- •Net loss after tax and after impairment provisions for full year of $3.8 million
- •All corporate debt repaid in May 2013
- •Completed Scheme of Arrangement to acquire PR Finance Group Limited
- •Sale of motor vehicle division (MVD) forecast to complete by September 2013
- •Provision of $1.4 million raised against solar plant asset post balance date
- •Estimated NTA of 22 cents per share as at 29 August 2013
Keybridge Capital Limited (Keybridge or Company) reported a net loss after tax for the six months to 30 June 2013 of $1.3 million and a full year net loss after tax of $3.8 million. In the year to 30 June 2012, Keybridge incurred a net loss after tax of $3.2 million.
A detailed breakdown of the result is provided in Attachment 1. Note that all amounts in this release are denominated in Australian Dollars, unless otherwise specified.
On 1 May 2013, Keybridge repaid its corporate debt in full, leaving the Company with a cash balance of approximately $12.5 million at 30 June 2013 and a mixed portfolio of assets.
Since 30 June 2012, the Group recognised a further $12.1 million of net impairments against its portfolio, of which $8.5 million was taken in the second half of the financial year. These impairments arose principally in the context of the Company realising on its aviation and private equity investments and from changed circumstances in one of our larger remaining property investments.
Both of Keybridge’s two remaining property investments experienced significant operating and financing issues over the last six months. The value of one of these investments has been severely and adversely impacted by development delays and changes to the senior financing arrangements that have occurred since the end of June 2013. As a result, that investment has been written down to zero.
The other remaining property investment is a portfolio of first ranking mortgage loans over commercial properties. The previous senior lender was repaid in full in January 2013, and Keybridge is now the sole lender to the remaining portfolio. During the past twelve months, Keybridge received $2.1 million in repayments from these loans. Over the last six months a number of these loans have underperformed and the Company has recognised an impairment provision for the year ended June 2013 to account for this. Future recovery of the remaining loans is expected as the properties are refinanced or sold.
The Acquisition of PR Finance Group Limited
With effect from 28 June 2013, Keybridge acquired PR Finance Group Limited (PRFG), under a Scheme of Arrangement (Scheme). Although the Scheme reached financial close on 16 August 2013, the Federal Court ordered an implementation date of 28 June 2013. PRFG’s two key businesses are:
•Motor Finance Wizard (MFW) and;
•AMX Money (AMX).
Details of these businesses were provided to shareholders in the Scheme documentation earlier this year.
Keybridge is currently in the process of facilitating the sale by PRFG of MFW to a foreign domiciled investment company in order to repay senior debt at PRFG. Completion is anticipated during September 2013 subject to the approval of the senior lender. The sale would result in the full repayment of PRFG’s outstanding senior debt facility and an $11.7 million repayment of its mezzanine loan from Keybridge, which was initially made to PRFG in 2007.
Keybridge is currently assessing PRFG’s other businesses including AMX, its short-term consumer-lending business. According to management accounts AMX generated an EBIT of $2.8 million for the full year ending 30 June 2013.
Investments
As at 30 June 2013, the written-down value of the Company’s non-cash investments by asset class was as follows:
| |
$m |
% |
| Lending |
11.7 |
39% |
| Infrastructure |
8.1 |
27% |
| Private Equity |
4.9 |
14% |
| Aviation |
2.7 |
9% |
| Property |
2.4 |
8% |
| |
29.8 |
100% |
Refer Attachment 2 for details of each asset class.
Balance Sheet
The following is a simplified balance sheet for the Company as at 30 June 2013:
| |
$m |
| Investments |
29.81 |
| Cash-on-Hand & Other Assets |
12.67 |
| Liabilities |
(0.44) |
| Shareholders’ Funds |
42.04 |
With 172.1 million listed shares on issue, this level of shareholders’ funds equates to net tangible assets of approximately 24 cents per share.
Of the Group’s total assets as at 30 June 2013, approximately 32% were denominated in either US Dollars or Euros, which are unhedged against movement in the value of the Australian Dollar.
The unrealised gain from foreign exchange in 2013 reflects the depreciation of the Australian Dollar across the year by approximately 9% against the US Dollar and 12% against the Euro.
Movements in foreign exchange (FX) rates will continue to impact the profit & loss due to Keybridge’s net long US Dollar asset position of approximately USD5.3 million (cash and Republic PE), plus Euro position (Totana) of EUR5.8 million.
Cash Flow
As at today’s date, the Company has approximately $10.6 million cash-on-hand. A further $11.7 million is expected to be generated from the sale of MFW
Provisions after Balance Date
On 12 July 2013, the Spanish Government indicated plans to introduce as law a profitability cap on solar farms equal to 3.0% per annum above the 10 year Spanish Government Bond rate. Whilst it is unclear exactly the terms upon which this will be implemented, or whether it will be implemented at all, Keybridge has decided to take an impairment against its Spanish solar asset of approximately $1.4 million for the 2014 financial year. [NB. Under relevant accounting standards, we are not permitted to raise an impairment for the 2013 financial year].
On 16 August 2013, Keybridge paid $2 million in cash and shares as part of its acquisition of PRFG. Management expects the PRFG financial consolidation to have a negative effect on Keybridge’s book NTA, (reducing the NTA to 22 cents per share).
Outlook
With the full repayment of its corporate debt, Keybridge is now looking to its future. Shareholders will be kept informed as the Company’s strategy is developed.
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|
Attachment 1
Profitability
|
|
6 Months To
30 Jun '13
$ millions
|
6 Months To
31 Dec '12
$ millions |
Full Year
2013
$ millions |
Full Year
2012
$ millions |
| Income1 |
2.0 |
3.9 |
5.9 |
13.6 |
| Operating Expenses |
(1.5) |
(1.1) |
(2.6) |
(2.8) |
| Borrowing Costs2 |
(0.1) |
(1.2) |
(1.3) |
(2.8) |
| Operating profit/(loss) |
0.4 |
1.6 |
2.0 |
8.0 |
| Foreign Exchange3 |
2.1 |
(0.1) |
2.0 |
0.2 |
| Net Impairments |
(8.5) |
(3.6) |
(12.1) |
(11.4) |
| Income tax (benefit) 4 |
4.7 |
(0.4) |
4.3 |
- |
| Net Loss After Tax |
(1.3) |
(2.5) |
(3.8) |
(3.2) |
(1) | Overall revenue in 2013 decreased from 2012 as a result of the realisation of aircraft investments and income from the lending portfolio not being recognised due to loan impairments. Income included an unrealised gain of $1.4 million on the investment of shares held in PTB Group Limited (PTB), which included $0.3 million of dividends that were reinvested into shares in PTB. |
(2) | The average cost of borrowings in 2013 was 5.6% per annum (versus 4.4% per annum in 2012). Although the base interest rate declined, the relevant margin and fees were higher overall. The level of debt outstanding was significantly lower than in 2012. |
(3) | Of the Group’s total assets as at 30 June 2013, approximately 32% were denominated in either US Dollars or Euros and are unhedged against movements in the value of the Australian Dollar.
The unrealised gain from foreign exchange in 2013 reflects the depreciation of the Australian Dollar across the year by approximately 9% against the US Dollar and 12% against the Euro. |
(4) | During the year, Keybridge, with the assistance of its tax adviser, undertook a review of the previously lodged ITRs for the financial years 2008 to 2010. The scope of the review was to determine whether the treatment of the recognition of foreign exchange (FX) movements was correctly recorded for both investments and borrowings.
The review found that in 2008, after writing-off all seven of its investments in US Securitisation (USSEC) investments to nil, the Company claimed bad debt deductions for only five of these USSEC investments. In accordance with advice from the Company’s auditor, two of the investments had been incorrectly characterised as equity and had not been claimed as deductions. Accordingly in December 2012, Keybridge submitted an amended 2008 ITR, which included the previously excluded USSEC bad debt deductions, as well as an adjustment to realised FX gains and losses made on an asset by asset basis.
As a result, Keybridge received a payment from the ATO of $5.13 million on 26 March 2013, being a refund entitlement of $4.35 million plus $0.78 million interest |
Attachment 2
Performance By Asset Classs
Lending
Total book value $11.7 million
Keybridge has one remaining investment in the Lending asset segment.
Keybridge holds a mezzanine loan to PRFG and on 16 August 2013, Keybridge acquired 100% of the shares in PRFG (via a Scheme of Arrangement).
Selected background information on Keybridge’s involvement with PRFG over the past 12 months is as follows:
• In July 2012, Keybridge syndicated $2 million of its mezzanine loan at par to a third-party. At this time the loan was performing.
• In January 2013, the mezzanine loan went into default due to a covenant breach under PRFG’s senior loan. Since this time, interest payments have not been made on the mezzanine loan (but the senior lender has been kept current).
• In April 2013, Keybridge and PRFG entered into a Scheme Implementation Agreement whereby Keybridge would acquire 100% of the shares in PRFG via a Scheme of Arrangement (Scheme) with an effective date of 28 June 2013.
• In May 2013, Keybridge re-purchased the mezzanine loan that it had syndicated, at a small discount to face value.
• In June 2013, Keybridge shareholders at a general meeting approved a change in the nature and scale of Keybridge’s operations to enable the Scheme to be implemented. Also during June 2013, PRFG shareholders approved the Scheme (such approval was further ratified in August 2013).
• The legal entitlement of the mezzanine loan as at 30 June 2013 was $15.0 million. The carrying value of the loan was $12.8 million at this time however this has been reduced by a further $1.1 million to $11.7 million based on the expected proceeds to be received under the MFW sale being progressed (see below).
• On 14 August 2013, the Federal Court approved the Scheme and ordered an effective date of 28 June 2013.
• On 16 August 2013, Keybridge completed the acquisition of 100% of the shares in PRFG for consideration of $1.5 million cash and 2.5 million Keybridge shares (issued at $0.20 per share or $0.5 million in total).
• Keybridge is in the process of facilitating the divestment by PRFG of the motor vehicle division in order to repay its senior debt. It is expected that this sale will be completed during September 2013 subject to approval by the senior lender. This sale would result in the full repayment of PRFG’s outstanding senior debt facility, and an $11.7 million repayment of its mezzanine loan from Keybridge.
• Post acquisition of PRFG, and should the sale of the motor vehicle division proceed, Keybridge would hold 100% of the equity in PRFG and a mezzanine loan with a legal entitlement of $3.4 million. PRFG’s remaining asset is AMX, a short-term consumer lending business.
Infrastructure
Total book value $8.1 million (as at June 30, 2013)
The Group has one remaining infrastructure investment, being a loan to, and an equity accounted investment in, a 1 MW solar electricity facility in Spain. The Company has 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. All such issues have now been rectified under warranty. The plant is currently functioning in accordance with the original contract. The Spanish Government however introduced legislation in December 2010 to place a cap on the production able to receive the original 2007 Spanish legislated feed-in tariff. This cap remains in place until 31 December 2013.
On 12 July 2013, the Spanish Government indicated plans to introduce as law a profitability cap on solar farms equal to 3.0% per annum above the 10 year Spanish Government Bond rate. Whilst it is unclear exactly the terms upon which this will be implemented, or whether it will be implemented at all, Keybridge has decided to take an impairment against its solar asset of approximately $1.4 million for the 2014 financial year. [NB. Under relevant accounting standards, we are not permitted to raise an impairment for the 2013 financial year.]
Private Equity
Total book value $4.9 million
As part of the arrangements to exit the Company’s aviation investments, Keybridge restructured its participation in a closed-end private equity fund based in the United States, which was managed by the same party as the aviation investment. As a result of the restructure, Keybridge now holds a limited recourse loan directly to the fund manager, which is supported by security over the units in the private equity fund that were previously held by the Company. Interest on the loan is being accrued and will be paid upon realisation of any of the underlying investments in the fund in a manner consistent with how cash flow would have previously been applied under the direct holding of the units in the fund.
Property
Total book value $2.4 million
As previously discussed, Keybridge’s two remaining property backed investments have experienced valuation pressures over the last six months. In particular, one of the investment’s value has deteriorated quickly as a result of changed circumstances in recent months. There is now a very real prospect that development of this property will not be able to progress, principally as a result of changed senior lending arrangements under which significant additional fees would need to be paid for the necessary consents to proceed with the development. These new fees and increases in interest, if accepted by Keybridge and the developer, are likely to seriously impact the realisable value of this investment. Accordingly, we have taken the decision to impair this asset to a nil carrying value
The other property investment is a portfolio of first ranking mortgage loans over commercial properties. Keybridge is the sole lender to this portfolio and during the past twelve months, Keybridge received $2.1 million in repayments from these loans. Over the last six months some of the loans ceased performing and the Company has recognised impairment provisions to account for this. Income is being generated and future recovery of the loans is expected as the properties are refinanced or sold.
Aviation
Total book value $2.7 million
During the year to 30 June 2013, Keybridge realised the largest of its remaining aviation investments, which involved the sale of four A330 aircraft and resulted in a material repayment to the Group. Keybridge’s remaining aviation investment is an 18.5% holding in ASX-listed PTB Group Limited (PTB) shares. This investment is marked-to-market at each balance date, which, as at 30 June 2013, resulted in a $0.5 million uplift from 31 December 2012 due to an increase in the PTB share price. Strategies for unlocking value in this investment remain under development.
Shipping
Total book value nil
Keybridge assigns no value to the remaining four vessels in which it holds junior loans (managed by our partner and co-investor Tufton Oceanic Limited of London, UK). This is due to the independent market value of the ships being at or below the outstanding balance on each of the respective vessel’s senior debt. The Company however continues to maintain an active dialogue with Tufton, with the aim of recovering some value in the future, should markets improve. Any realisation of value is dependent on the senior lenders on each asset being willing to ride out current market conditions.
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