It was a rainy morning as I headed over to the AGM for Babcock and Brown Structured Finance last week. The place was fully packed and the organisers had to bring in more seats for the shareholders.
The chairman, Sylvia Ann Wiggins, started the proceedings by doing a review of the fund’s performance compared to the IPO prospectus projections. There was a significant outperformance in all the categories shown. (projection indicated in brackets)
Strategic Review of Debt Level
In view of the current volatile market, the company will reduce the corporate debt from US$105m to US$35m or about 10% of gross investment value of S$483.9m.
No asset sales will be required to achieve the lower debt level as it will be funded from maturing debt assets. As a result, earnings and cashflow will drop.
Also, it will be a period of consolidation for the company so no acquisitions are expected in the near future.
Corporate debt facility maturing in December 2009 from UOB and Commonwealth Bank of Australia have been secured and being finalised.
Market volatilty and uncertainty is expected to continue and the company will be closely monitoring its assets.
The 1H08 dividend guidance fo 5.2cps has been confirmed. However, the company is unable to give an estimate whatsoever of the 2H08 dividend guidance. This is due to the uncertainty (and possible volatility) from the income streams of the company (particularly of the loan assets).
Selected Questions and Answers
1) The net asset value/share dropped from $0.85 to $0.79 because of the issuance of additional shares. Will this continue to happen?
At the present time, we do not have firm plans to issue additional shares other than for the payment of management fees. The other item that has affected the net asset value is the mark-to-market adjustments of certain assets.
2) Looking at the three asset classes, we have a significant portion in the loan portfolio and securitisation assets.
We share your concern and this is the asset class we think most about. Currently, these assets are still performing and providing the income. The US subprime has some ripple effects to the UK and Australia, where our holdings are. What will happen in the future is unclear as it will depend on interest rates and real estate values.
3) Your alternative assets of $70m+ only produced an income of $1.46m. Can you clarify?
These copyright assets were bought in April and December, thus there’s some distortion to the income reported.
4) Since you mention the impairment is only due to mark-to-market accounting, can we assume that the income stream to remain unchanged?
While the assets are still performing, we will continue to watch them. Economic conditions might affect the income as the cashflow is dependent on interest rates and pre-payments.
5) Your assets are in various currencies. Some of them are in weak currencies like the US dollars and British pounds. Can you explain how you protect the fund against currency movements?
The structure of the fund is to be a global one with investments in various currencies. The dividend distributions are hedged but not the principal amount. As long as the maturing assets are reinvested into another investment of the same currency, there won’t be a realisation or impact on the net economic income at that point.
6) In this current uncertain climate, we would like more information from the company. Can we request for more regular updates?
Yes, we will certainly be doing that. We will be providing regular quarterly financial updates of how the fund is performing and its asset value. Once we can predict to a certain degree of comfort for the 2H08, we will be doing that.
7) Speaking of quarterly updates, can we have quarterly dividends as well? Just like the REITS. We can put it to a vote and I’m sure we can get 100% acceptance.
Laughter from the entire room. No response from the management.
There were a few other questions on whether the company would restructure its investment portfolio to have more assets that would bring a steady cashflow. (One representative from Oilpods even started to pitch his product!)
The asset allocation will be considered as part of the strategic review but given the current consolidation phase, it is unlikely that there will be any acquisitions in the near term.
Overall, I get the feeling that the uncertainty from the loans portfolio is very high. How these will turn out remains to be seen.