
| Minimum Shareholders' Funds |
$225m |
$225m |
$259m |
| Minimum Interest Cover |
2.25 times |
2.0 times |
3.2 times |
| Maximum Debt to Assets |
50% |
n/a (1) |
n/a (1) |
Maximum Provisions as % of Assets
|
10% |
10% |
3% |
| (1) This covenant has been removed from the amended facility |
The lending margin under the debt facility has increased from 2% per annum to 3.75% per annum. To arrive at the total cost of borrowing, this margin is added to either the Bank Bill Rate (for Australian Dollars), LIBOR (for US Dollars) or Euribor (for Euro).
The close-out of the old forward foreign exchange contracts will give rise to charges to the Company’s profit and loss. For the six months to June 2009, the after tax charge is expected to be approximately $800,000.
Under the old facility, the Company put in place AUD125 million of interest rate swaps, which locked-in the Bank Bill Rate on part of its borrowings. Under the revised facilities, 80% of these interest rate swaps are to be converted to US Dollars. The face value of the new swaps will be USD70 million and the fixed rate will be 5.68% per annum.
Balance Sheet Impact
As at 31 December 2008, the gross value of the Company’s investments was AUD505 million. This was offset by a negative revaluation of outstanding foreign currency hedges of AUD52 million, leading to a net investment level of AUD453 million. Drawings under the corporate debt facility were AUD215 million.
With the amendment to the borrowing facilities, existing foreign currency hedges were closed-out, with the negative valuation of these hedges being funded by additional corporate borrowings. As a result, based on exchange rates as at 31 March 2009, the Company’s investments were equivalent to AUD508 million and its corporate borrowings were equivalent to AUD252 million.
There is no material change in the Company’s shareholders’ funds as a result of the amendment to the borrowing facilities.
Investment Portfolio
The following table compares the gross value of the investment portfolio as at 31 March 2009 with that as at 31 December 2008.
| |
31 Dec '08
AUDm |
31 Mar '08
AUDm |
% of Total |
| Property |
117 |
114 |
22% |
| Aviation |
175 |
179 |
35% |
Shipping
|
100 |
100 |
20% |
Infrastructure
|
67 |
70 |
14% |
| Other |
46 |
45 |
9% |
| Total |
505 |
508 |
100% |
The Company has made no new investments in the quarter. Thus, the change in investment levels reflects the impact of changes in exchange rates, net of repayments and accruals of income.
The portfolio contains 30 individual investments, 66% denominated in US Dollars, 22% in Australian Dollars and 12% in Euro.
Investment Performance
Conditions in most markets in which the Company invests remain difficult and, in the main, have continued to deteriorate further over the past three months.
The constrained levels of liquidity in the different markets are affecting the amount of cash income received by the Company, as well as its ability to realise investment repayments. In the March quarter, approximately 35% of the Company’s investment income was received as cash, about a half of the amount we would have expected in a more normal market. The remainder of the Company’s investment income is accrued to be received in the future.
Investment repayments in the March quarter were only $5.2 million. This reflected the difficulties, in the current environment, associated with the sale of assets and with counterparties raising new debt finance. As a result of the slowdown in investment repayments, Keybridge and its various transaction partners are increasing the number of recovery actions being pursued to bring forward cashflow realisations.
An updated commentary on each of the Company’s investments is provided in the Attachment to this release.
Outlook
The Company has been profitable in the March quarter. Because of the weakening conditions in the Company’s investment markets, however, there is a heightened risk that further investment provisions will be required in the Company’s end-of-year accounts. The level of such provisions will depend on the performance of asset and credit markets over the next three to six months. Should conditions not improve, the level of additional provisioning is likely to cause the Company to declare a loss for the year to 30 June 2009.
The Company’s focus remains on achieving debt repayments and on enhancing overall value for shareholders. Whilst we expect that investment repayments will continue to be difficult to achieve over the next twelve months, we are looking to achieve realisations over this period of at least $40 million.
Full Year Results
The Company will be releasing its full year results on 6 August 2009.
Keybridge Capital is a financial services company that invests in, or lends to, transactions backed by real assets, financial assets or cashflow. Its core asset classes are property, aviation, shipping and infrastructure.
Investment Portfolio
A. Property Investments
Transaction Number |
Book
Value |
Description |
Status |
1 |
A$31.2m |
Subordinated loan, secured and cross-collateralised by eight different residential and mixed use projects in Eastern Australia, as well as by parent guarantee. |
The majority of the underlying projects continue to perform satisfactorily. The financing for one project, in Brisbane, has been delayed due to the exit of a foreign bank. Alternative financing is being pursued. |
2 |
A$7.7m |
Preferred equity investment in a residential and retail development in Zetland in Sydney. |
KBC is restructuring its investment to facilitate a new equity participant and the financing of stage 2 of the project. It is expected this will support the book value of KBC’s investment. |
3 |
A$24.1m |
Two cross-collateralised senior loans backed, in turn, by two mezzanine loans, each secured by Queensland properties. One is an existing property on the Gold Coast and the other is a residential development on the Sunshine Coast. Parties associated with the originator and manager of the loans provide a first loss of $7m to support KBC’s investment. |
The Gold Coast loan is past due and a range of recapitalisation options are being pursued. Presales at the Sunshine Coast development were progressing satisfactorily but have now been affected significantly by the slowdown in the market. The expected outcome is an extension of term, with the senior and mezzanine loans being serviced by the rental income from unsold apartments. |
4 |
A$1.2m |
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$7.5m |
Subordinated loan secured by a pool of Australian commercial mortgages. |
Pool is gradually being wound down via the refinancing of the underlying loans. The senior financier is 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%. This notwithstanding, we anticipate an increased number of problem loans as the pool reduces in size. There have been no write-offs in the pool to date. |
6 |
A$1.5m |
Senior loan to an Australian wine company that entered voluntary administration in 2008. |
KBC received further repayments in March 2009. Recovery of the outstanding loan balance is being pursued against remaining assets. |
7 |
US$11.1m |
Subordinated loan secured by a condominium project in Chicago, USA. Loan is overseen by KBC transaction partner, Terra Capital. |
Settlement of presales is occurring, with the senior debt being repaid first. We now expect our loan will be repaid in the second half of this calendar year due to a slowdown in the speed of settlements and new sales. |
8 |
US$7.2m |
Subordinated loan secured by condominium project in Chelsea district of Manhattan. This loan is also overseen by Terra Capital. |
Sales within this project have stalled. The project is 90% complete. A cost overrun of $2m requires funding and Terra Capital, KBC and the senior lender are working together to resolve. It is not expected that KBC will advance further funding. KBC holds additional security on a property in Brooklyn, NY and recovery against this security has been initiated. |
B. Aviation Investments
Transaction Number |
Book Value |
Description |
Status |
1 |
US$54.1m |
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 over five years to 25 international airlines. Average age of the fleet is under six years. The owner of the portfolio manager has invested US$35m to provide KBC with a first loss buffer. |
The individual aircraft are predominantly newer generation and the lessee airlines generally are of higher credit quality. These factors continue to support the book value of KBC’s investment. Whilst a small number of airlines within the portfolio have been late in meeting lease payments to date, these have, in the main, been recovered in full. The ongoing receipt of lease payments remains a key determinant of the health of this investment. |
2 |
A$14.5m |
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$52.3m |
Three mezzanine loans secured by five wide body passenger aircraft leased for an average remaining term of approximately 2.5 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 support KBC’s investment. Lease payments on one aircraft are in arrears and enforcement action is being progressed. |
C. Shipping Investments
Transaction Number |
Book Value |
Description |
Status |
1 |
US$26m |
Two investments in a company that owns 17 handysize bulker vessels, chartered for an average term of over two years to seven major shipping companies. One investment (US$18m) is a loan secured by equity in the company, with a US$5.4m first loss supporting the loan. The other investment (US$8m) is directly in the equity of the company, with no first loss protection. |
The significant softening in the bulk shipping market over the past six months has removed the materially positive valuation buffer that supported these investments. It has also introduced vulnerability with respect to the loan to valuation tests within the senior debt financings. All senior debt, however, is 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. |
2 |
US$16.3m |
Two equity investments in four ships leased to two shipping companies for an average remaining term of over four years. Three ships are employed in the chemical/palm oil sector and one is in the petroleum products sector. |
These investments continue to perform soundly, underpinned by strong charters. |
3 |
US$26.3m |
Equity investment in two ships chartered to an investment-grade rated company listed on the NY Stock Exchange. Remaining term of charters is three years. |
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 and the remaining term of the charter is a positive factor. The returns from these vessels will be lower than originally forecast due to higher than budgeted costs. |
D. Infrastructure Investments
Transaction Number |
Book Value |
Description |
Status |
1 |
A$5.0m |
Subordinate loan underpinned by an Australian income producing ethane pipeline. |
Loan is performing soundly. |
2 |
US$3.0m |
Senior loan secured by a well performing water operations and maintenance business in the US, supported by a put to the ultimate parent company. |
Loan is performing soundly. |
3 |
EUR11.0m |
Equity investment in an operating wind farm in Midlum, Germany. |
Electricity production, whilst lower than forecast in January and February 2009, has tracked broadly according to expectations since acquisition of the asset in January 2007. Electricity is sold to an investment-grade rated power utility at a tariff which is fixed for a further 11 years. |
4 |
EUR21.2m |
Equity investments in two new 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. After some early “teething” issues, both parks are now producing at expected levels. Returns from one park will be lower than originally anticipated due to higher than budgeted development costs. |
E. Other Investments
Transaction Number |
Book Value |
Description |
Status |
1 |
A$9.0m |
Senior loan secured by IT leases to small and medium-sized Australian businesses. |
Loan is performing soundly. |
2 |
US$14.3m |
Senior loan to a retailing business in China. |
A restructuring of this transaction did not proceed due to the financial difficulties of one of the shareholders. KBC and its China-based co-lender have now enforced security to accelerate recovery of the loan. |
3 |
US$5.4m |
Senior loan to a copper production company, with operations principally in Chile. |
Receiver has been appointed. Company’s assets are being offered for sale. The estimated range of recoveries underpins KBC’s book value. |
4 |
A$15.0m |
Subordinated loan to an Australian motor vehicle leasing business. |
Borrower is continuing 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$2.75m |
Senior loan secured and cross-collateralised by ownership interests in a number of listed and unlisted Australian companies. |
Loan is performing soundly. |
6 |
US$6.5m |
Loan secured and cross-collateralised by controlling interests in five unlisted US companies. Investments managed by transaction partner, Republic Financial Corporation of Denver, USA. |
KBC’s investment is covered by updated business values. |
|
