The Company is a public limited liability company incorporated
for an unlimited term. The registered office of the Company is
established at 25C, Boulevard Royal, L-2449 Luxembourg. Information
pertaining to the Company is included to the extent required by the
London Stock Exchange listing rules. This information should not
deem to represent statutory annual accounts, which are separately
prepared in accordance with International Financial Reporting
Standard ("IFRS") as adopted by the European Union ("EU").
2. Basis of preparation
2.1 Statement of compliance
These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standard Board
(IASB), and adopted by the European Union ("EU").
These consolidated financial statements are presented for the
year ended 30 September 2014, with comparative figures for the year
ended 30 September 2013.
The consolidated financial statements have been approved for
issue by the Board of Directors on 29 January 2015.
2.2 Going concern
The consolidated financial statements have been prepared on a
going concern basis. It is the assessment of the Board of Directors
that the Group will continue as a going concern for at least twelve
months from the date of the issue of these consolidated financial
statements. In forming this opinion, the Board of Directors has
considered its ability to meet liabilities as they fall due and the
continued availability of the Group's interest bearing loans and
borrowings. As at the date of issue of these consolidated financial
statements, there is no breach of any of the covenants of either
the Senior Facility provided by Bank of America Merrill Lynch
International Limited ("BAML", or "the Senior Lender"), or the
Mezzanine Facility provided by Blackstone Real Estate Debt
Strategies ("BREDS", or "the Mezzanine Lender"), an affiliate of
the Blackstone Group LP ("Blackstone").
The Board of Directors has identified the Group's need to
sustain the costs of its borrowings with limited amounts of working
capital as one of the key risks to the going concern basis. The
primary objective of the Group is therefore to reduce its debt
costs. The new loan facilities entered into during the financial
year with BAML and BREDS have a flexible structure that will enable
the Group to reduce its borrowing costs from an interest rate
margin of 770 bps above 3M EURIBOR to 470bps over 3M EURIBOR (the
"Step-Down" event) in the event that the Group succeeds in paying
down enough of the mezzanine facility that its outstanding BREDS
indebtedness is reduced to EUR35m or below, among other
conditions.
The primary means of raising the capital required to reach the
Step-Down will be the pursuit of the Group's ongoing disposal
programme. The Group's Investment Manager (Internos Global
Investors) has identified that there is likely to be a funding gap
between sales proceeds and the repayment required to reach the
lower interest rate, and is pursuing a number of options with the
aim of securing additional funding for the gap. In the meantime the
Group is continuing with the sale strategy that was outlined in the
annual business plan provided to the Mezzanine Lender and reviewed
30 days before the end of the calendar year.
One of the consequences of pursuing the disposal programme will
be the sale of income-producing assets, which, given the current
cash constraints on the Group, is forecast to result in a breach of
the Interest Cover and Projected Debt Yield Covenants of the
Mezzanine Loan Facility. There is, therefore, a significant risk
that as a result of sales expected to be completed during the next
twelve months there will be a breach of covenants of the Mezzanine
Facility Agreement during the coming financial year.
At the time of a breach of the Mezzanine Facility Agreement,
BREDS would have the following options:
c) Enforce their security over the Group, thereby taking
effective control of the Group and possibly initiating a sale of
the assets. It is likely that this course of action would result in
a significant reduction in the proceeds received from the
accelerated sale of the Group's property assets and consequently
the amount of equity returnable to shareholders.
d) The Mezzanine Facility Agreement includes a provision for a
Default Rate of interest, which can be applied in the event of such
a breach, at the discretion of the Mezzanine Lender. This would
mean an additional 300 bps of interest on top of the current margin
of 770 bps. In the event that the Group is unable to support this
additional interest cost, a mechanism exists whereby it is possible
that the Mezzanine Lender may (but is not obliged to) allow unpaid
interest to be treated as an accruing liability on the balance
sheet of the Fund, thereby reducing the Net Asset Value.
The risks mentioned above are mitigated by a combination of
potential waivers from the Mezzanine Lender and the ongoing efforts
to secure a capital investment that will bring about the Step-Down.
In the light of this, the Company has recently appointed the
leading real estate investment bank Eastdil Secured LLC
("Eastdil"), part of Wells Fargo & Company, to undertake a
strategic review and advise it on a range of options, including the
sale of subsidiary undertakings owning the core portfolio. While
there can be no certainty of a transaction resulting, the directors
believe that the resources and experience of Eastdil will enhance
the Company's capability of navigating through the current
difficult waters.
On the basis of the Lender's stated approval of and support for
the Group's business plan provided to the Mezzanine Lender and
reviewed 30 days before the end of the calendar year, which
requires time and stability to enable the successful sale of assets
needed to achieve the Step-Down, it is expected that waivers will
be granted in the event of a breach of the Mezzanine Facility
Agreement. BREDS will not commit unconditionally to future waivers,
although the ongoing process run by Eastdil, which has been
initiated in close consultation with BREDS, is strongly in the
interest of the Mezzanine Lender as it is designed to secure
additional capital for the core portfolio, which, along with the
expected disposal proceeds, would reduce leverage to the target
level specified by the Step-Down. It is therefore anticipated that
while the Group continues to pursue the current agreed Business
Plan, temporary waivers should be granted to cover breaches brought
about by asset disposals. If further waivers were not granted, the
Group would be in breach of the Projected Debt Yield and Interest
Cover Covenants.
The combination of circumstances described above indicates the
existence of a material uncertainty which may cast significant
doubt about the Group's ability to continue as a going concern.
Nevertheless, in the light of the options which remain open to the
Group for financing the funding gap, as well as the Mezzanine
Lender's support for the Group's present course, the Board has
decided to continue to adopt the going concern basis of accounting
in preparing the annual consolidated financial statements.
2.3 Functional and presentation currency
These consolidated financial statements are presented in euro,
which is the Company's presentation and functional currency. All
financial information presented in euro has been rounded to the
nearest thousand.
2 Basis of preparation (continued)
2.4 Basis of measurement
The consolidated financial statements have been prepared on the
historical cost basis except for the investment properties and
derivative financial instruments that have been measured at fair
value.
The consolidated financial statements are prepared on a going
concern basis.
2.5 Use of estimates and judgements
The preparation of the consolidated financial statements in
conformity with IFRS requires management to make judgments,
estimates and assumptions that affect the application of the
accounting policies and the reported amounts of assets,
liabilities, income and expenses. Actual results may differ from
these estimates. Estimates and underlying assumptions are reviewed
on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimates are revised and in
any future periods affected.
Information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies that have
the most significant effect on the amounts recognised in the
consolidated financial statements are described in note 4.
Measurement of fair values
A number of the Group's accounting policies and disclosures
require the measurement of fair values, for both financial and
non-financial assets and liabilities. The Group has an established
control framework with respect to the measurement of fair values.
This includes the Investment Manager that has overall
responsibility for overseeing all significant fair value
measurements, including Level 3 fair values, and reports directly
to the Board of Directors.
The Investment Manager regularly reviews significant
unobservable inputs and valuation adjustments. If third party
information, such as broker quotes or pricing services, is used to
measure fair values, then the Investment Manager assesses the
evidence obtained from the third parties to support the conclusion
that such valuations meet the requirements of IFRS, including the
level in the fair value hierarchy in which such valuations should
be classified. Significant valuation issues are reported to the
Group Audit Committee.
When measuring the fair value of an asset or a liability, the
Group uses market observable data as far as possible. Fair values
are categorised into different levels in a fair value hierarchy
based on the inputs used in the valuation techniques as
follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
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