ALLCO FINANCE GROUP LIMITED
AFG - 2008 Full Year Results Presentation (Analyst Briefing) - Mr David Clarke (CEO), and Mr Ray Fleming (CFO)
Fri, 29 Aug 2008 11:00AM
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 INDIA EQUITIES FUND LIMITED
(INE)
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India Equities May Investment Report Mon, 29 Jun 2009 10:00AM |
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| INDIA EQUITIES FUND LIMITED (INE) |
EGM Computershare Conference Centre, Yarra Falls, 452 Johnston St, Abbotsford, VIC
Mon, 29 Jun 2009 01:30PM 01:30PM Australia/Victoria |
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ALLCO FINANCE GROUP LIMITED (AFG)
ASX code: AFG
Website: http://www.allco.com.au
Industry: Diversified Financials
Principal Activities:
Allco Finance Group is a fully integrated global financial services business specialising in asset origination, funds creation and funds management in the core asset classes of aviation, shipping, rail, infrastructure, property and financial assets.
Address:
1 Macquarie Place, Gateway, Level 24,
SYDNEY
NSW
Phone: (02) 9255 4100
Fax: (02) 8915 7803
Executives & Directors
Mr Robert C Mansfield, AO , Deputy Chairman, Non Exec. Director, Independent Director
Mr David Clarke , Managing Director, CEO, Director
Ms Christine Bowen , Director, Investor Relations
Sir Rod Eddington , Non Exec. Director, Independent Director
Mr Neil Raymond Lewis , Non Exec. Director, Independent Director
Mr Ray Fleming , CFO
Mr Tom Lennox , Company Secretary
Company Podcasts
Company ASX Announcements
Company ASX announcements can be viewed on the ASX website.
Announcements from the preceding six months are shown below.
Please refer to the relevant stock exchange if any of the above information is incorrect
ALLCO FINANCE GROUP LIMITED (AFG) Events
| Company (Stock Code) | Date/Time | Event |
Timezone: Australia/NSW |
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Thu, 23 Oct 2008 04:30PM |
AFG - Mr David Clarke (CEO) |
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Thu, 23 Oct 2008 04:15PM |
AFG - 2008 Annual General Meeting - Mr Bob Mansfield, Acting Chairman and Mr David Clarke (CEO) |
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Fri, 29 Aug 2008 11:00AM |
AFG - 2008 Full Year Results Presentation (Analyst Briefing) - Mr David Clarke (CEO), and Mr Ray Fleming (CFO) |
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Thu, 19 Jun 2008 09:00AM |
AFG - Announces the Sale of the Tehachapi, US Wind Development Project - Mr Steen Stavnsbo, Head of Wind Energy |
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Mon, 25 Feb 2008 10:00AM |
AFG - FY07 Interim Results (Audio Only) - Mr David Clarke, CEO and Mr Tim Dodd, CFO |
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Mon, 25 Feb 2008 10:00AM |
AFG - FY07 Interim Results - Mr David Coe, Executive Chairman, Mr David Clarke, CEO and Mr Tim Dodd, CFO |
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Wed, 12 Dec 2007 04:25PM |
AFG - December 2007 EGM - Mr Bob Mansfield, Deputy Chairman and Mr David Clarke, MD |
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Tue, 30 Oct 2007 03:30PM |
AFG - 2007 Annual General Meeting - Mr David Coe, Executive Chairman and Mr David Clarke, MD and CEO, Mr Bob Mansfield, Deputy Chairman |
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Thu, 25 Oct 2007 04:20PM |
AFG - 2007 Annual General Meeting - Mr David Coe, Executive Chairman and Mr David Clarke, MD and CEO |
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Tue, 23 Oct 2007 03:50PM |
AFG - Expansion of Real Estate Business - Mr David Clarke, MD and CEO of Allco and Dr Gordon Fell, Chairman and MD of Rubicon |
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| Thu, 23 Oct 2008 09:00AM |
Annual General Meeting Ballroom, Four Season Hotel, Sydney, NSW
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| Fri, 29 Aug 2008 | Full Year Results | ||
| Wed, 19 Mar 2008 11:00PM |
Date Payable | ||
| Wed, 5 Mar 2008 11:00PM |
Record Date | ||
| Thu, 28 Feb 2008 11:00PM |
Ex Div Date | ||
| Sun, 24 Feb 2008 11:00PM |
Interim Results | ||
| Tue, 11 Dec 2007 11:00PM |
EGM | ||
| Thu, 25 Oct 2007 10:00AM |
Annual General Meeting ASX Auditorium, 20 Bridge Street, Sydney NSW 2000
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| Fri, 21 Sep 2007 | Date Payable | ||
| Fri, 7 Sep 2007 | Record Date | ||
| Mon, 3 Sep 2007 | Ex Div Date | ||
| Tue, 21 Aug 2007 | Full Year Results | ||
| Tue, 20 Mar 2007 11:00PM |
Date Payable | ||
| Tue, 6 Mar 2007 11:00PM |
Record Date | ||
| Wed, 28 Feb 2007 11:00PM |
Ex Div Date | ||
| Wed, 14 Feb 2007 11:00PM |
Interim Results | ||
| Wed, 25 Oct 2006 10:00AM |
Annual General Meeting ASX Auditorium, 18 Bridge Street Sydney NSW 2000
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| Wed, 13 Sep 2006 | Date Payable | ||
| Mon, 28 Aug 2006 | Full Year Results | ||
| Fri, 30 Jun 2006 | Record Date | ||
  Displaying 1-20 of 31 events
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ALLCO FINANCE GROUP LIMITED (AFG)
| Final Director`s Interest Notice | Wed, 17 Jun 2009 |
| Final Director`s Interest Notice x 2 | Wed, 10 Jun 2009 |
| Director Resignations | Fri, 29 May 2009 |
| Results of Meeting of Creditors | Tue, 26 May 2009 |
| Declaration of valueless shares | Mon, 25 May 2009 |
| Meeting of Creditors | Mon, 25 May 2009 |
| Allco Aviation Assets Sold | Wed, 6 May 2009 |
| AEP:AEP reconfirms it has no borrowings from the Allco Group | Wed, 18 Mar 2009 |
| Administrators appointed | Fri, 2 Jan 2009 |
| Allco Rail Assets Sold | Tue, 23 Dec 2008 |
Please note: This company appears on this website as a result of its listing on the Australian Securities Exchange. Boardroom Radio does not claim any association with any company listed on this site.
PRESENTATION BY DAVID CLARKE, CHIEF EXECUTIVE OFFICER, AND RAY FLEMING, CHIEF FINANCIAL OFFICER OF ALLCO FINANCE GROUP LIMITED (AFG)
“Full Year Results”
http://www.brr.com.au/event/49326
FRIDAY, AUGUST 29, 2008, 11:00 AM.
Moderator Good morning, everyone. Thank you for joining us today. Today, we have two speakers taking you through the presentation, which was launched with the
10 ASX this morning, David Clarke, who is Allco’s Chief Executive Officer and Ray Fleming, who has recently been appointed as our Chief Financial Officer. Also with us today are a number of the leadership teams here in the room. And David and Ray will present the presentation and we will take questions at the end of the presentation. So, David, over to you. Thank you.
15
AFG Thanks, Christine. Good morning, everyone. Thank you for joining us. As we foreshadowed back in our announcement on the 1st of May, we are today announcing a very significant loss for the Allco Finance Group. When I joined a little over a year ago, I and my colleagues would not have believed that we
20 would be talking about a year of such change and the consequences thereof. So when we reported to you back in February, our half-year results, it was clear that the company was in a difficult position and it was also clear that we needed to take action. And I just want to very quickly summarize the action we’ve taken and what we need to do in the future. So we finalized our senior
25 balance sheet bank facility. We’ve sold over a $0.5 billion worth of assets and we’ve reduced our debt from $1 billion to $700 million of senior debt. The next steps, as we look ahead, continued asset sales to reduce debt, restructuring the business to match our new strategy, which I’ll spend a considerable time on today. And we need to raise investment capital for our new funds. We
30 obviously deeply regret the loss of shareholder value and our focus is now to implement a recovery plan as quickly as possible to seek to put value back into our company. If you look at the agenda slide, which is Slide 2, it gives you the order of our presentation. As Christine said, Ray Fleming, our new CFO and I, are going to present for about 25 to 30 minutes and then we’ll
35 have some questions. There is significant detail in the appendices and that detail has been put there to help guide you through the movements that have occurred and changes in what’s happened in the company. Let me say at the outset that we are not giving any performance guidance in respect to this financial year or any future year. So with that if I can just turn to 2008 in
40 review, which is the third slide, so until January 2008, we were focused on our stated growth strategy, making financial commitments to acquire assets, building our funds on the management and growing the organization very aggressively. Investors had indicated their commitment to invest in our new funds. Our bankers and at an asset level were supportive. And then we’ll
45 show the difficulty in debt markets and the volatility in equity markets -- a downturn began in asset markets and that all significantly impacted our operations, our financial position, and our outlook. That of course was coupled with a significant loss of confidence in Allco as well as the margin lines against the stock. We had continued short selling and resulting in a very dramatic fall on our share price. And as I said, loss of confidence, which of course, you will know is fundamental when you’re running a financial services organization. That triggered the market capitalization clause and enabled the banks to review the senior facilities. There was no breach and there never
5 has been a re-breach and there has been no default and there’s never been a late interest payment. Rather naively at the beginning of that process thought that it might take a couple of weeks to sort out. That if you’d told me it was going to take eight months, I wouldn’t have believed you. You’ve got that completely wrong and it’s been eight very, very long months. And during that
10 period of time, our ability to generate new business, of course, has declined very significantly. When we look at our model it was very vulnerable. When the crisis hit, we were in a transition from a balance sheet aggregator of assets and warehouse of our assets into a fund manager. We were too reliant on access to debt and equity markets, which of course, became inaccessible
15 to us and too reliant on the continued growth in asset values. We were over reliant on one-off non-recurring income items and there was too much leverage. If I can just take you back, I mean, we did in the latter part of last calendar year think about all of this, sought advice from various quarters, looked at what might be the consequences of what was a debt stage
20 unfolding in the American -- frankly a very small part of the American mortgage market and concluded that that was unlikely to close capital markets around the world and create a liquidity crisis. We thought that debt might get a little bit more expensive, but we felt that we still had access to it to pursue our strategic ambitions, but that clearly was a miss-assessment of the
25 consequences of what we all now very plainly see. If I could to turn page -- Slide 4 and how we’ve responded to this, as a consequence of what’s happened, is now a very radical change to our business model and we’ve now had to focus on our core competencies in Aviation, Shipping, and Private Equity. We’re going to exit all our other businesses and non-core assets. As
30 you are probably aware, we’ve exited our capital-intensive infrastructure business. We’re seeking to get out of our financial asset business, but what I’m saying for the first time today is that we’re going to be managing our rail and real estate portfolios for value and looking for appropriate exit opportunities out of those businesses, and that is a change from what we’ve
35 been doing in the past. We’ve got to -- as we’ve assessed where we are, we believe we need to move out of those businesses. Importantly also, we will no longer be using the balance sheet as a principal investor. We have, of course, some ongoing commitments that we will meet from our balance sheet resources in terms of some planes and some ships coming out of the
40 shipyards, but beyond that we will not be using the balance sheet; instead we’re going to transition to become a fiduciary fund manager. We’re going to be moving to become a much more simple business, and we’ve already commenced that through reducing vast amounts of complexity through the exit of some of those non-core businesses. And while a lot of work has been
45 done, a lot remains to be done. We’ve done a variety of things. We’ve clearly changed the Board composition, so there are now three non-executive directors along with myself. We’ve renegotiated the senior debt facility through to September -- mature in September ’09, and we’ve sold in excess of $500 million worth of assets, and reduced our senior debt facility to just over $700 million. And also as a consequence of this restructuring, we’ve shrunk our global footprint quite significantly. So in January of this year we had 620 employees, at 30 June, we had 480. As we sit here today, we have 370 and by the conclusion of this financial year, we would have 240. We
5 believe that as we move through our legacy issues and end up with our -- what we are calling now our core business of Aviation, Shipping and Private Equity, we will have an employee complement split between London and Sydney of something like 150 odd people. So you can see a very significant change to the employment numbers. If I move to Slide 5 and just talk about
10 the focus in the year ahead, the leadership team is committed to rebuilding value. It’s very clear what need to be done in the next 10 months. We need to retain our investment professionals in Aviation, Shipping, and Private Equity. So secondly, we need to sell assets and repay the debt. We’ve got to launch two funds and we’re just on the cusp of doing that and successfully raise
15 institutional funds into those two -- the Shipping and Aviation funds. We’ve got to manage our cash flow on operations extremely tightly. If I switch to -- flip to Page 6 -- Slide 6, it’s -- importantly -- you should clearly note that 2009 is dependent on delivering our business plan, that is those assets sales, raising of capital, and the reducing of costs. On the latter point of costs, the
20 cost -- total costs, non-interest costs in 2007 were $330 million. We are budgeting for those to be $165 million through 2009 and then drop further as in the years ahead. And I’ve already taken you through it, and of course, employees, the most significant contributor to those costs. In order to keep our key professionals in the business, we’re going to be asking our
25 shareholders in our October annual general meeting to approve and issue of $69 million options, which is approximately 18% of the share capital of the company that’s -- $49 million of those options in respect of the ’09 year and $20 million in reserve to award if appropriate in the 2010 year. They will be out of our existing, they will be subject to the terms and conditions of our
30 existing executive rights and options plan, so that’s three-year cliff vesting, a traditional total shareholder return hurdle and a market-based strike price sit on (inaudible) (0:11:29) basis before the annual general meeting. Keeping the people in this business gives us the opportunity to build value back to and the options align us with the shareholders, and importantly we’re seizing that
35 proprietary balance sheet investment business and becoming a true fiduciary fund manager. On Slide 7, it summarizes much of what I’ve already said. We’re going to be a much smaller, much more focused institutional manager. The complexity and the ubiquitous use of debt are things of the past, and our balance sheet will slowly wind down. We’ve got good assets on it in terms of
40 ships and planes producing good returns for us. So it will be a measured process over a considerable period of time that we move those off. We have skills, which are in demand. The pension funds are looking at ships and aviation, a combination of asset skills and financing skills that we do. Private Equity players are approaching us to see if they can get access to building
45 some our expertise to build funds for them. And so -- but all of this has to be done at the same time of dealing with legacy issues of which we’ll be happy to talk about perhaps in the question time. I’ll now hand over to Ray Fleming, who is, as I said earlier our new CFO to take you through the detail of the results. Over to you, Ray.
AFG Thank you, David. As David just highlighted, we’ve spent the last six months focusing on three main objectives: selling down non-core assets to pay down corporate debt, restructuring the business, and critically reviewing the value
5 of all our investments to reflect both the change in global markets and our revised business plan. As a result, we are reporting to you today a net loss of $1.7 billion. The Appendix to this presentation provides significant detail in relation to this loss. However, I’d like to draw your attention to a number of specific matters. In terms of reviewing the value of our investments, there are
10 non-cash charges of $1.7 billion. These charges include an impairment to goodwill of $885 million. This reflects the write-off of goodwill in all the non-core businesses. The remaining goodwill of $369 million relates to Aviation and Shipping reflecting our belief in the ongoing value in those businesses. We’ve also written down intangible management rights by $102 million. In
15 assessing the value of management rights, we have taken into account a number of factors, including the financial position of the respective funds, the current operating environment whereby these funds have engaged in asset disposal programs to reduce debt and meet debt covenants and repayment schedules, and future growth prospects. The majority of this impairment
20 relates to the management rights of the Rubicon funds. Allco hit and record realty. In addition, we have reviewed the value of our investments and have impaired a number of loans. In particular the Mobius program loans have been impaired by $0 million. Further details of impairments are provided on Slides 20 and 21. There have been a number of asset sales to pay down
25 debt, including this was a gain on the sale of Tehachapi, US wind development of $110 million. While there has been a significant overall loss for the 12 months ended 30 June 2008, I would like to highlight that after adjusting for the abnormal impacts of the past six months, there was a normalized profit after-tax of $29 million for the 2007 and 2008 financial year.
30 Net assets at June were $545 million, falling from $2.2 billion at 31 December 2007, driven by the asset write-downs and asset sales as previously discussed. As David has already noted, there will be no final dividend paid for the 2008 financial year. The next two slides examine the components of this loss in more detail, which I’ll leave you to review in your own time. Let us now
35 turn to Slide 11. As I mentioned previously, the net assets in the business have decreased to $545 million. After adjusting for intangible assets, minority interest and deferred tax losses, net tangible assets are $21 million. However, I would like to draw your attention to two items not included within this $21 million. Firstly, net tangible assets exclude the embedded value of our core
40 businesses. External market valuations of our Aviation and Shipping business showed that there is a potential embedded value uplift of $232 million. Secondly, we account for our funds based on their share of the net tangible assets of their investments. Relevantly, we are carrying our investment in Allco equity partners at a significant premium to its listed market value. This
45 reflects our view of Allco equity partners as a long-term investment that has a portfolio of good quality assets and that the carrying value at net tangible assets is affordable. Turning now to Slide 12, as announced to the ASX on 21 August this year, the total costs incurred by all Allco to restructure its senior debt facilities are approximately $28.1 million. These costs cover fees for financial advisers of $6.2 million, our senior banks of $16.7 million, including $7 million which is payable on maturity of the new loan, and lawyers for both the banks and Allco of $5.2 million. I’m pleased to advise that the condition is precedent to the senior debt facility have now been satisfied; otherwise, I’ll
5 refer you to Slides 26 and 27, which provide further detail in relation to Limited Recourse Debt. Back to you, David.
AFG Thanks, Ray. If I could take you to Slide 13, future business model. A simple business, we’re going to remove the complexity inherent in the legacy
10 businesses and have a very simple business going forward. We operate that business in our core competencies and the areas where we have deep expertise and proven competitive advantage and a proven track record of strong investment performance, and the key personnel are committed to rebuilding this business and shareholder value, and they are experts in their
15 field with a significant number of reviews of relevant experience in the Ships and Aviation area in particular, as well as the Private Equity. If I take you to Page 14, I just want to talk a little about why we’ve picked these particular divisions to pursue our forward-looking business strategy around. Assets that we invest in complement investment portfolios, which are comprised of
20 traditional equity and fixed incomes, and other alternative investment portfolios as well like hedge funds, real estate, and infrastructure. Adding transport of -- or private equity assets to a broader portfolio can clearly improve performance and they’re very attractive to risk-adjusted returns associated with these portfolios. We have done very, very well, if I refer you
25 to the slide and you look there at the IRRs that we have generated out of these portfolios over the last five -- in one case, five years and the other case, six years -- that’s attractive. Institutions are interested. Now, I have to make the clear point that we would expect to be raising the money almost exclusively in the northern hemisphere and because that is where the interest
30 is. It’s out of Europe, the Middle East, America, or in Asia. So perhaps, it will come as no surprise to you that there is not a lot of apparent interest in Australia. We did get interest back through the latter part of last calendar year, but that was withdrawn in late January or early February when our share price slid and there was much speculation about us. But nevertheless,
35 those parties did make the intellectual decision that these were the asset classes that they were interested in putting into their portfolio. What I draw your attention to is -- let’s just talk a little bit about the Aviation fleet and these are the assets that are currently the bulk of which sit on our balance sheet, although there are some Aviation assets in one existing small fund. We’ve got
40 a young fleet of aircraft -- that’s very important in these times. There is great geographic diversity around the world. I note that we do not have any US carriers as lessees of aircraft and why the fleet age is important its because the majority of our fleet are fuel-efficient aircraft, and those are the aircraft, they are going to be sort and used during this period. Every single aircraft is
45 on a lease. There is nothing that is not in use at the moment and that is the nature of our business, we do not take naked aircraft risk. If I look at the Shipping fleet, asset allocation and sector calls in that business have been very good. There are many subsectors in that business and getting it right is very, very important. So the asset allocation and sector selection as I say, have been very good in particular. And I’ve mentioned this before in these conference calls, are overweighting and to the offshore supply vessels -- offshore oil rig supply vessels is really paying dividends, so we’ve got a very significant fleet, probably the largest and most modern -- perhaps not the
5 largest but at least the most modern in the world there and those vessels are in very, very hot demand. And so we’re putting those on long-term charters and taking advantage of a construction price that we set sometime ago and getting the benefits of increasing charter rates as many of those come out of the shipyards and go into work. In Private Equity, you would have seen the
10 Allco equity partners’ result earlier this week and a good sound result with the companies within their portfolio are performing well. If I take you to Page 15 and no presentation would be complete without a risks slide, so it’s important that we -- I’m sure you can all see the risks in our business, but it’s important that we at least summarize them here for everyone. As I’ve said at the outset,
15 this is a fragile business. There are significant numbers of actions we need to get right. We need flawless execution at speed -- that’s what’s required. And there are three, again, crucial things to achieve: asset sales, fund raising, and the retention of our key employees. Those are absolutely mission-critical to building value back into this business. If I take you to the final slide on
20 Page 16, we’re in a tough position. The leadership team is committed, as I said, to building value back into the company. We’ve got a tightly focused business going forward. We’ve got very experienced teams and recognized competencies in Shipping and Aviation, and Private Equity. But we have been and we continue to have to do with the legacy issues at speed and get good
25 results. So far that’s exactly what we’ve done. We’ve addressed the issues head-on. We’ve got good results from the sale of assets, but there are still legacy issues wrapped up in this business. It’s going to take us a good 12 months, possibly longer, to get through a number of them. And as I said, the future depends on those three things: selling assets to pay debt, getting
30 costs down quickly, and raising investment funds. So thank you for your patience, and now we’re very happy to throw it up into questions.
Moderator Thank you, David. Thank you, Ray. As David mentioned, if you’d like to ask a question, please do so now.
35
Operator Thank you. The question and answer session will now begin. Just a reminder, the question and answer session has now begun. Our first question is from John Hegarty of ABN AMRO. Please go ahead, John.
40 Q Thanks. Good morning. Yeah, just want to ask a couple of questions really. Firstly on the NTA, could you give a bit more detail on exactly how NTA has fallen from $829 million to just $21 million in six months? I understand that you sort of ignored some of the write-downs on net tangibles.
45 AFG Sure. John -- Ray, would you like to just go through that?
AFG Yes, sorry. And I guess I’m (inaudible) (0:26:56) really June to June, but as I say the impairment of goodwill was $895 million and that has been across all the groups. So that’s within the funds management activities within Rubicon infrastructure.
Q But the NTA should ignore the goodwill.
5
AFG Sorry, apologies.
AFG So what we’ve seen is -- we’ve seen significant write-downs in the real estate portfolio and the financial assets portfolio during that period. Infrastructure,
10 there has been a reduction in the assets there, but the two big ones, our financial assets, so that’s in our Mobius and Gateway program, and in real estate, there has been the -- I think going back there was record investments loan to Rubicon of $150 million and that has -- at least half of that was supporting investments into the Rubicon Trust and that -- those funds have
15 been lost. So that, John, I think is where the principal amounts -- the whole series of smaller ones, that’ll be in the appendices, but those are the two big ones.
Q Thanks. Okay, and then the second question, the decision to exit from the
20 real estate business, looking back in it, would you accept that the acquisition of Rubicon was a mistake?
AFG Yes, it was. Yes. Now, that’s clear. That’s clear we -- that was a mistake.
25 Q Okay. I have other questions, but I’ll leave it to other people. Thanks.
AFG Okay.
Operator Thank you. The next question is from Mike Younger of Citigroup. Please go
30 ahead, Mike.
Q Thank you. You’ve certainly, with regard to NTA, certainly deferred taxes, assets that are free of charge of the stated NTA. Can you talk through on what kind of operation needs to be continued in order to take advantage of
35 those carried tax losses?
AFG Yes, Mike. That is -- those tax losses need Australian operations to be profitable and contribute over the next five years. So that’s how those taxes -- I mean, there’s clearly much -- there’s a much higher number of tax losses
40 available to the company but only that proportion that’s been brought forward and put on the balance sheet. So it relates to Australian operations.
Q And so it just includes the adjusted NTA of $21 million excludes those tax assets; you’re essentially suggesting it’s unlikely that you’re going to go with
45 the recruitment?
AFG No, that would be a misinterpretation of my remarks. I mean, the auditors and the Board has gone through very carefully the carrying of the deferred tax asset and goes through a process of ensuring that to the best of their judgment, those are tax assets that will be used over the next five years. Really, the (inaudible) (0:30:23) of the $21 million number was to make it quite clear in this age of transparency and disclosure exactly what the position was. It’s not to suggest the deferred taxes it is not valuable.
5
Q Okay. My second question relates to key debt covenant over the new senior debt facility, you want to elaborate on those?
AFG I guess I could, I mean, there’s no market capitalization clause, there is no
10 financial gearing ratio clauses except that they are in it and they relate to whether we drop. The margin drops from 3.5 to 2.75, and this change of control provision set -- all the rest is pretty standard.
Q All right. Interest coverage, is that what it means?
15
AFG Nothing like that, nothing like that. The key one -- the key thing is there’s an amortization of debt schedule in there and that’s the absolute main one and that says that through the period from now until the 30th of June 2009, there are certain debt repayment dates, where we must reduce debt and at the end
20 of it, the debt has got to be $400 million. As I say, it’s $700 million today.
Q Okay. And my final question at the moment, just on that need to write third-party capital, clearly the reputation of the company is very significantly impacted by what happened.
25
AFG Yes.
Q I understand why the market would be quite concerned that you need to do that in order to continue on with business. So what’s sort of reassurance can
30 you give us that you can actually can close on those transactions?
AFG What we’ve got -- we’ve got our private placement documents and memoranda ready to go into the markets now and we commenced at the -- in September at the beginning -- second week of September, a marketing
35 program in the northern hemisphere. We’re getting -- we’ve seen a selected group of institutions so far and getting some reasonable responses. I mean, there are no commitment, but we’re getting interest around this sector and some of the larger funds have been doing work on the -- both Aviation and Shipping. I think we would suggest that there’s a bit more interest at this
40 stage in Shipping than there is in Aviation. So I can’t give you a cost on assurance that there will be funds drawn, but funds flowing into those funds but we’re encouraged by the meetings that we’re taking.
Q And so this was to prove that this is going to take a lot longer than I anticipate
45 and a lot longer than you need in order to repay your debt according to the facility. Would you be able to sell those assets to third parties?
AFG Yes. You mean the -- you’re talking about the ships and planes that are on the balance sheet?
Q Yes.
AFG I think we’d probably, we’ll be selling those anyway. I mean the feedback from
5 the institutions that we’re talking to is they would have a preference for new assets that are going into funds rather than ones that have come from the balance sheet. And so I think, there’s a real question mark over the model of taking assets from a proprietary owner off their balance sheet into a fund, and so the institutions are saying, well, we would -- and there were some selected
10 cases where they’ll take those, but I think we will probably over time manage that portfolio for value, which means that we’ll hold it. I mean, the returns -- there are good returns coming off at the moment. Well in excess of the cost of debt and we will, over time, pick our opportunities I think to sell to -- just sell into the market. Obviously, any investors in their funds, clearly if they want
15 those assets, we’re more than happy to move them into the funds, but it’s really up to investors.
Operator Thank you. The next question is from Mark Carew of Macquarie. Please go ahead, Mark.
20
Q Good morning.
AFG Good morning, Mark.
25 Q It is just the impression I’m getting. The business still appeared to be mostly (inaudible) (0:35:26), I was wondering if you could give a few examples of deals you’ve done in the last few months?
AFG Sure. Sure, Mark, look -- the business is -- when you have -- I mean, the
30 important point is that the second half of this financial year has been very difficult. If you don’t have a long-term -- if you don’t have your balance sheet debt position sorted out, it’s not that easy to run this sort of business. But we still have done -- we’ve still completed on a number of ship purchases. I think it’s about four -- three purchases on ships. During this half, we’ve taken
35 delivery of something like 12, 13 planes. Now, those were ones in the pipeline and really we have been waiting to get, as I said, the bank facilities sorted out before we actually know our resources and our constraints and to get back into the marketplace.
40 Q That really is -- the pipeline is running down rather than meeting the new company?
AFG I think that’s -- we’re keeping in touch with clients and lessees, but yes, there hasn’t been any -- there has been one or two, but no real significant new
45 transactions mandated or agreed during this period.
Q Second question, can you explain how you’re going to fund your way going forward? What would change from previously to now to give you credit constrain (inaudible) (0:37:05)?
AFG Well we have cash flow plan agreed with the banks, and so they have seen our business plan. They’ve interrogated it extraordinarily thoroughly, and in that, we’ve got the capability to provide the equity component for the
5 commitments that we have. So that’s been agreed. The asset lenders are still lending on the basis of the assets that we’ve got, and the ships and the planes, so that’s happening. So that’s for pipeline. If I talk about the business, our new business that we might seek to write from today onwards, that’s going to have to be -- that can only be written if we’ve raised equity into funds
10 that we’re going to manage. Now, we will co-invest alongside those investors as a sign of alignment, but that’s where the equity is coming from in the future.
Q Sure. And just final question in terms of some of the (inaudible) (0:38:17) we
15 used to hedge the interest rates and the currency, if we had to find out an investor or banking counter-party to do the transaction, is (inaudible) (0:38:29) still able do those types of derivative transactions at the moment or not?
20 AFG It’s part of the wrap-up of the financing associated with that as part of the whole non-recourse asset financing package associated with either the ships. I mean, we’ve -- more recently we’ve got examples of doing that in the Shipping portfolio, that’s been a little while since we’ve done that in the Aviation portfolio. So I just -- I can’t answer your question in respect of
25 Aviation, but our ships that we’ve purchased have -- they’re all hedged.
Q Okay, thanks. Those are probably all the questions there.
AFG Okay, thank you.
30
Operator Thank you. The next question is from Mark Fichera of Cranport. Please go ahead, Mark.
Q Yes. Hi, David, just a question on the normalized asset in the second half
35 outside of the increase in the financing costs, what were the major drivers there? And then, second part of the question, on your operated cash flows (inaudible) (0:39:40) rental and charter income declines, if you can shed a bit more light on that. Thanks.
40 AFG Thanks, Mark. I’ll just talk about the normalization. Ray, would you like to just touch on the rental and charter income?
AFG Go on.
45 AFG But let me talk about the costs. We had a momentum to our expense base going into this half, so we were rapidly building up resources, people and assets leading into this half. So we had a momentum associated with our costs going into this half year. So that’s -- so I’m talking about the normalized result now, and as the debt lifted that was associated with the purchasing and ramp up of assets, so the average debt cost has flowed through into this half as well as have the people, our costs, so that’s an operational expenditure as well. So it’s interesting in -- well, I mean, you can see if you go back and look at it month by month, you can see costs and debt rising quickly through the
5 first half of the year into about January. There were some momentum carrying it through into February and then a very significant turnaround are being implemented, but really not coming through until the final couple of months of this half. So that’s what happened, so if our breakdown, so Ray talked about a normalized result of say, $29 million worth of profit after-tax.
10
Q Yes.
AFG And that’s accounted for in terms of a $93-million profit after-tax for the first half normalized and a $63-million odd normalized loss after-tax for the second
15 half. And there were no asset sales, so the revenue line just stopped, and we still had expense momentum. Ray, what about the Shipping in China business?
AFG And very simple answer on that is, during the course of the year we’ve sold a
20 number of ships and planes into funds and with that on balance sheet, obviously, we take up -- there is a reduction in the value of charter income as a result of those.
AFG So those were sold to -- we have -- there still the -- what we call the
25 Singapore investment fund, so that brought a reasonable number of ships, I think it also brought a few of planes as well.
Q Okay. So you would expect getting full return this current half but yet your operating cost expense should sort of reduce from the second half?
30
AFG As I said, the operating costs of the business, again, I have from $330 million for last year to $165 million for this year and that’s what I really would like to say, about -- I mean the half-and-half split, I don’t have.
35 Q Yes, okay. And just finally, just on the rail business, obviously, you’re selling that, is that held under transportation equipment, that $26 million in your group specified (inaudible) (0:43:31) sale, is it?
AFG No. I’m not sure it is. No, it’s not there. I think, it’s a portfolio -- the total value
40 of the portfolio is something like -- close to $300 million.
Q Right.
AFG The ownership of it is split between Allco and the Singapore Investment
45 Fund. Allco has invested equity in there is -- it’s either $40 million or a fraction below $40 million in that portfolio.
Q Yes, okay. Thanks.
Operator Thank you. Just a reminder, the question and answer has begun and you may ask a question now. The next question is from Mike Younger of Citigroup. Please go ahead, Mike.
5 Q Thank you. With regard to Private Equity, can you talk about the thinking behind why you see that as a core asset cost for you, as well as what this portfolio arrangement is ultimately going to result in coming up towards the end of the year?
10 AFG Sure, Mike. Maybe if I start with the put/call. Back in, I think it was July last year, we agreed with our partner in that business that we would acquire their shareholder, and that was the Liebermann’s, we would acquire their half of the management company and we would also acquire their holding in the -- of shares in the listed company or co-equity partners, so as a consequence of
15 that, we account in our books for net total shareholding, which is 35%. And we -- in terms of why -- I think the first part of the question was, why do we think that’s an ongoing business? We look at the business, it’s performing well. We think we’ve got a good position in there. We’ve made good investments with good returns, and it’s something that we want to pursue. We
20 think that there is a space for it. It’s got some issues associated with it, clearly being the fact that it’s listed and the share price is trading at a very significant discount to the net asset value. The Board of that company and the management are keenly focused on getting that gap closed and I think if you go through the results of AEP, you’ll see that there’s actually very good value
25 in those investment companies. That put that we have against -- and so while we account for the 25% of shares, which are going to be put to us, that don’t actually physically get put to us until December of 2009, and at that stage, we have to pay for them then.
30 Q And it’s a $5 a share?
AFG Yes, I think, it’s $5 a share less any distributions that occurred between now and then.
35 Q Okay. Another query I had was (inaudible) (0:46:58) prior question on the shipping income, the second half, the asset ownership for shipping was negative and the installation is due to one-off losses of income and repair cost on our interest cost, do you have -- you have a feel for what sort of normalized annual asset ownership level should be in terms of income, for
40 that particular segment?
AFG Mike, well in terms of what’s normalized, I think we have to get back to you on that one. What happened was, we had two vessels breakdown. They both break down together, so what you’ve got is both -- is a combination there of
45 their time off-charter and actually the repair costs to get them back up. So it’s -- I mean it’s an operating business and that’s what happened with the two vessels. So that’s why we’ve got that negative there and interest costs clearly rose during the period as well.
Q Okay, thank you.
Operator Thank you. The next question is from Mark Thurgood of RBS. Please go ahead, Mark.
5
Q Hi. Just a quick one on current view on the disposals and the time of disposals. Ray, am I right to say that your time to (inaudible) (0:48:17) your total asset is down to about $3 billion by the end of next year?
10 AFG Mark, I haven’t thought of it in terms of total assets. So I can’t make the linkage between that number and the number of debt -- and the amount of debt. I’ll have to come back to you with that. It’s really the -- to be honest, it’s been the debt that we’ve been focused on. So we’ve got the rail assets that we want to move, we’ve got between now and June next year. Some of our
15 on balance sheet real estate assets, our financial assets -- that’s the Gateway program and Mobius and those are the principal ones between now and June. We will probably look -- I mean we do a bit of re-writing in the Shipping portfolio as well, so -- sorry, that’s asset by asset. I know that’s not quite what you wanted, but that’s the why I think of it.
20
Q And just a quick question, I missed the start on your call (inaudible) (0:49:30) because I’m not based in Australia, but can you just give me a heads up on how your disposal of the financial business is done?
25 AFG Probably the easiest way to think about it is, there are two businesses, there are all leasing, which is a -- like a small business leasing business -- a small -- aimed at -- a small business client base, where we have a party in due diligence on that asset. In terms of the other big asset, which is the Gateway program of investments in financial assets and securitized instruments, that is
30 -- we’ve got a party that’s interested in part of that program and we’re looking at how best to deal with the other part of that program.
Q Okay, but let’s just hope that you could sit there, write that down over the next 5 or 10 years or so?
35
AFG That would be a -- not a bad thing to do when I look at the yields that come off some of the investments, and I have to say and that Gateway program, it is performing extraordinarily well, but financing pressure means that we need to move it on. So, if you’d like to help us out, you know, Mark, it’s performing
40 very well.
Q Okay, thank you very much.
AFG Thanks.
45
Operator Thank you. The next question is from Campbell Dawson of Elstree Investment. Please go ahead, Campbell.
Q Thanks. Just further on that leasing question, in the note you said that you learned it might not be recoverable? Why would that be the case?
AFG There is a senior lender, who’s owed about $30-odd million, our loan is $127
5 million or round about, and then there is a mezzanine provided, I mean, the easiest way to describe it as a mezzanine debt provider being a public security issue called the “AHUGs” is the code, and there is a letter of support that was given by Allco to the trust that supports or -- yes, and probably the trust that looks after the “AHUGs.” There is an issue over a difference of
10 opinion over the degree of support that is required and so as a consequence, we’re in negotiations and discussions with the AHUG. Though in effect the trustees or the responsible entity that oversees the AHUG interest, which may lead to a less than full recovery of our loan, so that’s why we’ve marked it down.
15
Q Thank you.
AFG So there’s a commercial discussion taking place at the moment.
20 Operator Thank you. The final question is from Mark Fichera of Cranport. Please go ahead, Mark.
Q Hi, David. This is Stuart (inaudible) (0:53:09). I just thought on Page 7 of the director’s report, you mentioned there that your group has had discussions
25 with various parties, you’re seeking to raise fresh capital in the group itself, I’m just wondering if you can give us some colour as to what sort of catalyst with those parties to be looking for to sort of crystallize the investment and am I right to assume that those discussions are still proceeding?
30 AFG Stuart, thank you for the question. What are those parties looking for? First of all, they’re looking for the stability of the banking facility, so while that was still being negotiated, they were incomplete discussions. We haven’t received any offer, so I should make that clear. We have had discussions and from time to time, we have ongoing discussions. So that’s really the state of the play.
35 What are those parties looking for? I guess, like all investors, they’re looking for stability and looking for signs that the new strategy is getting traction and working it. And so my sense is that once we see an ability to raise funds then those parties will become much more interested at that stage.
40 Q Do you believe you can get through it without having to do that on a worse case scenario?
AFG We’re operating on a basis that we have to get ourselves out of this position and that’s the basis of our business planning. It’s a basis of our discussion
45 with the banks and so we’re not holding up the card that someone is going to come and rescue us with a big equity injection.
Q Right.
AFG I think and my view is that we get to a stable position that some investment will certainly accelerate our progress.
Q Yes.
5
AFG But people want to see legacy issues tidied up and they want to see the current strategy taking traction.
Q That’s going to take another six months at least just probably to get some of
10 those legacy issues out of the way.
AFG Yes, if it’s six months that would be great.
Q Yes. And just on the -- you mentioned in the mail as well as on the
15 documents the issue of the options, which is quite a lot relative to the current capital base, as you mentioned your key (inaudible) (0:55:47) is one of the critical issues, the terms of this option may be disclosed in due course?
AFG Yes, absolutely, and I mean, are virtually disclosed now in three-year cliff
20 vesting and we’ve got to be in the top quartile of the total shareholder return compared to the -- we currently used the ASX 200 and I think that’s -- yes, and the strike price will be on set a (inaudible) (0:56:19) basis leading up to the AGM. I would just say they sound like a large number. You just go look at the market capitalization of the company.
25
Q Yes, I agree. Okay, thank you.
AFG Thank you, Stuart.
30 Operator Thank you. The next question is from Mike Younger of Citigroup. Please go ahead, Mike.
Q Thank you. This is my final question, just regarding the financial assets. There is certainly a very large portion of debt repayable within those financial
35 assets over the short term, am I right in the account to suggest that Allco’s maximum exposure (inaudible) (0:56:55) is about $38 million?
AFG Mike, I’ll just check with you -- just check.
40 AFG I mean, there are two components also (inaudible) (0:57:05) on the total net equity exposure of these… I’ll just check back with the (inaudible) (0:57:12) while we do it.
AFG I had a feeling it was about $50. I thought it was about $50.
45
AFG $70 million.
AFG Seventy million and that includes…
AFG That’s the Gateway and the net equity investments and exposure in the Gateway and Mobius investments.
AFG So that’s the net equity investment in the Gateway and Mobius programs.
5
Q All right, thank you.
Operator Thank you. Just a reminder, the question and answer session has begun and you may ask a question now. Thank you. I’m showing no further questions at
10 this time.
AFG Okay.
Moderator Thank you, everyone, for joining us today. If you’ve got any further questions,
15 by all means, get any of us and we look forward to catching up with you shortly.
AFG Thank you. Goodbye.
PRESENTATION CONCLUDED
Contact brr@brr.com.au for more information
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