- •Result for the full year was a loss of $129 million
- •Underlying operating profit of $35 million offset by investment writedowns
- •New banking terms agreed: Company able to pursue orderly realisation of assets
- •Major focus is on reducing level of outstanding borrowings
Keybridge Capital reported a loss of $129 million for the year to 30 June 2009.
An operating profit of $35 million was offset by impairment provisions of $151 million. Of these provisions, $126 million were taken as at 30 June. A breakdown of the 2009 result, compared with that for 2008, is provided in Attachment 1.
The Managing Director of Keybridge, Mark Phillips, said: “The past 12 months have been testing for the Company. As the year unfolded, the knock-on effects from the US housing downturn affected adversely virtually all the markets in which Keybridge participates.”
“The new debt terms agreed with our banks enable us to move forward in the ordinary course. We are focused on achieving realisations of investments to reduce our borrowings significantly. In time, this will allow us to resume distributions to shareholders.”
“Challenges remain, however, because the asset markets in which the Company operates continue to be characterised by illiquidity and depressed trading conditions.”
As at 30 June 2009, the written-down value of the Company’s investments by asset class was as follows:
| |
AUD
million |
% |
| Property |
37 |
11% |
| Aviation |
148 |
46% |
| Shipping |
47 |
15% |
| Infrastructure |
45 |
14% |
| Lending |
47 |
14% |
| |
324 |
100% |
The Company’s investments are denominated in US Dollars, Euros and Australian Dollars. The foreign currency investments are hedged as to almost 70% by borrowings in the same currencies. Keybridge’s profitability and shareholders’ funds, therefore, are subject to variability as movements in the value of the Australian Dollar impact the unhedged component of foreign currency investments. The Company’s simplified balance sheet as at 30 June 2009 is as follows:
| |
AUD
million |
Currency Composition |
| Cash & Other |
13 |
|
| Investments |
324 |
USD177m
EUR 23m
AUD 69m |
| Borrowings |
(215) |
USD127m
EUR 12m
AUD 39m |
| Shareholders’ Funds |
122 |
|
This level of shareholders’ funds is equal to net assets of $0.71 per share.
Investment Performance
The new impairment provisions taken as at 30 June reflect market conditions across Keybridge’s asset classes. A progress report on each of the Company’s current investments is provided in Attachment 3. We can summarise the performance of the various segments of the investment portfolio as follows:
Property: 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 the slowdown in sales activity and the fall in prices in residential markets in these locations. Keybridge has raised provisions against its property investments equal to 62% of original asset values.
Aviation: The Company’s aviation transactions predominantly involve preferred equity and 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 underpinning Keybridge’s investments have, in the main, performed soundly. Only one aircraft within the portfolio has been repossessed due to the default of the lessee airline. Keybridge has raised provisions equal to 5% of the aggregate aviation portfolio.
Shipping: Keybridge’s shipping transactions are ordinary and preferred equity investments in vessels that carry wet or dry cargoes. Short-term charter rates and secondary market prices of vessels have fallen over the past 12 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. A factor that provides confidence that this should occur is that all the charterparties in Keybridge’s portfolio continue to meet their payment obligations on time. Reflecting the depressed conditions in shipping markets, the Company has raised provisions equal to 45% of the aggregate shipping portfolio.
Infrastructure: The Company has five infrastructure investments: Two loans which should be repaid during 2010 and three equity investments in renewable 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. The Company intends to progress sales of its renewable investments and, as a result, has raised provisions equal to 28% of the aggregate infrastructure portfolio.
Lending: 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 at the present time. The Company has initiated actions in two of these transactions to have the loans repaid. Provisions equal to 15% of total lending assets have been raised.
Cashflow
Over the course of the year, a range of investments stopped paying cash income to Keybridge. This was 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 second half of 2009, cash income fell to 34% of total income, compared with 60% in the first half of the year. In the second half, the Company also classified some investments as non-income accruing, which lowered operating profit in this period.
In the 12 months to 30 June 2009, $41 million of investments were repaid, mainly in the Property and Lending portfolios.
New Corporate Debt Terms
The writedown in asset values at 30 June 2009 led to a breach of covenants in Keybridge’s corporate debt facility. The Company has now reached agreement with its banks to have this breach waived and to amend the terms of the loan facility to ensure Keybridge can continue an orderly realisation of assets. The new debt terms, compared with those already existing, are summarised in Attachment 2.
The final maturity date of 2 June 2011 has not changed. The major changes in the debt terms are as follows:
- - The majority of the financial covenants have been removed;
- - The required interim repayments ahead of the final maturity date have been reduced but with more regular milestones;
- - Non-achievement of these interim repayments is now a review event, rather than an event of default; and
- - There is no change in the borrowing margin of 3.75% per annum but there is a new additional risk fee of 1.75% per annum which accrues monthly and is payable on the maturity date of June 2011.
The new debt terms continue the requirement for all surplus cashflow to be applied to repaying debt. Thus, it is not anticipated that shareholders will receive dividends over the medium term.
Outlook
For the time being, the Company is not looking to make new investments. The priority is to achieve realisations of investments to repay our debt facility. It is only after we have been able to reduce our outstanding borrowings significantly that we can contemplate resuming distributions to shareholders.
In the meantime, our strategies will revolve around:
Keeping our operating costs as low as practicable;
Bringing forward investment repayments wherever possible; and in those transactions where market liquidity and pricing do not permit a realisation in the short to medium term, pursuing strategies to preserve as much value for Keybridge as possible.
This last point is particularly relevant for the Company’s aviation and shipping investments. In these asset classes, realisations are impractical in current market conditions due to the unavailability of reasonably priced senior debt and the generally subdued trading conditions.
Over the period to December 2010, the Company requires investment realisations of approximately $70 million to meet its debt repayment, interest and operating cost obligations. This is equivalent to 22% of the current book value of investments. Whilst this will be challenging, the Company has strategies under way across its investment portfolio that would enable this level of realisations to be achieved.
Over the medium to longer term, it is likely that repayment of the Company’s debt facility will take approximately three years to achieve. Cash distributions to shareholders would likely occur thereafter.
Beyond the strategies described above, which address the current investment portfolio, there remains a challenge for the Company in how to respond to, and take advantage of, some of the opportunities that will be available in the market as a result of the changes brought on by the events of the past two years. To address this challenge, we are exploring a variety of options that can be implemented as the Company’s debt repayment program gains momentum.
