YEAR IN REVIEW
Before moving to the formal business of the Annual General Meeting of Keybridge Capital Limited, I would like to comment on Keybridge’s performance over the past 12 months, and make some comments about the future of the Company.
Keybridge now has a portfolio of investments much reduced in size compared to prior periods. Investments have been sold and redeemed with the proceeds applied to the repayment of the Company’s corporate debt facility.
On 1 May 2013, Keybridge repaid the balance of its corporate debt. Keybridge is debt-free and has net assets of approximately $34 million comprising cash of $20 million and a small portfolio of other assets predominantly in property and lending.
During the last financial year, the Group recognised $12.1 million of net impairments against its investment portfolio, of which, $8.5 million were taken in the second half of the financial year. These impairments came about as part of the realisation of our aviation and private equity investments and from changed circumstances in our remaining property investments.
Both of Keybridge’s two remaining property investments experienced adverse operating issues over the last six months, and the Company has taken the view that the recoverable value of one of these investments has been dramatically reduced by ongoing development delays and also changes to the senior financing arrangements that have occurred since the end of June 2013.
The other remaining 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 12 months, Keybridge received $2.1 million in repayments from these loans. However over the last six months a number of these loans have underperformed and the Company recognised an impairment provision for the year ended June 2013 to account for this.
Further, and subsequent to 30 June 2013 as stated in Keybridge’s 2013 Annual Report, a further $1.4 million provision was raised against the Company’s solar park asset. Specifically, on 12 July 2013, the Spanish Government indicated that it planned to introduce 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 raised the impairment of $1.4 million effective during the 2014 financial year. Under relevant accounting standards, we were not permitted to raise the impairment for the 2013 financial year.
THE ACQUISITION OF PR FINANCE GROUP LIMITED
On 25 June 2013, Keybridge became the effective owner of PR Finance Group Limited, by way of Scheme of Arrangement. Although the Scheme of Arrangement reached financial close on 16 August 2013, the Federal Court ordered the implementation date of the scheme to be 28 June 2013.
PR Finance owned and operated two key businesses:
- Motor Finance Wizard and;
- AMX Money.
On 17 September 2013, PR Finance closed the sale of its major asset, Motor Finance Wizard, to an investment company. The sale generated sufficient funds to fully repay PR Finance’s senior debt of over $40 million to the CBA and $10.5 million as partial repayment of the mezzanine loan initially made by Keybridge to PR Finance in 2007. The amount repaid to Keybridge was less than expected. The $1.2 million shortfall was the result of extra costs associated with the delayed completion of the sale and an unbudgeted fee charged to PR Finance by the senior lender.
A condition subsequent of the sale transaction requires PR Finance to reimburse the purchaser for any deterioration in the total assets of the business acquired at completion as compared to a reference Balance Sheet from September 2012. It is currently estimated that PR Finance will have a resulting obligation to reimburse up to $6.5 million over a period of up to two years. This amount may be reduced by an earn-out arrangement.
Keybridge is currently undertaking a review of PR Finance’s remaining businesses, primarily AMX Money, its short-term consumer-lending business. However, as announced to the market last week, the Australian Securities and Investment Commission issued a letter to AMX Money on 1 October 2013 expressing its view that the bundle of products currently being offered by AMX Money constitutes the provision of credit, and that AMX Money should cease “providing credit” until such time as it holds an Australian Credit Licence. AMX Money has been operating under what it considers to be an exemption to the Australian Credit Licence requirements. ASIC has granted AMX Money a two week timeframe within which to consider its position and provide a response.
PROFITABILITY
The Group incurred a net loss after tax for the year to 30 June 2013 of $3.8 million, compared with a loss of $3.2 million in the prior year.
The profit performance of the Group was obviously negatively impacted by impairments taken against some of the Group’s investments. Keybridge had a net operating profit from normal activities and pre- impairments (but post foreign exchange adjustments) of $4.0 million against ($8.2 million in 2012).
Overall revenue decreased from 2012 as a result of the realisation of the Company’s largest aviation investment and income from the lending portfolio not being recognised due to the remaining loan being impaired. Income included an unrealised gain of $1.4 million on the investment of shares held in PTB Group Limited, which included $0.3 million of dividends that were reinvested into shares in PTB Group.
The average cost of borrowings in 2013 was 5.6% per annum (versus 4.4% per annum in 2012). However the level of debt outstanding was significantly lower in 2013 than in 2012 such that the overall borrowing cost for 2013 was approximately half that of 2012.
Savings in operating costs were due to reductions in employee costs partially offset by an increase in professional costs arising from the Scheme to acquire PRFG.
TAXATION
During the year, with the assistance of the Company’s tax adviser, a review of the previously lodged Income Tax Returns for financial years 2008 to 2010 was undertaken. The scope of the review was to determine whether the treatment of recognition of foreign exchange movements was correctly recorded for both investments and borrowings.
The review found that in 2008, after writing-off all seven of its US Securitisation investments to nil, the Company claimed bad debt deductions for five of its US Securitisation investments. Two investments were incorrectly excluded. Accordingly, in December 2012, Keybridge submitted an amended 2008 Income Tax Return.
As a result, on 26 March 2013, Keybridge received a payment from the ATO of $5.13 million, being a refund entitlement of $4.35 million plus $0.78 million interest.
FINANCIAL POSITION (including AMX)
As at 30 September 2013, the Group’s balance sheet can be simplified as: Cash $22.0 million, investments $19.6 million, liabilities $8.5 million, of which $8.3 million is recourse to PR Finance and shareholders’ funds of $33.1 million.
Unaudited NTA per share is $19.0 cents.
I now want to offer my thoughts about the future of your Company.
Keybridge last completed a capital raising in June 2007 at a price per share of $2.00. Once fully invested in 2008, Keybridge had gross assets of in excess of $400 million and $220 million of debt.
With the onset of the global financial crisis, assets were marked down and, where sensible to do so, sold. The Company’s corporate debt was extended and the market had its say on the value of the Company.
From a high of over $2.50 per share in 2007, the Keybridge share price touched 6.5 cents in 2010 before recovering somewhat to a price of 14 cents plus today.
Through the tumultuous years I refer to, Keybridge was a company burdened by the constraints of debt but enlightened by the honesty of its management and directors. However these years are viewed – and from the point of view of a 2007 investor, they have been very unhappy years – your Company survived.
Keybridge currently has $60.4 million of tax losses and $8.2 million of franking credits although the franking credit position is the subject of tax audit.
It follows that if the Company can start making money, most shareholders will be happier retaining their investments in the Company than redeeming them.
The other side of that coin is that if Keybridge does not make money going forward, its assets are best distributed to shareholders sooner rather than later.
In response to an enquiry on the matter by a Keybridge shareholder recently, I said two things:
- the Company is dealing with at least two business situations which require its full attention; and
- since Keybridge became debt-free several months ago, some ideas have emerged for the “redevelopment” of the Company which I think merits evaluation.
I indicated in my response that I placed a priority on the business matters requiring management ahead of consideration of the redevelopment – or not – of Keybridge.
That remains my position today. Individual members of the Board have their own views on the future of Keybridge and will be heard as your Board of Directors fulfils its responsibilities to shareholders.
On behalf of the Board and the small management team at Keybridge, I thank shareholders, our bankers, our advisers and other stakeholders for their support.
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, finance receivables and infrastructure.
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