Invista EUR Prf Discussion Threads

[flyfisher] 10/11/2013 17:34

Kenny, I think you have the decimal point wrong , euribor down 0.011%.

[kenny] 10/11/2013 11:12

I am becoming more confident that a refinancing will be achieved by IERE – whether before 31.12.13 or after that date. I think there are two factors which are persuasive:

1. There is about €58.65m of NAV against a market cap of about £9.1m. Therefore, any group of investors willing to put up about £25m to £27m will likely access 75% of the resulting combined value. In effect, they will roughly double their money at the outset.

2. Assuming a refinancing at a blended interest rate of 5% on the loan, currently about €225m, gives an annual interest saving of about €4.43m. If €22.5m of the capital raise is used to reduce the loan that increases the annual reduction in interest payable to a total of €5.55m. I think the interest rate could be even lower on a 60% LTV situation e.g. 4.5%, but I also note other posters believe the blended rate could be higher than 5%.

In my opinion, whichever way you analyse the possible outcomes, it appears the preference shares offer value, importantly, with a good margin of safety.

[kenny] 08/11/2013 17:17

Euribor down 0.11% today.

[kenny] 07/11/2013 21:47

Thanks flyfisher - my mistake. Hopefully, euribor will decrease in line but there is no guarantee of this.

[flyfisher] 07/11/2013 19:20

Kenny, The debt is linked to 3 month euribor, not base rate. 3 month euribor has not changed.

[kenny] 07/11/2013 18:34

Agreed – there is still a big margin of safety for the preference shares – even if all the empty properties were written down by another 50%. Looking on the positive side, if only some of the void properties are let, in due course, it makes a big difference.

Also, today's 0.25% reduction in European interest rates improves net income by about €560k per annum.

[badtime] 07/11/2013 17:19

Shud add property was mostly vacant and also saves 180k euros costs per yearsbp..ta for earlier reply.. stopped being lazy I see they went Exdiv Dec 5th last year

[badtime] 07/11/2013 17:14

50% still leaves the prefs well placed

[stupidboypike] 07/11/2013 17:10

yes thankfully small beer E1.1m Hopefully they are getting rid of the rubbish first!

Best regards SBP

[chinahere] 07/11/2013 16:53

50% discount to 30 September 2013 valuation for recent sale.

Ouch!

[stupidboypike] 07/11/2013 12:25

"The coupon is 9% payable half yearly in June and December and the redemption date is 30 December 2016." From post 61 from Kenny. Best regards SBP

[badtime] 07/11/2013 11:58

Being lazy..webs next div due?

[mega_trader] 04/11/2013 08:26

Would you say ALPH are in a similar situation IERE?

[kenny] 03/11/2013 23:27

Hi mega trader, there has been no firm announcement of a rights issue. Also, your more positive view may prove to be correct.

Perhaps I am setting out a picture that is bleaker than warranted. There is a redemption fee of about 2% of the loan due to Lloyds at the end of the year (another terrible term of the loan from Lloyds). They have the cash to pay this and providing a) they can find someone to give them a 70% LTV replacement loan and, b) they do not take out another hedge then, actually, from an income/cashflow point of view they will be in good shape. Income will increase by a guesstimated €5.5m to €6m per annum. That is a mega amount for a small company like IERE.

Of course, the great unknown is whether they are able to find someone to refinance them. If they do on something like the above terms, then the outlook for preference shareholders is very sunny; not least because interest on the preference shares will be more than 3 times covered by net rental income!!

[mega_trader] 03/11/2013 19:16

Hi Kenny, has there been a solid announcement of a rights issue or ANY details? I can't find any. As I understand iere have a 70% ltv and are within covenant limits. A sale of the on offer properties could reduce this further.

Is 70% ltv as excessive, particularly in a recovering market.


All they have to do is keep going until prices and the ecconomy pickup, which they will.

[kenny] 02/11/2013 23:10

That's interesting flyfisher because even from your perspective the annual interest saving is €5.45m, so there is not a lot difference between a potential mezzanine route and my conservative estimate of a €6.1m per annum saving for a single 60% LTV loan.

We do, of course, hold differing opinions upon the need for a new hedge. Even after a fundraising I wonder if IERE is going to have a life of more than 4 to 6 years; or whatever length of time it takes to sell the portfolio at reasonable prices, picking up any increase in European property values. IERE probably has too poor a history to be viewed other than as a candidate for an orderly winding up. Therefore, I wonder if new equity investment will be marketed to the institutions on a "wink and nudge" basis that they will recover their equity plus a profit in a short time frame of a few years. Amazing to think that a property investment company that has raised about £225m to date has to raise another £25m or so in these circumstances.

[flyfisher] 02/11/2013 19:36

Kenny - thanks for your reply. The figures I had in mind are 5% up to 50% ltv , 7-8% for a mezzanine tranche up to 60% and a balance raised from equity and prefs holders of £25m .

With regard to your final paragraph. ''You need only consider interest rates over a shorter term''. Yes, but that will not be the consideration of the potential fund providers in your scenario.

Whilst you may only be interested in the shorter term , equally so the potential new equity holders ( if funds are raised with equity ) will only be interested in their own long term future , a rising value of the equity, and will presumably consider the future interest rate scenario at the point of the next loan rollover , for which they may require some form of hedge. They may also consider that they are down very heavily on their original investment ( if in at floatation ) and they may prefer to see it fail and crystalise the loss, if only to clean up their own book.

[kenny] 02/11/2013 17:17

Thanks for your input flyfisher – your comments are, in my opinion, highly relevant.

We retail investors really have no idea what is going on behind the scenes in relation to debt refinancing talks but the very few thinks we can glean are:

- The company has dropped strong hints on more than one occasion that a rights issue will be required as part of a fundraising.
- The most recent report on Project Hampton talks of bidders for our part of Project Hampton being, initially, offered 60% loan-on-loans on terms of Libor plus just under 4% margin. Let's say that equals a total of 4.25%.

From the above limited facts and others we know, we can only speculate. However, it is certain that a number of factors need to come together for a refinancing instead of liquidation to transpire.

First, and most importantly, shareholders in a company valued at about £9m need to be willing to put up quite a lot – I guesstimate a little under three times that amount to bring IERE's LTV down to 60% and leave the company with a generous cash float. For discussion purposes, let's assume the figure they need to put up is exactly three times current market cap. or £27m.

On paper, such a rights issue should be easy to get away because whoever puts up money will be buying into what is then a well-capitalised company and, importantly, receiving, again in rough terms, roughly twice the value in NAV terms. As Warren Buffet in effect says; do not think that you are buying shares but rather a slice of the entire business. Put another way, if you had £27m and someone offered you shares in a company with net assets of, say, £54m backing your shares – being roughly 75% of the NAV of the re-capitalised company - would you think that was a rather good deal?

However, as we all know, what looks good on paper may not necessary persuade fund managers to come up with three times their current investment albeit it is entirely possible some new investors may be willing to step in to underwrite the new ordinary shares which need to be issued.

Second, having achieved a 60% LTV through a rights issue and with a cash float, IERE then turns into quite a good proposition for an institution to offer a loan against. Bear in mind that if in relation to Project Hampton, institutions are willing to offer 60% loan-on-loans on terms of 4.25% inclusive of margin and Project Hampton includes some non-performing loans, then a pure 60% LTV on a performing loan at say 4.25% would certainly look as attractive (albeit they are not the same beast for comparison purposes). I think this would be the case even if 20% of the portfolio is empty because that factor is more than compensated for by the large free cash flow buffer against a) further voids and b) an increase in interest rates.

One final point I would make relates to your comments about a new hedge. Like Forum Partners, I only own the preference shares so I need only consider interest rates over a shorter term, namely, between now and redemption on 30.12.16. We might see rates flat between now and then or at worst rise by quite a small amount, perhaps, 0.25% or 0.5%. Also, not taking out a new hedge will enable the company to accumulate the redemption money mostly in cash rather than being forced to sell property or issue a new, replacement, preference share. If they do achieve a refinancing, the 9% coupon looks expensive.

Thanks and keep the comments and views coming.

[flyfisher] 02/11/2013 14:25

Kenny , in speculating what the earnings enhancement would be in the event of a refinancing you seem to be working on figures of 3%-4.25% , however their is no evidence that the portfolio can be refinanced at these rates. Competitive financing may be available for prime, fully let, office and retail properties , however the same terms may not be available for logistics / industrial where the market is weaker , and one would expect even less so for empty premises.
The relevant comparison would be the recent terms for similarly structured portfolios with a similar void level.

Your comment that ''management and Lloyds should really be taken out and shot for imposing such a shoddy deal on the company when originally taking out the interest rate hedge'' is made with the benefit of hindsight. In fact, Lloyds should be congratulated on a good deal, they have profited from it. What might investors say in 5 years if a new loan is taken out without an interest rate hedge and rates rise sharply.

We read that the company has been offered part refinancing and that some form of capital raise would be necessary. I would be very interested to read the recent financing terms of similar portfolios with similar void levels.

Thanks for your excellent work.

[kenny] 02/11/2013 10:31

Pejaten, I am not surprised you have found it really difficult to confirm the split between "ordinary" interest and the hedging cost because nowhere does the company set out a clear division between the two; not even in its annual accounts. Therefore, I found that quite a bit of digging/research was required to establish the respective costs, which I set out below.

First, in all of the accounts and statements the total interest/hedge cost is stated as one total interest rate, for example look at the interim accounts for the six months to 31.03.13, which state:

"All debt is fully hedged against changes in European interest rates until December 2013, giving a total interest cost of 6.98% per annum at current LTV levels."

Next, you need to go all the way back to the 2009 capital raise document (I cannot find it in any later document issued by the company!) and on page 39 you will find details of the interest rates excluding hedging costs on their debt, as below:

"margin per annum (when no event of default is outstanding) over 3-month EURIBOR by reference to the prevailing LTV ratio on the following basis: 225 basis points if the LTV ratio is less than 65 per cent.; 250 basis points if the LTV ratio is more than or equal to 65 per cent. but less than 70 per cent.; 275 basis points if the LTV ratio is more than or equal to 70 per cent. but less than 75 per cent.; 300 basis points if the LTV ratio is more than or equal to 75 per cent. but less than 80 per cent. and 400 basis points if the LTV ratio is more than or equal to 80 per cent."

If you want confirmation that the above are the interest rates they pay, again, this is somewhat obscured by the company. However, at page 16 to the annual accounts to 30.09.12 you will find confirmation in the following statement:

"Prior to 25 July, the Company decided not to over-amortise the senior loan to reduce the LTV below 65% and maintain a loan margin at 2.25% as this strategy would require a payment of €12.3 million of cash."

Further down on that same page they confirm:

"All debt is fully hedged against changes in European interest rates until December 2013, giving a total interest cost of 6.70% per annum at current LTV levels."


Currently, Euribor is a fraction over 0.5% and as per the above; the margin is 2.50% because their loan is currently just under 70%, giving a total interest cost of about 3%. By deduction, the difference between the "total interest cost of 6.98%" and the 3% is the hedging cost.

As mentioned above, nowhere does the company give a split between the interest cost and the hedge element (it is almost as if they are trying to hide their embarrassment) albeit accounting rules require them to show hedging as finance costs. However, the annual accounts to 30.09.10, at page 18, contain a statement which I agree with as a true analysis/comment about their interest costs:

"All debt is fully hedged against changes in European interest rates until December 2013, giving a total interest cost of 6.58% per annum at current LTV levels. This cost of financing significantly reduces the Company's net earnings, and efforts will continue so as to take advantage of any opportunities that may exist to access lower borrowing costs."

Obviously, since 2010 the company has been unable to refinance because of the continuing fall in property values (so the wording has been changed in subsequent accounts!!). Therefore, IERE has arrived at the horrendous position where hedging costs, currently, at about 3.97% exceed the interest on the loan, currently about 3%.

Thankfully, this situation comes to an end on 31.12.13 so, one way or another, net income from 01.01.14 onwards will be massively boosted – I believe by a minimum of €6.1m per annum as outlined in my earlier post. In the short term, the company is also likely to benefit from a reduction in the European base rate – if you believe the speculation it will be reduced from 0.5% to 0.25% in December - worth a further €0.5m per annum to the company.

I hope the above answers your questions and I am happy to answer any further points, if I can, from you or anyone else. I think the hedge coming to an end will have a very material benefit to the company - and we IERP holders - but I would like to hear if others either agree or disagree. The revised cost of financing will, to borrow and adapt the company's own statement from 2010, "significantly increase the Company's net earnings".

[pejaten] 02/11/2013 01:18

Kenny, where do you get the hedging cost from? If I read the accounts, which are in euro, their only hedge seems to be to cover payment of dividend in pounds when cash flow is in euro? I must be missing something.

[badtime] 01/11/2013 13:51

I do find it interesting that the mm's play around with the bid..it was 80 now bak to 76..its not the first time.. order filling?

[kenny] 31/10/2013 19:32

One simple action could, by itself, change IERE/IERP's fortunes and that relates to interest rate hedging. Simply by not taking out a new hedge, with any new financing arrangements that are put in place, could transform the company's finances.

At present, the company is paying about 3% interest, being the total of Euribor plus margin of about 2.75%. Yet with hedging costs added, the total rate actually paid rises to 6.97%. That is an outrageously high rate.

An annual saving of 3.97% on the current loan of about €225m is about €8.9m. That is €8.9m dropping straight down to the bottom line as additional profit - each and every year! That is a massive improvement for a company whose ordinary share capitalisation is currently only about £9m.

Management and Lloyds should really be taken out and shot for imposing such a shoddy deal on the company when originally taking out the interest rate hedge, albeit I guess it was not unusual at the time. Lloyds have profited handsomely over the years from the hedging arrangements but now, it appears, it suits them not to offer a new loan.

I appreciate that without a hedge, the interest expense will rise as and when interest rates rise. However, it is going to be some years before market rates rise to 6.97% and in the interim shareholders should benefit – not a load of greedy bankers. Even today, there has been talk of the Euro base rate needing to be reduced from 0.50% to 0.25%.

Incidentally, the above factor is also why I believe liquidation holds no fear for us preference shareholders. If the company get a refinancing away, there is always the danger that management will be stupid enough to take out a new interest rate hedge. On the other hand, if the company goes into liquidation at the end of this year, then it is guaranteed that there will be no new interest rate hedge and, over time, the properties will be sold. I am guesstimating that it will take 3 years or so to liquidate the portfolio and all the while the company is in liquidation its income profits will improve by €750,000 per month! And this is ignoring the possible benefit of any new letting of vacant properties it achieves, or increases in the value of its portfolio.

Even using a more conservative estimate of likely savings, it still amounts to a material annual saving. For example, if the company's new interest rate was 4.25% inclusive of margin that is a 2.72% saving or about €6.1m - every year!

Fears that any liquidator will undertake a quick fire sale are really misplaced in the context of the very high free cashflow the company will benefit from during the course of a liquidation – should a liquidation occur.

I believe the above analysis of current and likely future interest costs is a material factor in underscoring how cheap the preference shares are (and a major reason I have been topping up my holding of preference shares this month). However, I would welcome critical comment or any alternative view. Or, indeed, confirmation from anyone else who has run the figures, that I am not barking mad in relation to this very important factor.

[ibarty] 31/10/2013 00:19

Agree with you Kenny on the improved refinancing landscape. I was rather hoping that the disposal of the vacant properties referred to in last management statement would have been completed by now though. Guess once that is done it will provide a good platform for the refinancing