YEAR IN REVIEW
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.
OUTLOOK
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.
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