TIDMEFR
RNS Number : 3297H
EF Realisation Company Limited
06 June 2017
6 June 2017
FOR IMMEDIATE RELEASE
INTERIM FINANCIAL RESULTS ANNOUNCEMENT
THE BOARD OF DIRECTORS OF EF REALISATION COMPANY LIMITED
ANNOUNCES THE INTERIM FINANCIAL REPORT FOR THE PERIOD FROM 28 JUNE
2016 (INCORPORATION) TO 31 MARCH 2017
INTERIM MANAGEMENT REPORT
financial highlights, performance summary and dividend
history
Financial highlights
Scheme of Reconstruction
EF Realisation Company Limited was established as a successor
vehicle to Ecofin Water & Power Opportunities plc ("EWPO") to
hold the illiquid assets formerly owned by EWPO. Further to the
Scheme of Reconstruction which was completed in September 2016,
EWPO ceased trading on 21 September 2016. Its two successor
companies are EF Realisation Company Limited (the "Company" or "EF
Realisation") and Ecofin Global Utilities and Infrastructure Trust
plc ("Ecofin Global"). The ordinary shares of the Company and
Ecofin Global began trading on the London Stock Exchange on 26
September 2016.
As at 13 September 2016, the value of the pool of assets
attributable to the Company, further to the Scheme of
Reconstruction of EWPO, was GBP47,184,416; these comprised assets
valued at GBP46,071,195, cash of GBP2,358,000 and a provision of
GBP1,244,779. This is the opening value for the Company's equity in
the Condensed Statement of Changes in Equity. In turn, on 22
September 2016, the Company issued 52,473,633 Ordinary Shares to
EWPO shareholders at a price of 89.92p per share for gross proceeds
of GBP47,184,416. The Company's Ordinary Shares were admitted to
trading on the London Stock Exchange on 26 September 2016.
The first valuation point for the Company's assets after
admission was as at the close of trading on 30 September 2016.
During the period from 13 September 2016 to 30 September 2016, the
net asset value ("NAV") per share fell from 89.92p to 83.89p as a
result of movement in the fair value of investments.
Share ratio of the Scheme of Reconstruction
Pursuant to the Scheme of Reconstruction, EWPO Shareholders
received one share in the Company for every four EWPO shares held
and, for those who did not elect to receive cash in respect of some
or all of their holding of EWPO shares, one share in Ecofin Global
for every one EWPO share held.
Number of Ordinary Shares and market capitalisation as at 31
March 2017
Number of Ordinary Shares 52,473,633 Ordinary Shares
in issue:
Market capitalisation: Ordinary Share class: GBP18,890,508
Performance summary
As at As at % change
31 March 30 September
2017 2016(1)
Net assets (GBP'000) GBP27,050 GBP44,020
NAV per Ordinary
Share 51.55p 83.89p (38.55)%
Ordinary Share price
(bid price) 36.00p 37.00p (2.70)%
Discount to NAV (based
on published NAV) 30.16% 55.89%
Dividend and distribution history
No dividend or distribution was declared during the period. The
Company realised its investment in Menhaden Capital plc in February
2017 which raised GBP1.2 million, equal to 2.3p per Ordinary Share.
As the investment was relatively small, the proceeds of the sale
were added to the Company's working capital, rather than returned
immediately to Shareholders. Although it is not expected that the
Company will receive any income during the realisation period, to
the extent that it does receive any income, the Board intends to
distribute it to Shareholders.
(1) (Net asset value and share price per Ordinary Share is based
on the 30 September 2016 valuation point, being the first NAV
released after the Ordinary Shares were admitted to trading on the
London Stock Exchange.)
chairman's statement
Dear Shareholder,
This is the first interim report for the Company which was
incorporated on 28 June 2016 and whose shares commenced trading on
the London Stock Exchange on 26 September 2016. The Company is a
successor company to EWPO further to a scheme of reconstruction
which was approved by EWPO's shareholders on 13 September 2016.
The Company was established to realise the unquoted and illiquid
investments of EWPO in an orderly manner. An ordinary resolution to
wind up the Company will be put to Shareholders once all the
Company's investments have been realised or distributed and in any
event no later than the second anniversary of the listing of the
Company's shares on the London Stock Exchange, that is, 26
September 2018. Shareholders do, however, have the right to extend
the life of the Company for further successive periods of one year
if approved by a special resolution. The Company will distribute
the proceeds of any realisation to Shareholders, subject to the
Company's working capital requirements, and will make no new
investments.
Over the interim period to 31 March, 2017, the net asset value
per Ordinary Share fell by 38.6%. This was almost wholly
attributable to a fall in the share price of Lonestar Resources US
Inc. ("Lonestar"), which accounted for 70.9% of the Company's
portfolio at 30 September 2016, the beginning of the period under
review. Lonestar, which is a U.S. company whose shares are listed
on the NASDAQ exchange in the U.S., is the only listed equity in
the Company's portfolio. Its share price fell from US$10.20 at 30
September 2016 to US$5.06 on 31 March 2017. Five of the other six
holdings in the Company's portfolio are unlisted holdings valued by
the Directors using fair value techniques, and there were only
minor changes to the fair values of these holdings over the course
of the interim period. The sixth holding is in a listed bond that
has represented not more than 2% of the portfolio since
inception.
The bid price of an Ordinary Share of the Company, however, fell
by only 2.7% over the interim period. As a result, the discount to
net asset value at which the Shares traded narrowed from 55.9% at
the beginning of the period to 30.2% at 31 March 2017, after
reaching its highest level of 61.1% on 28 November 2016. The
movement in the share price and discount over the period under
review is due to a number of factors. Following their listing on
the London Stock Exchange on 26 September 2016, the Shares traded
at a large discount to their published net asset value which the
Directors attribute to the fact that the Shares were not purchased
by long-term investors in the Company but were issued to investors
as part of a reorganisation of EWPO, to the illiquidity of the
Company's portfolio, and to uncertainty about the valuation
methodologies used in valuing the Company's investments.
In the last quarter of calendar 2016 and in early 2017, large
volumes of the Company's Shares traded on the secondary market as
some of the Company's largest shareholders sold their holdings.
Since then, the volumes traded in the secondary market have fallen
and the discount to net asset value at which the Shares trade has
narrowed progressively. As at 31 May 2017, the Shares were trading
at a discount of 32.6% which was similar to the discounts at which
the shares of a number of private equity investment trusts or
companies trade - companies whose holdings are in illiquid
investments. As the Company is a liquidating vehicle, the Directors
would expect the discount to net asset value at which the Company's
Shares trade to narrow further as the Company's unquoted
investments are realised and the proceeds returned to
Shareholders.
Lonestar has repositioned itself significantly since September
2016. In December 2016, Lonestar completed an equity raising in the
U.S. market to strengthen its balance sheet. The Company did not
participate in the offering because under its investment policies
it is not allowed to make new investments, including in companies
in which it already has an interest. This equity raising reduced
the Company's holding in Lonestar from 52.0% to 19.1%.
On 30 May 2017, subsequent to the period under review in this
interim report, Lonestar announced two major acquisitions which,
its management believes, will significantly increase the company's
scale and attractiveness to prospective investors. The acquisitions
- which are expected to close in the third quarter of 2017 - will
increase Lonestar's net leasehold acreage by 59%, its proved
reserves by 70% and its net oil and gas production by 39%. The
acquisitions are being financed by the issue of a new preferred
security convertible into ordinary shares, the issue of ordinary
shares and bank borrowings. The manner in which the acquisitions
are being financed will also, Lonestar's management believes,
reduce the use of debt in Lonestar's balance sheet and materially
increase its debt coverage ratios, a key metric for equity
investors. The financing of the acquisitions will have the effect
of further reducing the Company's interest in Lonestar to 17.1%,
and to 11.0% when, and if, the convertible preferred security is
converted into ordinary shares of Lonestar. Additional information
on Lonestar and the Company's other investments can be found in the
Investment Manager's Report.
The Company's strategy is to realise its illiquid investments as
soon as practicable and to return the proceeds of realisations to
Shareholders. However, the Board notes that the Realisation
Strategy could take between 12 to 16 months. It will also continue
to support Lonestar's board and management in their efforts to
increase the company's scale, to improve its balance sheet and
growth prospects and to close the valuation discount at which
shares in Lonestar trade relative to its peers.
Martin Nègre
Chairman
executive sUMMARY
This Executive Summary is designed to provide information about
the Company's business and results for the period ended 31 March
2017. It should be read in conjunction with the Chairman's
Statement and the Investment Manager's Report which gives a
detailed review of the investments, realisation activities for the
period, and an outlook for future realisations.
Corporate summary
The Company was incorporated in Guernsey on 28 June 2016, with
registered number 62195, as a non-cellular company with liability
limited by shares. The Company has been registered by the Guernsey
Financial Services Commission ("GFSC") as a registered closed-ended
collective investment scheme pursuant to The Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the
Registered Collective Investment Scheme Rules ("RCIS Rules")
2015.
The Company has a wholly owned subsidiary called EFR Guernsey
Holding Limited, which holds an equity investment in Lonestar.
The Company is regulated by the GFSC and is a member of the
Association of Investment Companies ("AIC").
The Company's share capital is denominated in Sterling and each
Ordinary Share carries equal voting rights.
The Company's Ordinary Shares were admitted to trading on the
London Stock Exchange (Specialist Fund Segment) on 26 September
2016. As at 31 March 2017, the Company's issued share capital
comprised 52,473,633 Ordinary Shares.
The Company is categorised as an internally managed non-European
Union ("EU") alternative investment fund for the purposes of the
Alternative Investment Fund Manager Directive. As such, the Board
retains overall responsibility for portfolio management and risk
management of the Company.
The Company has appointed Ecofin Limited (the "Investment
Manager") as investment manager and in such capacity the Investment
Manager has, subject to the overall supervision of the Board,
responsibility for the management of the Company's investment
portfolio and day to day management of the strategy to realise the
Company's investments (the "Realisation Strategy"). The Board
actively and continuously supervises the Investment Manager in the
performance of its function.
The Company is a self-managed fund and therefore acts as the
Alternative Investment Fund Manager ("AIFM") of the Company. During
2016, the Company registered with the Guernsey Financial Services
Commission, being the Company's competent regulatory authority, as
a self-managed non-EU Alternative Investment Fund (AIF), and has
registered with the UK Financial Conduct Authority, under the
relevant national private placement regime ("NPPR"). As the Company
is non-EU domiciled, no depositary has been appointed in line with
the AIFM Directive, however BNP Paribas Securities Services S.C.A.,
Guernsey Branch has been appointed to act as custodian.
Investment objective
The Company's investment objective is to conduct an orderly
realisation of the assets of the Company, to be effected in a
manner that seeks to achieve a balance between returning cash to
Shareholders promptly and maximising the value of the investment
portfolio.
Investment policy
The Board and the Investment Manager believe that the portfolio
may take in the region of 12 to 16 months from the date of this
report to be fully realised. The mechanics and timing of
distributions will be set out in the redemption announcement(s)
and/or circular(s) to be sent to Shareholders at the relevant
time(s).
The Company will not make any new investments save that:
(a) available cash may be used to fund, where necessary, capital
calls in relation to existing investments where the Directors
believe it is necessary to preserve the value of that investment;
and/or
(b) available cash may be invested in liquid cash-equivalent
securities, including cash funds, and bank cash deposits, pending
its return to Shareholders.
The investment policy involves a continual evaluation of the
business prospects of each investment in the portfolio and the
disposal options for each asset in order to assess the most
appropriate realisation timing and strategy to be pursued in
relation to each investment. Whilst some investments may be
considered appropriate for sale in the shorter term, other
investments may be held for a longer period with a view to enabling
their inherent value to be realised successfully. The strategy for
realising individual investments may need to be altered to reflect
changes in the circumstances of a particular investment or in the
prevailing market conditions. The Board meets regularly to review
progress in implementing the investment objective and the
Realisation Strategy and the current position of the holdings in
the portfolio.
Further information on the current status of the Realisation
Strategy can be found in the Investment Manager's report.
Key performance indicators ("KPIs")
The Board seeks to achieve a balance between returning cash to
Shareholders promptly and maximizing the value of the investment
portfolio. In order to achieve this, the Board is in ongoing
discussions with the Investment Manager in respect of each
investment. In order to measure the success of the Company in
meeting its objectives and to evaluate the performance of the
Investment Manager, the Directors take into account the following
key performance indicators:
Realisations at NAV
The Board monitors the ability of the Company to realise the
value of each investment at its recoverable amount, as included in
the NAV (as at the latest practical date to the realisation date),
whilst placing due consideration on the timing of the realisation
of each investment and the position of the Company post investment
realisation.
Total return including distributions
The Board reviews at each meeting the performance of the
Company's investment portfolio and NAV, as well as the total
return, including distributions, earned by Shareholders.
Directors' interests
The Board comprises three Directors: Martin Nègre, Robert
Sinclair and Nick Tostevin. The Directors are all non-executive
and, other than Martin Nègre, are independent of the Investment
Manager.
A biography for each Director is shown in the Board Members'
section of this Interim Financial Report. Information on the
Directors' remuneration is detailed in note 5.
As at the date of approval of the Interim Financial Report, the
Directors held the following number of Ordinary Shares in the
Company:
Director Director holdings
in the Company's
Ordinary Shares
------------------- ------------------
Martin Nègre 271,502
------------------- ------------------
Robert Sinclair Nil
------------------- ------------------
Nick Tostevin Nil
------------------- ------------------
Committees of the Board
Audit Committee
The Board has delegated certain responsibilities and functions
to the Audit Committee which consists of Robert Sinclair (Audit
Committee Chairman) and Nick Tostevin. The Audit Committee meets at
least twice a year. The members of the Audit Committee consider
that they collectively have the requisite skills and experience to
fulfil the responsibilities of the Audit Committee. The Audit
Committee reviews the scope and results of the external audit, its
cost effectiveness and the independence and objectivity of the
external auditors, including the provision of non-audit services.
Each year the Audit Committee reviews the independence of the
auditors.
Management Engagement Committee
The Company's Management Engagement Committee comprises Robert
Sinclair and Nick Tostevin (Management Engagement Committee
Chairman). The Management Engagement Committee meets at least once
a year and its main function is to review and make recommendations
on any proposed amendment to the Investment Management Agreement
and keep under review the performance of the Investment Manager and
all other service providers.
Remuneration and Nomination Committee
The Company has not established a separate Remuneration and
Nomination Committee as matters as to the remuneration of the
Directors of the Company will be considered by the Board.
Attendance at meetings of the Board and its committees for the
period ended 31 March 2017
Inaugural Quarterly Ad-hoc Audit Management
Board Board Board Committee Engagement
and Committee Meetings Meetings Meetings Committee
Meetings
------------------- --------------- ---------- ---------- ----------- ------------
Number of
meetings 2 1 7 1 -
------------------- --------------- ---------- ---------- ----------- ------------
Martin Nègre 1 1 5 1(*) -
------------------- --------------- ---------- ---------- ----------- ------------
Robert Sinclair 2 1 6 1 -
------------------- --------------- ---------- ---------- ----------- ------------
Nick Tostevin 2 1 7 1 -
------------------- --------------- ---------- ---------- ----------- ------------
(*) attended with permission from the Audit Committee but did
not vote in the meeting.
The Committees report to the Board, as part of a separate agenda
item, on the activity of the Committees and matters of particular
relevance to the Board in the conduct of their work.
Principal risks and uncertainties
The Directors believe the principal risks facing the Company are
summarised below along with, where appropriate, the steps taken by
the Board to monitor and mitigate such risks. The specific
financial risks associated with foreign currencies, interest rates,
market prices, liquidity and credit - which may or may not be
material to the Company - are described in note 8 to the unaudited
condensed interim financial statements.
The principal risks faced by the Company can be divided into
various areas as follows:
-- Performance, market and liquidity, any of which may affect the Realisation Strategy
-- Lonestar specific risk
-- Portfolio concentration
-- Operational
-- Financial
Performance, market and liquidity
The performance of the Company depends primarily on the
investment decisions taken by the Investment Manager within the
parameters and constraints imposed by the Company's investment
policy and restrictions. As the Company has investments in
securities which are listed on recognised stock exchanges - but
which are illiquid - and in unquoted securities, it is regularly
exposed to market risk and the value of the Company's portfolio can
fluctuate, particularly over the short-term, in response to
developments in financial markets. Further, the Company's assets
may not be realised at their estimated net realisable values, as
reflected in the Company's NAV, due to company or market related
factors or the illiquid nature of the investments, and it is
possible that the Company may not be able to realise some assets at
any value or within 12 to 16 months in accordance with the
investment objective. This may lead to volatility in the market
price of shares in the Company.
The Directors assess these risk factors, and the implementation
and results of the Realisation Strategy, regularly at Board and
other meetings with the Investment Manager. The Board examines the
sources of investment performance, liquidity and currency
exposures. It also monitors liquidity risk on an ongoing basis to
ensure that the Company maintains sufficient working capital to
meet the Company's ongoing requirements over the expected remaining
life of the Company.
As a realisation vehicle with an intended life at inception of
two years, the Board adopted a methodology for the calculation of
the Company's NAV which was designed to reflect the realisable
value of the portfolio, net of taxes and other expenses, were the
investments in the portfolio to be realised as soon as possible but
in an orderly fashion in the current market. The Board regularly
reviews this methodology, which is detailed in the Company's
prospectus, and the application of the methodology, to determine
with the Investment Manager whether or not any changes should be
adopted and to assess the Investment Manager's progress toward
realising the assets of the Company in accordance with the
valuations resulting from applying this methodology.
Lonestar specific risk
Lonestar accounted for 51.3% of the Company's net assets at 31
March 2017. The Company owned at that time approximately 19% of
Lonestar which is a public company whose shares are listed on the
NASDAQ Exchange in the US. Lonestar acquires and develops shale
reserves in Texas in the United States, sells the oil, gas and gas
liquids produced and is exposed to the commodity price, operating,
environmental and other risks associated with the oil and gas
industry. The Directors monitor closely the investment in Lonestar
and two representatives of the Investment Manager are directors of
Lonestar. The Directors believe that the risks to the Company from
its holding in Lonestar are mitigated by the risk procedures
followed by Lonestar, Lonestar's insurance and the fact that
Lonestar and its operating subsidiaries are separately
incorporated. The Company values Lonestar in its NAV and financial
statements at its trailing 5-day volume weighted average share
price as reported to the NASDAQ Exchange less estimated costs
(taxes and other expenses) that may be associated with the
realisation of the investment.
Portfolio concentration
As at 31 March 2017, the Company's investment portfolio included
debt and equity securities in the United States, Australia, United
Kingdom and Mexico. The Company is exposed to concentration of
geographical risk and may, from time to time, have significant
exposure to portfolio companies from certain business sectors,
specifically oil and gas which made up 54.6% of the NAV as at 31
March 2017. Greater concentration of investments in any one
geographical and/or industry sector may result in greater
volatility in the value of the Company's investments, and
consequently its NAV, and may materially and adversely affect the
performance of the Company and returns to Shareholders.
As part of the Realisation Strategy, the number of investments
held by the Company is expected to reduce over time and, as a
consequence, concentration risk will increase and the aggregate
return on the remaining investment portfolio will become
increasingly exposed to the performance, favourable or
unfavourable, of the remaining individual investments. To a large
extent, this is unavoidable in view of the Company's Realisation
Strategy.
Operational
In common with most other investment companies, the Company has
no executive directors, no executive management and no employees.
The Company delegates key operational tasks to third-party service
providers which are specialists in their fields: the management of
the Company's investment portfolio to the Investment Manager,
Ecofin Limited; the preparation and maintenance of the Company's
unaudited condensed interim financial statements, the maintenance
of its corporate records and the custody of the Company's assets to
BNP Paribas Securities Services SCA, Guernsey Branch. The Board
reviews the performance of these third-party service providers and
their risk control procedures on a regular basis as well as the
terms on which they provide services to the Company.
Financial
The specific financial risks associated with foreign currencies
are described below, and those associated with interest rates and
credit (counterparties) - which may or may not be material to the
Company - are described in detail in note 8 to the unaudited
condensed interim financial statements.
Foreign exchange risk is the risk that the values of the
Company's assets and liabilities are adversely affected by changes
in the values of foreign currencies by reference to the Company's
base currency, Sterling. The vast majority (91.78%) of the
Company's assets are denominated in currencies other than Sterling.
Accordingly, fluctuations in exchange rates between Sterling and
the relevant local currencies - principally the US dollar and the
Australian dollar - and the costs of conversion and exchange
control regulations will directly affect the value of the Company's
investments and the ultimate sums realised by Shareholders.
The Board monitors the Company's exposure to foreign currencies
on a regular basis. During the period ended 31 March 2017, the
Company did not use financial instruments to manage or mitigate the
foreign currency exposure. Please refer to note 8.1c for further
details.
Break-up basis
Under the AIC Code of Corporate Governance ("AIC Code") and
applicable regulations, the Directors are required to determine
whether it is reasonable to assume that the Company is a going
concern from date of approval of the unaudited condensed interim
financial statements. Given the Board believes that the investments
held by the Company may be fully realised in 12 months from the
date of approving the unaudited condensed interim financial
statements, the Board has adopted the break-up basis in preparing
the unaudited condensed interim financial statements. However, the
Board notes that the Realisation Strategy could take longer,
between 12 to 16 months. This accords with the methodology utilised
in calculating the Company's NAV on a weekly basis. Under this
basis of accounting, assets are valued at their estimated net
realisable value and provisions are made for estimated future costs
to realise the investments and operating costs to liquidate the
Company.
Events after the reporting date
The Directors are not aware of any developments that might have
a significant effect on the operations of the Company in subsequent
financial periods that are not already disclosed in this report or
the attached unaudited condensed interim financial statements as
detailed in note 15.
Future strategy
The Board believes that the investment strategy and policy
adopted by the Company is appropriate for and is capable of meeting
the Company's realisation objectives. The overall Realisation
Strategy remains unchanged and it is the Board's assessment that
the Investment Manager's resources are appropriate to manage
properly the Company's investment portfolio.
BOARD MEMBERS
All Directors are non-executive.
CHAIRMAN
Martin Nègre
Appointed 20 July 2016
Martin was a director of EWPO until September 2016. He is
currently a non-executive director of both EF Realisation and
Ecofin Global Utilities and Infrastructure Trust plc. He was, until
June 2001, the chief executive officer of Northumbrian Water plc,
then a subsidiary of Suez Lyonnaise des Eaux, and Suez Lyonnaise's
chief corporate representative in the UK. Prior to that, he was
Suez Lyonnaise's international director in Paris and then its
Asia-Pacific president in Hong Kong and Singapore. Before that, he
spent 21 years with Alsthom and GEC Alsthom, the Anglo/French
engineering company, where he was a senior executive and the chief
executive officer of the power generation division.
He is chairman of the Ecofin Vista Long-Short Fund and the
Ecofin Global Renewables Infrastructure Fund, funds managed by the
Investment Manager, a non-executive director of Northumbrian Water
Ltd and of Messrs Hottinger & Cie, Paris.
DIRECTORS
Robert Sinclair (independent) - Chairman of the Audit
Committee
Appointed 28 June 2016
Robert is managing director of the Guernsey based company,
Artemis Trustees Limited, and a director of a number of investment
fund management companies and investment funds associated with
Artemis Trustees Limited. Robert is chairman of Schroder Oriental
Income Fund Limited, a director of Sirius Real Estate Limited, a
director of Picton Property Income Limited and chairman of its
audit committee, a director of Chariot Oil and Gas Limited and
chairman of its audit committee, and a director of Rainbow Rare
Earths Limited and chairman of its audit committee.
He is a fellow of the Institute of Chartered Accountants in
England & Wales, a member of the Institute of Chartered
Accountants of Scotland and a member of the Society of Trust and
Estate Practitioners. Robert is resident in Guernsey.
Nicholas (Nick) Tostevin (independent) - Chairman of the
Management Engagement Committee
Appointed 28 June 2016
Nick holds the degree of LLB (Hons) (Bachelor of Law). He
qualified as a barrister in 1975 and as an advocate of the Royal
Court of Guernsey in 1976 and practised as such for 33 years until
he retired as the senior partner of a Guernsey law firm. He is a
non-executive director of a number of Guernsey-based investment
funds and insurance companies.
INVESTMENT MANAGER'S REPORT
Summary and performance
The Company is one of two listed successor vehicles to EWPO, a
UK investment trust which was reorganised pursuant to a scheme of
reconstruction. The Company's shares were issued to Shareholders
and admitted to trading on the London Stock Exchange on 26
September 2016. EF Realisation, a Guernsey company, holds the
illiquid and unquoted investments of EWPO and had net assets of
approximately GBP44.0 million at the date of its first published
net asset value on 30 September 2016. The Company's investment
objective is the orderly realisation of its assets for the benefit
of its Shareholders. As a consequence, it cannot make any new
investments and the proceeds of any realisation, subject to the
working capital requirements of the Company, will be distributed to
Shareholders. In September 2018, a resolution will be put to
Shareholders to wind-up the Company unless Shareholders have voted
before then to extend the life of the Company.
In the half-year from 30 September 2016 to 31 March 2017, the
net asset value of the Company declined from GBP44.0 million to
GBP27.1 million, a fall of 39%. This decline was almost completely
attributable to a fall in the share price of Lonestar Resources US,
Inc., the Company's largest investment which, at the time of the
first net asset value of the Company, accounted for approximately
70.9% of the Company's investment portfolio. The value of the
Company's other assets rose by GBP400,000 over the half-year.
Since admission on 26 September 2016, the Company's shares have
traded at a discount to net asset value which, given the nature of
the Company's investments and the uncertain outlook for their
realisation, was to be expected as investment trusts which invest
in private equity typically trade at steep discounts to their
published net asset values. The discount to net asset value at
which shares in EF Realisation traded averaged 46.1% over the
period and was 30.2% as at 31 March 2017. The discount to net asset
value was 32.6% as at 31 May 2017.
During the period, the Company realised one investment, a
holding in Menhaden Capital plc, a listed UK investment trust which
invests in clean energy and energy efficiency. In February 2017,
the Company took advantage of a recovery in Menhaden's share price
and sold its entire holding of two million shares, realising GBP1.2
million, a premium of 21% to the valuation at which Menhaden was
carried in the Company's accounts at the time of the Company's
launch; it had been the Company's policy to carry its investment in
Menhaden at a discount to its quoted share price given the
illiquidity of its shares. As the proceeds from the sale were
relatively small, the Directors elected to add them to the working
capital of the Company rather than make a cash distribution to
Shareholders.
Summary of investments
At 31 March 2017, EF Realisation had seven investments which
were valued at GBP24.9 million plus GBP2.2 million in net working
capital. All the Company's investments were in unquoted securities
with the exception of its investment in Lonestar, which is a
company quoted on the U.S. NASDAQ exchange, and its investment in a
bond issued by Integradoro de Servicios Petroleros Oro Negro SAPI
de CV ("Oro Negro"). The Company values Lonestar by using a five
day, volume-weighted average of its share price and, in addition,
deducts certain estimated expenses which the Company's directors
believe could be incurred in realising the Company's investment in
Lonestar. The Company values its other, unquoted investments based
on third-party valuations or valuation techniques typically used to
value such investments and may also apply a further discount for
illiquidity or deduct estimated expenses to realise any
investment.
Lonestar
Lonestar is EF Realisation's largest investment and accounted
for 51.3% of the Company's portfolio at 31 March 2017. Lonestar
owns and develops U.S. oil and gas reserves and produces oil and
gas from those reserves, primarily in the Eagle Ford shale basin in
southern Texas. Lonestar was formerly an Australian company, listed
on the Australian Stock Exchange, but in mid-2016 it was
re-organised as a U.S. domiciled company and, with effect from 5
July 2016, its shares have been listed on the U.S. NASDAQ
exchange.
As at 31 March 2017, the Company owned, through a wholly-owned
subsidiary, 4,174,259 ordinary shares of Lonestar, equivalent to
approximately 19% of the company's outstanding equity. Lonestar has
its origins in a private equity investment made by EWPO which was
then merged in 2012 with a smaller Australian-listed company whose
assets were oil and gas reserves in the United States. In 2016,
Lonestar's shares were de-listed from the Australian Stock
Exchange, the company was re-domiciled as a U.S. company and its
shares were listed and began trading on the U.S. NASDAQ exchange
from 5 July 2016.
At admission on 26 September 2016, EF Realisation owned
approximately 52% of Lonestar. The decline in EF Realisation's
percentage ownership of Lonestar over the period was attributable
to an equity raising Lonestar undertook in December 2016 to
strengthen its balance sheet and which diluted EF Realisation's
holding in Lonestar. Under its investment policies, EF Realisation
is prohibited from making new investments and, therefore, it was
not permitted to participate in Lonestar's equity issue and to
maintain its percentage interest in the company.
Under an agreement with Lonestar, EF Realisation has the right
to nominate two directors to Lonestar's board, subject to the
approval of Lonestar's shareholders in an annual general meeting,
as long as its ownership of Lonestar is in excess of 15%, and one
director if its ownership is less than 15% but greater than 10%. EF
Realisation's nominated directors of Lonestar are John Murray,
chairman of Ecofin Limited, the Investment Manager, and Dr
Christopher Rowland, head of special situations at Ecofin
Limited.
Over the half-year period from EF Realisation's first net asset
value on 30 September 2016 to 31 March 2017, Lonestar's U.S. dollar
share price fell by 50%, or by 48% in sterling terms. Over the same
period, an equity index of U.S. Small Capitalisation Exploration
& Production (E&P) companies fell by 9% in U.S. dollar
terms while the U.S. West Texas Intermediate (WTI) oil price rose
by 5%. The decline in the valuation of smaller E&P companies -
which gathered pace in March 2017 - reflected a number of factors
including concerns about continued evidence of oversupply in world
oil markets and, therefore, the outlook for oil prices, doubts
about the efficacy of OPEC production cuts and, importantly, the
sharp increase in oil production from U.S. unconventional oil and
gas producers in response to technology and efficiency gains.
Following the precipitous decline in the WTI oil price during
the first quarter of 2016 to a low of $26.21 per barrel, Lonestar's
priority was to strengthen its balance sheet and finances. Lonestar
restricted its capital expenditures to an amount that was covered
by its cash flow, repurchased and retired approximately 31% of its
senior unsecured 8 3/4 % Notes due 2019 at an average price of 53
cents in the dollar, made a small disposal of its non-core reserves
and, in December 2016, raised $79 million in new equity. These
measures reduced Lonestar's debt from $319.5 million at 30 June
2016 to $212.3 million at 31 December 2016. In addition, the equity
issuance resulted in EF Realisation's stake in Lonestar declining
from 52.0% to 19.1%.
By early 2017, with the oil price having traded in a range of
U.S. $40 to $54 over the previous year, Lonestar had embarked on a
growth strategy, taking advantage of technological and productivity
gains which had lowered its cost of drilling and production.
Lonestar was planning to complete fourteen new wells in 2017,
compared to five in 2016, and hoped to complete a number of
bolt-on, value-accretive acquisitions of reserves. By early May
2017, it had increased its proved, probable and possible reserves
through acquisitions by approximately 11%, from 63.4 million
barrels at 31 December 2016 to 70.1 million barrels, at an average
acquisition cost of just $1.30 per barrel. As a result, Lonestar
was forecasting that its production of oil, gas and other liquids
would increase by between 65% and 85% in 2017, measured from the
fourth quarter of 2016 to the fourth quarter of 2017.
On 30 May 2017, Lonestar announced that it had entered into
definitive agreements to acquire oil and gas properties in the
Eagle Ford Shale area for a total purchase price of $116.6 million.
The acquisitions will be funded primarily by an $80 million issue
of convertible preference shares to Chambers Energy Capital, a
specialist investor in US oil and gas companies, and an issue of
2.6 million Class A common shares; $25 million will also be drawn
on the company's senior secured credit facility. The acquisitions
increase Lonestar's Eagle Ford Shale holdings by 59% to 57,330 net
acres, increase the company's pro-forma Q1 2017 net production by
39% to 7,318 barrels of oil equivalent per day, and increase
pro-forma 2016 earnings before interest, taxes, depreciation and
amortisation (EBITDA) by 33% to $75.3 million. Also on a pro-forma
basis, as at 31 December 2016 proved reserves increase by 70% to
76.3 MMBOE, and the PV-10 of Lonestar's proved reserves (an
assessment of the future cash flows, discounted at a rate of 10%
per annum, undertaken according to SEC regulated procedures)
increases by 68%. Proved reserves are being acquired at $3.7 per
barrel of oil and at a 55% discount to their PV-10 value.
Concurrently, Lonestar agreed amendments to its Citibank-led
senior secured credit facility: the company's borrowing base has
been increased to $160 million from $112 million and various
covenant tests have been relaxed. JP Morgan has joined the
syndicate of banks lending to Lonestar. Lonestar is also
simplifying its debt structure by repurchasing its 2nd lien
facility, issued last year to finance the buyback of senior notes
at an average discount to par value of 47%.
Upon issuance of the new ordinary shares to finance the
acquisitions, EF Realisation's shareholding in Lonestar will fall
from 19.1% of the outstanding ordinary shares to 17.1%, and
potentially to 11.0% on the eventual conversion of the convertible
preferred shares. The convertible preferred shares may be converted
into ordinary shares at $6 per ordinary share, a conversion premium
of 45% above the Lonestar share price over the 20 days prior to the
terms being agreed, demonstrating Chambers Energy Capital's
confidence in the accretive nature of these transactions for
Lonestar.
These transactions, therefore, add high quality assets and
significant scale to Lonestar, and they have been financed in a
manner which strengthens the balance sheet and improves the credit
metrics of the company. In the view of Lonestar's management, these
transactions will significantly increase the company's scale and
attractiveness to prospective investors.
Since its NASDAQ listing, Lonestar has consistently traded at a
valuation discount to its U.S. peers. We attribute this to a number
of factors in addition to uncertainty about the outlook for oil and
gas prices; namely, concerns about the financial viability of
smaller E&P companies and their ability to access capital
markets in the current environment and, more specifically,
Lonestar's level of gearing, the visibility of its strategy and
efforts, and the relative illiquidity of its shares. Pro-forma,
including the acquisitions, Lonestar's shares currently trade at an
enterprise value equivalent to approximately 4.2 times analysts'
estimates of 2018 EBITDA, while its peers which operate in the
Eagle Ford shale basin or are smaller oil focussed companies trade
at an average of 7.0 times. Lonestar's under-valuation is even more
pronounced when calculated on the basis of its proved reserves. On
this basis, Lonestar's enterprise value is currently equivalent to
U.S. $5.6 per barrel of proved reserves while its peers trade at an
average value of U.S. $14.0 per barrel.
As Lonestar is a U.S. company listed on NASDAQ, it regularly
files detailed reports on its operations and financial statements
with the U.S. Securities and Exchange Commission (SEC). These
annual and quarterly reports as well as investor presentations and
other information on the company are available on the company's
website (http://www.lonestarresources.com).
Eastern Australia Irrigation
Eastern Australian Irrigation Limited ("EAI") owns two large
farms in Queensland, Australia, whose principal assets include
access to water rights and the associated water storage
infrastructure for irrigating the farms, whose main crop is cotton.
The Company owns 9.6% of EAI's equity.
The cotton price rose from 58 cents per pound to 80 cents per
pound over the thirteen months to 28 April 2017, an increase of
38%, and the institutions which own EAI are working towards a sale
of the company or its assets which would be planned to take place
during the second half of 2017. EF Realisation carries its
investment in EAI at an independent expert's valuation of the
expected proceeds from a sale of the farms prepared in June 2016
which is approximately 30% below the most recent quarterly
valuation of EAI by another independent third-party. Until binding
bids for either the company or its principal assets are received,
the timing of any sale of EF Realisation's holding in EAI and the
proceeds of such a sale are uncertain.
TRF/Prescott Valley
EF Realisation has a majority interest in 2,724 acre-feet of
water entitlements in the Prescott Valley region of Arizona, near
Phoenix, in the United States. An independent expert values these
water entitlements on an annual basis. EF Realisation uses this
valuation as a basis for valuing its investment in TRF but it
applies a further discount to reflect the illiquidity of the
investment and the expenses that might be incurred by EF
Realisation upon disposal of the investment. Following an update
provided by the independent expert, EF Realisation reduced its own
valuation of this asset by GBP0.2 million during the period to 31
March 2017.
Property developers in the Prescott Valley region must
demonstrate that they have access to 100 years of future water
supply before they can be granted permission to develop land. The
water entitlements owned by EF Realisation would enable developers
to demonstrate a future water supply and 2,724 acre-feet of water
entitlements are sufficient to allow for the development of
approximately 8,000 homes.
Development activity in the Prescott Valley region came to a
standstill after the global financial crisis, significantly
reducing the demand for water entitlements. As a measure of the
downturn in building activity, the number of new single dwelling
housing permits granted fell to less than 50 per year in 2009-2011,
having exceeded 1,000 permits per year in 2004-2005. Fortunately,
property development activity has picked up and interest from
property developers for water entitlements has grown. Several sales
of water entitlements are in the early stages of negotiation and,
while there is no guarantee that any sale can be concluded at an
attractive price, there are signs that a significant sale of water
entitlements might be able to be achieved by the end of calendar
2017. The scale of water entitlements in this investment, however,
means that a complete disposal of this asset during 2017 is
unlikely.
Oro Negro Investment
Oro Negro is a privately-owned Mexican oil service company which
owns several jack-up rigs which it has contracted to the Mexican
state-owned oil company, Petroleos Mexicanos ("Pemex"). EF
Realisation owns 1.8% of Oro Negro's equity and a small position in
the company's bonds.
The collapse in oil prices in 2014 and 2015 forced Pemex to
downsize its oil field appraisal and development activities and, as
a result, its demand for Oro Negro's jack-up rigs declined. Pemex
halted payments to Oro Negro which in turn stopped paying interest
on its bonds. In 2016, the company's contract with Pemex was
renegotiated and Oro Negro agreed to idle two rigs and accepted a
reduced day-rate on the working rigs until summer/autumn 2017 when
the day rate is contractually set to increase and the two idled
rigs are to be recommissioned. Following this contract
renegotiation, Pemex resumed payments to Oro Negro, enabling Oro
Negro to resume coupon payments on its bonds.
In its NAV, EF Realisation carries its investment in Oro Negro's
bonds at their market price and carries its investment in Oro
Negro's equity at nil value. Following the resumption of coupon
payments on its bonds by Oro Negro, the price of the bonds improved
contributing an increase of GBP0.3 million to EF Realisation's net
asset value during the period to 31 March 2017. There is a
reasonably active market in Oro Negro's bonds, and with the outlook
for Oro Negro improving, we plan to realise the investment in Oro
Negro once the commercial relationship with Pemex clarifies.
Other Investments
EF Realisation holds interests in the debt and equity of Energy
Future Holdings Limited ("EFH"), the holding company for the
leveraged buyout, in 2007, of the Texas-based utility TXU Energy
which filed for Chapter 11 bankruptcy in 2014. The Company also
owns a position in the debt of International Wood Fuels, an
inactive U.S. wood pellet producer, and in Bluewater Bio Holdings
Limited, a UK water treatment company. In addition, the Company is
party to an introductory fee arrangement with an established U.S.
wood pellet producer. EF Realisation carries all of these
investments at nil value. In our estimation only the introductory
fee arrangement has the potential to be of some value, but in the
current market it is unlikely that this will be material to EF
Realisation's net asset value over the next twelve months.
Outlook
The Company's intention is to move ahead with an orderly
realisation of its unquoted assets with a view to making
significant distributions to Shareholders over the next six to
twelve months. In all likelihood, however, the Company will
continue to hold its investment in Lonestar in the coming months.
This is due to the operational progress being made by Lonestar,
continuing efforts by its management to strengthen its finances and
to grow the company and to the fact that, following its listing on
NASDAQ in July of 2016, it continues to trade at a significant
valuation discount to its peers. In our opinion, there is scope for
a significant increase in the Company's net asset value if
Lonestar's management is able successfully to execute the company's
business plan and if, in time, the company is rewarded with a
valuation in line with those enjoyed by its peers with further
optionality for an increase in value if the outlook for oil prices
improves significantly during the realisation period.
Investment Manager
Directors' Statement of Responsibilities
The Directors are responsible for preparing the Interim
Financial Report which gives a true and fair view of the state of
affairs of the Company for that period and which is in accordance
with applicable laws and IAS 34 - "Interim Financial Reporting" as
adopted by the EU. In preparing the unaudited condensed interim
financial statements contained within the Interim Financial Report
the Directors are required to:
-- select suitable accounting policies and apply them consistently;
-- present information including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- make judgements and estimates that are reasonable and prudent;
-- prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Company will
continue in business; and
-- provide additional disclosures when compliance with the
specific requirements of International Financial Reporting
Standards, as adopted by the EU ("IFRS"), is insufficient to enable
users to understand the impact of particular transactions, other
events and conditions on the Company's financial position and
financial performance.
The Directors confirm that they have complied with these
requirements in preparing the unaudited condensed interim financial
statements contained within the Interim Financial Report.
The Directors confirm to the best of their knowledge that:
-- the unaudited condensed interim financial statements
contained within the Interim Financial Report have been prepared in
accordance with IAS 34 - "Interim Financial Reporting" as adopted
by the EU and give a true and fair view of the state of affairs of
the Company as at 31 March 2017, as required by the Financial
Conduct Authority ("FCA") through the Disclosure Guidance and
Transparency Rules ("DTR") 4.2.4R;
-- the combination of the Chairman's Statement, the Investment
Manager's Report, the Executive Summary and the notes to the
unaudited condensed interim financial statements includes a fair
review of the information required by:
a) DTR 4.2.7R, being an indication of important events that have
occurred during the period ended 31 March 2017 and their impact on
the set of unaudited condensed interim financial statements; and a
description of the principal risks and uncertainties for the
remaining six months of the year; and
b) DTR 4.2.8R, being related party transactions that have taken
place during the period since incorporation to 31 March 2017 and
that have materially affected the financial position or performance
of the Company during that period.
Approved and signed on behalf of the Board,
Martin Nègre Robert Sinclair
Chairman Audit Committee Chairman
independent review report to EF REALISATION COMPANY LIMITED
Introduction
We have been engaged by EF Realisation Company Limited (the
"Company") to review the Unaudited Condensed Interim Financial
Statements in the Interim Financial Report for the period ended 31
March, 2017 which comprise the Condensed Interim Statement of
Comprehensive Income, the Condensed Interim Statement of Financial
Position, the Condensed Interim Statement of Changes in Equity, the
Condensed Interim Statement of Cash Flows and the related notes 1
to 16. We have read the other information contained in the Interim
Financial Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the Unaudited Condensed Interim Financial Statements. The Unaudited
Condensed Interim Financial Statements have been prepared on a
break-up basis.
This report is made solely to the Company in accordance with
guidance contained in the International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity"
issued by the Auditing Practices Board. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company for our work, for this report, or for
the conclusions we have formed.
Directors' Responsibility
The Interim Financial Report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the Interim Financial Report in accordance with the
Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
The Unaudited Condensed Interim Financial Statements included in
this Interim Financial Report have been prepared in accordance with
International Accounting Standard 34, "Interim Financial
Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the Unaudited Condensed Interim Financial Statements in the Interim
Financial Report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the Unaudited Condensed Interim Financial
Statements in the Interim Financial Report for the period ended 31
March, 2017 are not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Guernsey
Channel Islands
The Unaudited Condensed Interim Financial Report are published
on websites maintained by the Investment Advisor.
The maintenance and integrity of these websites are the
responsibility of the Investment Advisor; the work carried out by
the Auditor does not involve consideration of these matters and,
accordingly, the Auditor accepts no responsibility for any changes
that may have occurred to the Unaudited Condensed Interim Financial
Report since they were initially presented on the website.
Legislation in Guernsey governing the preparation and
dissemination of Unaudited Condensed Interim Financial Report may
differ from legislation in other jurisdictions.
CONDENSED INTERIM STATEMENT OF COMPREHENSIVE INCOME
For the period from 28 June 2016 (incorporation) to 31 March
2017
For the
period
from
28 June
2016 to
31 March
2017
Notes GBP
---------------------------- ------ -------------
Income
Investment income 162,495
Foreign exchange gain 64,937
227,432
---------------------------- ------ -------------
Expenses
Net loss on financial
assets designated at fair
value through profit or
loss (19,888,595)
Operating expenses 4 (446,198)
------------------------------ ------ -------------
(20,334,793)
---------------------------- ------ -------------
Loss before taxation (20,107,361)
------------------------------ ------ -------------
Taxation -
---------------------------- ------ -------------
Loss after taxation and
total comprehensive loss (20,107,361)
Basic and diluted earnings
per Ordinary Share 12 (0.5557)
The Company has no items of other comprehensive income or loss,
and therefore the loss for the period is also the total
comprehensive loss.
All items in the above statement are derived from continuing
operations. No operations were acquired or discontinued during the
period.
The notes form an integral part of these unaudited condensed
interim financial statements.
CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION
As at 31 March 2017
31 March
2017
Notes GBP
----------------------------------- ------ -------------
Current assets
Financial assets designated
at fair value through profit
or loss 7 24,867,302
Cash and cash equivalents 3,602,771
Other receivables and prepayments 6 28,430
Total current assets 3,631,201
----------------------------------- ------ -------------
Total assets 28,498,503
----------------------------------- ------ -------------
Current liabilities
Other payables 9 (88,639)
Liquidation provision 10 (1,359,695)
----------------------------------- ------ -------------
Total current liabilities (1,448,334)
----------------------------------- ------ -------------
Total liabilities (1,448,334)
----------------------------------- ------ -------------
Net assets 27,050,169
----------------------------------- ------ -------------
Capital and reserves
Share capital 11 47,157,530
Retained earnings (20,107,361)
----------------------------------- ------ -------------
Equity Shareholders' funds 27,050,169
Net asset value per share 13 0.5155
The unaudited condensed interim financial statements were
approved and authorised for issue by the Board of Directors on 6
June 2017 and signed on its behalf by:
Martin Nègre Robert Sinclair
Chairman Audit Committee Chairman
The notes form an integral part of these unaudited condensed
interim financial statements.
CONDENSED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS'
EQUITY
For the period from 28 June 2016 (incorporation) to 31 March
2017
Share Retained
capital earnings Total
Note GBP GBP GBP
------------------------------ ----- ----------- ------------- -------------
Opening equity Shareholders' - - -
funds at 28 June 2016
------------------------------ ----- ----------- ------------- -------------
Total comprehensive
loss for the period - (20,107,361) (20,107,361)
Transactions with owners,
recorded directly to
equity
Proceeds from issuance
of Ordinary Shares 11 47,184,416 - 47,184,416
Share issue costs 11 (26,885) - (26,885)
Redemption of Ordinary
Shares 11 (1) - (1)
------------------------------ ----- ----------- ------------- -------------
Closing equity Shareholders'
funds at 31 March 2017 47,157,530 (20,107,361) 27,050,169
------------------------------ ----- ----------- ------------- -------------
The notes form an integral part of these unaudited condensed
interim financial statements.
CONDENSED INTERIM STATEMENT OF CASH FLOWS
For the period from 28 June 2016 (incorporation) to 31 March
2017
For the
period
from
28 June
2016 to
31 March
2017
Notes GBP
------------------------------------------------------------- ------ -------------
Cash outflow from operating
activities
Loss before taxation (20,107,361)
Adjustments to reconcile
profit before tax to net
cash flows from operating
activities:
* Realised gain on financial assets designated at fair
value through profit or loss 7 (315,260)
* Unrealised loss on financial assets designated at
fair value through profit or loss 7 20,203,855
* Net gain on foreign exchange translation (64,937)
Proceeds from sale of financial
assets designated at fair
value through profit or loss 7 1,315,298
Changes in working capital
Increase in other receivables
and prepayments 6 (28,430)
Increase in other payables 9 88,639
Increase in liquidation provisions 114,916
------------------------------------------------------------- ------ -------------
Net cash used from operating
activities 1,206,720
------------------------------------------------------------- ------ -------------
Cash inflow from financing
activities
Proceeds from Scheme of Reconstruction 2,358,000
Ordinary Share issue costs
paid 11 (26,885)
Net cash from financing activities 2,331,115
------------------------------------------------------------- ------ -------------
Net increase in cash and
cash equivalents in the period 3,537,836
------------------------------------------------------------- ------ -------------
Cash and cash equivalents -
at the beginning of the period
------------------------------------------------------------- ------ -------------
Effect of exchange rate fluctuations
on cash and cash equivalents 64,936
Cash and cash equivalents
at the end of the period 3,602,771
------------------------------------------------------------- ------ -------------
Supplemental disclosure of
non-cash flow information
Transfer of assets from Scheme
of Reconstruction (46,071,195)
Issue of Ordinary Shares
in specie 11 47,184,416
Liquidation provisions 1,244,779
------------------------------------------------------------- ------ -------------
Cash proceeds from Scheme
of Reconstruction 2,358,000
------------------------------------------------------------- ------ -------------
The notes form an integral part of these unaudited condensed
interim financial statements.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. General information
The Company was incorporated with limited liability in Guernsey
under The Companies (Guernsey) Law, 2008 (the "Companies Law"), as
amended, on 28 June 2016 with registered number 62195.
The Company is a closed-ended investment company registered with
the Guernsey Financial Services Commission under the Registered
Collective Investment Schemes Rules 2015 and the Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended. The
Company is not authorised or regulated as a collective investment
scheme by the Financial Conduct Authority.
The Company's Ordinary Shares were admitted to trading on the
Specialist Fund Segment of the Main Market of the London Stock
Exchange on 26 September 2016.
The Company's registered address is BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting policies
The principal accounting policies applied in the preparation of
these unaudited condensed interim financial statements are set out
below. These policies have been consistently applied throughout the
period presented.
2.1. Basis of preparation
(a) Statement of Compliance
The unaudited condensed interim financial statements of the
Company for the period 28 June 2016 to 31 March 2017 have been
prepared in accordance with the Disclosure Guidance and
Transparency Rules of the FCA and with International Accounting
Standards ("IAS") 34 - 'Interim Financial Reporting' as adopted by
the EU. The Annual Financial Report will be prepared in accordance
with IFRS, as adopted by the EU, which comprise standards and
interpretations approved by the International Accounting Standards
Board ("IASB"), and interpretations issued by the International
Financial Reporting Standards Interpretations Committee ("IFRIC")
as approved by the International Accounting Standards Committee
("IASC") which remain in effect. The unaudited condensed interim
financial statements give a true and fair view of the Company's
affairs and comply with the requirements of the Companies Law.
The unaudited condensed interim financial statements have been
prepared under a break-up basis. The Directors deem it appropriate
to adopt a break-up basis in preparing the unaudited condensed
interim financial statements given the fact they believe that the
investments held by the Company may be fully realised and the
Company put into liquidation in the next 12 months from the date of
approving the unaudited condensed interim financial statements in
line with the Company's Realisation Strategy. However, the Board
notes that the Realisation Strategy could take longer, between 12
to 16 months. Please refer to note 11 for detail regarding the
compulsory redemption mechanism and liquidation resolution.
As a result of the application of the break-up basis, the fair
value of each investment has been adjusted as necessary to reflect
any taxes and costs of disposal to fall due were the investment to
be disposed of as soon as possible but in an orderly manner (the
recoverable amount). In addition, future foreseeable working
capital requirements and costs expected to be paid on ultimate
wind-up of the Company have been accounted for as part of a
liquidation provision. Refer to note 10 for further detail.
The impact of seasonality or cyclicality on operations is not
regarded as significant to the unaudited condensed interim
financial statements.
(b) Basis of measurement
These unaudited condensed interim financial statements have been
prepared on a historical cost basis adjusted to take account of the
revaluation of financial assets designated at fair value through
profit or loss.
(c) Functional and presentation currency
The Company's functional currency is Sterling, which is the
currency of the primary economic environment in which it operates.
The Company's performance is evaluated and its liquidity is managed
in Sterling. Accordingly, the unaudited condensed interim financial
statements are presented in Sterling.
(d) Critical accounting estimates and assumptions
The preparation of unaudited condensed interim financial
statements in conformity with IAS 34 requires the Company to make
estimates and assumptions that affect items reported in the
Condensed Statement of Financial Position and Condensed Statement
of Comprehensive Income and the disclosure of contingent assets and
liabilities at the date of the unaudited condensed interim
financial statements. Although these estimates are based on
management's best knowledge of current facts, circumstances and, to
some extent, future events and actions, the Company's actual
results may ultimately differ from those estimates, possibly
significantly. The investments in the equity and fixed interest
stocks of unquoted companies that the Company holds are not
actively traded and as such the prices are more uncertain than
those of more widely traded securities. The unquoted investments
are valued by reference to valuation techniques approved by the
Directors and based on International Private Equity and Venture
Capital ("IPEV") valuation guidelines and IFRS 13 - Fair Value
Measurement ("IFRS 13").
Fair value of financial assets designated at fair value through
profit or loss
Valuation techniques applied in determining the fair value of
financial assets designated at fair value through profit or loss
are subject to significant estimates and assumptions. Please refer
to note 2.4 for detail regarding the valuation process and
valuation techniques applied where an active market does not
exist.
(e) Critical accounting judgements
As outlined in note 2.1(a) and 2.1(c) the Directors have used
their judgement to determine that the Company's financial
statements are prepared on a break-up basis and that the Company's
presentation and functional currency is Sterling.
Non-consolidation of EFR Guernsey Holding Limited -
consideration of consolidated financial statements exemption under
IFRS 10 - Consolidated Financial Statements ("IFRS 10")
As at 31 March 2017, the Company had one subsidiary undertaking,
EFR Guernsey Holding Limited, as defined under IAS 27 - Separate
Financial Statements, which is incorporated in Guernsey. The
relevant activities of EFR Guernsey Holding Limited is that of
investment holding with an investment objective in line with the
Company. The Company has a significant interest in EFR Guernsey
Holding Limited through its 100% ownership of the issued share
capital. As a result of this significant interest, the Company has
the ability to influence the decisions made by EFR Guernsey Holding
Limited through its 100% holding of the voting rights and ownership
and consequently has control of this entity.
In assessing the control, the Company has considered the
following criteria:
i) The investor has existing rights that give it the ability to
direct the relevant activities that significantly affect the
investee's returns;
ii) The investor has exposure or rights to variable returns from
its involvement with the investee; and
iii) The investor has the ability to use its power over the
investee to affect the amount of the investor's returns.
The Company does have a beneficial interest in the investment
activities of EFR Guernsey Holding Limited and in the returns
generated thereof. In addition, the Company has the ability to
influence these decisions and the amounts it receives as proceeds
from its investment in EFR Guernsey Holding Limited which satisfies
the criteria above.
In adopting the exemption from preparing consolidated financial
statements under IFRS 10, the Company considered the definition,
including the criteria and typical characteristics of an Investment
Entity, as detailed in IFRS 10. The Company meets the IFRS 10
definition of an Investment Entity and is required to account for
its investment at fair value through profit or loss.
The Company is deemed to meet the definition of an Investment
Entity per IFRS 10 as the following conditions exist:
i) The Company has obtained funds for the purpose of providing
investors with investment management services;
ii) The Company's business purpose, which has been communicated
directly to investors, is investing solely for returns from capital
appreciation, investment income, or both; and
iii) The performance of investments are measured and evaluated on a fair value basis.
The Board has also considered the typical characteristics of an
investment entity per IFRS 10 in assessing whether it meets the
definition of an Investment Entity. These include:
-- It has exposure to more than one investment;
-- It has multiple investors;
-- The majority of its investors are not related parties; and
-- It has ownership interests in the form of equity.
The Board believes that the Company portrays the above typical
characteristics of an Investment Entity. Accordingly, EFR Guernsey
Holding Limited has not been consolidated in accordance with IFRS
10 and is accounted at fair value through profit or loss.
Please refer to notes 7 and 8 for further disclosures relating
to the Company's interest in EFR Guernsey Holding Limited.
2.2. Investment in associate
An associate is an entity over which the Company has significant
influence. An entity is regarded as a subsidiary only if the
Company has control over its strategic, operating and financial
policies and intends to hold the investment on a long-term basis
for the purpose of securing a contribution to the Company's
activities.
In accordance with the exemption available to venture capital
and similar organisations within IAS 28 Investments in Associates
and Joint Ventures, the Company does not account for its investment
in Lonestar using the equity method. Instead, the Company has
elected to measure its investment in its associates at fair value
through profit or loss.
As at 31 March 2017, the Directors determined that although the
Company had a less than 20% economic interest in Lonestar, it did
have significant influence over Lonestar's strategic, operating and
financial policies.
On the 30 May 2017, Lonestar announced that it has entered into
definitive agreements with unaffiliated parties to acquire oil and
gas properties in the Eagle Ford Shale play. The financing of this
transaction has diluted the Company's interest in Lonestar from
19.1% to 17.1% and as a result, subsequent to the 31 March 2017,
the Company has less significant influence over Lonestar's
strategic, operating and financial policies. Please refer to note
15 for further detail.
2.3 Foreign currency translations
Foreign exchange gains and losses resulting from the settlement
of transactions in foreign currencies and from the translation of
monetary assets and liabilities at period-end exchange rates to
Sterling are recognised in the Statement of Comprehensive Income as
foreign exchange translation gains/losses.
Non-monetary items such as financial assets designated at fair
value through profit or loss measured at fair value in a foreign
currency, are translated using exchange rates at the Statement of
Financial Position date when the fair value was determined. Effects
of exchange rate changes on non-monetary items measured at fair
value on a foreign currency are recorded as part of the fair value
gain or loss.
2.4 Financial instruments
Financial assets
a) Classification
The Company classifies its investments as financial assets
designated at fair value through profit or loss. These financial
instruments are held for investment purposes. Financial assets also
include cash and cash equivalents and interest receivables which
are measured at amortised cost using the effective interest rate
method.
Financial assets designated at fair value through profit or
loss
Financial assets designated at fair value through profit or loss
are financial instruments whose performance is evaluated on a fair
value basis in accordance with the Company's documented investment
strategy. The Company's policy requires the Investment Manager and
the Board to evaluate the information about these financial assets
on a fair value basis together with other related financial
information.
b) Recognition, measurement and derecognition
Purchases and sales of investments are recognised on the trade
date which is the date on which the Company commits to purchase or
sell the investment. Financial assets designated at fair value
through profit or loss are measured initially at fair value.
Transaction costs are expensed as incurred and movements in fair
value are recorded in the Statement of Comprehensive Income.
Subsequent to initial recognition, all financial assets designated
at fair value through profit or loss are measured at fair value
adjusted to reflect costs of disposal because the Company's
financial statements are prepared on a break-up basis. Financial
assets are derecognised when the rights to receive cash flows from
the investments have expired or the Company has transferred
substantially all risks and rewards of ownership.
c) Fair value estimation
In accordance with IFRS 13 and IPEV guidelines, fair value is
the amount deemed to be the price that would be received upon sale
of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. As
the Company is a realisation vehicle with an intended life from
inception of two years, fair value of investments is adjusted to be
the realisable value of the investments, net of taxes and other
costs of disposal, were the investments in the portfolio to be
realised as soon as possible but in an orderly fashion in the
current market.
The Company's asset valuation methodology, which was outlined in
the Company's Prospectus and is explained below, was designed to be
consistent with the break-up basis of accounting that would be
adopted for the preparation of the Company's unaudited condensed
interim financial statements. Fair value is measured by the
Directors in accordance with the NAV methodology adopted by the
Board which, in turn, reflects IFRS 13 and the IPEV guidelines
published in December 2015, as appropriate for a Company with a
limited life.
The valuation methodology adopted by the Board:
-- Uses the most widely recognised form of valuation applied by
market participants as a basis for the valuation of each asset
(quoted active market trading prices for listed investments, NAV
valuations for funds, a valuation based on comparable peers, or
payments on liquidation);
-- Adjusts this valuation to account for illiquidity or
volatility considerations, in order to be conservative (the
Company's investment in Lonestar, for example, is valued on a per
share basis using the trailing 5-day volume weighted average traded
share price); and
-- Deducts estimated taxes and other material expenses that
would fall due in managing each investment or on a disposal to
derive a net realisable value measure for each investment.
d) Valuation process
The Directors are in ongoing communications with the Investment
Manager to discuss valuation methodologies and techniques applied
in assessing fair value. The Directors analyse the investment
portfolio in terms of fair value hierarchy and consider the impact
of general market and credit conditions and/or events which may
impact the valuation of the investment portfolio.
For listed investments, fair value is based on recent bid prices
adjusted as necessary to reflect any taxes and other material
expenses estimated to fall due were the investment to be disposed
of as soon as possible but in an orderly manner, in line with the
break-up basis of accounting.
The Investment Manager is responsible for carrying out the fair
market valuation of the unlisted investments of the Company and
these are presented to the Directors for their approval and
adoption. The valuation principles used in such methodology are
based on IFRS 13 and IPEV guidelines and the following valuation
methodologies:
i. investments in funds are valued at their net asset value,
adjusted as necessary to reflect the fair value of the underlying
investments held and any taxes and other expenses estimated to fall
due were the investment to be disposed of as soon as possible but
in an orderly manner;
ii. investments in bonds are valued at prices quoted by the brokers; and
iii. where a value is indicated by a material arm's length
transaction with a third party in the shares of an investment or a
comparable investment, this value may be considered representative
of fair value adjusted as necessary to reflect any taxes and other
expenses estimated to fall due were the investment to be disposed
of as soon as possible but in an orderly manner.
However, if the Board considers that the basis of valuation is
inappropriate for any particular reason, or generally, it may adopt
such other valuation procedures as it considers reasonable in the
circumstances.
Financial liabilities
Financial liabilities include trade payables and other payables
which are held at amortised cost using the effective interest rate
method. Financial liabilities are recognised initially at fair
value, net of transaction costs incurred and are subsequently
carried at amortised cost using the effective interest rate method.
Financial liabilities are derecognised when the obligation
specified in the contract is discharged, cancelled or expires.
2.5 Investment income, interest income and expenses
Interest income and expenses are recognised in the Statement of
Comprehensive Income on an accruals basis using the effective
interest rate method.
2.6 Operating expenses
Operating expenses are recognised on an accruals basis and are
recognised in the Statement of Comprehensive Income.
2.7 Cash and cash equivalents
Cash includes cash at bank and cash equivalents are short term,
highly liquid investments with original maturities of three months
or less that are readily convertible to known amounts of cash and
are subject to an insignificant risk of change in value.
2.8 Segmental reporting
In accordance with IFRS 8 - "Operating Segments", the Board as a
whole has been determined as constituting "the chief operating
decision maker" of the Company. The Directors are of the opinion
that the Company is engaged in one segment of business, being the
investment business.
2.9 Liquidation provision
As a result of the Company's financial statements being prepared
on a break-up basis, the Board, in liaison with the Investment
Manager, has recognised a liquidation provision. The liquidation
provision includes future funding commitments in relation to
existing investments, estimated liquidation costs which will be
incurred on wind-up of the Company and a working capital
requirement provision. The working capital requirement provision
has been included to provide for future direct operational costs
expected to be incurred in the next 12 months, however the Board
notes that the Realisation Strategy could take longer, between 12
to 16 months. Operational costs include Directors' fees, fees for
third party service providers, professional fees and other sundry
operational expenses incurred as part of the ongoing activities of
the Company. These provisions have been based on underlying
agreements, together with historical financial information from the
Company to date and quotes from third party service providers.
Refer to note 10 for further detail.
2.10 Share capital
Ordinary Shares are classified as equity in accordance with IAS
32 - "Financial Instruments: Presentation" as these instruments
include no contractual obligation to deliver cash and the
redemption mechanism is not mandatory. Costs directly attributable
to the issue of new Ordinary Shares are shown in equity as a
deduction from the proceeds.
3. Taxation
The Company has applied for and been granted exemption from
liability to income tax in Guernsey under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance, 1989 as amended by the Director of
Income Tax in Guernsey for the current period. Exemption must be
applied for annually and will be granted, subject to the payment of
an annual fee, which is currently fixed at GBP1,200 per applicant,
provided the Company qualifies under the applicable legislation for
exemption. It is the intention of the Directors to conduct the
affairs of the Company so as to ensure that it continues to qualify
for exempt company status for the purposes of Guernsey
taxation.
4. Operating expenses
For the
period
from
28 June
2016 to
31 March
2017
GBP
Legal and professional
fees 143,861
Liquidation provision 111,034
Administration fees 53,746
Directors' fees 38,683
Company secretariat fees 27,884
Audit fees 15,033
Non-audit fees - interim
review services 15,000
Registrar fees 13,224
Broker fees 12,917
Sundry expenses 7,276
Custody fees 5,139
Transaction fees 2,401
Total operating expenses 446,198
----------------------------- ----------
Investment Manager fee
On 22 August 2016, the Company signed an Investment Management
Agreement with the Investment Manager. Under the Investment
Management Agreement the Investment Manager has, subject to the
overall supervision of the Board, responsibility for the day to day
management of the Company's Realisation Strategy. The Investment
Manager also has responsibility for advising the Company in
relation to the strategic management of the Company's investment
portfolio and monitoring the Company's funding requirements.
The Investment Manager is not entitled to any annual base
management fee but is eligible to receive a performance fee of 15%
of all Company distributable proceeds over the performance fee
initial value (as defined below), subject to a compounding 10%
hurdle (the "Performance Fee"). The Performance Fee is subject to a
cap of 4% of the Company distributable proceeds (as detailed below)
and will only be payable to the Investment Manager once
Shareholders have received cash distributions of an amount equal to
the performance fee initial value plus the hurdle.
The performance fee initial value will be the aggregate of the
initial value of each asset (excluding Texas Energy Future Holdings
Investments, the WoodFuels Investment and Bluewater Bio Holdings
Limited (the "Nil Value Assets") calculated as the higher of: (i)
the original cost price to EWPO; or (ii) the holding value as at 26
September 2016 (the aggregate of all such valuations being the
performance fee initial value).
The Company distributable proceeds equals the amount distributed
or available for distribution to Shareholders and any performance
fee payable to the Investment Manager. The Investment Manager is
not entitled to a Performance Fee in respect of the Nil Value
Assets.
During the period ended 31 March 2017, the Company incurred a
performance fee of GBPnil.
Administration fee
On 22 August 2016, the Company signed an agreement with BNP
Paribas Securities Services S.C.A., Guernsey Branch, (the
"Administrator") to provide fund administrative and company
secretarial services to the Company. Under the administration
agreement, the Administrator is entitled to a minimum annual fixed
fee for fund administration services and company secretarial
services. These fees are paid monthly in arrears. Ad hoc other
administration services are chargeable on a time cost basis. In
addition, the Company will reimburse the Administrator for any out
of pocket expenses. Administration and company secretarial service
fees payable as at 31 March 2017 were GBP9,054 and GBP3,457,
respectively.
Custody fee
On 22 August 2016, the Company signed a Global Custody Agreement
between the Company and the Administrator, whereby the Company
appointed the Administrator to carry out custodian services. In its
role as custodian, the Administrator is entitled to a fee payable
by the Company of a minimum fixed fee payable monthly in arrears
and transaction by transaction fee basis. Custody fees payable as
at 31 March 2017 were GBP861.
Broker fee
On 22 September 2016, the Company signed a Financial Advisory
Agreement with Winterflood Securities Limited (the "Financial
Advisor"), to provide corporate brokering and financial adviser
services to the Company. Under the agreement, the Financial Advisor
is entitled to a fee payable by the Company of GBP25,000 per annum
payable half yearly in arrears. Broker fees payable as at 31 March
2017 were GBP12,917.
5. Directors' fees and interests
The Directors of the Company are remunerated for their services
with a fee of GBP22,500 each per annum. The Chairman of the Company
and Chairman of the Audit Committee receive an additional GBP5,000
and GBP2,500, respectively, for their services. Directors' fees
payable as at 31 March 2017 were GBP18,750.
As at the date of approval of these unaudited condensed interim
financial statements, Martin Nègre held 271,502 Ordinary Shares in
the Company. No other Director holds shares in the Company.
No pension contributions were payable in respect of any of the
Directors.
6. Other receivables and prepayments
31 March
2017
GBP
Accrued income 12,992
Prepayments 6,945
Intercompany balances -
EFR Guernsey Holding Limited 8,493
Total other receivables
and prepayments 28,430
---------------------------------- ---------
The Directors believe that these balances are fully
recoverable.
7. Financial assets designated at fair value through profit or
loss
31 March
2017
GBP
Financial assets designated
at fair value through profit
or loss 24,867,302
---------------------------------- -------------
The investments of the Company were transferred from EWPO
pursuant to the Scheme of Reconstruction in accordance with the EF
Realisation Transfer Agreement. As at 31 March 2017, the Company
held 100% of the issued share capital of EFR Guernsey Holding
Limited (referred to as the "EFR Guernsey equity interest") and a
diversified portfolio of debt securities and equity investments in
companies. The fair value of the EFR Guernsey equity interest is
based primarily on the share price of Lonestar.
Fair value hierarchy
IFRS 13 requires an analysis of investments valued at fair value
based on the reliability and significance of information used to
measure their fair value. The Company categorises its financial
assets according to the following fair value hierarchy detailed in
IFRS 13, that reflects the significance of the inputs used in
determining their fair values:
Level 1: Investments valued using quoted market prices,
unadjusted, in active markets for identical assets are included in
Level 1. Level 1 investment is in Oro Negro (bond).
Level 2: Financial instruments that are valued using observable
inputs, i.e. quoted market prices, dealer quotations or alternative
pricing sources supported by observable inputs, are classified as
Level 2. Level 2 investments include the Company's investment, via
EFR Guernsey Holding Limited, in Lonestar.
Level 3: Investments classified as Level 3 have unobservable
inputs and these include the Company's unquoted investments
(equity, equity-related and debt instruments of unquoted
companies). Level 3 investments include Bluewater Bio Holdings Ltd
(held at nil value), Eastern Australia Irrigation Ltd, Energy
Future Holdings (equity and bond; held at nil value), Oro Negro
(equity), TRF Feeder Fund (Cayman) LP, TRF LLC and the WoodFuels
investment (held at nil value). These types of securities are
generally subject to higher valuation uncertainties and liquidity
risks than securities listed or traded on a regulated market.
Level 3 fair values are determined by the Directors using
valuation methodologies in accordance with the IPEV Guidelines and
as detailed in note 2.4. Significant inputs include investment
cost, the value of the most recent capital raising, the adjusted
net asset value of funds, and the Directors' assessment of expenses
that may be incurred in the sale of these assets. Carrying values
are reviewed and assessed regularly by the Board, in conjunction
with the Investment Manager, and approved in the Audit Committee
meetings.
31 March
Level Level Level 2017
1 2 3 Total
GBP GBP GBP GBP
Financial assets
----------------------------- -------- ----------- ----------- -----------
Debt instruments 632,880 - - 632,880
Equity instruments - 13,874,967 10,359,455 24,234,422
----------------------------- -------- ----------- ----------- -----------
Financial assets designated
at fair value through
profit and loss 632,880 13,874,967 10,359,455 24,867,302
----------------------------- -------- ----------- ----------- -----------
Financial assets designated at fair value through profit or loss
reconciliation
The following table shows a reconciliation of all movements in
the fair value of financial assets categorised within Level 1 to 3
between the beginning and the end of the reporting period.
31 March
Level Level Level 2017
1 2 3 Total
GBP GBP GBP GBP
---------------------------- --------- ------------- ----------- -------------
Opening valuation - - - -
---------------------------- --------- ------------- ----------- -------------
Movements in the period:
Transfers during the
period from EWPO Scheme
of Reconstruction 409,861 35,520,648 10,140,686 46,071,195
Sales - proceeds during
the period (24,280) (1,200,000) (91,018) (1,315,298)
Realised gain on financial
assets designated
at fair value through
profit or loss(1) 14,242 210,000 91,018 315,260
Unrealised gain /
(loss) on financial
assets designated
at fair value through
profit or loss(2) 233,057 (20,655,681) 218,769 (20,203,855)
Closing valuation 632,880 13,874,967 10,359,455 24,867,302
Total unrealised gains
/ (loss) on financial
assets for the period
ended 31 March 2017 233,057 (20,655,681) 218,769 (20,203,855)
---------------------------- --------- ------------- ----------- -------------
(1) Realised gain on financial assets designated at fair value
through profit and loss is made up of GBP315,260 gain and GBPnil
loss.
(2) Unrealised loss on financial assets designated at fair value
through profit and loss is made up of GBP451,826 gain and
GBP(20,655,681) loss.
During the period ended 31 March 2017, there were no
reclassifications between levels of the fair value hierarchy.
Sensitivity of Level 3 holdings to unobservable inputs
At 31 March 2017, the Company's Level 3 investments accounted
for 41.66% of its assets. Investments accounting for 48.17% of
these Level 3 assets were in funds managed by a third-party manager
which values the funds at an independent expert's estimate of fair
value. The Directors value these investments at net asset value,
adjusted as necessary to recognise the illiquidity of the
investments and any expected costs associated with their sale.
Direct investments in the equity, equity-related or fixed-income
securities of unquoted companies accounted for 51.83% of these
Level 3 assets at 31 March 2017. The Directors valued these
investments according to the valuation methodology outlined
above.
The Directors may consider adjustments to these valuations. The
range of possible adjustments could be large, depending on the
circumstances. The Directors would consider the recommendation of
the Investment Manager. The valuation methodologies applied for the
Level 3 assets are based on independent experts' and Directors'
assessments of fair value, indicative bids for the investments, and
last transactions in the equity or comparable equity. The
unobservable inputs used are discounts applied for illiquidity
which range from 0% to 100%. For the purposes of sensitivity
analysis, a 25 percentage point adjustment in the discount rates
for the Level 3 assets could be considered reasonable. A 25
percentage point adjustment in the discount rates for the Level 3
assets would result in a movement, up or down, in the Company's net
assets of 13.5%.
Please refer to note 2.4 for detail regarding valuation
methodologies used.
EFR Guernsey Holding Limited equity interest
The Company holds a 100% equity interest in EFR Guernsey Holding
Limited. Ordinary shares in EFR Guernsey Holding Limited have no
par value and are redeemable. The Board does not expect income from
EFR Guernsey Holding Limited to exceed significantly the
anticipated annual running costs of EFR Guernsey Holding Limited
and therefore does not expect that EFR Guernsey Holding Limited
will pay significant, or any, dividends although it reserves the
right to do so.
The Lonestar investment is valued in the Company's NAV and
financial statements at its trailing 5-day volume weighted average
share price as reported to the NASDAQ Exchange, adjusted as
necessary for any expected costs associated with its sale.
As at 31 March 2017, EFR Guernsey Holding Limited held one
investment, 4,174,259 shares in Lonestar. Lonestar operates in the
United States and constitutes 51.3% of the Company's investment
portfolio (included as a Level 2 asset in the table above). Please
refer below for a reconciliation of the fair value movements of
Lonestar held by EFR Guernsey Holding Limited. This disclosure has
been included to provide an insight to Shareholders of the
underlying investment portfolio held by EFR Guernsey Holding
Limited.
8. Financial risk management
The Board sets out its investment objectives and policies in the
Interim Management Report. The Board and the Company's Investment
Manager consider and review the principal risks inherent in
managing the Company's assets and these are detailed below.
The Company's activities expose it to a variety of financial
risks: market risk (including price risk, interest rate risk and
foreign exchange risk), credit risk and liquidity risk.
8.1a Price risk
The Company's investment portfolio is subject to fluctuations,
volatility and the vagaries of market prices. As at 31 March 2017,
the Company's investments consisted of a portfolio of equity
investments and debt securities in companies which operate in the
United States, Australia, the UK and Mexico. As the Company has
investments in securities which are listed on recognised stock
exchanges - but which are illiquid - and in unquoted securities, it
is regularly exposed to market risk and the value of the Company's
portfolio can fluctuate, particularly over the short-term, in
response to developments in financial markets.
The performance of the EFR Guernsey Holding Limited equity
interest is substantially driven by the market price of Lonestar.
Lonestar is a public company whose shares are listed on the NASDAQ
Exchange in the US. Lonestar acquires and develops shale reserves
in Texas in the United States, sells the oil, gas and gas liquids
produced and is exposed to the commodity price, operating,
environmental and other risks associated with the oil and gas
industry. The Company values Lonestar in its NAV and financial
statements at its trailing 5-day volume weighted average share
price as reported to the NASDAQ Exchange less estimated costs
(taxes and other expenses) that may be associated with the
realisation of the investment.
Investments that are not traded in an active market, as detailed
in note 7, are subject to significant judgements, estimates or
assumptions when determining their fair value. The valuation
provided at period end is only an estimate of value and is not a
precise measure of realisable value. Ultimate realisation of the
market value of an asset depends to a great extent on economic and
other conditions beyond the control of the Company, and valuations
do not necessarily represent the price at which an investment can
be sold or that the assets comprising the investment portfolio are
saleable readily or otherwise. As a result the estimated fair
values may differ from the values that would have been realised had
a ready market existed and the difference could be material.
Any significant event which affects a specific industry sector
in which the investment portfolio has a significant holding could
materially and adversely affect the performance of the Company. The
Board and Investment Manager actively monitor market prices and
performance of investments throughout the financial period and meet
regularly in order to consider the Realisation Strategy. Please
refer to the Investment Manager report for further detail regarding
the Company investment portfolio.
8.1b Interest rate risk
Interest rate risk is the risk that the fair value of financial
instruments and related income from these financial instruments and
cash and cash equivalents will fluctuate due to changes in market
interest rates.
The Company is only exposed to interest rate risk through the
fair value of investments in fixed interest securities and cash and
cash equivalents which, at 31 March 2017, were valued at
GBP4,235,650 in total (15.66% of NAV).
Any reasonable change in interest rates will have an immaterial
impact and therefore no sensitivity analysis has been provided.
8.1c Foreign currency risk
Foreign currency risk is the risk that the values of the
Company's assets and liabilities are adversely affected by changes
in the values of foreign currencies by reference to the Company's
functional currency. The value of the Company's assets and the
total return earned by the Company's Shareholders can be
significantly affected by foreign exchange movements as most of the
Company's assets are denominated in currencies other than Sterling,
the currency in which the Company's unaudited condensed interim
financial statements are prepared.
The Investment Manager monitors the Company's exposure to
foreign currencies and reports to the Board on a regular basis. The
Investment Manager measures the risk to the Company of the foreign
currency exposure by considering the effect on the Company's NAV of
a movement in the exchange rate to which the Company's assets,
liabilities, income and expenses are exposed.
Although the Company does not pursue a policy of hedging such
currencies back to Sterling, it may do so from time to time,
depending on market conditions. The Company may enter into currency
hedging transactions for the purposes of efficient portfolio
management, including matching the currency of expected
liabilities. During the period ended 31 March 2017, the Company did
not use financial instruments to manage or mitigate the foreign
currency exposure.
The following table sets out the Company's total foreign
currency exposure and the net exposure to foreign currencies of the
monetary assets and liabilities as at 31 March 2017:
Currency exposure 2017 2017 2017 2017
Investments Cash Other net Total net
current assets
assets attributable
/ to ordinary
(liabilities) Shareholders
GBP GBP GBP GBP
------------------- ------------ ---------- --------------- --------------
United States
Dollar 19,757,567 1,288,404 (785,460) 20,260,511
Australian
Dollar 5,109,735 - - 5,109,735
Sterling - 2,314,367 (634,444) 1,679,923
------------------- ------------ ---------- --------------- --------------
Total 24,867,302 3,602,771 (1,419,904) 27,050,169
------------------- ------------ ---------- --------------- --------------
The following analysis demonstrates the impact of a 15% movement
in the exchange rate of Sterling against the United States Dollar
and Australian Dollar on the net assets attributable to ordinary
Shareholders, with all other variables held constant.
Effect on
net assets
attributable
Change in exchange to ordinary
rate Shareholders
31 March 2017 Increase/(decrease) Increase/(decrease)
GBP
----------------------- --------------------- --------------------
Sterling versus (3,039,077)
United States Dollar 15% / (15%)(1) / 3,039,077
------------------------ --------------------- --------------------
Sterling versus (766,460)
Australian Dollar 15% / (15%)(1) / 766,460
------------------------ --------------------- --------------------
(1) 15% has been assessed at 31 March 2017 as a reasonably
possible movement in currency rate sensitivity over the period. It
is not intended to illustrate a remote, worst case or stress test
scenario.
As at 31 March 2017, the Company was exposed to foreign currency
risk exposure on its investment position in EFR Guernsey Holding
Limited equity interest holding. EFR Guernsey Holding Limited does
not use financial instruments to manage or mitigate foreign
currency exposure.
8.2 Credit risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company. The Board, with input from
the Investment Manager, monitors the credit quality of all
counterparties on a periodic basis to mitigate credit risk. The
Company's credit risk exposure as at the Statement of Financial
Position date was GBP4,235,650, represented by a debt instrument
position of GBP632,879 and cash and cash equivalents of
GBP3,602,771. As at 31 March 2017 there were no items past due or
impaired.
The financial assets designated at fair value through profit or
loss are held by BNP Paribas Securities Services S.C.A, Guernsey
branch, the Company's Administrator and custodian, in a segregated
account. In the event of bankruptcy or insolvency of the
Administrator, the Company's rights with respect to the securities
held by the custodian may be delayed or limited. All cash is placed
with BNP Paribas Securities Services S.C.A, a wholly owned
subsidiary of BNP Paribas Securities Services S.A. which is
publicly traded and a constituent of the S&P 500 Index with a
long term credit rating of A from Standard & Poor's.
8.3 Liquidity risk
Liquidity risk is the risk that the Company will not be able to
settle its liabilities as they fall due. The Company may encounter
difficulties in realising assets in accordance with the Realisation
Strategy or otherwise raising funds to meet financial commitments
as and when these fall due for payment. The liquidity profile of
the Company's investment portfolio is such that Shareholders may
have to wait a considerable time before receiving all of their
distributions pursuant to the Realisation Strategy.
Liquidity risk is monitored on an ongoing basis by the Board and
Investment Manager so as to ensure that the Company maintains
sufficient working capital in cash or near cash form so as to be
able to meet the Company's ongoing requirements to pay accounts
payable and accrued expenses. In addition, the Company's liquidity
management policy involves projecting cash flows and considering
the level of liquid assets necessary to meet these.
The table below shows the residual contractual maturity of the
financial liabilities as at 31 March 2017:
Maturity analysis of financial liabilities
Less than 3 to 12 More than
3 months months 1 year Total
GBP GBP GBP GBP
Financial liabilities
Other payables (88,639) - - (88,639)
Total financial
liabilities (88,639) - - (88,639)
----------------------- ---------- -------- ---------- ---------
In accordance with Article 23(4)(a) and (b) of the AIFMD
Directive, the Board in its capacity as the AIFM has assessed that
the financial assets designated at fair value through profit or
loss held by the Company are not subject to any special liquidity
arrangements and that the AIF has no new arrangements in place for
managing liquidity, other than liquidity policies outlined
above.
Capital risk management
The Board defines capital as financial resources available to
the Company. The Company's capital as at 31 March 2017 comprises
its share capital at a total of GBP47,157,530. The Company's
objectives when managing capital are to:
- safeguard the Company's ability to fulfil its investment objective;
- provide returns for Shareholders; and
- maintain sufficient working capital.
The Board monitors the capital adequacy of the Company on an
ongoing basis and the Company's objectives regarding capital
management have been met. The Company has no imposed capital
requirements.
9. Other payables
31 March
2017
GBP
Audit fees 24,968
Directors' fees 18,750
Sundry other payables 13,923
Broker fees 12,917
Administration fees 9,054
Registrar fees 4,709
Company Secretariat
fees 3,457
Custody fees 861
Total other payables 88,639
-------------------------- ---------
10. Liquidation provision
The Company has a liquidation provision of GBP1,359,695 which
includes future funding commitments (GBP785,460) in relation to one
existing investment, estimated liquidation and other costs
(GBP174,235) expected to be paid on ultimate wind-up of the
Company, and a working capital requirement provision (GBP400,000).
GBP1,244,779 of the liquidation provision was taken on as part of
EWPO's Scheme of Reconstruction and has therefore not been
recognised in the Statement of Comprehensive Income. Refer to
Interim Management Report for detail regarding EWPO's Scheme of
Reconstruction.
11. Share capital
Authorised
The authorised share capital of the Company is represented by an
unlimited number of redeemable Ordinary Shares at no par value.
Allotted, called up and fully-paid
Ordinary Shares Number Share
of shares capital
GBP
-------------------- ------------- -------------
Total issued share
capital as at 28 - -
June 2016
-------------------- ------------- -------------
Ordinary Shares
issued during the
period 52,473,634 47,184,416
----------------------- ------------- -------------
Share issue costs (26,885)
----------------------- ------------- -------------
Ordinary Shares
redeemed during
the period (1) (1)
----------------------- ------------- -------------
Total issued share
capital as at 31
March 2017 52,473,633 47,157,530
----------------------- ------------- -------------
Ordinary Shares
On incorporation, the Company issued one Ordinary Share at a
price of GBP1 to Ecofin Limited. On 22 September 2016, the Company,
pursuant to the Scheme of Reconstruction under section 110 of the
Insolvency Act 1986 (as amended) of EWPO, issued a further
52,473,633 Ordinary Shares at a price of GBP0.8992 per Ordinary
Share, raising gross proceeds of GBP47,184,416 (net proceeds of
GBP47,157,531). The newly issued 52,473,633 Ordinary Shares were
admitted to trading on the Specialist Fund Segment of the Main
Market of the London Stock Exchange with effect from 26 September
2016. The costs and expenses of the initial placing of Ordinary
Shares attributable to the Company pursuant to the Scheme of
Reconstruction were paid for by EWPO, with the exception of listing
fees of GBP26,885 which were paid for by the Company. On 23
September 2016, the Company redeemed the one Ordinary Share that
was issued to Ecofin Limited for a consideration of GBP1. As at 31
March 2017, the Company had 52,473,633 Ordinary Shares in
issue.
Each holder of Ordinary Shares is entitled to attend and vote at
all general meetings that are held by the Company and have equal
rights. Each holder is also entitled to receive payment of a
dividend should the Company declare such a dividend payment. Any
dividends payable by the Company will be distributed to the holders
of the Company's Ordinary Shares, and on the winding-up of the
Company or other return of capital (other than by way of a
repurchase or redemption of shares in accordance with the
provisions of the amended and restated Articles of Incorporation
(the "Articles") and the Companies Law), the Company's surplus
assets, after payment of all creditors, will be distributed among
the holders of the Ordinary Shares.
Although it is not expected that the Company will receive any
income during the realisation period, to the extent that it does
receive income, the Board intends to distribute to Shareholders all
of the income received by the Company, net of reasonable expenses,
during the realisation period (subject to compliance with the
Companies Law). The Board intends to consider with its advisers the
most efficient method of returning capital to Shareholders during
the realisation period as the Company investment portfolio is
realised, including the compulsory redemption mechanism as detailed
below.
No dividends have been declared or paid during the period.
Compulsory redemption mechanism
The Board intends to operate the compulsory redemption mechanism
set out below as the Company's investments are realised, however it
will seek to adopt the most efficient method of returning capital
to Shareholders at the time which may include a tender offer and/or
other capital return schemes.
The Articles provide that the Company may make compulsory
redemptions of Ordinary Shares, with the timing and size of such
redemptions being determined at the sole discretion of the
Directors, reflecting the available cash at the relevant time,
subject to any retention made for working capital. Shares will be
redeemed from all Shareholders pro rata to their existing holdings
of Ordinary Shares on the relevant record date for any given
redemption being a date chosen at the Directors' absolute
discretion, as determined by the Directors to be in the best
interests of Shareholders as a whole (the "Redemption Date").
When the Directors exercise their discretion to redeem
compulsorily a given percentage of the Ordinary Shares in issue,
the Directors will make a redemption announcement in advance of the
relevant Redemption Date. The redemption announcement will include
the following details:
-- the aggregate amount to be distributed to Shareholders;
-- the Redemption Date;
-- the percentage of the Ordinary Shares to be redeemed (pro
rata as between Shareholders on the redemption record date being
the close of business on the relevant Redemption Date or as
otherwise set out in the relevant redemption announcement (the
"Redemption Record Date");
-- the Redemption Price per Ordinary Share (being the price per
Ordinary Share at which Ordinary Shares will be redeemed on a
particular Redemption Date as determined by the Directors (the
"Redemption Price")); and
-- any additional information that the Board deems necessary in
connection with the redemption.
Redemptions of Ordinary Shares will become effective on each
Redemption Date. In determining the timing of any Redemption Date,
the Directors will take into account the amount of cash available
for payment of redemption proceeds and the costs associated with
such redemption and the working capital requirements of the
Company. The Ordinary Shares redeemed will be the relevant
percentage (being a percentage of the shares to be redeemed by the
Company on a given Redemption Date as determined by the Directors
in their ultimate discretion), of the Ordinary Shares registered in
the names of Shareholders on the Redemption Record Date.
Shareholders will receive the Redemption Price per Ordinary Share
in respect of each of their Ordinary Shares redeemed
compulsorily.
Liquidation resolution
Subject to any extension of the period of time granted by
special resolution of the Company (described below), the Directors
shall convene a general meeting as soon as reasonably practicable
after the realisation of all of the realisable investments held by
the Company as decided by the Board in their discretion, and in any
event no later than the second anniversary of Admission (or such
later date as determined in accordance with the Articles). At such
general meeting, the Directors shall propose an ordinary resolution
that the Company should be voluntarily wound up (the Liquidation
Resolution).
Every Shareholder present in person or by proxy voting in favour
of the Liquidation Resolution shall have such number of votes as
are required for the Liquidation Resolution to be duly passed.
With effect from the passing of the Liquidation Resolution, a
liquidator will be appointed and the Company shall cease to carry
on business except in so far as may be expedient for the beneficial
winding up the Company. At any time prior to the general meeting at
which the Liquidation Resolution is to be proposed, the Company may
by special resolution extend the deadline for proposing such
liquidation period for a period of one year and thereafter may
extend such deadline for additional periods of one year in each
case by a further special resolution.
12. Basic and diluted earnings per Ordinary Share
For the
period
from
28 June
2016 to
31 March
2017
GBP
Total comprehensive loss
for the period (20,107,361)
Weighted average number of
Ordinary Shares during the
period 36,182,180
Basic and diluted earnings
per Ordinary Share (0.5557)
The weighted average number of Ordinary Shares during the period
is calculated on the basis that one Ordinary Share was in issue
during the period from incorporation to 21 September 2016,
52,473,634 Ordinary Shares were in issue on the 22 September 2016,
and 52,473,633 Ordinary Shares were in issue during the period from
23 September 2016 to 31 March 2017.
13. Net asset value per share
31 March
2017
GBP
Net asset
value 27,050,169
Number of Ordinary
Shares at period end 52,473,633
Net asset value per
Ordinary Share 0.5155
14. Related party disclosure
The Investment Manager is deemed a related party. Please refer
to note 5 for further detail.
The Directors are entitled to remuneration for their services.
Please refer to note 5 for further detail. Martin Nègre was a
director of EWPO until September 2016 and is currently a
non-executive director of funds managed by the Investment
Manager.
For Director fees payable as at 31 March 2017, please refer to
note 9. No investment manager performance fee was payable as at 31
March 2017.
15. Material events after the reporting date
There were no events which occurred subsequent to the period end
until the date of approval of the unaudited condensed interim
financial statements which would have a material impact on the
unaudited condensed interim financial statements of the Company as
at 31 March 2017, except as set out below:
On the 30 May 2017, Lonestar announced that it has entered into
definitive agreements with unaffiliated parties to acquire oil and
gas properties in the Eagle Ford Shale play for a total purchase
price of approximately $116.6 million, consisting of $105 million
in cash and 2.6 million Lonestar Class A common shares. Lonestar's
financing for the acquisition is fully committed with the private
placement of Convertible Preferred Stock and borrowings from its
Senior Secured Credit Facility.
During the period 31 March 2017 to 31 May 2017, the NAV per
share fell from 51.55p to 47.50p as a result of a decrease in the
fair value of Lonestar and adverse movements in foreign currency
translation.
16. Controlling party
In the Directors' opinion, the Company has no ultimate
controlling party.
Company information
Legal advisers to the
Board members Company
Martin Nègre (Chairman) (as to Guernsey law)
Robert Sinclair (Chairman Carey Olsen
of the Audit Committee) P.O. Box 98
Nick Tostevin (Chairman Carey House
of the Management Engagement Les Banques
Committee) St Peter Port
Guernsey
All Directors were appointed GY1 4BZ
on the 28 June 2016
with the exception of
Martin Nègre who
was appointed on the
20 July 2016.
Registered Office Custodian
BNP Paribas Securities
BNP Paribas House Services S.C.A., Guernsey
St Julian's Avenue Branch
BNP Paribas House
St Julian's Avenue
St Peter Port St Peter Port
Guernsey Guernsey
GY1 1WA GY1 1WA
Registrar Independent Auditor
Capita Registrars (Guernsey) Ernst & Young LLP
Limited Royal Chambers
Mont Crevelt House St Julian's Avenue
Bulwer Avenue St Peter Port
St. Sampson Guernsey
Guernsey GY1 4AF
GY2 4LH
Administrator and Company
Secretary Investment Manager
BNP Paribas Securities
Services S.C.A., Guernsey Ecofin Limited
Branch Burdett House
BNP Paribas House 15 Buckingham Street
St Julian's Avenue London
St Peter Port WC2N 6DU
Guernsey
GY1 1WA
BNP Paribas Securities Ecofin Limited is regulated
Services S.C.A. Guernsey by the Financial Conduct
Branch is regulated Authority and the Securities
by the Guernsey Financial and Exchange Commission.
Services Commission.
Financial Adviser UK Transfer Agent
Winterflood Securities Capita Registrars Limited
Limited (trading as Capita
The Atrium Building Asset Services)
Cannon Bridge House The Registry
25 Dowgate Hill 34 Beckenham Road
London Beckenham
EC4R 2GA Kent
BR3 4TU
Legal advisers to the
Company
(as to English law)
Norton Rose Fulbright
LLP
3 More London Riverside
London
SE1 2AQ
- ENDS -
Enquiries:
BNP Paribas Securities Services S.C.A., Guernsey Branch
01481 750 822
Company Secretary
Sarah Hendry
A copy of the Company's Interim Financial Report will be posted
to the shareholders of the Company. Copies are also available from
the Company Secretary, BNP Paribas Securities Services S.C.A.,
Guernsey Branch at BNP Paribas House, St Julian's Avenue, St Peter
Port, Guernsey, GY1 1WA, or on the Company's website
www.ecofin.co.uk.
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR QQLFBDQFBBBF
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