- •Loss for the half year of $39 million
- •Net tangible assets equal to 50 cents per share
- •Bank debt repayments ahead of schedule
- •Operating environment remains uncertain
Keybridge Capital reported a loss of $39 million for the six months to 31 December 2009. An operating profit of $4 million was offset by new impairment provisions of $18 million, a net write-down of $14 million in the value of deferred tax assets and foreign currency losses of $11 million.
A breakdown of the half year result is provided in Attachment 1.
From June 2009 up to the date of this release, $40 million of investment repayments have been received. With the Company not making new investments, the bulk of this cashflow has been, or will be, used to pay down the Company's corporate borrowings.
The Managing Director of Keybridge, Mark Phillips, said: "Conditions remain challenging in our markets for achieving investment repayments and maintaining equity value for shareholders. We are pleased to have made headway in reducing our borrowings and, for now, this remains our key objective."
Investments
As at 31 December 2009, the written-down value of the Company's investments by asset class was as follows:
| |
AUD
million |
% |
| Property |
29 |
11% |
| Aviation |
140 |
52% |
| Shipping |
36 |
14% |
| Infrastructure |
22 |
8% |
| Lending |
41 |
15% |
| |
268 |
100% |
Since the end of the half year, $16 million of additional repayments have been received: Approximately $10 million from an Aviation investment and $6 million from a Lending transaction.
At 31 December 2009, the Company took additional impairment provisions against its investments of $18 million. These provisions arose, in part, because Keybridge had either agreed to accept, or was considering accepting, accelerated repayment of some investments at a discount to its book value. Another factor was the continuing difficult operating environment for many of the Company's investments.
Since June 2009, Keybridge has received repayments from nine separate investments. A majority of the repayments were in the Infrastructure asset class, with the remainder being in Aviation, Lending and Property.
Over the past 12 to 18 months, a range of the Company's investments have stopped paying cash income to Keybridge. This has been 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 December half of 2009, Keybridge received cash income of approximately $8.5 million, representing 59% of total income.
Attachment 2 includes a description of Keybridge's remaining portfolio of investments.
Attachment 3 includes a summary of the performance of the Company's investments by asset class.
Balance Sheet
The Company's investments are denominated in US Dollars, Euros and Australian Dollars. The foreign currency investments are hedged, on average, as to approximately 60% by borrowings in the same currencies. Because there is an unhedged component, Keybridge's profitability and shareholders' funds are subject to variability with changes in the value of the Australian Dollar. Over the six months to December 2009, the Australian Dollar appreciated in value, rising from 81 to 90 US cents. As a result, the Company incurred foreign currency losses in this period, with the majority being unrealised.
At 30 June 2009, Keybridge held an intangible asset in the form of a Deferred Tax Asset (DTA). With market conditions, and the Company's future profitability, being uncertain, it was decided to write-down the DTA by a net $14 million, reducing its value to zero.
A simplified balance sheet for the Company as at 31 December 2009 was as follows:
| |
AUD
million |
| Investments |
268 |
| Cash-on-Hand |
7 |
| Borrowings |
(189) |
| Shareholders' Funds |
86 |
This level of shareholders' funds equates to net tangible assets of 50 cents per share.
Corporate Debt Facility
Keybridge had $189 million of outstanding corporate borrowings as at 31 December 2009. This level of borrowings includes $9 million of revaluation losses on interest rate swaps undertaken in prior periods to lock-in the bank bill cost of the Company's debt.
Since the end of the half year, borrowings have been reduced by a further $10 million in January and another amount of approximately $6 million should be repaid in February. This would bring total debt repayments since June 2009 to $37 million.
The debt facility matures in June 2011. Ahead of that, the Company has to meet a schedule of prepayment obligations. The repayments anticipated by the end of February 2010 satisfy this schedule through to September 2010. By December 2010, a further $25 million of repayments have to be made. The Company is confident of achieving this requirement.
Management
The Company has a management team of six executives. The Keybridge Board is conscious that retaining and motivating these executives is important for the ongoing recovery of the Company.
In the 2009 financial year, key performance criteria were not met and no incentive payments were made to the management team.
Given the changed operating conditions for the Company as a result of the financial crisis, the Board has determined that new remuneration arrangements for executives should be introduced for the 2010 and 2011 financial years. These new arrangements reflect the importance of retaining and motivating staff, whilst ensuring that the key objectives of the Company are met and that cash payments are kept to a minimum.
Subject to key performance criteria being satisfied, the new arrangements allow for incentive payments to be made to executives in addition to their base salaries. These payments are to be split broadly 50/50 between a cash component and an allocation of shares in the Company. In aggregate for all executives, the cash payments in each year would be up to approximately $600,000, or 37.5% of total base salaries. The share component is for a broadly equivalent aggregate value and could see up to 5.6 million shares issued in 2010 and up to 4.6 million shares issued in 2011. On a fully diluted basis, these maximum shares across the two years would equal 5.6% of the Company's total shares on issue. Once allocated, the shares would be subject to a sales restriction under which the executive would not be able to sell or otherwise deal with the shares for a period of one year, at which point the executive would be able to deal with half of the shares. The executive would not be able to sell or otherwise deal with the remaining half of the allocated shares for a further one year period.
The key performance criteria applying to these incentive payments relate to the Company's profitability, the reduction of outstanding borrowings, development of a longer-term business plan and stakeholder management.
Outlook
For the time being, the Company is not looking to make new investments. Its priority is to achieve realisations of investments to repay its debt facility. It is only after outstanding borrowings have been reduced significantly that a resumption of distributions to shareholders can be contemplated.
Keybridge's strategies for the next 6 to 12 months remain as follows:
- To keep operating costs as low as practicable;
- To bring forward investment realisations wherever possible; and
- For those transactions where this is not practicable, to preserve as much value for the Company and its shareholders as possible.
This last point is particularly relevant for the Company's aviation and shipping investments. In these asset classes, significant realisations are impractical in current market conditions.
It is likely that repayment of the Company's debt facility will take approximately a further three years to achieve.
