Digital 9 Infrastructure Share Discussion Threads

[williamcooper104] 20/3/2024 10:48

It's just basic apart from any tax benefit - you put money in as a shareholder loan because you can get that out easily Whereas you need dist reserves to pay a dividend and redeeming equity is more painful than just repaying a loan

[invisage] 20/3/2024 10:46

The shareholder loan notes carry fixed interest rates of between 13.0% and 14.0%, payment of which can be deferred
at the option of the Group subject to certain conditions, qualification of which are subject to bi-annual review (see
note 22).




(h) Shareholder loan notes which are unsecured, are listed on the Channel Islands Stock Exchange, are repayable
between March 2029 and March 2030, and cannot be called upon early. The shareholder loan notes carry a fixed rate
of interest ranging between 13% and 14% applicable to the capital and unpaid interest which can be deferred at the
option of the Group subject to certain conditions, qualification of which are subject to bi-annual review, applicable to
the capital and unpaid interest. The Group has exercised this option to defer interest payments since 2009


hxxps://www.arqiva.com/group-financial-results/2023/Arqiva-Group-Limited/AGL%20FY23%20Financial%20Statements.pdf

[invisage] 20/3/2024 10:43

Financial Position

Net liabilities were £4,825.0m, representing an increase of 14.2% from £4,224.5m in the prior year.

The net liability position is primarily driven by the capital structure reflecting the shareholder loan notes, borrowings,
lease liabilities and derivative financial instruments held. The increase in liabilities for the year is driven by the
financing costs for the Group. Post year end the Group has completed a further senior debt refinancing. See page 32 for further information. Our assessment of going concern is set out on page 33.


hxxps://www.arqiva.com/group-financial-results/2023/Arqiva-Group-Limited/AGL%20FY23%20Financial%20Statements.pdf

[keith95] 20/3/2024 10:37

“ The accounting of P&L into reserves and shareholders loans aren’t really relevant”

In my view, owing shareholders £4 bn with nothing in reserves, is markedly different to owing shareholders £4 bn with £3.5 bn in reserves.

What are the shareholders going to do? Force the business into administration?

[williamcooper104] 20/3/2024 10:36

One thing our friends could give clarity on is that while our divi was rightly cut it was cut, so we have been led to believe, mostly to fund capex and if not that then to pay down debt (and given the cost of debt that's accretive) The accretion payments on the RPI swaps is money down the drain But everything else should be accretive so what we are not getting in a cash divi should mostly be used to grow NAV Although in practise I'm forgetting about 1 huge payments to the likes of GS 2 terrible deal execution leading to locked cash 3 hey it's Tripple Point

[keith95] 20/3/2024 10:28

"especially with its debt load "

What part of "shareholder loans" was hard to understand?

Operating profits are pushed into reserves and loan notes are issued to owners.

It's a practice used in some private businesses, apparently.

[williamcooper104] 20/3/2024 10:24

Not sure it would IPO at a 20 PE especially with its debt load plus the TV transmission contracts won't last for that long (relative to typical infra 30 year assets) The accounting of P&L into reserves and shareholders loans aren't really relevant All infra investments are structured with shareholders sub debt It's a question of what the cashflows are and what's the visibility over future cashflows in a DCF Using operating cashflow for capex should be accretive; using it for RPI accretion payments isn't

[keith95] 20/3/2024 10:17

I've now bought in on the drop this morning so happy to distribute the reason why I topped up this morning.

Arqiva limited as opposed to Arqiva Global, books operating profits into reserves each year, as do all subsiduary companies, so according to the latest accounts, Arqiva Limited has some £3.18 billion recorded as reserves and tied to the Arqiva Limited equity. All in all, reserves tied to equity are closer £3.5 Billion across the group.

These profits, having been stored, and then released to the owners as a shareholder loan note whose interest builds, but ensures that Arqiva Global itself doesn't register a profit on paper each year. The £2 bn sale to Cellnet of assets back in 2019 was indeed used to pay off shareholder and other bank loans.

So in this respect, Old Bloke is spot on when he refers to assets of Arqiva being sizeable.

What it means of course, is that DGI9 should never have bought Arqiva since shareholder loan notes are not much use to banks or DGI9 shareholders as dividends, but that's history now.

The value, however, in Arqiva is huge - if it IPOs with £200 million of operating profit each year at 5% yield with dividend cover of 2 that makes it a £2 bn market cap ... so a generous return to DGI9 with a near 50% stake.

DYOR

[invisage] 20/3/2024 10:12

As disclosed in June 2023, Arqiva implemented a collar on its inflation-linked swaps, which applies a cap and floor to future accretion payments, limiting downside cash flow exposure for the business. For its financial year ending June 2023, Arqiva paid £147 million in accretion (equating to c.£76 million pro-rated for D9's 51.76% economic interest in Arqiva). This was based on a 13.5% Retail Price Index ("RPI") inflation rate in March 2023. As a result of the collar, accretion payments going forwards are effectively limited. For example, net of the collar, the accretion payment for the year to June 2024 is effectively capped at c.£75 million (c.£39m pro-rated for D9's ownership). This maximum payment will only be payable if RPI in March 2024 exceeds the collar's cap of 6.0%. If RPI is lower, the accretion payment will be proportionally lower as well, down to an RPI floor of 2.5%. If the January 2024 RPI levels of 4.9% continue to March 2024, the June 2024 accretion payment will be c.£60 million (c.£31 million pro-rated for D9's ownership). The swaps expire in April 2027, and, for the avoidance of doubt, the accretion payments are made by Arqiva out of its operational cash flows.

[redhorse2020] 20/3/2024 08:44

Should also be a big boost to Arqiva in theory but then again this share price never seems to react in the way you'd expect....

[invisage] 20/3/2024 08:23

With inflation dropping and interest rates likely headed lower should boost the prices of remaining assets in DGI9..... We should get competitive prices for the rest of the portfolio now that they have significantly deleveraged and should be able to sell from a position of strength.

[keith95] 19/3/2024 17:20

.... so after some digging .... post removed … I’m not giving good information out for free want to buy more in the morning.

[keith95] 18/3/2024 18:37

"The shareholder loans are just tax structuring and are not cash pay just rolled up."

Obviously. But I've answered my own question I suspect. DGI9 would effectively have bought out CPP interest in the shareholder loans with the VLN. One can infer the advantage for a fund manager in employing VLNs - in effect an artifical boost of NAVs.

I'll go back and check 2019 arqiva accounts to see if the £2bn sale of telecoms to Cellnet was used to pay off shareholder loans. I'm hoping the answer is yes ... in which case I'll be happy since it would make it reasonably apparent that Arqiva builds business and then sells them off ... I think & hope.

[bagpuss67] 18/3/2024 17:09

The shareholder loans are just tax structuring and are not cash pay just rolled up.

[keith95] 18/3/2024 16:54

CC2014 - Asking a question, if one already knows the answer, is rather unhelpful.

Asking a question, if one doesn't know the answer, whilst alluding to a conclusion, would come under my view of "troll" - and best filtered IMO.

[cc2014] 18/3/2024 16:44

Ah - but that 14% interest has never once been paid in the approximately 20 years the loan has been in existence.

Understanding why that is gives some insight into what Arqiva might be worth

[bagpuss67] 18/3/2024 16:27

Keith it's a number of share sales not business and assets so I don't think those provisions apply. I guess it some VAT recovery that the company has made or other potential VAT liability that the purchaser sees some doubt in and they need to wait for the position to become clear with HMRC

[keith95] 18/3/2024 16:02

Old Bloke also notes:

"Deep deep into Arqiva - part of DGI"

"So at first glance Arqiva actually lost a whole load of money £606.8m in 1 year alone……. Or did it?

The magic trick is the bit I’ve highlighted. “Accrued interest on shareholder loan notes” refers to the fact that DGI9 and one other shareholder are accruing profits in Arqiva. So this is a form of shareholder funds (by another name). They also award themselves a 13-14% interest so that’s why this “interest̶1; is colossal."

The operating profit last year was £238 m of which £114 m accrues to DGI9 .... so if I've read correctly, Arqiva are booking shareholder funds accumulating with 13% interest on revenues of £114m with a VLN of £170 m at 6%.

I think whole portfolio itself overvalued in terms of Old Bloke's view ... but there is value in Arqiva that would appear to be increasing ... hence the 350 m - 450 m question on valuation.

[keith95] 18/3/2024 15:35

"don’t understand the VAT provision" I'm no accountant but I read:

"VAT on transfers of a business as a going concern"

"It is vital that the parties are suitably protected in the event that HMRC considers that TOGC treatment does not apply. For example, the transferor should ensure that the purchase price is VAT-exclusive to allow it to charge VAT in addition to the purchase price. Furthermore, it may be appropriate for the transferor to seek a provision in the contractual documentation for the transferee to indemnify the transferor against any penalty or interest charged by HMRC that may be due if the transfer is not a TOGC because of something that the transferee has done or failed to do. The contractual wording is key and should include suitable warranties with a view to ensuring that the conditions for TOGC treatment are met."

[williamcooper104] 18/3/2024 15:26

Yep - not least as we have literally no clue if the Verne earn out is as good as in the bank or no chance of seeing a euro

[williamcooper104] 18/3/2024 15:25

Which would then push it back to the purchaser W&I often excludes a lot of tax liabilities but still don't understand the VAT provision and why there isn't as of yet a W&I policy

[williamcooper104] 18/3/2024 15:23

The VLN is all non recourse so presumably the interest was let roll because that saved more cash than being able to take out divis from Acquivia Acquiva has capex needs and we were told that this would be meet by Acquivas own resources which presumably left little for dividends From memory if you assumed no value for Acquiva you still got to a 40p plus NAV

[keith95] 18/3/2024 14:31

"the VAT indemnification provision of £23m" My understanding is that VAT is not owed if Verne carries on as a going concern, and Adrian are VAT registered in the UK.

[keith95] 18/3/2024 14:29

From Old Bloke:

"But the problem is Arqiva can’t pay dividends to DGI until the £163m Vendor Loan Note (VLN) i.e. the principal is repaid plus any interest (£7m so far). So £170m must be found to unlock Arqiva earnings. Disposing of Verne is a step in the right direction."

This is the headache and question, namely why DGI9 have not paid interest on the VLN given from the half year report:

"Accrued interest must be repaid in full before distributions can be made to the Group. After the fourth anniversary of the VLN, the Group can only receive distributions if the entirety of the VLN principal and any rolled up interest has been repaid in full. The Company expects Arqiva’s future cashflows to cover D9’s VLN interest payments. The Investment Manager expects that the VLN will be refinanced prior to its fourth anniversary in October 2026, as was anticipated at acquisition"

That would unlock Arqiva distributions and access to much needed cash?

My own view, is that winding down will leave a relatively small amount of cash having paid off the RCF and VLN with other assets coupled with the Arqiva equity - but getting a valuation of the Arqiva equity seems to have a variance of £350 m from annual reports to £460 m - namely that paid for Arqiva by DGI9 ... can anyone clarify which is the appropriate number to use for Arqiva?

It obviously makes a big difference to the underlying NAV of DGI9.