Sdic Power Discussion Threads

[scburbs] 18/6/2010 11:23

Lagosboy,

Thanks for your insight. I like examples if you can point me in the right direction. There is, of course, a swap breakage cost if a swap is out of the money, but my question is whether this is the same as the fair value liability (mark to market - MTM). A quick bit of research implies breakage costs and MTM are the same thing which was my previous understanding.

"Therefore, the swap breakage costs are effectively a mark-to-market of the swap." [P2]

"To calculate the breakage costs involved with this, we discount the difference between the fixed rate and the current swap rate for the remaining maturity of the swap. We used a 1.25% rate, based on current 3mth Libor, to discount the cash flows to arrive at the swap breakage costs." [P6 - this is how MTM is calculated]

"In general, we believe that the lack of public disclosure of the full
swap details makes it difficult for investors to calculate the mark-to-market (or breakage costs) on the swaps." [P6]

[lagosboy] 18/6/2010 11:08

If a borrower was able to simply terminate their fixed
rate obligation without any form of compensation to
the lender, this could leave the lender with a funding
mis-match. The lender's hedged position would become
imbalanced (or 'unhedged'), because the obligation
on the lender to pay out the fixed rate expense to the
swap counterparty would still exist, but there would
be no offsetting fixed rate income received from the
borrower. Therefore when a borrower breaks their fixed
rate arrangement early, the lender must in turn unwind
the fixed rate funding arrangement with the swap
counterparty. In doing so, the break-costs charged by the
swap counterparty to the lender will usually be passed
on to the borrower.

[lagosboy] 18/6/2010 10:57

scburbs

Your understanding is incorrect.The mark to market is just part of the breakage costs. Your SWAP counter party has no legal obligation to even close the SWAP, that is why callable swaps exist.

In practice they will, if in the money, but if they have to unwind their offset position at a loss this will be added to the breakage costs.

I speak from direct experience.

[scburbs] 18/6/2010 10:44

Morning Lagosboy,

I refer you back to my earlier post when I outlined how the worsening swap rates and the orderly wind up (over 2 years) should interact. The sales at a premium would mitigate the current higher swap liability and the latter sales would have a lesser swap liability to offset as the swap liability ultimately tends to zero.

I have always viewed the balance sheet fair value as the cost to close the swap. Do you have any evidence of situations where that has not been the case? I take the £1.7m in the trading statement to be the market value loss on the date of closing rather than an additional breakage cost.

There remains no doubt in my mind that an orderly wind up is preferable to an equity raise at current share price levels. This is because the per share value destruction of an equity raise will be much greater than the swap costs. If there is no value in an orderly wind up then this is just evidence that the valuations are not right and in this case no sensible person should give them equity anyway.

If they can could struggle on without an equity raise then it would make a lot of sense to defer an orderly wind up until closer to the refinancing date (i.e. 2012/3) due to the lower swap liability. However, Envirovision correctly pulled me up on this flight of fancy! Therefore, an orderly wind up over 2-3 years remains the best for shareholders IMV, but clearly the board does not agree!

scburbs - 10 Jun'10 - 12:51 - 1196 of 1266 edit

...

The bad news is that the swap rates have got worse (from SDIC's perspective), the lower swap rates translates to a higher swap liability.




However, if swap rates remainded constant then every day that passes reduces SDIC's swap exposure. This is because the value of the swap liability will be nil on its expiry date and it will tend to nil over the remaining life (this will be impacted by swap rate movements, but it will always reach nil).

This means that in an orderly disposal scenario the latter disposals will not have such an onerous swap liability to offset. Therefore, the strategy that I outlined for an orderly disposal was to sell the properties that can be sold at a premium straight away. This is likely to be fully let low yielding properties in major cities.

They should hold back certain high yielding low vacancy properties and those that can only be sold at a discount until the end of the process. The high yielders are being retained so they can be operating cashflow neutral or close to it (assuming fees have been slashed) during the process. When these properties are sold later on then selling them at a discount would be less of an issue as SDIC would have released part of the swap liability by this stage. If they can use this c.2 year period to reduce vacancy in the meantime then they may achieve a stronger valuation (although it is unclear exactly how this property is valued at the moment).

[lagosboy] 18/6/2010 08:26

Morning scburbs

Seems the SWAP's are more of an issue than you thought to your orderly wind up concept.

Problem is , like other balance sheet assets and liabilities thay have an acoounting driven mark to market valuation but this valuation is often quite different to the available bid. Breakage costs, over and above the mark to market valuation on the interest differential, can be quite significant when the counterparty has to unwind an offsetting SWAP also. Worth bearing in mind.

[scburbs] 17/6/2010 21:40

WJ,

Don't get me wrong I didn't say it was a terrible deal for SYG. As I said straight away it was an ok deal for SDIC making it an ok deal for SYG as well.

At 5p SYG looks fairly valued. This deal will do wonders for the face of its balance sheet, but it has lost its major earnings stream and will now be a loss making business. It is now trading at about 50% discount to NAV (perhaps £5-6mish assuming Speymill Contracts is now break even). Is a 50% discount to NAV good value for a loss making business with little potential to raise new funds to manage? At the risk of repeating myself in respect of a different company, the best way SYG could preserve value for shareholders would be to wind itself up!! After all it has failed with Speymill Contracts and its has failed with its management of SDIC (albeit it has done very well with the fees whilst mismanaging the company). SYG has even less reason to keep going than SDIC.

They will not wind it up as SYG will want to keep paying the big wages to its major employees. If they don't wind it up how are they going to be profitable? At 5p it looks fairly valued, although I will not be buying (unless they indicate they will wind it up and even then probably not due to lack of trustworthiness). SYG is now an asset play rather than an earnings play. As I said before it is very dangerous to value a badly performing asset manager on an earnings basis when its contracts can be terminated.

[w1ndjammer] 17/6/2010 20:42

scburbs

forgive me if i got it wrong !

so perhaps you can tell me, from your vast experiance

how much is the "total package" worth to SYG

then take a look at SDIC market cap

straw and clutching by the looks of it LOL....

WJ.

[scburbs] 17/6/2010 20:30

WJ, LOL! Tell yourself that if you want to, but the posts speak for themselves. When I saw the announcement of the price for Goal I wondered if you would be too embarrassed to show your face! It hasn't been dressed up at all the SYG contract has been paid up to its notice period and Goal been bought at its low value.

[w1ndjammer] 17/6/2010 19:54

scburbs

we were allways talking about the whole package.

it has just been dressed up a bit thats all,
interesting that SYG will also take over the loans
so quite a large chunk of SDIC flag ship properties lost,
and notice the rest paid in shares so could be another large chunk
os SDIC coming SYG way.

WJ.

[lagosboy] 17/6/2010 19:54

windjammer

The properties transferred are immaterial in value, just 0.005% of total property value.

SYG has also tanked and it has now become a property company by default, and one that nobody would wish to invest in.

The SYG arrangement was to allow fees to be paid into SYG for the benefit of its major shareholders, Mr Mellon and Burnbrae.

Shareholders were intially happy to acept this arrangement for the golden opportunity to particpate in a company promoted and controlled by one of the UK's richest men and a high profile entrepreneur.


The prospects as I see it are as bleak for both companies, although SDIC does have the option of trying to raise equity.

I presume SYG still has outstanding loans to repay...will these be satisfied by the transfer of the newly acquired property?

I don't think anyone who has invested in either of these companies has any reason to crow.

[scburbs] 17/6/2010 19:23

W1ndjammer, I expect you did not fully understand the arrangements. You claimed that Goal was worth £9m and referred to some random December 2007 valuation and were expecting 10 times earnings. I pulled you up on this and pointed you in the direction of a June 2008 valuation and suggested NAV or one times earnings. Goal has now been sold in line with my comments.

The termination of the SYG strategic management contract was always a separate issue with the 12 month notice period creating value for SYG. You did not make any outrageous comments about this aspect and, therefore, I had nothing to pull you up on!

I await your apology.

W1NDJAMMER - 6 Jun'10 - 08:41 - 1144 of 1259

so how much are you guys willing to pay for GOAL
say 9 or 10 mill just trying to work out how
much the special dividend will be over at SYG
could be worth topping up.

WJ.

scburbs - 6 Jun'10 - 09:38 - 1145 of 1259 edit

W1ndjammer, LOL! At least I hope for your sake that you are joking. Don't forget that your investment case for SYG was based on its earnings whereas you now seem to be moving it towards an asset play (as it won't really have any earnings left). With a starting position of negative net assets there is a lot of cash needed before SYG becomes undervalued compared to its market cap.

49% of Goal was worth €1m in June 2008. The price paid was 1*earnings.



The earnings may have gone up a little, but who would pay more than this for a company whose main client is in massive financial difficulty. In the circumstances 1*earnings would be overly generous (and should be paid in shares at NAV). After all Goal potentially has a negative value due to the potential redundancy costs.

Of course you have the chance that the board of SDIC will continue overpaying the SYG Group as they have done for years.

W1NDJAMMER - 6 Jun'10 - 09:56 - 1146 of 1259


scburbs

ok lets forget the past valuations

concentrate on earnings for GOAL

just x the profit by 10 the same as if you or i were buying any co.

we would be looking for a 10% return on our investment

all these posters have been banging on about how SDIC have

been ripped off by SYG you can`t have it both ways.

as an investor i am now looking for a special divi say 15p

and the rest of SYG to be morphed into some other co.

WJ.

scburbs - 6 Jun'10 - 09:59 - 1148 of 1259 edit

WJ, LOL! Another cracker, 10*earnings! I don't believe you mean/believe it. I wonder if you are desperate to stop SYG crashing so you can exit? I am certain that you will not be buying SYG on Monday morning.

"we would be looking for a 10% return on our investment" (What investment? There has been no capital investment in Goal other than buying 49% for €1m)

[w1ndjammer] 17/6/2010 19:02

well looks like you guys are finnaly agreeing
with what i have been saying for months

scburbs you are a bit slow with the appology

i make the sale worth over 10,000,000 euros
as i said about £9,000,000
you and a few others shot me to bits what was it you said 1.5 mill
told you SYG is Jims baby he has managed to get the best
properties out before the rest goes to the banks.

WJ.

[lagosboy] 17/6/2010 14:34

The internalisation is the first step, and it is the first step because if the equity raise fails SDIC will be wound up and SYG will rank behind the banks as a creditor and get nada.

[envirovision] 17/6/2010 14:18

I guess thats about the best drumming up of shareholder support they can muster to be fair though, and jeez I guess that just gives you a taste of some of the duds they are sitting on! No wonder this has hapened.

Who ever did the research on the swaps was spot on, erm lagotsboy?

What a dogs breakfst this is.

[scburbs] 17/6/2010 14:13

I think they need some numbers to support this sort of statement. Vacancy down by 0.1%?

"The Company has seen an improvement in operating performance as occupancy levels across all packages have gradually increased and net new lettings continue to show an upward bias, demonstrating that the increased level of direct management of property units is having a positive effect on operations. The reduction of overall vacancies will continue to be a core focus of the Company as further units are brought under the direct management of GOAL service GmbH ("GOAL"), the Company's investment adviser."

[scburbs] 17/6/2010 14:11

There's more. Banks valuations marginally down (how much is marginally) and first disposal of one of the dud properties (key question is how many duds have they got). Trying to take wind up option off the table by pausing the disposal programme.

Swap liability has got worse as I flagged previously.

[envirovision] 17/6/2010 14:07

Ydderf, nice try but out of the three posts so far:
eg. Cake crumbs, Chicken & farmer, Body parts.

The farmer and chicken is firmly in the lead imo.

Nevertheless looking very much excitedly to to your next one.

:-)

[scburbs] 17/6/2010 14:02

Lagosboy,

Now that makes me chuckle! Asking shareholders for €200m! Will not happen. If it does I'm an orange!

[ydderf] 17/6/2010 13:58

SDIC is like a body in a permanent vegetitive state being kept alive with technology, so that the body parts can be harvested - first dibs on the bits was SYG, the banks will be next - the body could conceivable be kept alive for a couple of years before the death (into administration) announcement is made

i don't understand how shareholders believe there is hope, the only purpose they serve is to act as host....

the facts speak for theselves, why doesn't SYG take their compensation 100% in SDIC shares for example - wouldn't you, if you thought the company had a future?

if SYG won't take shares why should the market (rights issue fans here)?

[lagosboy] 17/6/2010 13:56

Afternoon scburbs

I said many, and there were indeed many including you that advocated selling a few properties at a premium and now transfering to a connected company at book is acceptable.


I have never read an RNS full of such converluted piffle, the purpose of which was to terminate a management agreement between 2 connected companies under which the Manager has managed the 'FUND' to almost total oblivion.

The reality is that the assets and loans being transferred are circa 0.007% of the total property assets and total loans. Drop in the ocean.

It is merely window dressing to placate shareholders before they are asked to cough up € 200 million +.

[scburbs] 17/6/2010 13:29

Agreed, there will be no buying from me despite the fact that it is clear (to me) that the orderly wind up value is much higher than market cap.

I am not confident that they will do the decent thing and put this out of its misery and if it does stumble along I am confident that they would find a way of eliminating or massively diluting (on a per share basis) the wind up value that currently exists.

The ICR disclosures on the Silos indicates that one of the facilities had an ICR of 1.33 at 31 December 2009 (this is presumably that one that will not breach on 30 June which we are assuming to be Silo 1). This Silo (especially after the fee reductions) is genuinely cashflow positive. The fact that it is has strong cashflow should provide time for an orderly wind up over a couple of years as the swap liability falls.

[envirovision] 17/6/2010 13:25

Well yep I would indeed certainly be a banana. For some reason I do get a feeling its not going to be wound up, but at the same time I cant see a reason to buy, theres something I cant quite put my finger on.

[scburbs] 17/6/2010 13:20

Lagosboy,

If you are referring to me. You will know that I was always very keen for the company to sell properties whether it be at book, above book or marginally below book.

Envirovision,

Nothing wrong with a bit of fanciful speculation, although I readily admit that that is what it was! An orderly wind up is still the most sensible in my view as hopefully the shareholders told them where to go when it came to equity raising and if the banks insist on it then a wind up is the only option left.

If they are transferring Silo 5 and 6 to SYG then the wind up value is reduced, but Silo 1 should not be in breach of any covenant and should produce an orderly wind up amount. If it did would you change your handle to banana?

[envirovision] 17/6/2010 13:13

The market dont like it one bit, no surprise not a murmur of anyone putting in new investment cash to keep the whole silly game going. I guess theres simply no one stupid enough left to do so.

I see even scburbs is reduced to fanciful speculation that the banks may do it for them. Rest assured if they do ordinary shareholders will get nowt.

Yes it will be interesting to see what SYG get, I assume it newly refurbed stuff courtesy of sdic shareholders ahem.

Strange though, SYG has also reacted badly, not sure why that is. Perhaps they will be given a pile of duff stuff as well?

[lagosboy] 17/6/2010 13:12

It was not long ago that many were advocating selling a few properties at a premium, now it seems reasonable to transfer a few properties to SYG at their valuation. Interesting.

There is no cash settlement because SDIC has no cash and the last thing the banks will allow is any cash above that needed for day to day operations to leave SDIC.

I still fully expect a equity raise to be announced. This is not a solution to the underlying massive debt/liquidity issue but is merely a necessary pre-requisite to remove the conflict of interest which has caused so much shareholder concern, anger and has become totally uncommercial given the performance.

If this was a arms length transaction I suspect SDIC would be suing its manager for incompetence and non performance rather than transferring properties to met the noitce clause.