Elanor announces new strategic investor and funds management initiatives
On 11 April 2019, Elanor Investors Group announced that Singapore-headquartered real estate funds and asset manager, Rockworth Capital Partners Pte Ltd (Rockworth), had acquired an 18% strategic interest in the group. Rockworth has an Australia portfolio of approximately AD850m predominantly across the retail and office real estate sectors. Elanor also entered into a strategic alliance agreement with Rockworth aimed at delivering commercial alignment and growth in funds under management between the groups.
This announcement follows two further announcements from Elanor last week detailing the below funds management initiatives:
- The establishment of the Elanor Luxury Hotel Fund (ELHF), a multi asset accommodation fund consisting of two premium hotels in Adelaide with a valuation of approximately AUD99m.
- The acquisition of two additional properties in the Elanor Metro and Prime Regional Hotel Fund (EMPR) for AUD14.45m. Following the acquisition, the EMPR now holds a portfolio of 11 hotels with a combined valuation of over AUD191m
We see these announcements as positive and supports our belief that Elanor is well placed to continue to grow its assets under management.
Bank of Queensland 1H19 Results
On 11 April 2019, Bank of Queensland (BOQ) released its results for the six months ended February 2019 (1H19). The results were soft, with statutory net profit after tax down 10% on the prior corresponding period (pcp) at AUD167m. The fall in earnings was caused by a number of factors, including low growth (2% annualised on the half) and lower margins (off 3bps pcp), a function of competition for new loans and higher funding costs. Non-interest costs were controlled.
The growth results were not overly surprising. System credit growth has slowed markedly over the last two years, meaning competition for new (and existing loans) is intense. Regional banks, including BOQ, are structurally hampered by higher capital requirements for each loan they underwrite relative to the major banks, for example. This impediment becomes particularly acute during periods of slow system growth. There were a couple of bright spots for BOQ. Business loan growth was up 13% pcp. Good growth was also reported in the bank’s Virgin Money branded business.
Looking forward, some respite may come in the form of reduced pressure on funding costs in light of the decline in BBSW since the beginning of the year. However, this is a benefit that all banks are likely to avail themselves of at some point during the year. At the same time, BOQ is in somewhat of a transition period, with a number of senior executive positions currently held in an acting capacity. At the same time, in light of the Royal Commission, some questions have arisen around the long-term sustainability of the bank’s Owner Manager franchise distribution model.
Despite the weaker financial results, typical measures of underlying credit quality remain overwhelmingly solid. The bank’s Common Equity Tier 1 ratio was broadly unchanged at 9.26%, at the upper-end of immediate regional bank peer comparisons. The bank remains well-funded, with customer deposits and long-term wholesale funding at more than 80% of funding needs.
Non-performing loans (90-days past due and impaired) were up marginally to 96bps, with the increase fairly uniform across each lending class. Credit losses (loan impairment expense) were higher at 13bps, although much of the increase (from a very low 8bps at the start of the year) reflected an increase in the bank’s collective provision and a function of the application of AASB 9, a new accounting standard for the recognition of credit provisions. Specific provision coverage was unchanged at 50% of impaired assets.
Pioneer Credit Limited: Update on Accounting Issue
Implementation of AASB 9 Financial Instruments
On 9 April 2019, Pioneer provided an update on the accounting treatment of its Purchased Debt Portfolios (PDP’s). As a reminder, Pioneer purchases distressed debt (personal loans 180 days in arrears) primarily from major banks and some regional banks at around 20 cents in the dollar and, on average, recover the full debt (i.e. 100 cents and not 20 cents) in about 2 to 3 years (2.5 years currently) (“the liquidation period”). Fundamentally, Pioneer is a cash flow business.
Background --
We refer back to our update on 26 February 2019. As part of its 1H19 results, Pioneer noted a potential accounting change in relation to the valuation of PDP’s after initial recognition. Pioneer currently uses a fair value methodology.
Under both the fair value and amortised cost approach (the alternative method), the requirement to estimate reliable cash flows and the total returns from the PDP’s over the liquidation period are the same. However, the two approaches differ in how discount rates are determined, which may result in different recognition patterns of returns.
A change in the measurement of PDP’s after initial recognition to amortised cost would result in:
- no change to cash flows;
- no change to the total value of revenue generated;
- a possible change in the period in which revenue is recognised.
On the latter point, this is likely to explain some of the recent share price movements, which are more sensitive to changes in earning patterns. A change in accounting treatment should have no impact to the underlying business model and credit quality of Pioneer, as there is no change to the cash flows and no change to the overall level of earnings generated.
Update --
Pioneer has since decided to report under both valuation methods for the next two reporting periods to assist interested stakeholder in assessing the impact of a possible change. Based on their preliminary assessment, profit and PDP valuations are expected to be similar under both methods in FY19. This may not always be the case. However, we refer back to our comment that overall, there is no change to the level of earnings generated, irrespective of which valuation method is adopted.
Pioneer has again reaffirmed guidance for FY19:
- PDP investments of AUD80m (with AUD72m contracted as at February 2019)
- Liquidations > AUD120m, up at least 18% on the prior corresponding period (pcp)
- EBITDA > AUD65m, up at least 20% pcp
- NPAT > AUD20m, up at least 14% pcp.
Overall, we remain comfortable with the credit profile of Pioneer.
Ensco plc completes acquisition of Rowan Companies, Inc.
On 11 April 2019, Ensco plc announced the completion its acquisition of Rowan Companies, Inc (Rowan, combined with Ensco Plc, EnscoRowan) and following the announcement Moody’s downgraded the combined company’s credit ratings. As a result, Ensco’s 2025 Notes are now subject to FIIG’s trading restrictions.
Following the acquisition. EnscoRowan has one of the largest, youngest, most diversified and most technologically advanced fleets in the industry. The combined company has the world's largest jack-up fleet with 54 jack-ups and the second largest floater fleet with 28 floaters. Following the completion of the transaction, EnscoRowan also has a stronger and broader customer base which, according to Moody’s, places it in a strong competitive position during the expected recovery phase of the offshore drilling industry.
Despite the company’s stronger competitive position, the acquisition has resulted in an extremely high gross and net leverage of 26.7x and 21.7x, respectively. Further, Moody’s expects EnscoRowan to have significant negative cash flow generation and elevated re-contracting risks through to 2020 when a number of contracts come up for renewal. Overall, the challenging operating environment for the company is expected to persist as a material improvement in customer demand and market day rates remains absent. For this reason, Moody’s maintains a negative credit outlook for EnscoRowan.
Bristow downgraded by S&P
On 11 April 2019, S&P downgraded Bristow Group’s credit rating on the back of continued uncertainty around the company’s financial reporting issues. The downgrade brings S&P’s ratings on the issuer back in line with Moody’s. S&P commented that the downgrade reflects the rating agency’s view that Bristow's restructuring risk has become elevated due to its liquidity constraints and financial reporting issues. Further, the rating agency believes that additional waivers on Bristow’s debt may be required following the continued delay of the release of its 10-Q financial report. Bristow’s 2023 notes remain subject to FIIG’s trading restrictions.