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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| EF Realisation | LSE:EFR | London | Ordinary Share | GG00BF243Y95 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 70.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMEFR
RNS Number : 3297H
EF Realisation Company Limited
06 June 2017
6 June 2017
FOR IMMEDIATE RELEASE
INTERIM FINANCIAL RESULTS ANNOUNCEMENT
THE BOARD OF DIRECTORS OF EF REALISATION COMPANY LIMITED ANNOUNCES THE INTERIM FINANCIAL REPORT FOR THE PERIOD FROM 28 JUNE 2016 (INCORPORATION) TO 31 MARCH 2017
INTERIM MANAGEMENT REPORT
financial highlights, performance summary and dividend history
Financial highlights
Scheme of Reconstruction
EF Realisation Company Limited was established as a successor vehicle to Ecofin Water & Power Opportunities plc ("EWPO") to hold the illiquid assets formerly owned by EWPO. Further to the Scheme of Reconstruction which was completed in September 2016, EWPO ceased trading on 21 September 2016. Its two successor companies are EF Realisation Company Limited (the "Company" or "EF Realisation") and Ecofin Global Utilities and Infrastructure Trust plc ("Ecofin Global"). The ordinary shares of the Company and Ecofin Global began trading on the London Stock Exchange on 26 September 2016.
As at 13 September 2016, the value of the pool of assets attributable to the Company, further to the Scheme of Reconstruction of EWPO, was GBP47,184,416; these comprised assets valued at GBP46,071,195, cash of GBP2,358,000 and a provision of GBP1,244,779. This is the opening value for the Company's equity in the Condensed Statement of Changes in Equity. In turn, on 22 September 2016, the Company issued 52,473,633 Ordinary Shares to EWPO shareholders at a price of 89.92p per share for gross proceeds of GBP47,184,416. The Company's Ordinary Shares were admitted to trading on the London Stock Exchange on 26 September 2016.
The first valuation point for the Company's assets after admission was as at the close of trading on 30 September 2016. During the period from 13 September 2016 to 30 September 2016, the net asset value ("NAV") per share fell from 89.92p to 83.89p as a result of movement in the fair value of investments.
Share ratio of the Scheme of Reconstruction
Pursuant to the Scheme of Reconstruction, EWPO Shareholders received one share in the Company for every four EWPO shares held and, for those who did not elect to receive cash in respect of some or all of their holding of EWPO shares, one share in Ecofin Global for every one EWPO share held.
Number of Ordinary Shares and market capitalisation as at 31 March 2017
Hot Features
Premium
Number of Ordinary Shares 52,473,633 Ordinary Shares
in issue:
Market capitalisation: Ordinary Share class: GBP18,890,508
Performance summary
As at As at % change
31 March 30 September
2017 2016(1)
Net assets (GBP'000) GBP27,050 GBP44,020
NAV per Ordinary
Share 51.55p 83.89p (38.55)%
Ordinary Share price
(bid price) 36.00p 37.00p (2.70)%
Discount to NAV (based
on published NAV) 30.16% 55.89%
Dividend and distribution history
No dividend or distribution was declared during the period. The Company realised its investment in Menhaden Capital plc in February 2017 which raised GBP1.2 million, equal to 2.3p per Ordinary Share. As the investment was relatively small, the proceeds of the sale were added to the Company's working capital, rather than returned immediately to Shareholders. Although it is not expected that the Company will receive any income during the realisation period, to the extent that it does receive any income, the Board intends to distribute it to Shareholders.
(1) (Net asset value and share price per Ordinary Share is based on the 30 September 2016 valuation point, being the first NAV released after the Ordinary Shares were admitted to trading on the London Stock Exchange.)
chairman's statement
Dear Shareholder,
This is the first interim report for the Company which was incorporated on 28 June 2016 and whose shares commenced trading on the London Stock Exchange on 26 September 2016. The Company is a successor company to EWPO further to a scheme of reconstruction which was approved by EWPO's shareholders on 13 September 2016.
The Company was established to realise the unquoted and illiquid investments of EWPO in an orderly manner. An ordinary resolution to wind up the Company will be put to Shareholders once all the Company's investments have been realised or distributed and in any event no later than the second anniversary of the listing of the Company's shares on the London Stock Exchange, that is, 26 September 2018. Shareholders do, however, have the right to extend the life of the Company for further successive periods of one year if approved by a special resolution. The Company will distribute the proceeds of any realisation to Shareholders, subject to the Company's working capital requirements, and will make no new investments.
Over the interim period to 31 March, 2017, the net asset value per Ordinary Share fell by 38.6%. This was almost wholly attributable to a fall in the share price of Lonestar Resources US Inc. ("Lonestar"), which accounted for 70.9% of the Company's portfolio at 30 September 2016, the beginning of the period under review. Lonestar, which is a U.S. company whose shares are listed on the NASDAQ exchange in the U.S., is the only listed equity in the Company's portfolio. Its share price fell from US$10.20 at 30 September 2016 to US$5.06 on 31 March 2017. Five of the other six holdings in the Company's portfolio are unlisted holdings valued by the Directors using fair value techniques, and there were only minor changes to the fair values of these holdings over the course of the interim period. The sixth holding is in a listed bond that has represented not more than 2% of the portfolio since inception.
The bid price of an Ordinary Share of the Company, however, fell by only 2.7% over the interim period. As a result, the discount to net asset value at which the Shares traded narrowed from 55.9% at the beginning of the period to 30.2% at 31 March 2017, after reaching its highest level of 61.1% on 28 November 2016. The movement in the share price and discount over the period under review is due to a number of factors. Following their listing on the London Stock Exchange on 26 September 2016, the Shares traded at a large discount to their published net asset value which the Directors attribute to the fact that the Shares were not purchased by long-term investors in the Company but were issued to investors as part of a reorganisation of EWPO, to the illiquidity of the Company's portfolio, and to uncertainty about the valuation methodologies used in valuing the Company's investments.
In the last quarter of calendar 2016 and in early 2017, large volumes of the Company's Shares traded on the secondary market as some of the Company's largest shareholders sold their holdings. Since then, the volumes traded in the secondary market have fallen and the discount to net asset value at which the Shares trade has narrowed progressively. As at 31 May 2017, the Shares were trading at a discount of 32.6% which was similar to the discounts at which the shares of a number of private equity investment trusts or companies trade - companies whose holdings are in illiquid investments. As the Company is a liquidating vehicle, the Directors would expect the discount to net asset value at which the Company's Shares trade to narrow further as the Company's unquoted investments are realised and the proceeds returned to Shareholders.
Lonestar has repositioned itself significantly since September 2016. In December 2016, Lonestar completed an equity raising in the U.S. market to strengthen its balance sheet. The Company did not participate in the offering because under its investment policies it is not allowed to make new investments, including in companies in which it already has an interest. This equity raising reduced the Company's holding in Lonestar from 52.0% to 19.1%.
On 30 May 2017, subsequent to the period under review in this interim report, Lonestar announced two major acquisitions which, its management believes, will significantly increase the company's scale and attractiveness to prospective investors. The acquisitions - which are expected to close in the third quarter of 2017 - will increase Lonestar's net leasehold acreage by 59%, its proved reserves by 70% and its net oil and gas production by 39%. The acquisitions are being financed by the issue of a new preferred security convertible into ordinary shares, the issue of ordinary shares and bank borrowings. The manner in which the acquisitions are being financed will also, Lonestar's management believes, reduce the use of debt in Lonestar's balance sheet and materially increase its debt coverage ratios, a key metric for equity investors. The financing of the acquisitions will have the effect of further reducing the Company's interest in Lonestar to 17.1%, and to 11.0% when, and if, the convertible preferred security is converted into ordinary shares of Lonestar. Additional information on Lonestar and the Company's other investments can be found in the Investment Manager's Report.
The Company's strategy is to realise its illiquid investments as soon as practicable and to return the proceeds of realisations to Shareholders. However, the Board notes that the Realisation Strategy could take between 12 to 16 months. It will also continue to support Lonestar's board and management in their efforts to increase the company's scale, to improve its balance sheet and growth prospects and to close the valuation discount at which shares in Lonestar trade relative to its peers.
Martin Nègre
Chairman
executive sUMMARY
This Executive Summary is designed to provide information about the Company's business and results for the period ended 31 March 2017. It should be read in conjunction with the Chairman's Statement and the Investment Manager's Report which gives a detailed review of the investments, realisation activities for the period, and an outlook for future realisations.
Corporate summary
The Company was incorporated in Guernsey on 28 June 2016, with registered number 62195, as a non-cellular company with liability limited by shares. The Company has been registered by the Guernsey Financial Services Commission ("GFSC") as a registered closed-ended collective investment scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Scheme Rules ("RCIS Rules") 2015.
The Company has a wholly owned subsidiary called EFR Guernsey Holding Limited, which holds an equity investment in Lonestar.
The Company is regulated by the GFSC and is a member of the Association of Investment Companies ("AIC").
The Company's share capital is denominated in Sterling and each Ordinary Share carries equal voting rights.
The Company's Ordinary Shares were admitted to trading on the London Stock Exchange (Specialist Fund Segment) on 26 September 2016. As at 31 March 2017, the Company's issued share capital comprised 52,473,633 Ordinary Shares.
The Company is categorised as an internally managed non-European Union ("EU") alternative investment fund for the purposes of the Alternative Investment Fund Manager Directive. As such, the Board retains overall responsibility for portfolio management and risk management of the Company.
The Company has appointed Ecofin Limited (the "Investment Manager") as investment manager and in such capacity the Investment Manager has, subject to the overall supervision of the Board, responsibility for the management of the Company's investment portfolio and day to day management of the strategy to realise the Company's investments (the "Realisation Strategy"). The Board actively and continuously supervises the Investment Manager in the performance of its function.
The Company is a self-managed fund and therefore acts as the Alternative Investment Fund Manager ("AIFM") of the Company. During 2016, the Company registered with the Guernsey Financial Services Commission, being the Company's competent regulatory authority, as a self-managed non-EU Alternative Investment Fund (AIF), and has registered with the UK Financial Conduct Authority, under the relevant national private placement regime ("NPPR"). As the Company is non-EU domiciled, no depositary has been appointed in line with the AIFM Directive, however BNP Paribas Securities Services S.C.A., Guernsey Branch has been appointed to act as custodian.
Investment objective
The Company's investment objective is to conduct an orderly realisation of the assets of the Company, to be effected in a manner that seeks to achieve a balance between returning cash to Shareholders promptly and maximising the value of the investment portfolio.
Investment policy
The Board and the Investment Manager believe that the portfolio may take in the region of 12 to 16 months from the date of this report to be fully realised. The mechanics and timing of distributions will be set out in the redemption announcement(s) and/or circular(s) to be sent to Shareholders at the relevant time(s).
The Company will not make any new investments save that:
(a) available cash may be used to fund, where necessary, capital calls in relation to existing investments where the Directors believe it is necessary to preserve the value of that investment; and/or
(b) available cash may be invested in liquid cash-equivalent securities, including cash funds, and bank cash deposits, pending its return to Shareholders.
The investment policy involves a continual evaluation of the business prospects of each investment in the portfolio and the disposal options for each asset in order to assess the most appropriate realisation timing and strategy to be pursued in relation to each investment. Whilst some investments may be considered appropriate for sale in the shorter term, other investments may be held for a longer period with a view to enabling their inherent value to be realised successfully. The strategy for realising individual investments may need to be altered to reflect changes in the circumstances of a particular investment or in the prevailing market conditions. The Board meets regularly to review progress in implementing the investment objective and the Realisation Strategy and the current position of the holdings in the portfolio.
Further information on the current status of the Realisation Strategy can be found in the Investment Manager's report.
Key performance indicators ("KPIs")
The Board seeks to achieve a balance between returning cash to Shareholders promptly and maximizing the value of the investment portfolio. In order to achieve this, the Board is in ongoing discussions with the Investment Manager in respect of each investment. In order to measure the success of the Company in meeting its objectives and to evaluate the performance of the Investment Manager, the Directors take into account the following key performance indicators:
Realisations at NAV
The Board monitors the ability of the Company to realise the value of each investment at its recoverable amount, as included in the NAV (as at the latest practical date to the realisation date), whilst placing due consideration on the timing of the realisation of each investment and the position of the Company post investment realisation.
Total return including distributions
The Board reviews at each meeting the performance of the Company's investment portfolio and NAV, as well as the total return, including distributions, earned by Shareholders.
Directors' interests
The Board comprises three Directors: Martin Nègre, Robert Sinclair and Nick Tostevin. The Directors are all non-executive and, other than Martin Nègre, are independent of the Investment Manager.
A biography for each Director is shown in the Board Members' section of this Interim Financial Report. Information on the Directors' remuneration is detailed in note 5.
As at the date of approval of the Interim Financial Report, the Directors held the following number of Ordinary Shares in the Company:
Director Director holdings
in the Company's
Ordinary Shares
------------------- ------------------
Martin Nègre 271,502
------------------- ------------------
Robert Sinclair Nil
------------------- ------------------
Nick Tostevin Nil
------------------- ------------------
Committees of the Board
Audit Committee
The Board has delegated certain responsibilities and functions to the Audit Committee which consists of Robert Sinclair (Audit Committee Chairman) and Nick Tostevin. The Audit Committee meets at least twice a year. The members of the Audit Committee consider that they collectively have the requisite skills and experience to fulfil the responsibilities of the Audit Committee. The Audit Committee reviews the scope and results of the external audit, its cost effectiveness and the independence and objectivity of the external auditors, including the provision of non-audit services. Each year the Audit Committee reviews the independence of the auditors.
Management Engagement Committee
The Company's Management Engagement Committee comprises Robert Sinclair and Nick Tostevin (Management Engagement Committee Chairman). The Management Engagement Committee meets at least once a year and its main function is to review and make recommendations on any proposed amendment to the Investment Management Agreement and keep under review the performance of the Investment Manager and all other service providers.
Remuneration and Nomination Committee
The Company has not established a separate Remuneration and Nomination Committee as matters as to the remuneration of the Directors of the Company will be considered by the Board.
Attendance at meetings of the Board and its committees for the period ended 31 March 2017
Inaugural Quarterly Ad-hoc Audit Management
Board Board Board Committee Engagement
and Committee Meetings Meetings Meetings Committee
Meetings
------------------- --------------- ---------- ---------- ----------- ------------
Number of
meetings 2 1 7 1 -
------------------- --------------- ---------- ---------- ----------- ------------
Martin Nègre 1 1 5 1(*) -
------------------- --------------- ---------- ---------- ----------- ------------
Robert Sinclair 2 1 6 1 -
------------------- --------------- ---------- ---------- ----------- ------------
Nick Tostevin 2 1 7 1 -
------------------- --------------- ---------- ---------- ----------- ------------
(*) attended with permission from the Audit Committee but did not vote in the meeting.
The Committees report to the Board, as part of a separate agenda item, on the activity of the Committees and matters of particular relevance to the Board in the conduct of their work.
Principal risks and uncertainties
The Directors believe the principal risks facing the Company are summarised below along with, where appropriate, the steps taken by the Board to monitor and mitigate such risks. The specific financial risks associated with foreign currencies, interest rates, market prices, liquidity and credit - which may or may not be material to the Company - are described in note 8 to the unaudited condensed interim financial statements.
The principal risks faced by the Company can be divided into various areas as follows:
-- Performance, market and liquidity, any of which may affect the Realisation Strategy -- Lonestar specific risk -- Portfolio concentration -- Operational -- Financial
Performance, market and liquidity
The performance of the Company depends primarily on the investment decisions taken by the Investment Manager within the parameters and constraints imposed by the Company's investment policy and restrictions. As the Company has investments in securities which are listed on recognised stock exchanges - but which are illiquid - and in unquoted securities, it is regularly exposed to market risk and the value of the Company's portfolio can fluctuate, particularly over the short-term, in response to developments in financial markets. Further, the Company's assets may not be realised at their estimated net realisable values, as reflected in the Company's NAV, due to company or market related factors or the illiquid nature of the investments, and it is possible that the Company may not be able to realise some assets at any value or within 12 to 16 months in accordance with the investment objective. This may lead to volatility in the market price of shares in the Company.
The Directors assess these risk factors, and the implementation and results of the Realisation Strategy, regularly at Board and other meetings with the Investment Manager. The Board examines the sources of investment performance, liquidity and currency exposures. It also monitors liquidity risk on an ongoing basis to ensure that the Company maintains sufficient working capital to meet the Company's ongoing requirements over the expected remaining life of the Company.
As a realisation vehicle with an intended life at inception of two years, the Board adopted a methodology for the calculation of the Company's NAV which was designed to reflect the realisable value of the portfolio, net of taxes and other expenses, were the investments in the portfolio to be realised as soon as possible but in an orderly fashion in the current market. The Board regularly reviews this methodology, which is detailed in the Company's prospectus, and the application of the methodology, to determine with the Investment Manager whether or not any changes should be adopted and to assess the Investment Manager's progress toward realising the assets of the Company in accordance with the valuations resulting from applying this methodology.
Lonestar specific risk
Lonestar accounted for 51.3% of the Company's net assets at 31 March 2017. The Company owned at that time approximately 19% of Lonestar which is a public company whose shares are listed on the NASDAQ Exchange in the US. Lonestar acquires and develops shale reserves in Texas in the United States, sells the oil, gas and gas liquids produced and is exposed to the commodity price, operating, environmental and other risks associated with the oil and gas industry. The Directors monitor closely the investment in Lonestar and two representatives of the Investment Manager are directors of Lonestar. The Directors believe that the risks to the Company from its holding in Lonestar are mitigated by the risk procedures followed by Lonestar, Lonestar's insurance and the fact that Lonestar and its operating subsidiaries are separately incorporated. The Company values Lonestar in its NAV and financial statements at its trailing 5-day volume weighted average share price as reported to the NASDAQ Exchange less estimated costs (taxes and other expenses) that may be associated with the realisation of the investment.
Portfolio concentration
As at 31 March 2017, the Company's investment portfolio included debt and equity securities in the United States, Australia, United Kingdom and Mexico. The Company is exposed to concentration of geographical risk and may, from time to time, have significant exposure to portfolio companies from certain business sectors, specifically oil and gas which made up 54.6% of the NAV as at 31 March 2017. Greater concentration of investments in any one geographical and/or industry sector may result in greater volatility in the value of the Company's investments, and consequently its NAV, and may materially and adversely affect the performance of the Company and returns to Shareholders.
As part of the Realisation Strategy, the number of investments held by the Company is expected to reduce over time and, as a consequence, concentration risk will increase and the aggregate return on the remaining investment portfolio will become increasingly exposed to the performance, favourable or unfavourable, of the remaining individual investments. To a large extent, this is unavoidable in view of the Company's Realisation Strategy.
Operational
In common with most other investment companies, the Company has no executive directors, no executive management and no employees. The Company delegates key operational tasks to third-party service providers which are specialists in their fields: the management of the Company's investment portfolio to the Investment Manager, Ecofin Limited; the preparation and maintenance of the Company's unaudited condensed interim financial statements, the maintenance of its corporate records and the custody of the Company's assets to BNP Paribas Securities Services SCA, Guernsey Branch. The Board reviews the performance of these third-party service providers and their risk control procedures on a regular basis as well as the terms on which they provide services to the Company.
Financial
The specific financial risks associated with foreign currencies are described below, and those associated with interest rates and credit (counterparties) - which may or may not be material to the Company - are described in detail in note 8 to the unaudited condensed interim financial statements.
Foreign exchange risk is the risk that the values of the Company's assets and liabilities are adversely affected by changes in the values of foreign currencies by reference to the Company's base currency, Sterling. The vast majority (91.78%) of the Company's assets are denominated in currencies other than Sterling. Accordingly, fluctuations in exchange rates between Sterling and the relevant local currencies - principally the US dollar and the Australian dollar - and the costs of conversion and exchange control regulations will directly affect the value of the Company's investments and the ultimate sums realised by Shareholders.
The Board monitors the Company's exposure to foreign currencies on a regular basis. During the period ended 31 March 2017, the Company did not use financial instruments to manage or mitigate the foreign currency exposure. Please refer to note 8.1c for further details.
Break-up basis
Under the AIC Code of Corporate Governance ("AIC Code") and applicable regulations, the Directors are required to determine whether it is reasonable to assume that the Company is a going concern from date of approval of the unaudited condensed interim financial statements. Given the Board believes that the investments held by the Company may be fully realised in 12 months from the date of approving the unaudited condensed interim financial statements, the Board has adopted the break-up basis in preparing the unaudited condensed interim financial statements. However, the Board notes that the Realisation Strategy could take longer, between 12 to 16 months. This accords with the methodology utilised in calculating the Company's NAV on a weekly basis. Under this basis of accounting, assets are valued at their estimated net realisable value and provisions are made for estimated future costs to realise the investments and operating costs to liquidate the Company.
Events after the reporting date
The Directors are not aware of any developments that might have a significant effect on the operations of the Company in subsequent financial periods that are not already disclosed in this report or the attached unaudited condensed interim financial statements as detailed in note 15.
Future strategy
The Board believes that the investment strategy and policy adopted by the Company is appropriate for and is capable of meeting the Company's realisation objectives. The overall Realisation Strategy remains unchanged and it is the Board's assessment that the Investment Manager's resources are appropriate to manage properly the Company's investment portfolio.
BOARD MEMBERS
All Directors are non-executive.
CHAIRMAN
Martin Nègre
Appointed 20 July 2016
Martin was a director of EWPO until September 2016. He is currently a non-executive director of both EF Realisation and Ecofin Global Utilities and Infrastructure Trust plc. He was, until June 2001, the chief executive officer of Northumbrian Water plc, then a subsidiary of Suez Lyonnaise des Eaux, and Suez Lyonnaise's chief corporate representative in the UK. Prior to that, he was Suez Lyonnaise's international director in Paris and then its Asia-Pacific president in Hong Kong and Singapore. Before that, he spent 21 years with Alsthom and GEC Alsthom, the Anglo/French engineering company, where he was a senior executive and the chief executive officer of the power generation division.
He is chairman of the Ecofin Vista Long-Short Fund and the Ecofin Global Renewables Infrastructure Fund, funds managed by the Investment Manager, a non-executive director of Northumbrian Water Ltd and of Messrs Hottinger & Cie, Paris.
DIRECTORS
Robert Sinclair (independent) - Chairman of the Audit Committee
Appointed 28 June 2016
Robert is managing director of the Guernsey based company, Artemis Trustees Limited, and a director of a number of investment fund management companies and investment funds associated with Artemis Trustees Limited. Robert is chairman of Schroder Oriental Income Fund Limited, a director of Sirius Real Estate Limited, a director of Picton Property Income Limited and chairman of its audit committee, a director of Chariot Oil and Gas Limited and chairman of its audit committee, and a director of Rainbow Rare Earths Limited and chairman of its audit committee.
He is a fellow of the Institute of Chartered Accountants in England & Wales, a member of the Institute of Chartered Accountants of Scotland and a member of the Society of Trust and Estate Practitioners. Robert is resident in Guernsey.
Nicholas (Nick) Tostevin (independent) - Chairman of the Management Engagement Committee
Appointed 28 June 2016
Nick holds the degree of LLB (Hons) (Bachelor of Law). He qualified as a barrister in 1975 and as an advocate of the Royal Court of Guernsey in 1976 and practised as such for 33 years until he retired as the senior partner of a Guernsey law firm. He is a non-executive director of a number of Guernsey-based investment funds and insurance companies.
INVESTMENT MANAGER'S REPORT
Summary and performance
The Company is one of two listed successor vehicles to EWPO, a UK investment trust which was reorganised pursuant to a scheme of reconstruction. The Company's shares were issued to Shareholders and admitted to trading on the London Stock Exchange on 26 September 2016. EF Realisation, a Guernsey company, holds the illiquid and unquoted investments of EWPO and had net assets of approximately GBP44.0 million at the date of its first published net asset value on 30 September 2016. The Company's investment objective is the orderly realisation of its assets for the benefit of its Shareholders. As a consequence, it cannot make any new investments and the proceeds of any realisation, subject to the working capital requirements of the Company, will be distributed to Shareholders. In September 2018, a resolution will be put to Shareholders to wind-up the Company unless Shareholders have voted before then to extend the life of the Company.
In the half-year from 30 September 2016 to 31 March 2017, the net asset value of the Company declined from GBP44.0 million to GBP27.1 million, a fall of 39%. This decline was almost completely attributable to a fall in the share price of Lonestar Resources US, Inc., the Company's largest investment which, at the time of the first net asset value of the Company, accounted for approximately 70.9% of the Company's investment portfolio. The value of the Company's other assets rose by GBP400,000 over the half-year.
Since admission on 26 September 2016, the Company's shares have traded at a discount to net asset value which, given the nature of the Company's investments and the uncertain outlook for their realisation, was to be expected as investment trusts which invest in private equity typically trade at steep discounts to their published net asset values. The discount to net asset value at which shares in EF Realisation traded averaged 46.1% over the period and was 30.2% as at 31 March 2017. The discount to net asset value was 32.6% as at 31 May 2017.
During the period, the Company realised one investment, a holding in Menhaden Capital plc, a listed UK investment trust which invests in clean energy and energy efficiency. In February 2017, the Company took advantage of a recovery in Menhaden's share price and sold its entire holding of two million shares, realising GBP1.2 million, a premium of 21% to the valuation at which Menhaden was carried in the Company's accounts at the time of the Company's launch; it had been the Company's policy to carry its investment in Menhaden at a discount to its quoted share price given the illiquidity of its shares. As the proceeds from the sale were relatively small, the Directors elected to add them to the working capital of the Company rather than make a cash distribution to Shareholders.
Summary of investments
At 31 March 2017, EF Realisation had seven investments which were valued at GBP24.9 million plus GBP2.2 million in net working capital. All the Company's investments were in unquoted securities with the exception of its investment in Lonestar, which is a company quoted on the U.S. NASDAQ exchange, and its investment in a bond issued by Integradoro de Servicios Petroleros Oro Negro SAPI de CV ("Oro Negro"). The Company values Lonestar by using a five day, volume-weighted average of its share price and, in addition, deducts certain estimated expenses which the Company's directors believe could be incurred in realising the Company's investment in Lonestar. The Company values its other, unquoted investments based on third-party valuations or valuation techniques typically used to value such investments and may also apply a further discount for illiquidity or deduct estimated expenses to realise any investment.
Lonestar
Lonestar is EF Realisation's largest investment and accounted for 51.3% of the Company's portfolio at 31 March 2017. Lonestar owns and develops U.S. oil and gas reserves and produces oil and gas from those reserves, primarily in the Eagle Ford shale basin in southern Texas. Lonestar was formerly an Australian company, listed on the Australian Stock Exchange, but in mid-2016 it was re-organised as a U.S. domiciled company and, with effect from 5 July 2016, its shares have been listed on the U.S. NASDAQ exchange.
As at 31 March 2017, the Company owned, through a wholly-owned subsidiary, 4,174,259 ordinary shares of Lonestar, equivalent to approximately 19% of the company's outstanding equity. Lonestar has its origins in a private equity investment made by EWPO which was then merged in 2012 with a smaller Australian-listed company whose assets were oil and gas reserves in the United States. In 2016, Lonestar's shares were de-listed from the Australian Stock Exchange, the company was re-domiciled as a U.S. company and its shares were listed and began trading on the U.S. NASDAQ exchange from 5 July 2016.
At admission on 26 September 2016, EF Realisation owned approximately 52% of Lonestar. The decline in EF Realisation's percentage ownership of Lonestar over the period was attributable to an equity raising Lonestar undertook in December 2016 to strengthen its balance sheet and which diluted EF Realisation's holding in Lonestar. Under its investment policies, EF Realisation is prohibited from making new investments and, therefore, it was not permitted to participate in Lonestar's equity issue and to maintain its percentage interest in the company.
Under an agreement with Lonestar, EF Realisation has the right to nominate two directors to Lonestar's board, subject to the approval of Lonestar's shareholders in an annual general meeting, as long as its ownership of Lonestar is in excess of 15%, and one director if its ownership is less than 15% but greater than 10%. EF Realisation's nominated directors of Lonestar are John Murray, chairman of Ecofin Limited, the Investment Manager, and Dr Christopher Rowland, head of special situations at Ecofin Limited.
Over the half-year period from EF Realisation's first net asset value on 30 September 2016 to 31 March 2017, Lonestar's U.S. dollar share price fell by 50%, or by 48% in sterling terms. Over the same period, an equity index of U.S. Small Capitalisation Exploration & Production (E&P) companies fell by 9% in U.S. dollar terms while the U.S. West Texas Intermediate (WTI) oil price rose by 5%. The decline in the valuation of smaller E&P companies - which gathered pace in March 2017 - reflected a number of factors including concerns about continued evidence of oversupply in world oil markets and, therefore, the outlook for oil prices, doubts about the efficacy of OPEC production cuts and, importantly, the sharp increase in oil production from U.S. unconventional oil and gas producers in response to technology and efficiency gains.
Following the precipitous decline in the WTI oil price during the first quarter of 2016 to a low of $26.21 per barrel, Lonestar's priority was to strengthen its balance sheet and finances. Lonestar restricted its capital expenditures to an amount that was covered by its cash flow, repurchased and retired approximately 31% of its senior unsecured 8 3/4 % Notes due 2019 at an average price of 53 cents in the dollar, made a small disposal of its non-core reserves and, in December 2016, raised $79 million in new equity. These measures reduced Lonestar's debt from $319.5 million at 30 June 2016 to $212.3 million at 31 December 2016. In addition, the equity issuance resulted in EF Realisation's stake in Lonestar declining from 52.0% to 19.1%.
By early 2017, with the oil price having traded in a range of U.S. $40 to $54 over the previous year, Lonestar had embarked on a growth strategy, taking advantage of technological and productivity gains which had lowered its cost of drilling and production. Lonestar was planning to complete fourteen new wells in 2017, compared to five in 2016, and hoped to complete a number of bolt-on, value-accretive acquisitions of reserves. By early May 2017, it had increased its proved, probable and possible reserves through acquisitions by approximately 11%, from 63.4 million barrels at 31 December 2016 to 70.1 million barrels, at an average acquisition cost of just $1.30 per barrel. As a result, Lonestar was forecasting that its production of oil, gas and other liquids would increase by between 65% and 85% in 2017, measured from the fourth quarter of 2016 to the fourth quarter of 2017.
On 30 May 2017, Lonestar announced that it had entered into definitive agreements to acquire oil and gas properties in the Eagle Ford Shale area for a total purchase price of $116.6 million. The acquisitions will be funded primarily by an $80 million issue of convertible preference shares to Chambers Energy Capital, a specialist investor in US oil and gas companies, and an issue of 2.6 million Class A common shares; $25 million will also be drawn on the company's senior secured credit facility. The acquisitions increase Lonestar's Eagle Ford Shale holdings by 59% to 57,330 net acres, increase the company's pro-forma Q1 2017 net production by 39% to 7,318 barrels of oil equivalent per day, and increase pro-forma 2016 earnings before interest, taxes, depreciation and amortisation (EBITDA) by 33% to $75.3 million. Also on a pro-forma basis, as at 31 December 2016 proved reserves increase by 70% to 76.3 MMBOE, and the PV-10 of Lonestar's proved reserves (an assessment of the future cash flows, discounted at a rate of 10% per annum, undertaken according to SEC regulated procedures) increases by 68%. Proved reserves are being acquired at $3.7 per barrel of oil and at a 55% discount to their PV-10 value.
Concurrently, Lonestar agreed amendments to its Citibank-led senior secured credit facility: the company's borrowing base has been increased to $160 million from $112 million and various covenant tests have been relaxed. JP Morgan has joined the syndicate of banks lending to Lonestar. Lonestar is also simplifying its debt structure by repurchasing its 2nd lien facility, issued last year to finance the buyback of senior notes at an average discount to par value of 47%.
Upon issuance of the new ordinary shares to finance the acquisitions, EF Realisation's shareholding in Lonestar will fall from 19.1% of the outstanding ordinary shares to 17.1%, and potentially to 11.0% on the eventual conversion of the convertible preferred shares. The convertible preferred shares may be converted into ordinary shares at $6 per ordinary share, a conversion premium of 45% above the Lonestar share price over the 20 days prior to the terms being agreed, demonstrating Chambers Energy Capital's confidence in the accretive nature of these transactions for Lonestar.
These transactions, therefore, add high quality assets and significant scale to Lonestar, and they have been financed in a manner which strengthens the balance sheet and improves the credit metrics of the company. In the view of Lonestar's management, these transactions will significantly increase the company's scale and attractiveness to prospective investors.
Since its NASDAQ listing, Lonestar has consistently traded at a valuation discount to its U.S. peers. We attribute this to a number of factors in addition to uncertainty about the outlook for oil and gas prices; namely, concerns about the financial viability of smaller E&P companies and their ability to access capital markets in the current environment and, more specifically, Lonestar's level of gearing, the visibility of its strategy and efforts, and the relative illiquidity of its shares. Pro-forma, including the acquisitions, Lonestar's shares currently trade at an enterprise value equivalent to approximately 4.2 times analysts' estimates of 2018 EBITDA, while its peers which operate in the Eagle Ford shale basin or are smaller oil focussed companies trade at an average of 7.0 times. Lonestar's under-valuation is even more pronounced when calculated on the basis of its proved reserves. On this basis, Lonestar's enterprise value is currently equivalent to U.S. $5.6 per barrel of proved reserves while its peers trade at an average value of U.S. $14.0 per barrel.
As Lonestar is a U.S. company listed on NASDAQ, it regularly files detailed reports on its operations and financial statements with the U.S. Securities and Exchange Commission (SEC). These annual and quarterly reports as well as investor presentations and other information on the company are available on the company's website (http://www.lonestarresources.com).
Eastern Australia Irrigation
Eastern Australian Irrigation Limited ("EAI") owns two large farms in Queensland, Australia, whose principal assets include access to water rights and the associated water storage infrastructure for irrigating the farms, whose main crop is cotton. The Company owns 9.6% of EAI's equity.
The cotton price rose from 58 cents per pound to 80 cents per pound over the thirteen months to 28 April 2017, an increase of 38%, and the institutions which own EAI are working towards a sale of the company or its assets which would be planned to take place during the second half of 2017. EF Realisation carries its investment in EAI at an independent expert's valuation of the expected proceeds from a sale of the farms prepared in June 2016 which is approximately 30% below the most recent quarterly valuation of EAI by another independent third-party. Until binding bids for either the company or its principal assets are received, the timing of any sale of EF Realisation's holding in EAI and the proceeds of such a sale are uncertain.
TRF/Prescott Valley
EF Realisation has a majority interest in 2,724 acre-feet of water entitlements in the Prescott Valley region of Arizona, near Phoenix, in the United States. An independent expert values these water entitlements on an annual basis. EF Realisation uses this valuation as a basis for valuing its investment in TRF but it applies a further discount to reflect the illiquidity of the investment and the expenses that might be incurred by EF Realisation upon disposal of the investment. Following an update provided by the independent expert, EF Realisation reduced its own valuation of this asset by GBP0.2 million during the period to 31 March 2017.
Property developers in the Prescott Valley region must demonstrate that they have access to 100 years of future water supply before they can be granted permission to develop land. The water entitlements owned by EF Realisation would enable developers to demonstrate a future water supply and 2,724 acre-feet of water entitlements are sufficient to allow for the development of approximately 8,000 homes.
Development activity in the Prescott Valley region came to a standstill after the global financial crisis, significantly reducing the demand for water entitlements. As a measure of the downturn in building activity, the number of new single dwelling housing permits granted fell to less than 50 per year in 2009-2011, having exceeded 1,000 permits per year in 2004-2005. Fortunately, property development activity has picked up and interest from property developers for water entitlements has grown. Several sales of water entitlements are in the early stages of negotiation and, while there is no guarantee that any sale can be concluded at an attractive price, there are signs that a significant sale of water entitlements might be able to be achieved by the end of calendar 2017. The scale of water entitlements in this investment, however, means that a complete disposal of this asset during 2017 is unlikely.
Oro Negro Investment
Oro Negro is a privately-owned Mexican oil service company which owns several jack-up rigs which it has contracted to the Mexican state-owned oil company, Petroleos Mexicanos ("Pemex"). EF Realisation owns 1.8% of Oro Negro's equity and a small position in the company's bonds.
The collapse in oil prices in 2014 and 2015 forced Pemex to downsize its oil field appraisal and development activities and, as a result, its demand for Oro Negro's jack-up rigs declined. Pemex halted payments to Oro Negro which in turn stopped paying interest on its bonds. In 2016, the company's contract with Pemex was renegotiated and Oro Negro agreed to idle two rigs and accepted a reduced day-rate on the working rigs until summer/autumn 2017 when the day rate is contractually set to increase and the two idled rigs are to be recommissioned. Following this contract renegotiation, Pemex resumed payments to Oro Negro, enabling Oro Negro to resume coupon payments on its bonds.
In its NAV, EF Realisation carries its investment in Oro Negro's bonds at their market price and carries its investment in Oro Negro's equity at nil value. Following the resumption of coupon payments on its bonds by Oro Negro, the price of the bonds improved contributing an increase of GBP0.3 million to EF Realisation's net asset value during the period to 31 March 2017. There is a reasonably active market in Oro Negro's bonds, and with the outlook for Oro Negro improving, we plan to realise the investment in Oro Negro once the commercial relationship with Pemex clarifies.
Other Investments
EF Realisation holds interests in the debt and equity of Energy Future Holdings Limited ("EFH"), the holding company for the leveraged buyout, in 2007, of the Texas-based utility TXU Energy which filed for Chapter 11 bankruptcy in 2014. The Company also owns a position in the debt of International Wood Fuels, an inactive U.S. wood pellet producer, and in Bluewater Bio Holdings Limited, a UK water treatment company. In addition, the Company is party to an introductory fee arrangement with an established U.S. wood pellet producer. EF Realisation carries all of these investments at nil value. In our estimation only the introductory fee arrangement has the potential to be of some value, but in the current market it is unlikely that this will be material to EF Realisation's net asset value over the next twelve months.
Outlook
The Company's intention is to move ahead with an orderly realisation of its unquoted assets with a view to making significant distributions to Shareholders over the next six to twelve months. In all likelihood, however, the Company will continue to hold its investment in Lonestar in the coming months. This is due to the operational progress being made by Lonestar, continuing efforts by its management to strengthen its finances and to grow the company and to the fact that, following its listing on NASDAQ in July of 2016, it continues to trade at a significant valuation discount to its peers. In our opinion, there is scope for a significant increase in the Company's net asset value if Lonestar's management is able successfully to execute the company's business plan and if, in time, the company is rewarded with a valuation in line with those enjoyed by its peers with further optionality for an increase in value if the outlook for oil prices improves significantly during the realisation period.
Investment Manager
Directors' Statement of Responsibilities
The Directors are responsible for preparing the Interim Financial Report which gives a true and fair view of the state of affairs of the Company for that period and which is in accordance with applicable laws and IAS 34 - "Interim Financial Reporting" as adopted by the EU. In preparing the unaudited condensed interim financial statements contained within the Interim Financial Report the Directors are required to:
-- select suitable accounting policies and apply them consistently;
-- present information including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-- make judgements and estimates that are reasonable and prudent;
-- prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business; and
-- provide additional disclosures when compliance with the specific requirements of International Financial Reporting Standards, as adopted by the EU ("IFRS"), is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance.
The Directors confirm that they have complied with these requirements in preparing the unaudited condensed interim financial statements contained within the Interim Financial Report.
The Directors confirm to the best of their knowledge that:
-- the unaudited condensed interim financial statements contained within the Interim Financial Report have been prepared in accordance with IAS 34 - "Interim Financial Reporting" as adopted by the EU and give a true and fair view of the state of affairs of the Company as at 31 March 2017, as required by the Financial Conduct Authority ("FCA") through the Disclosure Guidance and Transparency Rules ("DTR") 4.2.4R;
-- the combination of the Chairman's Statement, the Investment Manager's Report, the Executive Summary and the notes to the unaudited condensed interim financial statements includes a fair review of the information required by:
a) DTR 4.2.7R, being an indication of important events that have occurred during the period ended 31 March 2017 and their impact on the set of unaudited condensed interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
b) DTR 4.2.8R, being related party transactions that have taken place during the period since incorporation to 31 March 2017 and that have materially affected the financial position or performance of the Company during that period.
Approved and signed on behalf of the Board,
Martin Nègre Robert Sinclair
Chairman Audit Committee Chairman
independent review report to EF REALISATION COMPANY LIMITED
Introduction
We have been engaged by EF Realisation Company Limited (the "Company") to review the Unaudited Condensed Interim Financial Statements in the Interim Financial Report for the period ended 31 March, 2017 which comprise the Condensed Interim Statement of Comprehensive Income, the Condensed Interim Statement of Financial Position, the Condensed Interim Statement of Changes in Equity, the Condensed Interim Statement of Cash Flows and the related notes 1 to 16. We have read the other information contained in the Interim Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Unaudited Condensed Interim Financial Statements. The Unaudited Condensed Interim Financial Statements have been prepared on a break-up basis.
This report is made solely to the Company in accordance with guidance contained in the International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our work, for this report, or for the conclusions we have formed.
Directors' Responsibility
The Interim Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Financial Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
The Unaudited Condensed Interim Financial Statements included in this Interim Financial Report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the Unaudited Condensed Interim Financial Statements in the Interim Financial Report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the Unaudited Condensed Interim Financial Statements in the Interim Financial Report for the period ended 31 March, 2017 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Guernsey
Channel Islands
The Unaudited Condensed Interim Financial Report are published on websites maintained by the Investment Advisor.
The maintenance and integrity of these websites are the responsibility of the Investment Advisor; the work carried out by the Auditor does not involve consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the Unaudited Condensed Interim Financial Report since they were initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of Unaudited Condensed Interim Financial Report may differ from legislation in other jurisdictions.
CONDENSED INTERIM STATEMENT OF COMPREHENSIVE INCOME
For the period from 28 June 2016 (incorporation) to 31 March 2017
For the
period
from
28 June
2016 to
31 March
2017
Notes GBP
---------------------------- ------ -------------
Income
Investment income 162,495
Foreign exchange gain 64,937
227,432
---------------------------- ------ -------------
Expenses
Net loss on financial
assets designated at fair
value through profit or
loss (19,888,595)
Operating expenses 4 (446,198)
------------------------------ ------ -------------
(20,334,793)
---------------------------- ------ -------------
Loss before taxation (20,107,361)
------------------------------ ------ -------------
Taxation -
---------------------------- ------ -------------
Loss after taxation and
total comprehensive loss (20,107,361)
Basic and diluted earnings
per Ordinary Share 12 (0.5557)
The Company has no items of other comprehensive income or loss, and therefore the loss for the period is also the total comprehensive loss.
All items in the above statement are derived from continuing operations. No operations were acquired or discontinued during the period.
The notes form an integral part of these unaudited condensed interim financial statements.
CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION
As at 31 March 2017
31 March
2017
Notes GBP
----------------------------------- ------ -------------
Current assets
Financial assets designated
at fair value through profit
or loss 7 24,867,302
Cash and cash equivalents 3,602,771
Other receivables and prepayments 6 28,430
Total current assets 3,631,201
----------------------------------- ------ -------------
Total assets 28,498,503
----------------------------------- ------ -------------
Current liabilities
Other payables 9 (88,639)
Liquidation provision 10 (1,359,695)
----------------------------------- ------ -------------
Total current liabilities (1,448,334)
----------------------------------- ------ -------------
Total liabilities (1,448,334)
----------------------------------- ------ -------------
Net assets 27,050,169
----------------------------------- ------ -------------
Capital and reserves
Share capital 11 47,157,530
Retained earnings (20,107,361)
----------------------------------- ------ -------------
Equity Shareholders' funds 27,050,169
Net asset value per share 13 0.5155
The unaudited condensed interim financial statements were approved and authorised for issue by the Board of Directors on 6 June 2017 and signed on its behalf by:
Martin Nègre Robert Sinclair
Chairman Audit Committee Chairman
The notes form an integral part of these unaudited condensed interim financial statements.
CONDENSED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the period from 28 June 2016 (incorporation) to 31 March 2017
Share Retained
capital earnings Total
Note GBP GBP GBP
------------------------------ ----- ----------- ------------- -------------
Opening equity Shareholders' - - -
funds at 28 June 2016
------------------------------ ----- ----------- ------------- -------------
Total comprehensive
loss for the period - (20,107,361) (20,107,361)
Transactions with owners,
recorded directly to
equity
Proceeds from issuance
of Ordinary Shares 11 47,184,416 - 47,184,416
Share issue costs 11 (26,885) - (26,885)
Redemption of Ordinary
Shares 11 (1) - (1)
------------------------------ ----- ----------- ------------- -------------
Closing equity Shareholders'
funds at 31 March 2017 47,157,530 (20,107,361) 27,050,169
------------------------------ ----- ----------- ------------- -------------
The notes form an integral part of these unaudited condensed interim financial statements.
CONDENSED INTERIM STATEMENT OF CASH FLOWS
For the period from 28 June 2016 (incorporation) to 31 March 2017
For the
period
from
28 June
2016 to
31 March
2017
Notes GBP
------------------------------------------------------------- ------ -------------
Cash outflow from operating
activities
Loss before taxation (20,107,361)
Adjustments to reconcile
profit before tax to net
cash flows from operating
activities:
* Realised gain on financial assets designated at fair
value through profit or loss 7 (315,260)
* Unrealised loss on financial assets designated at
fair value through profit or loss 7 20,203,855
* Net gain on foreign exchange translation (64,937)
Proceeds from sale of financial
assets designated at fair
value through profit or loss 7 1,315,298
Changes in working capital
Increase in other receivables
and prepayments 6 (28,430)
Increase in other payables 9 88,639
Increase in liquidation provisions 114,916
------------------------------------------------------------- ------ -------------
Net cash used from operating
activities 1,206,720
------------------------------------------------------------- ------ -------------
Cash inflow from financing
activities
Proceeds from Scheme of Reconstruction 2,358,000
Ordinary Share issue costs
paid 11 (26,885)
Net cash from financing activities 2,331,115
------------------------------------------------------------- ------ -------------
Net increase in cash and
cash equivalents in the period 3,537,836
------------------------------------------------------------- ------ -------------
Cash and cash equivalents -
at the beginning of the period
------------------------------------------------------------- ------ -------------
Effect of exchange rate fluctuations
on cash and cash equivalents 64,936
Cash and cash equivalents
at the end of the period 3,602,771
------------------------------------------------------------- ------ -------------
Supplemental disclosure of
non-cash flow information
Transfer of assets from Scheme
of Reconstruction (46,071,195)
Issue of Ordinary Shares
in specie 11 47,184,416
Liquidation provisions 1,244,779
------------------------------------------------------------- ------ -------------
Cash proceeds from Scheme
of Reconstruction 2,358,000
------------------------------------------------------------- ------ -------------
The notes form an integral part of these unaudited condensed interim financial statements.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. General information
The Company was incorporated with limited liability in Guernsey under The Companies (Guernsey) Law, 2008 (the "Companies Law"), as amended, on 28 June 2016 with registered number 62195.
The Company is a closed-ended investment company registered with the Guernsey Financial Services Commission under the Registered Collective Investment Schemes Rules 2015 and the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. The Company is not authorised or regulated as a collective investment scheme by the Financial Conduct Authority.
The Company's Ordinary Shares were admitted to trading on the Specialist Fund Segment of the Main Market of the London Stock Exchange on 26 September 2016.
The Company's registered address is BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting policies
The principal accounting policies applied in the preparation of these unaudited condensed interim financial statements are set out below. These policies have been consistently applied throughout the period presented.
2.1. Basis of preparation
(a) Statement of Compliance
The unaudited condensed interim financial statements of the Company for the period 28 June 2016 to 31 March 2017 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the FCA and with International Accounting Standards ("IAS") 34 - 'Interim Financial Reporting' as adopted by the EU. The Annual Financial Report will be prepared in accordance with IFRS, as adopted by the EU, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and interpretations issued by the International Financial Reporting Standards Interpretations Committee ("IFRIC") as approved by the International Accounting Standards Committee ("IASC") which remain in effect. The unaudited condensed interim financial statements give a true and fair view of the Company's affairs and comply with the requirements of the Companies Law.
The unaudited condensed interim financial statements have been prepared under a break-up basis. The Directors deem it appropriate to adopt a break-up basis in preparing the unaudited condensed interim financial statements given the fact they believe that the investments held by the Company may be fully realised and the Company put into liquidation in the next 12 months from the date of approving the unaudited condensed interim financial statements in line with the Company's Realisation Strategy. However, the Board notes that the Realisation Strategy could take longer, between 12 to 16 months. Please refer to note 11 for detail regarding the compulsory redemption mechanism and liquidation resolution.
As a result of the application of the break-up basis, the fair value of each investment has been adjusted as necessary to reflect any taxes and costs of disposal to fall due were the investment to be disposed of as soon as possible but in an orderly manner (the recoverable amount). In addition, future foreseeable working capital requirements and costs expected to be paid on ultimate wind-up of the Company have been accounted for as part of a liquidation provision. Refer to note 10 for further detail.
The impact of seasonality or cyclicality on operations is not regarded as significant to the unaudited condensed interim financial statements.
(b) Basis of measurement
These unaudited condensed interim financial statements have been prepared on a historical cost basis adjusted to take account of the revaluation of financial assets designated at fair value through profit or loss.
(c) Functional and presentation currency
The Company's functional currency is Sterling, which is the currency of the primary economic environment in which it operates. The Company's performance is evaluated and its liquidity is managed in Sterling. Accordingly, the unaudited condensed interim financial statements are presented in Sterling.
(d) Critical accounting estimates and assumptions
The preparation of unaudited condensed interim financial statements in conformity with IAS 34 requires the Company to make estimates and assumptions that affect items reported in the Condensed Statement of Financial Position and Condensed Statement of Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the unaudited condensed interim financial statements. Although these estimates are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly. The investments in the equity and fixed interest stocks of unquoted companies that the Company holds are not actively traded and as such the prices are more uncertain than those of more widely traded securities. The unquoted investments are valued by reference to valuation techniques approved by the Directors and based on International Private Equity and Venture Capital ("IPEV") valuation guidelines and IFRS 13 - Fair Value Measurement ("IFRS 13").
Fair value of financial assets designated at fair value through profit or loss
Valuation techniques applied in determining the fair value of financial assets designated at fair value through profit or loss are subject to significant estimates and assumptions. Please refer to note 2.4 for detail regarding the valuation process and valuation techniques applied where an active market does not exist.
(e) Critical accounting judgements
As outlined in note 2.1(a) and 2.1(c) the Directors have used their judgement to determine that the Company's financial statements are prepared on a break-up basis and that the Company's presentation and functional currency is Sterling.
Non-consolidation of EFR Guernsey Holding Limited - consideration of consolidated financial statements exemption under IFRS 10 - Consolidated Financial Statements ("IFRS 10")
As at 31 March 2017, the Company had one subsidiary undertaking, EFR Guernsey Holding Limited, as defined under IAS 27 - Separate Financial Statements, which is incorporated in Guernsey. The relevant activities of EFR Guernsey Holding Limited is that of investment holding with an investment objective in line with the Company. The Company has a significant interest in EFR Guernsey Holding Limited through its 100% ownership of the issued share capital. As a result of this significant interest, the Company has the ability to influence the decisions made by EFR Guernsey Holding Limited through its 100% holding of the voting rights and ownership and consequently has control of this entity.
In assessing the control, the Company has considered the following criteria:
i) The investor has existing rights that give it the ability to direct the relevant activities that significantly affect the investee's returns;
ii) The investor has exposure or rights to variable returns from its involvement with the investee; and
iii) The investor has the ability to use its power over the investee to affect the amount of the investor's returns.
The Company does have a beneficial interest in the investment activities of EFR Guernsey Holding Limited and in the returns generated thereof. In addition, the Company has the ability to influence these decisions and the amounts it receives as proceeds from its investment in EFR Guernsey Holding Limited which satisfies the criteria above.
In adopting the exemption from preparing consolidated financial statements under IFRS 10, the Company considered the definition, including the criteria and typical characteristics of an Investment Entity, as detailed in IFRS 10. The Company meets the IFRS 10 definition of an Investment Entity and is required to account for its investment at fair value through profit or loss.
The Company is deemed to meet the definition of an Investment Entity per IFRS 10 as the following conditions exist:
i) The Company has obtained funds for the purpose of providing investors with investment management services;
ii) The Company's business purpose, which has been communicated directly to investors, is investing solely for returns from capital appreciation, investment income, or both; and
iii) The performance of investments are measured and evaluated on a fair value basis.
The Board has also considered the typical characteristics of an investment entity per IFRS 10 in assessing whether it meets the definition of an Investment Entity. These include:
-- It has exposure to more than one investment; -- It has multiple investors; -- The majority of its investors are not related parties; and -- It has ownership interests in the form of equity.
The Board believes that the Company portrays the above typical characteristics of an Investment Entity. Accordingly, EFR Guernsey Holding Limited has not been consolidated in accordance with IFRS 10 and is accounted at fair value through profit or loss.
Please refer to notes 7 and 8 for further disclosures relating to the Company's interest in EFR Guernsey Holding Limited.
2.2. Investment in associate
An associate is an entity over which the Company has significant influence. An entity is regarded as a subsidiary only if the Company has control over its strategic, operating and financial policies and intends to hold the investment on a long-term basis for the purpose of securing a contribution to the Company's activities.
In accordance with the exemption available to venture capital and similar organisations within IAS 28 Investments in Associates and Joint Ventures, the Company does not account for its investment in Lonestar using the equity method. Instead, the Company has elected to measure its investment in its associates at fair value through profit or loss.
As at 31 March 2017, the Directors determined that although the Company had a less than 20% economic interest in Lonestar, it did have significant influence over Lonestar's strategic, operating and financial policies.
On the 30 May 2017, Lonestar announced that it has entered into definitive agreements with unaffiliated parties to acquire oil and gas properties in the Eagle Ford Shale play. The financing of this transaction has diluted the Company's interest in Lonestar from 19.1% to 17.1% and as a result, subsequent to the 31 March 2017, the Company has less significant influence over Lonestar's strategic, operating and financial policies. Please refer to note 15 for further detail.
2.3 Foreign currency translations
Foreign exchange gains and losses resulting from the settlement of transactions in foreign currencies and from the translation of monetary assets and liabilities at period-end exchange rates to Sterling are recognised in the Statement of Comprehensive Income as foreign exchange translation gains/losses.
Non-monetary items such as financial assets designated at fair value through profit or loss measured at fair value in a foreign currency, are translated using exchange rates at the Statement of Financial Position date when the fair value was determined. Effects of exchange rate changes on non-monetary items measured at fair value on a foreign currency are recorded as part of the fair value gain or loss.
2.4 Financial instruments
Financial assets
a) Classification
The Company classifies its investments as financial assets designated at fair value through profit or loss. These financial instruments are held for investment purposes. Financial assets also include cash and cash equivalents and interest receivables which are measured at amortised cost using the effective interest rate method.
Financial assets designated at fair value through profit or loss
Financial assets designated at fair value through profit or loss are financial instruments whose performance is evaluated on a fair value basis in accordance with the Company's documented investment strategy. The Company's policy requires the Investment Manager and the Board to evaluate the information about these financial assets on a fair value basis together with other related financial information.
b) Recognition, measurement and derecognition
Purchases and sales of investments are recognised on the trade date which is the date on which the Company commits to purchase or sell the investment. Financial assets designated at fair value through profit or loss are measured initially at fair value. Transaction costs are expensed as incurred and movements in fair value are recorded in the Statement of Comprehensive Income. Subsequent to initial recognition, all financial assets designated at fair value through profit or loss are measured at fair value adjusted to reflect costs of disposal because the Company's financial statements are prepared on a break-up basis. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.
c) Fair value estimation
In accordance with IFRS 13 and IPEV guidelines, fair value is the amount deemed to be the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As the Company is a realisation vehicle with an intended life from inception of two years, fair value of investments is adjusted to be the realisable value of the investments, net of taxes and other costs of disposal, were the investments in the portfolio to be realised as soon as possible but in an orderly fashion in the current market.
The Company's asset valuation methodology, which was outlined in the Company's Prospectus and is explained below, was designed to be consistent with the break-up basis of accounting that would be adopted for the preparation of the Company's unaudited condensed interim financial statements. Fair value is measured by the Directors in accordance with the NAV methodology adopted by the Board which, in turn, reflects IFRS 13 and the IPEV guidelines published in December 2015, as appropriate for a Company with a limited life.
The valuation methodology adopted by the Board:
-- Uses the most widely recognised form of valuation applied by market participants as a basis for the valuation of each asset (quoted active market trading prices for listed investments, NAV valuations for funds, a valuation based on comparable peers, or payments on liquidation);
-- Adjusts this valuation to account for illiquidity or volatility considerations, in order to be conservative (the Company's investment in Lonestar, for example, is valued on a per share basis using the trailing 5-day volume weighted average traded share price); and
-- Deducts estimated taxes and other material expenses that would fall due in managing each investment or on a disposal to derive a net realisable value measure for each investment.
d) Valuation process
The Directors are in ongoing communications with the Investment Manager to discuss valuation methodologies and techniques applied in assessing fair value. The Directors analyse the investment portfolio in terms of fair value hierarchy and consider the impact of general market and credit conditions and/or events which may impact the valuation of the investment portfolio.
For listed investments, fair value is based on recent bid prices adjusted as necessary to reflect any taxes and other material expenses estimated to fall due were the investment to be disposed of as soon as possible but in an orderly manner, in line with the break-up basis of accounting.
The Investment Manager is responsible for carrying out the fair market valuation of the unlisted investments of the Company and these are presented to the Directors for their approval and adoption. The valuation principles used in such methodology are based on IFRS 13 and IPEV guidelines and the following valuation methodologies:
i. investments in funds are valued at their net asset value, adjusted as necessary to reflect the fair value of the underlying investments held and any taxes and other expenses estimated to fall due were the investment to be disposed of as soon as possible but in an orderly manner;
ii. investments in bonds are valued at prices quoted by the brokers; and
iii. where a value is indicated by a material arm's length transaction with a third party in the shares of an investment or a comparable investment, this value may be considered representative of fair value adjusted as necessary to reflect any taxes and other expenses estimated to fall due were the investment to be disposed of as soon as possible but in an orderly manner.
However, if the Board considers that the basis of valuation is inappropriate for any particular reason, or generally, it may adopt such other valuation procedures as it considers reasonable in the circumstances.
Financial liabilities
Financial liabilities include trade payables and other payables which are held at amortised cost using the effective interest rate method. Financial liabilities are recognised initially at fair value, net of transaction costs incurred and are subsequently carried at amortised cost using the effective interest rate method. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.
2.5 Investment income, interest income and expenses
Interest income and expenses are recognised in the Statement of Comprehensive Income on an accruals basis using the effective interest rate method.
2.6 Operating expenses
Operating expenses are recognised on an accruals basis and are recognised in the Statement of Comprehensive Income.
2.7 Cash and cash equivalents
Cash includes cash at bank and cash equivalents are short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value.
2.8 Segmental reporting
In accordance with IFRS 8 - "Operating Segments", the Board as a whole has been determined as constituting "the chief operating decision maker" of the Company. The Directors are of the opinion that the Company is engaged in one segment of business, being the investment business.
2.9 Liquidation provision
As a result of the Company's financial statements being prepared on a break-up basis, the Board, in liaison with the Investment Manager, has recognised a liquidation provision. The liquidation provision includes future funding commitments in relation to existing investments, estimated liquidation costs which will be incurred on wind-up of the Company and a working capital requirement provision. The working capital requirement provision has been included to provide for future direct operational costs expected to be incurred in the next 12 months, however the Board notes that the Realisation Strategy could take longer, between 12 to 16 months. Operational costs include Directors' fees, fees for third party service providers, professional fees and other sundry operational expenses incurred as part of the ongoing activities of the Company. These provisions have been based on underlying agreements, together with historical financial information from the Company to date and quotes from third party service providers. Refer to note 10 for further detail.
2.10 Share capital
Ordinary Shares are classified as equity in accordance with IAS 32 - "Financial Instruments: Presentation" as these instruments include no contractual obligation to deliver cash and the redemption mechanism is not mandatory. Costs directly attributable to the issue of new Ordinary Shares are shown in equity as a deduction from the proceeds.
3. Taxation
The Company has applied for and been granted exemption from liability to income tax in Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended by the Director of Income Tax in Guernsey for the current period. Exemption must be applied for annually and will be granted, subject to the payment of an annual fee, which is currently fixed at GBP1,200 per applicant, provided the Company qualifies under the applicable legislation for exemption. It is the intention of the Directors to conduct the affairs of the Company so as to ensure that it continues to qualify for exempt company status for the purposes of Guernsey taxation.
4. Operating expenses
For the
period
from
28 June
2016 to
31 March
2017
GBP
Legal and professional
fees 143,861
Liquidation provision 111,034
Administration fees 53,746
Directors' fees 38,683
Company secretariat fees 27,884
Audit fees 15,033
Non-audit fees - interim
review services 15,000
Registrar fees 13,224
Broker fees 12,917
Sundry expenses 7,276
Custody fees 5,139
Transaction fees 2,401
Total operating expenses 446,198
----------------------------- ----------
Investment Manager fee
On 22 August 2016, the Company signed an Investment Management Agreement with the Investment Manager. Under the Investment Management Agreement the Investment Manager has, subject to the overall supervision of the Board, responsibility for the day to day management of the Company's Realisation Strategy. The Investment Manager also has responsibility for advising the Company in relation to the strategic management of the Company's investment portfolio and monitoring the Company's funding requirements.
The Investment Manager is not entitled to any annual base management fee but is eligible to receive a performance fee of 15% of all Company distributable proceeds over the performance fee initial value (as defined below), subject to a compounding 10% hurdle (the "Performance Fee"). The Performance Fee is subject to a cap of 4% of the Company distributable proceeds (as detailed below) and will only be payable to the Investment Manager once Shareholders have received cash distributions of an amount equal to the performance fee initial value plus the hurdle.
The performance fee initial value will be the aggregate of the initial value of each asset (excluding Texas Energy Future Holdings Investments, the WoodFuels Investment and Bluewater Bio Holdings Limited (the "Nil Value Assets") calculated as the higher of: (i) the original cost price to EWPO; or (ii) the holding value as at 26 September 2016 (the aggregate of all such valuations being the performance fee initial value).
The Company distributable proceeds equals the amount distributed or available for distribution to Shareholders and any performance fee payable to the Investment Manager. The Investment Manager is not entitled to a Performance Fee in respect of the Nil Value Assets.
During the period ended 31 March 2017, the Company incurred a performance fee of GBPnil.
Administration fee
On 22 August 2016, the Company signed an agreement with BNP Paribas Securities Services S.C.A., Guernsey Branch, (the "Administrator") to provide fund administrative and company secretarial services to the Company. Under the administration agreement, the Administrator is entitled to a minimum annual fixed fee for fund administration services and company secretarial services. These fees are paid monthly in arrears. Ad hoc other administration services are chargeable on a time cost basis. In addition, the Company will reimburse the Administrator for any out of pocket expenses. Administration and company secretarial service fees payable as at 31 March 2017 were GBP9,054 and GBP3,457, respectively.
Custody fee
On 22 August 2016, the Company signed a Global Custody Agreement between the Company and the Administrator, whereby the Company appointed the Administrator to carry out custodian services. In its role as custodian, the Administrator is entitled to a fee payable by the Company of a minimum fixed fee payable monthly in arrears and transaction by transaction fee basis. Custody fees payable as at 31 March 2017 were GBP861.
Broker fee
On 22 September 2016, the Company signed a Financial Advisory Agreement with Winterflood Securities Limited (the "Financial Advisor"), to provide corporate brokering and financial adviser services to the Company. Under the agreement, the Financial Advisor is entitled to a fee payable by the Company of GBP25,000 per annum payable half yearly in arrears. Broker fees payable as at 31 March 2017 were GBP12,917.
5. Directors' fees and interests
The Directors of the Company are remunerated for their services with a fee of GBP22,500 each per annum. The Chairman of the Company and Chairman of the Audit Committee receive an additional GBP5,000 and GBP2,500, respectively, for their services. Directors' fees payable as at 31 March 2017 were GBP18,750.
As at the date of approval of these unaudited condensed interim financial statements, Martin Nègre held 271,502 Ordinary Shares in the Company. No other Director holds shares in the Company.
No pension contributions were payable in respect of any of the Directors.
6. Other receivables and prepayments
31 March
2017
GBP
Accrued income 12,992
Prepayments 6,945
Intercompany balances -
EFR Guernsey Holding Limited 8,493
Total other receivables
and prepayments 28,430
---------------------------------- ---------
The Directors believe that these balances are fully recoverable.
7. Financial assets designated at fair value through profit or loss
31 March
2017
GBP
Financial assets designated
at fair value through profit
or loss 24,867,302
---------------------------------- -------------
The investments of the Company were transferred from EWPO pursuant to the Scheme of Reconstruction in accordance with the EF Realisation Transfer Agreement. As at 31 March 2017, the Company held 100% of the issued share capital of EFR Guernsey Holding Limited (referred to as the "EFR Guernsey equity interest") and a diversified portfolio of debt securities and equity investments in companies. The fair value of the EFR Guernsey equity interest is based primarily on the share price of Lonestar.
Fair value hierarchy
IFRS 13 requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value. The Company categorises its financial assets according to the following fair value hierarchy detailed in IFRS 13, that reflects the significance of the inputs used in determining their fair values:
Level 1: Investments valued using quoted market prices, unadjusted, in active markets for identical assets are included in Level 1. Level 1 investment is in Oro Negro (bond).
Level 2: Financial instruments that are valued using observable inputs, i.e. quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs, are classified as Level 2. Level 2 investments include the Company's investment, via EFR Guernsey Holding Limited, in Lonestar.
Level 3: Investments classified as Level 3 have unobservable inputs and these include the Company's unquoted investments (equity, equity-related and debt instruments of unquoted companies). Level 3 investments include Bluewater Bio Holdings Ltd (held at nil value), Eastern Australia Irrigation Ltd, Energy Future Holdings (equity and bond; held at nil value), Oro Negro (equity), TRF Feeder Fund (Cayman) LP, TRF LLC and the WoodFuels investment (held at nil value). These types of securities are generally subject to higher valuation uncertainties and liquidity risks than securities listed or traded on a regulated market.
Level 3 fair values are determined by the Directors using valuation methodologies in accordance with the IPEV Guidelines and as detailed in note 2.4. Significant inputs include investment cost, the value of the most recent capital raising, the adjusted net asset value of funds, and the Directors' assessment of expenses that may be incurred in the sale of these assets. Carrying values are reviewed and assessed regularly by the Board, in conjunction with the Investment Manager, and approved in the Audit Committee meetings.
31 March
Level Level Level 2017
1 2 3 Total
GBP GBP GBP GBP
Financial assets
----------------------------- -------- ----------- ----------- -----------
Debt instruments 632,880 - - 632,880
Equity instruments - 13,874,967 10,359,455 24,234,422
----------------------------- -------- ----------- ----------- -----------
Financial assets designated
at fair value through
profit and loss 632,880 13,874,967 10,359,455 24,867,302
----------------------------- -------- ----------- ----------- -----------
Financial assets designated at fair value through profit or loss reconciliation
The following table shows a reconciliation of all movements in the fair value of financial assets categorised within Level 1 to 3 between the beginning and the end of the reporting period.
31 March
Level Level Level 2017
1 2 3 Total
GBP GBP GBP GBP
---------------------------- --------- ------------- ----------- -------------
Opening valuation - - - -
---------------------------- --------- ------------- ----------- -------------
Movements in the period:
Transfers during the
period from EWPO Scheme
of Reconstruction 409,861 35,520,648 10,140,686 46,071,195
Sales - proceeds during
the period (24,280) (1,200,000) (91,018) (1,315,298)
Realised gain on financial
assets designated
at fair value through
profit or loss(1) 14,242 210,000 91,018 315,260
Unrealised gain /
(loss) on financial
assets designated
at fair value through
profit or loss(2) 233,057 (20,655,681) 218,769 (20,203,855)
Closing valuation 632,880 13,874,967 10,359,455 24,867,302
Total unrealised gains
/ (loss) on financial
assets for the period
ended 31 March 2017 233,057 (20,655,681) 218,769 (20,203,855)
---------------------------- --------- ------------- ----------- -------------
(1) Realised gain on financial assets designated at fair value through profit and loss is made up of GBP315,260 gain and GBPnil loss.
(2) Unrealised loss on financial assets designated at fair value through profit and loss is made up of GBP451,826 gain and GBP(20,655,681) loss.
During the period ended 31 March 2017, there were no reclassifications between levels of the fair value hierarchy.
Sensitivity of Level 3 holdings to unobservable inputs
At 31 March 2017, the Company's Level 3 investments accounted for 41.66% of its assets. Investments accounting for 48.17% of these Level 3 assets were in funds managed by a third-party manager which values the funds at an independent expert's estimate of fair value. The Directors value these investments at net asset value, adjusted as necessary to recognise the illiquidity of the investments and any expected costs associated with their sale. Direct investments in the equity, equity-related or fixed-income securities of unquoted companies accounted for 51.83% of these Level 3 assets at 31 March 2017. The Directors valued these investments according to the valuation methodology outlined above.
The Directors may consider adjustments to these valuations. The range of possible adjustments could be large, depending on the circumstances. The Directors would consider the recommendation of the Investment Manager. The valuation methodologies applied for the Level 3 assets are based on independent experts' and Directors' assessments of fair value, indicative bids for the investments, and last transactions in the equity or comparable equity. The unobservable inputs used are discounts applied for illiquidity which range from 0% to 100%. For the purposes of sensitivity analysis, a 25 percentage point adjustment in the discount rates for the Level 3 assets could be considered reasonable. A 25 percentage point adjustment in the discount rates for the Level 3 assets would result in a movement, up or down, in the Company's net assets of 13.5%.
Please refer to note 2.4 for detail regarding valuation methodologies used.
EFR Guernsey Holding Limited equity interest
The Company holds a 100% equity interest in EFR Guernsey Holding Limited. Ordinary shares in EFR Guernsey Holding Limited have no par value and are redeemable. The Board does not expect income from EFR Guernsey Holding Limited to exceed significantly the anticipated annual running costs of EFR Guernsey Holding Limited and therefore does not expect that EFR Guernsey Holding Limited will pay significant, or any, dividends although it reserves the right to do so.
The Lonestar investment is valued in the Company's NAV and financial statements at its trailing 5-day volume weighted average share price as reported to the NASDAQ Exchange, adjusted as necessary for any expected costs associated with its sale.
As at 31 March 2017, EFR Guernsey Holding Limited held one investment, 4,174,259 shares in Lonestar. Lonestar operates in the United States and constitutes 51.3% of the Company's investment portfolio (included as a Level 2 asset in the table above). Please refer below for a reconciliation of the fair value movements of Lonestar held by EFR Guernsey Holding Limited. This disclosure has been included to provide an insight to Shareholders of the underlying investment portfolio held by EFR Guernsey Holding Limited.
8. Financial risk management
The Board sets out its investment objectives and policies in the Interim Management Report. The Board and the Company's Investment Manager consider and review the principal risks inherent in managing the Company's assets and these are detailed below.
The Company's activities expose it to a variety of financial risks: market risk (including price risk, interest rate risk and foreign exchange risk), credit risk and liquidity risk.
8.1a Price risk
The Company's investment portfolio is subject to fluctuations, volatility and the vagaries of market prices. As at 31 March 2017, the Company's investments consisted of a portfolio of equity investments and debt securities in companies which operate in the United States, Australia, the UK and Mexico. As the Company has investments in securities which are listed on recognised stock exchanges - but which are illiquid - and in unquoted securities, it is regularly exposed to market risk and the value of the Company's portfolio can fluctuate, particularly over the short-term, in response to developments in financial markets.
The performance of the EFR Guernsey Holding Limited equity interest is substantially driven by the market price of Lonestar. Lonestar is a public company whose shares are listed on the NASDAQ Exchange in the US. Lonestar acquires and develops shale reserves in Texas in the United States, sells the oil, gas and gas liquids produced and is exposed to the commodity price, operating, environmental and other risks associated with the oil and gas industry. The Company values Lonestar in its NAV and financial statements at its trailing 5-day volume weighted average share price as reported to the NASDAQ Exchange less estimated costs (taxes and other expenses) that may be associated with the realisation of the investment.
Investments that are not traded in an active market, as detailed in note 7, are subject to significant judgements, estimates or assumptions when determining their fair value. The valuation provided at period end is only an estimate of value and is not a precise measure of realisable value. Ultimate realisation of the market value of an asset depends to a great extent on economic and other conditions beyond the control of the Company, and valuations do not necessarily represent the price at which an investment can be sold or that the assets comprising the investment portfolio are saleable readily or otherwise. As a result the estimated fair values may differ from the values that would have been realised had a ready market existed and the difference could be material.
Any significant event which affects a specific industry sector in which the investment portfolio has a significant holding could materially and adversely affect the performance of the Company. The Board and Investment Manager actively monitor market prices and performance of investments throughout the financial period and meet regularly in order to consider the Realisation Strategy. Please refer to the Investment Manager report for further detail regarding the Company investment portfolio.
8.1b Interest rate risk
Interest rate risk is the risk that the fair value of financial instruments and related income from these financial instruments and cash and cash equivalents will fluctuate due to changes in market interest rates.
The Company is only exposed to interest rate risk through the fair value of investments in fixed interest securities and cash and cash equivalents which, at 31 March 2017, were valued at GBP4,235,650 in total (15.66% of NAV).
Any reasonable change in interest rates will have an immaterial impact and therefore no sensitivity analysis has been provided.
8.1c Foreign currency risk
Foreign currency risk is the risk that the values of the Company's assets and liabilities are adversely affected by changes in the values of foreign currencies by reference to the Company's functional currency. The value of the Company's assets and the total return earned by the Company's Shareholders can be significantly affected by foreign exchange movements as most of the Company's assets are denominated in currencies other than Sterling, the currency in which the Company's unaudited condensed interim financial statements are prepared.
The Investment Manager monitors the Company's exposure to foreign currencies and reports to the Board on a regular basis. The Investment Manager measures the risk to the Company of the foreign currency exposure by considering the effect on the Company's NAV of a movement in the exchange rate to which the Company's assets, liabilities, income and expenses are exposed.
Although the Company does not pursue a policy of hedging such currencies back to Sterling, it may do so from time to time, depending on market conditions. The Company may enter into currency hedging transactions for the purposes of efficient portfolio management, including matching the currency of expected liabilities. During the period ended 31 March 2017, the Company did not use financial instruments to manage or mitigate the foreign currency exposure.
The following table sets out the Company's total foreign currency exposure and the net exposure to foreign currencies of the monetary assets and liabilities as at 31 March 2017:
Currency exposure 2017 2017 2017 2017
Investments Cash Other net Total net
current assets
assets attributable
/ to ordinary
(liabilities) Shareholders
GBP GBP GBP GBP
------------------- ------------ ---------- --------------- --------------
United States
Dollar 19,757,567 1,288,404 (785,460) 20,260,511
Australian
Dollar 5,109,735 - - 5,109,735
Sterling - 2,314,367 (634,444) 1,679,923
------------------- ------------ ---------- --------------- --------------
Total 24,867,302 3,602,771 (1,419,904) 27,050,169
------------------- ------------ ---------- --------------- --------------
The following analysis demonstrates the impact of a 15% movement in the exchange rate of Sterling against the United States Dollar and Australian Dollar on the net assets attributable to ordinary Shareholders, with all other variables held constant.
Effect on
net assets
attributable
Change in exchange to ordinary
rate Shareholders
31 March 2017 Increase/(decrease) Increase/(decrease)
GBP
----------------------- --------------------- --------------------
Sterling versus (3,039,077)
United States Dollar 15% / (15%)(1) / 3,039,077
------------------------ --------------------- --------------------
Sterling versus (766,460)
Australian Dollar 15% / (15%)(1) / 766,460
------------------------ --------------------- --------------------
(1) 15% has been assessed at 31 March 2017 as a reasonably possible movement in currency rate sensitivity over the period. It is not intended to illustrate a remote, worst case or stress test scenario.
As at 31 March 2017, the Company was exposed to foreign currency risk exposure on its investment position in EFR Guernsey Holding Limited equity interest holding. EFR Guernsey Holding Limited does not use financial instruments to manage or mitigate foreign currency exposure.
8.2 Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Board, with input from the Investment Manager, monitors the credit quality of all counterparties on a periodic basis to mitigate credit risk. The Company's credit risk exposure as at the Statement of Financial Position date was GBP4,235,650, represented by a debt instrument position of GBP632,879 and cash and cash equivalents of GBP3,602,771. As at 31 March 2017 there were no items past due or impaired.
The financial assets designated at fair value through profit or loss are held by BNP Paribas Securities Services S.C.A, Guernsey branch, the Company's Administrator and custodian, in a segregated account. In the event of bankruptcy or insolvency of the Administrator, the Company's rights with respect to the securities held by the custodian may be delayed or limited. All cash is placed with BNP Paribas Securities Services S.C.A, a wholly owned subsidiary of BNP Paribas Securities Services S.A. which is publicly traded and a constituent of the S&P 500 Index with a long term credit rating of A from Standard & Poor's.
8.3 Liquidity risk
Liquidity risk is the risk that the Company will not be able to settle its liabilities as they fall due. The Company may encounter difficulties in realising assets in accordance with the Realisation Strategy or otherwise raising funds to meet financial commitments as and when these fall due for payment. The liquidity profile of the Company's investment portfolio is such that Shareholders may have to wait a considerable time before receiving all of their distributions pursuant to the Realisation Strategy.
Liquidity risk is monitored on an ongoing basis by the Board and Investment Manager so as to ensure that the Company maintains sufficient working capital in cash or near cash form so as to be able to meet the Company's ongoing requirements to pay accounts payable and accrued expenses. In addition, the Company's liquidity management policy involves projecting cash flows and considering the level of liquid assets necessary to meet these.
The table below shows the residual contractual maturity of the financial liabilities as at 31 March 2017:
Maturity analysis of financial liabilities
Less than 3 to 12 More than
3 months months 1 year Total
GBP GBP GBP GBP
Financial liabilities
Other payables (88,639) - - (88,639)
Total financial
liabilities (88,639) - - (88,639)
----------------------- ---------- -------- ---------- ---------
In accordance with Article 23(4)(a) and (b) of the AIFMD Directive, the Board in its capacity as the AIFM has assessed that the financial assets designated at fair value through profit or loss held by the Company are not subject to any special liquidity arrangements and that the AIF has no new arrangements in place for managing liquidity, other than liquidity policies outlined above.
Capital risk management
The Board defines capital as financial resources available to the Company. The Company's capital as at 31 March 2017 comprises its share capital at a total of GBP47,157,530. The Company's objectives when managing capital are to:
- safeguard the Company's ability to fulfil its investment objective; - provide returns for Shareholders; and - maintain sufficient working capital.
The Board monitors the capital adequacy of the Company on an ongoing basis and the Company's objectives regarding capital management have been met. The Company has no imposed capital requirements.
9. Other payables
31 March
2017
GBP
Audit fees 24,968
Directors' fees 18,750
Sundry other payables 13,923
Broker fees 12,917
Administration fees 9,054
Registrar fees 4,709
Company Secretariat
fees 3,457
Custody fees 861
Total other payables 88,639
-------------------------- ---------
10. Liquidation provision
The Company has a liquidation provision of GBP1,359,695 which includes future funding commitments (GBP785,460) in relation to one existing investment, estimated liquidation and other costs (GBP174,235) expected to be paid on ultimate wind-up of the Company, and a working capital requirement provision (GBP400,000). GBP1,244,779 of the liquidation provision was taken on as part of EWPO's Scheme of Reconstruction and has therefore not been recognised in the Statement of Comprehensive Income. Refer to Interim Management Report for detail regarding EWPO's Scheme of Reconstruction.
11. Share capital
Authorised
The authorised share capital of the Company is represented by an unlimited number of redeemable Ordinary Shares at no par value.
Allotted, called up and fully-paid
Ordinary Shares Number Share
of shares capital
GBP
-------------------- ------------- -------------
Total issued share
capital as at 28 - -
June 2016
-------------------- ------------- -------------
Ordinary Shares
issued during the
period 52,473,634 47,184,416
----------------------- ------------- -------------
Share issue costs (26,885)
----------------------- ------------- -------------
Ordinary Shares
redeemed during
the period (1) (1)
----------------------- ------------- -------------
Total issued share
capital as at 31
March 2017 52,473,633 47,157,530
----------------------- ------------- -------------
Ordinary Shares
On incorporation, the Company issued one Ordinary Share at a price of GBP1 to Ecofin Limited. On 22 September 2016, the Company, pursuant to the Scheme of Reconstruction under section 110 of the Insolvency Act 1986 (as amended) of EWPO, issued a further 52,473,633 Ordinary Shares at a price of GBP0.8992 per Ordinary Share, raising gross proceeds of GBP47,184,416 (net proceeds of GBP47,157,531). The newly issued 52,473,633 Ordinary Shares were admitted to trading on the Specialist Fund Segment of the Main Market of the London Stock Exchange with effect from 26 September 2016. The costs and expenses of the initial placing of Ordinary Shares attributable to the Company pursuant to the Scheme of Reconstruction were paid for by EWPO, with the exception of listing fees of GBP26,885 which were paid for by the Company. On 23 September 2016, the Company redeemed the one Ordinary Share that was issued to Ecofin Limited for a consideration of GBP1. As at 31 March 2017, the Company had 52,473,633 Ordinary Shares in issue.
Each holder of Ordinary Shares is entitled to attend and vote at all general meetings that are held by the Company and have equal rights. Each holder is also entitled to receive payment of a dividend should the Company declare such a dividend payment. Any dividends payable by the Company will be distributed to the holders of the Company's Ordinary Shares, and on the winding-up of the Company or other return of capital (other than by way of a repurchase or redemption of shares in accordance with the provisions of the amended and restated Articles of Incorporation (the "Articles") and the Companies Law), the Company's surplus assets, after payment of all creditors, will be distributed among the holders of the Ordinary Shares.
Although it is not expected that the Company will receive any income during the realisation period, to the extent that it does receive income, the Board intends to distribute to Shareholders all of the income received by the Company, net of reasonable expenses, during the realisation period (subject to compliance with the Companies Law). The Board intends to consider with its advisers the most efficient method of returning capital to Shareholders during the realisation period as the Company investment portfolio is realised, including the compulsory redemption mechanism as detailed below.
No dividends have been declared or paid during the period.
Compulsory redemption mechanism
The Board intends to operate the compulsory redemption mechanism set out below as the Company's investments are realised, however it will seek to adopt the most efficient method of returning capital to Shareholders at the time which may include a tender offer and/or other capital return schemes.
The Articles provide that the Company may make compulsory redemptions of Ordinary Shares, with the timing and size of such redemptions being determined at the sole discretion of the Directors, reflecting the available cash at the relevant time, subject to any retention made for working capital. Shares will be redeemed from all Shareholders pro rata to their existing holdings of Ordinary Shares on the relevant record date for any given redemption being a date chosen at the Directors' absolute discretion, as determined by the Directors to be in the best interests of Shareholders as a whole (the "Redemption Date").
When the Directors exercise their discretion to redeem compulsorily a given percentage of the Ordinary Shares in issue, the Directors will make a redemption announcement in advance of the relevant Redemption Date. The redemption announcement will include the following details:
-- the aggregate amount to be distributed to Shareholders; -- the Redemption Date;
-- the percentage of the Ordinary Shares to be redeemed (pro rata as between Shareholders on the redemption record date being the close of business on the relevant Redemption Date or as otherwise set out in the relevant redemption announcement (the "Redemption Record Date");
-- the Redemption Price per Ordinary Share (being the price per Ordinary Share at which Ordinary Shares will be redeemed on a particular Redemption Date as determined by the Directors (the "Redemption Price")); and
-- any additional information that the Board deems necessary in connection with the redemption.
Redemptions of Ordinary Shares will become effective on each Redemption Date. In determining the timing of any Redemption Date, the Directors will take into account the amount of cash available for payment of redemption proceeds and the costs associated with such redemption and the working capital requirements of the Company. The Ordinary Shares redeemed will be the relevant percentage (being a percentage of the shares to be redeemed by the Company on a given Redemption Date as determined by the Directors in their ultimate discretion), of the Ordinary Shares registered in the names of Shareholders on the Redemption Record Date. Shareholders will receive the Redemption Price per Ordinary Share in respect of each of their Ordinary Shares redeemed compulsorily.
Liquidation resolution
Subject to any extension of the period of time granted by special resolution of the Company (described below), the Directors shall convene a general meeting as soon as reasonably practicable after the realisation of all of the realisable investments held by the Company as decided by the Board in their discretion, and in any event no later than the second anniversary of Admission (or such later date as determined in accordance with the Articles). At such general meeting, the Directors shall propose an ordinary resolution that the Company should be voluntarily wound up (the Liquidation Resolution).
Every Shareholder present in person or by proxy voting in favour of the Liquidation Resolution shall have such number of votes as are required for the Liquidation Resolution to be duly passed.
With effect from the passing of the Liquidation Resolution, a liquidator will be appointed and the Company shall cease to carry on business except in so far as may be expedient for the beneficial winding up the Company. At any time prior to the general meeting at which the Liquidation Resolution is to be proposed, the Company may by special resolution extend the deadline for proposing such liquidation period for a period of one year and thereafter may extend such deadline for additional periods of one year in each case by a further special resolution.
12. Basic and diluted earnings per Ordinary Share
For the
period
from
28 June
2016 to
31 March
2017
GBP
Total comprehensive loss
for the period (20,107,361)
Weighted average number of
Ordinary Shares during the
period 36,182,180
Basic and diluted earnings
per Ordinary Share (0.5557)
The weighted average number of Ordinary Shares during the period is calculated on the basis that one Ordinary Share was in issue during the period from incorporation to 21 September 2016, 52,473,634 Ordinary Shares were in issue on the 22 September 2016, and 52,473,633 Ordinary Shares were in issue during the period from 23 September 2016 to 31 March 2017.
13. Net asset value per share
31 March
2017
GBP
Net asset
value 27,050,169
Number of Ordinary
Shares at period end 52,473,633
Net asset value per
Ordinary Share 0.5155
14. Related party disclosure
The Investment Manager is deemed a related party. Please refer to note 5 for further detail.
The Directors are entitled to remuneration for their services. Please refer to note 5 for further detail. Martin Nègre was a director of EWPO until September 2016 and is currently a non-executive director of funds managed by the Investment Manager.
For Director fees payable as at 31 March 2017, please refer to note 9. No investment manager performance fee was payable as at 31 March 2017.
15. Material events after the reporting date
There were no events which occurred subsequent to the period end until the date of approval of the unaudited condensed interim financial statements which would have a material impact on the unaudited condensed interim financial statements of the Company as at 31 March 2017, except as set out below:
On the 30 May 2017, Lonestar announced that it has entered into definitive agreements with unaffiliated parties to acquire oil and gas properties in the Eagle Ford Shale play for a total purchase price of approximately $116.6 million, consisting of $105 million in cash and 2.6 million Lonestar Class A common shares. Lonestar's financing for the acquisition is fully committed with the private placement of Convertible Preferred Stock and borrowings from its Senior Secured Credit Facility.
During the period 31 March 2017 to 31 May 2017, the NAV per share fell from 51.55p to 47.50p as a result of a decrease in the fair value of Lonestar and adverse movements in foreign currency translation.
16. Controlling party
In the Directors' opinion, the Company has no ultimate controlling party.
Company information
Legal advisers to the
Board members Company
Martin Nègre (Chairman) (as to Guernsey law)
Robert Sinclair (Chairman Carey Olsen
of the Audit Committee) P.O. Box 98
Nick Tostevin (Chairman Carey House
of the Management Engagement Les Banques
Committee) St Peter Port
Guernsey
All Directors were appointed GY1 4BZ
on the 28 June 2016
with the exception of
Martin Nègre who
was appointed on the
20 July 2016.
Registered Office Custodian
BNP Paribas Securities
BNP Paribas House Services S.C.A., Guernsey
St Julian's Avenue Branch
BNP Paribas House
St Julian's Avenue
St Peter Port St Peter Port
Guernsey Guernsey
GY1 1WA GY1 1WA
Registrar Independent Auditor
Capita Registrars (Guernsey) Ernst & Young LLP
Limited Royal Chambers
Mont Crevelt House St Julian's Avenue
Bulwer Avenue St Peter Port
St. Sampson Guernsey
Guernsey GY1 4AF
GY2 4LH
Administrator and Company
Secretary Investment Manager
BNP Paribas Securities
Services S.C.A., Guernsey Ecofin Limited
Branch Burdett House
BNP Paribas House 15 Buckingham Street
St Julian's Avenue London
St Peter Port WC2N 6DU
Guernsey
GY1 1WA
BNP Paribas Securities Ecofin Limited is regulated
Services S.C.A. Guernsey by the Financial Conduct
Branch is regulated Authority and the Securities
by the Guernsey Financial and Exchange Commission.
Services Commission.
Financial Adviser UK Transfer Agent
Winterflood Securities Capita Registrars Limited
Limited (trading as Capita
The Atrium Building Asset Services)
Cannon Bridge House The Registry
25 Dowgate Hill 34 Beckenham Road
London Beckenham
EC4R 2GA Kent
BR3 4TU
Legal advisers to the
Company
(as to English law)
Norton Rose Fulbright
LLP
3 More London Riverside
London
SE1 2AQ
- ENDS -
Enquiries:
BNP Paribas Securities Services S.C.A., Guernsey Branch
01481 750 822
Company Secretary
Sarah Hendry
A copy of the Company's Interim Financial Report will be posted to the shareholders of the Company. Copies are also available from the Company Secretary, BNP Paribas Securities Services S.C.A., Guernsey Branch at BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA, or on the Company's website www.ecofin.co.uk.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR QQLFBDQFBBBF
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June 06, 2017 12:06 ET (16:06 GMT)
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