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Archive for the Category ◊ Unsecured Financing ◊

Adara Power, EGIA Partner on Financing
Sunday, March 19th, 2017 | Author:

lt;img class= wp-image-122827 alignleft src=×122.jpg alt=finance width=231 height=141 srcset=×122.jpg 200w,×91.jpg 150w, 500w sizes=(max-width: 231px) 100vw, 231px /gt;Energy storage provider Adara Power and the Electric amp; Gas Industries Association (EGIA) have partnered to offer five financing options.

Two of the options are aimed solely at residential customers, according to the press release. Two are aimed at commercial customers. No residential or commercial designation is made on the fifth. Two of the five programs include Property Assessed Clean Energy (PACE) financing elements.

The Benji Unsecured Financing program is an unsecured platform that can be used with Renovate America’s HERO PACE program. It enables energy and non-energy upgrades costing as much as $50,000 with payment periods of 5, 7 or 10 years with 6 or 12 interest- and payment-free months options.

The Energy Wise Lease Program is aimed at the commercial market. It offers leases for facility upgrades in amounts from $20,000 to $99,999.99. The Commercial Financing Program is aimed at larger projects. It has terms as long as 10 years and loan amounts to $5 million.

In what is seen as good news for the nascent PACE financing, Morningstar Credit Ratings has endorsed the approach:

In a new report, however, Morningstar Credit Ratings said PACE loans present little risk of driving a borrower into a foreclosure, and could bolster property values and save the homeowner money in efficiency improvements. The securities backed by the PACE revenue streams also are highly rated, Morningstar said.

The story says that PACE, to this point, is more common in the commercial sector.

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Another important event for us was, as you have seen, the issue of our inaugural bond in January. We used the refinancing of subsidized debt as a trigger event to tap the bond market and to take advantage of the current very favorable terms for unsecured financing and to diversify our debt structure. Issued at interest cost of 1.34%, the bond currently trades in secondary market at an in-place credit margin of only around 60 to 65 basis points, providing strong evidence for LEGs very low cost of capital.

Let me now give you a brief overview of the development of our key operating and financial KPIs in fiscal year 2016. In absence of mere cost rent adjustments, we saw a decent like-for-like rent growth of 2.5% with sound growth of our free-financed units of 3.4%.

Our like-for-like vacancy rate stayed at a low level of 2.9%, but slightly up versus previous year, due to some organizational changes on our operating units in the second half of the year, as a temporary effect. As you know, we achieved these letting results with a high capital discipline and investments of around EUR18 per square meter.

Coming to the financials, we saw the expected very strong earnings growth with FFO slightly exceeding our guidance. Our FFO climbed by 30.2% to EUR268.3 million, or by plus 20.7% to EUR4.26 on a per share basis. A significant boost of our operating margins pre-maintenance costs of 380 basis points was an important driver for this.

As a result, our shareholders will also benefit from the strong rise of our dividend. The dividend proposal is EUR2.76, an increase of 22.1% versus last year.

Finally, our reported NAV at year-end stands at EUR67.15 per share, up 14% year on year based on the still attractive rental yield of 6.6%.

In light of the price dynamic in the market, we are going to conduct our next portfolio appraisal already in Q2. And we are confident that you can expect further capital growth.

With that, I would like to hand over to Holger.


Holger Hentschel, LEG Immobilien AG – COO [4]


Yes, thank you, Thomas and good morning from my side. I would like to continue with the slide 6. As already mentioned, we saw again a very descent rental growth of 2.5% for our entire portfolio and of 3.4% for free-financed units, within the line with our targets.

We continue to see a broad based upswing in our market and we observe especially an accelerating positive momentum in the catchment area of the economic center. LEGs portfolio is highly exposed to this positive trend.

Around 93% of the LEG portfolio, we see this on slide 7, is located within the 60 kilometer commuting distance of attractive swarm cities, such as Cologne, Dusseldorf, or university cities such as Aachen and Munster.

Generally, affordability in cities such as Cologne and Dusseldorf is still in a favorable situation also relative to some metropolitan areas in Germany. And this especially was true to the commuter belt. LEG, within its portfolio structure, should therefore be in a very good position to outperform the broader market.

Coming to the next slide 8, as usual we would like to highlight just a few local markets to illustrate the underlying rent dynamics in our portfolio. In our high growth markets, we saw again a strong rent momentum in Dusseldorf with a growth rate of 3.55%. In the free-financed part, rents grew by 4.9%.

In the district of Mettmann, within the catchment area of Dusseldorf, we saw very dynamic growth in towns like Mulheim or Ratingen. In Mulheim, where we own more than 3,400 units, rent grew by 4.5%. In Ratingen, at the border of Dusseldorf, our sub-portfolio contains a high share of subsided units. Here our free-financed units grew by an impressive 6.5%.

In our stable markets, we achieved a very strong performance in Hamm, where we own more than 4000 units, with a rent growth of around 3% and of 4.1% for our free-financed units.

Finally, in our higher yielding markets, we achieved a strong rent growth of 3.3% in our important Duisburg market where we managed more than 7,000 units.

Let us now move to slide number 9. Our like-for-like vacancy stayed at a low level of 2.9%, a slight increase versus previous years. Record low is attributable to organizational changes of our operational units, which had a short-term negative impact on our letting activities in the fourth quarter. This is only a temporary effect and we expect catch-up effects starting Q2. For the whole fiscal year 2017, we expect again a further rise in like-for-like occupancy.

Coming to slide 10, which illustrates our maintenance and CapEx spending. In 2016, we invested around EUR18.20 per square meter in our portfolio, with a share of value enhancing CapEx of slightly above 50%. Due to the tailwinds we are seeing from the market, we started an additional investment program as an additional growth initiative.

Therefore, we are currently targeting higher total investments of around EUR24 per square meter in 2017 and of around EUR29 per square meter in 2018 and 2019. As of today, I see the chance that our investments could even be somewhat higher.

With that, Id like to hand over to Eckhard for the more insight to the financials.


Eckhard Schultz, LEG Immobilien AG – CFO [5]


Thank you, Holger and also good morning from my side. Let us now have a look at the financial key metrics on slide 12.

It was a strong financial performance in 2016, with an FFO per share growth of more than 20%, as a result of LEGs very focused business model and growth strategy. We saw a significant further expansion of our operating margins. The structural advantages of a regionally concentrated portfolio, high synergies from acquisitions in our core markets and our strict cost discipline are the key drivers for this.

A leading operating profitability in combination with a comparatively high rental yield from the comp basis for very attractive cash returns for our shareholders.

Our adjusted EBITDA margin improved by around 220 basis points on a yearly basis to 69.5%. Adjusted for the higher maintenance expenses, our adjusted EBITDA margin pre-maintenance expenses even jumped by 380 basis points over the same period. And also on the property management level, we further improved the efficiency with the rising NRI margin pre-maintenance costs of more than 100 bps.

And as you know, there is a short-term drag from our comparatively higher share of rentals for these units and our operating margins, which will vanish over time. If you want to compare apples to apples within the industry, adjusted for this effect, LEGs EBITDA margin even would be around 150 basis points higher.

Especially over the last 12 months, weve put a lot of management efforts in the further optimization of our internal structures and processes. We have laid the foundation for further improvement of our operating margin and therefore, for further attractive bottom line growth in the years to come, even in a scenario without acquisitions.

By the way, we have become more optimistic on acquisitions since the start of the year and therefore, the risk to our projected earnings appears to be on the upside.

On slide 13, the summarized income statement also reveals a positive impact from our top line growth and from our margin expansion. Positive earnings contributors were, of course, also the revaluation result and our asset disposal, with pre-tax disposal gains of EUR25 million, which are a strong confirmation of LEGs portfolio valuation. A smaller part of the sales profit, of around EUR8 million, is included in the revaluation result.

As already discussed in previous calls, the reported admin costs were affected by one-off acquisition costs. The underlying recurring admin cost decreased noticeably, despite the strong volume growth and despite the regular wage adjustment, which is a very impressive result as we believe.

Further down the Pamp;L line, the net financing costs include one-off costs of around 60 million for the early refinancing of subsidized loans as the IFRS value, as you know, are below their nominal values.

On slide 14, we present the FFO. This chart again shows the very dynamic development of our recurring earnings. As already mentioned, the adjusted NRI margin slightly decreased, due to higher maintenance costs. Adjusted for this effect, our NRI margin climbed by more than 100 basis points.

Important drivers for this were only a moderate increase of our staff costs, including wage inflation compared to the volume growth and also the earnings contribution from our energy service business. The development of staff costs perfectly shows the high potential for synergies from acquisitions in core markets.

On the overhead level, our corporate platform was able to fully absorb the portfolio growth. As a result of our efficiency program, our recurring admin costs even decreased by more than EUR4 million in absolute numbers to EUR32.1 million. This result contains a minor positive impact from the release of the provision. But also without this effect, the result is exceeding our internal target.

Moreover, the FFO result benefits from further reduced average cost of debt and lower interest charges, despite the higher financing volume. As a result, we saw the jump in FFO I to EUR268.3 million.

On chart 14 you find an overview of the drivers contributing to our FFO growth.

On slide 17, you find the calculation of our current reported NAV. After the portfolio revaluation in Q4, the adjusted EPRA-NAV, excluding goodwill, stands at EUR67.15 per share. The portfolio valuation only includes moderate yield compression so far.

The rental yield on the resi portfolio remains at an attractive level of 6.6%. The rental yield for the free-financed portfolio stands at 6.7%. This is clearly above the average asking prices for portfolio deals we are seeing in the market. Such a rental yield supports high cash returns and it provides a strong argument for future capital growth.

In the coming years, we expect like-for-like rent growth north of 3%. This is backed by a positive net immigration and high affordability. And against this backdrop, I think, you can find strong arguments that such a portfolio yield offers attractive relative value.

Given the current strong price dynamics in the market, we think it makes sense to conduct two portfolio appraisals per annum. And therefore, you can expect the next valuation uplift with the release of our Q2 results.

On chart 18, we provide an overview of our revaluation results in 2016. The revaluation gains amounted to 8.4%, or 6.0% excluding the refinancing effect of the subsidized loans. The operating performance and the development of market rents was the most important value driver, followed by a moderate adjustment of the discount rate.

The regular valuation uplift in our high growth and on our stable markets was at the same level. While there was a stronger impact from yield compression in high growth markets. The above average catch-up potential for rent in many regions in the commuter belt of A cities had a positive impact on the respective valuations in our stable markets.

The increasing spillover effect to the commuter belt is presently an exciting development in the German residential market and especially for LEG.

Based on current in-place rents, the portfolio yield for the different market segments are between 5.4% for our orange market and 7.9% for our purple market. According to CBRE data, our in-place rents are around 10% below market rents.

Coming to slides 21 and 22. Our LTV at end of Q4 stands at 44.9%. As we do not intend to use yield compression for leveraging up our business, the LTV could decrease further. As a counterbalancing factor, future acquisitions could lead to a somewhat higher LTV. Our financing strategy for acquisitions remains unchanged with the general assumption of an LTV ratio of 50%.

At the current stage of the cycle, an LTV ratio for our business of 45% to 50% seems reasonable to us. But again, yield compression could also lead to somewhat lower ratio.

The following slide, 23, gives an overview of our financing structure on a pro forma basis, including the bond transaction and early redemption of loans, with a total volume of around EUR400 million. After completion of the refinancing, we expect a further decrease of the average cost of debt to below 2% with average debt maturity of close to 10 years, providing high visibility for long-term secured earnings growth, also in an environment of potentially rising rates.

With that, I would like to hand over to Thomas for the business update.


Thomas Hegel, LEG Immobilien AG – CEO [6]


Thank you very much, Eckhard. Let me now come to our business update with a summary on charts 25 and 26. Acquisitions and the expansion of our leading market position in our core markets has been an important value driver for LEG in the past. Our financial performance in fiscal year 2016 clearly demonstrates the strength of this acquisition strategy.

In 2016, however, we decided to be more cautious on acquisitions, mainly due to a mismatch of price expectation. Im sure you agree with us that a value accretive investment strategy has to take into account its cost of capital. And we could not justify to buy portfolios below our implied rental yields.

We have to benchmark our acquisitions also against an investment into our own shares. We finally bought 2,000 units in the course of the year at an attractive rental yield of 7.4%. On the other hand, we used the opportunity to sell non-core assets at a premium to book value of 13%, corresponding to a disposal gain of EUR25 million.

Over the last couple of months, we generally observed a continuation of this positive drive trend in the market, despite the slightly rising rates. We still see a significant spread between our IFRS values to average asking prices in the market. As Eckhard has just mentioned, we therefore decided to conduct our next portfolio appraisal in Q2.

In spite of the challenges of the market environment, we have become somewhat more optimistic for external growth since the start of the year. There is currently quite a lot of supply in the market also for mid-sized deals, which is quite unusual for the start of the year. And maybe even more important, there seems to be the opportunity for the one or the other special situation where we can avoid bidding competition, but well have to see. Today its still too early to give you a guidance.

At the current stage, its generally more than obvious that we can create tangible value for our shareholders with our acquisition strategy in our core markets. We buy at attractive yields. Our margin expansion reflects the high synergies and low integration costs. And last but not least, we extract superior value from such portfolios with our leading management skills.

On chart 27, youll find an overview of the operating performance of our acquisitions. Although we mainly bought in stable and higher yielding markets, the acquired portfolio at the end of February shows a rent CAGR of 3.9%.

In this respect, the Vitus, NRW and the Charlie portfolio, the two larger portfolios we bought from Vonovia, even show above average growth rates coming to our internal costs and growth initiatives.

An important milestone was the extension of our services business with the launch of our launch of our craftsmen joint venture with Bamp;O. With a focus on smaller repair services, a high level of capacity utilization is secured and we also avoid operational risk from more complex construction work. We maintain a very lean and flexible cost structure. I think that this differs from the strategy of peer companies.

We expect an immediate positive FFO contribution of more than EUR3 million annually. I believe this was a very smart deal for our shareholders.

In our last earnings call, we announced the additional CapEx program of about EUR200 million, which is a reflection of steadily improving market momentum. The program is on track and the preparation is nearly completed. As planned, construction work will start mid-2017. We expect a positive contribution to accelerating rent growth starting in 2018.

This initial program is derived from the bottom up analysis with clearly defined projects. We are now analyzing the potential for an extension of this program. This comprises the potential from the repositioning of existing assets and also new construction on existing sites. Well keep you posted at our next earnings call.

We have successfully lifted additional value from an early redemption of subsidized loans. It seems likely that you can expect some more early repayments in the future, but the future tranches are likely to be smaller and its also fair to say that you cannot extrapolate the valuation uplift from our first step. We repaid the loans with the highest upside first. You see, we are actively working on all relevant drivers to maximize the value for our shareholders.

Let me conclude the presentation with a summary of our outlook for 2017 and 2018 on chart 30. We have adjusted our FFO guidance for 2017 and for 2018 for the expected interest savings after the completion of the current refinancing with a total volume of EUR400 million. The positive annual impact is around EUR3 million.

The associated one-off costs for the refinancing are around EUR10 million, implying an attractive payback period. Additionally, we have now taken into account the first minor impact of the CapEx program on our 2017 numbers. Accordingly, we have raised our FFO outlook for 2017 by EUR4 million and the guidance for 2018 by EUR3 million respectively.

As you know, our guidance does not include any effects from planned future acquisitions. Therefore, you can see that our straightforward business model can produce higher single digit earnings and dividend growth rates, even based on a conservative scenario, without external growth. And we have proven that we can achieve additional excess returns with our bolt-on acquisition strategy.

Ladies and gentlemen, thank you for your attention. With that, Id like to open the call for questions.


Questions and Answers


Operator [1]


Ladies and gentlemen, we will begin the question and answer session (Operator Instructions).

The first question comes from the line of Thomas Neuhold. Please go ahead.


Thomas Neuhold, Kepler Cheuvreux – Analyst [2]


Yes, good morning. I have three questions basically. Firstly, on the valuation of your portfolio, you repeatedly mentioned in the presentation that you see transactions happening at higher prices than you have assets on your books and that you will revalue the portfolio again at H1 this year. Can you give us any indication what kind of gap you see between market values and your portfolio values?

Secondly, I was wondering regarding the payback of the subsidized loans. I think you have around EUR400 million left. Why dont you pay back all the subsidized loans? Do you have any restrictions which dont allow you to pay back everything, or are there other economic reasons why you dont want to do that at once, given the still low interest rate environment were in?

And the last question is on slide 6. Interestingly, the in-place rent growth on a like-for-like basis in the higher yielding markets at 2.4% is higher than in the stable markets. Can you give us an explanation here why thats the case? Thank you.


Eckhard Schultz, LEG Immobilien AG – CFO [3]


Yes, sure. This is Eckhard speaking. Hello, Mr. Neuhold. So the valuation, as we indicated in our last earnings call, we have basically two — we are coming from two edges. On the one side, we sold 4,000 units in the last year with a premium to book value of 13%. As we said, we certainly did not sell the parts in our portfolio, so that gives you an indication that our higher portfolio has a prudent valuation level. And in the transaction market, we see currently pricings approximately 15% to 20% above our IFRS value, so thats the range.

Your second question, why did we not repay all of our subsidized loans? First of all, we have approximately 30,000 units, 10,000 units of EUR577 million subsidized loans. One-third refers to units which come off rent restriction within the next 10 years anyway, so it does not make sense economically to repay them because we have the opportunity to cash up the reversionary potential after T10 anyway.

The second point, why havent we repaid the other tranche? Because we were looking for a balance and we will try to balance out the interest of all of our shareholders. And especially in an election year of 2017, the repayment of subsidized loans is also a sensitive political topic. Therefore, we have chosen one-third repayment of the subsidized loans, but we clearly generated the highest economic effect, as we mentioned, with EUR140 million NAV impact.

So thats the reason why we have not repaid all of our subsidized loans. But we also said that we consider to repay smaller tranches in the future. This is clearly an ongoing process and we still see potential, but the impact will be lower than in the first step.

On slide 6, as you rightly said, the rental growth, like-for-like rental growth, in the higher yielding market was stronger than in the stable market. Simple reason is that in the stable markets we have a higher proportion of subsidized units, approximately 30% compared to 20% in the higher yielding market. And Holger also mentioned that we had an extremely strong like-for-like rental growth in Duisburg with a like-for-like rental growth of 3.3%, where we own 7,000 units. So thats basically the reason why we have this deferring rent development which looks a little bit counterintuitive at first sight.


Thomas Neuhold, Kepler Cheuvreux – Analyst [4]


Very clear. Thank you.


Operator [5]


The next question comes from the line of Charles Boissier of UBS. Please go ahead.


Charles Boissier, UBS – Analyst [6]


Yes, good morning. Thank you for taking my questions. I have three questions. The first one, given the upside that you now identify on the identification and CapEx investments and which you mention on page 26, could that impact your view on where to buy in the medium term? And Im just wondering, isnt the upside higher in the dense urban areas where loan value is high, so more of the high growth market?

And a related question is in your acquisition due diligence, do you factor in those upside potentials from identification CapEx investments?

Second question, your stock is now back at an NAV premium. Is it for you a green light that the next acquisitions will be funded at least partly with an equity issue given that you seem optimistic for higher acquisition volume this year?

And then thirdly, last question, if I look at your like-for-like guidance and I strip out the contribution from CapEx, the guidance is 2.5% to 2.8% in 2017, but only 2.1% in 2018, which seems very conservative especially given you have 2,400 units coming out of restriction in 2017 and where I deduce a 25% reversion. So could you help with the gap here? Thank you.


Eckhard Schultz, LEG Immobilien AG – CFO [7]


Maybe I can start with the second question. So, as we clearly said, we have currently financial fire power, but we said that we usually finance transactions with an LTV of 50%. So smaller transactions we could finance with our current firepower, so an equity increase would not be necessary. But for larger acquisitions, certainly this would require an equity injection in line with our financing strategy and also in line with our communicated LTV target range of 45% to 50%.

Im not 100% sure if I understood your question rightly regarding the like-for-like rental growth. So our like-for-like rental guidance for 2017 is in the range between 3% and 3.3%. So this year we achieved a like-for-like rental growth of 2.5%, 2016 was, as you know, a year without the adjustment of the rent restricted units. But the impact on the adjustment of rent restricted units is only 20 basis points because we had a very low CPI level in the past three years. And, as you know, the cost rent is basically based on the development of the CPI.

What we can say is then that basically, I think, an interesting aspect. If you dive a little bit deeper, we achieved a 1.5% rental growth in 2016 from a Mietspiegel adjustment. For 2017, we do expect an acceleration of this component to approximately 180 basis points.

And I think also, as you mentioned, in 2017, approximately 2,400 units will come off rent restriction and this will have also a positive impact on the rent development of approximately 20 bps. And with these components, we derive like-for-like rental growth in the range of 3.0% to 3.3%. Is that clear?


Charles Boissier, UBS – Analyst [8]


Yes, thank you. Thank you. I guess, sorry, apologies, but just on the 2018 like-for-like, I think the contribution from CapEx is 90 basis points so–


Eckhard Schultz, LEG Immobilien AG – CFO [9]


No, no, so what we said is we will start our additional CapEx program. So we are close to finalizing the rent uptake. We will start construction work and we will invest EUR40 million in 2017, but you will not see any major impact on the like-for-like rental growth in 2017.

We start with an additional like-for-like rental component of 50 basis points in 2018 and 90 basis points in 2018. So this is the reason why we will see the full impact of our CapEx program in 2019 and not in 2018. So 50 bps comes from the CapEx program which we start now.

Your first question, the additional CapEx program, if I understand you right your question was does it have an impact where we are going to be buy? So is it interesting for us to buy more in economic centers such as Dusseldorf or Cologne? Well, we have a view that we want to generate value and we try to find ideally targets which are in an earlier stage of the real estate cycle.

And if you look back, the 40,000 or 42,000 units we have bought since the IPO, were mainly located in the stable and the higher yielding areas of the economic centers. So Duisburg, Dortmund, for example, where we now see a strong confirmation for all our pieces and this is reflected also in our valuation. As we said, and as we have shown in the presentation, we had valuation uplift of 5.7%, or 6.7%, I dont know it out of my head, in both; in the high growth market and the stable market.

This might be a little bit counterintuitive, but as Thomas said, we had a stronger yield compression in the higher yielding markets, but that was offset in the stable markets by a more dynamic development and the catch-up effect of the rent, of the market rents and target rents in the stable market. So we see the increasingly positive impact of the spillover effect from the economic centers to the B and the C locations.

Whats also an interesting aspect is that we have basically no yield compression shown, or only a negligible yield compression in the high growth market. And we expect that this trend of spilling over effect will continue also from the stable to the higher yielding market, which also is a confirmation for our thesis that we can expect catch-up effects in the coming valuation.

And therefore, we are looking at all classes. We have also bought in all the sub-classes, but I think we currently in the current market environment, we see the best risk return ratio more in the stable and in selected higher yielding markets.


Charles Boissier, UBS – Analyst [10]


Okay. Thank you.


Operator [11]


Your next question comes from the line of Georg Kanders of Bankhaus Lampe. Please go ahead.


Georg Kanders, Bankhaus Lampe – Analyst [12]


Yes, good morning. I have one question regarding the joint venture here. This EUR3 million FFO effect, this is probably mainly a tax effect, or are there other implications?


Holger Hentschel, LEG Immobilien AG – COO [13]


Yes, hello. Holger speaking. Thats not only the tax effect. Thats only a share of the profits from this company. So in this joint venture, we have two aspects from the economical standpoint. First is the tax effect, and the second point is that you earn money due to this joint venture from the profit of the company. Both.


Georg Kanders, Bankhaus Lampe – Analyst [14]


And the more — as you have built this company, its more on a stable basis for — regarding employees and only growing probably if your portfolio is expanding? Is this the right assumption?


Holger Hentschel, LEG Immobilien AG – COO [15]


Yes. Yes, for sure. That is our maintenance budget we invested in this company. And when we increase our portion of units, it is also that we can expect an increase of the profit in this company. We have round about 300 employees in this company, and so they managed our maintenance, this portion of the maintenance. And when we increase the units, so its an effect also for this company.


Georg Kanders, Bankhaus Lampe – Analyst [16]


Okay. Thank you.


Holger Hentschel, LEG Immobilien AG – COO [17]




Operator [18]


The next question comes from the line of Marc Mozzi of Societe Generale. Please go ahead.


Marc Mozzi, Societe Generale – Analyst [19]


Thank you. A very good morning, gentlemen. On my side, I guess I have three questions as well not very original I guess starting with the upside potential you see in the asset revaluation of your portfolio. I would like to understand, where do you see the highest potential between the three markets you have, high growth, stable and high yielding?

Because if I compare your yield, at least for high growth on the high yield market, they are exactly in line with the one of Vonovia. The only one where there is a massive gap of 60 bps is on the stable market. So I would like to ask you to share with us if thats where you see the upside and why that upside will be materialized this year.

I will follow-up with another question later if you would like.


Eckhard Schultz, LEG Immobilien AG – CFO [20]


Yes. Maybe Marc — hello. Good morning. This is Eckhard speaking.


Marc Mozzi, Societe Generale – Analyst [21]


Good morning.


Eckhard Schultz, LEG Immobilien AG – CFO [22]


Well, I cant comment on the portfolio valuation of Vonovia. As far as I know, (multiple speakers).


Marc Mozzi, Societe Generale – Analyst [23]


But Im sure youve seen the numbers as well.


Eckhard Schultz, LEG Immobilien AG – CFO [24]


Of course I have seen the numbers, but as now, as long as I know, Vonovia does not differ between high yielding, high growth and stable market. Thats a classification we apply for our portfolio. Vonovia only disclosed numbers on the basis of four sub-classes, Westphalia, southern and northern, Ruhrgebiet and the Rhineland area. And according to what I have seen, the valuation uplift was 11% and they derive an average value per square meter of EUR1,088, whereas we show an average value of EUR930.

So I cannot comment that they — then you might have more detailed information. But if you look at the gross rental yield of our higher-yielding portfolio, this has a yield of 7.9%. And, as we said, the like-for-like rental growth in the higher-yielding portfolio in the last year was 2.4%. And the rent development of the free finance unit was even higher, and I think that shows clearly that there should be some upside potential, especially also in the higher-yielding markets.

And, as I said, if you look at the analysis in our presentation on slide 18, you can see that there was hardly any valuation uplift. The valuation uplift was only 3.7% in the higher-yielding market. So there will be a catch-up effect because we expect the spillover effect also to this market portfolio.

So this is — but generally speaking, I think we have a conservative valuation level. If you go through, we have a gross yield of 5.4% in our high-growth markets. Vonovia, as far as I have seen the numbers, have 5.6% for the entire portfolio. We have, in our stable market, 7.2%, and the higher-yielding portfolio, 7.9%, although we have like-for-like rental growth guided from 2017 of north of 3%.

So we have a strong underlying growth. And if you compare the real growth without fueling top line growth with modernization, we have generated a rental growth of 210 basis points. So only 40 basis points came from modernization. Therefore, if you compare that, thats a stronger underlying real rental growth with a significantly lower rental yield. And these are our thoughts when we think on the revaluation in Q2 this year.


Marc Mozzi, Societe Generale – Analyst [25]


Okay. Well, just one remark. But I know those are not fully comparable numbers, but its interesting, when you do privatization you generate a margin of 13%. When they do not privatization they generate a margin of 14%. So thats also something which is questionable for me. But I do understand what is — across Germany you are focused on North Rhine-Westphalia. I do admit that.

My second question is about your guidance for 2017 and 2018 in terms of FFO. I just would like to confirm if, first of all, you do include a benefit of your joint ventures in 2017 and 2018 already, the EUR3 million were talking about.

And secondly, if the effect of EUR5 million gain of FFO from modernization is effectively included in 2018 or if it will be fully in 2019? Thank you.


Eckhard Schultz, LEG Immobilien AG – CFO [26]


Well, we have included the benefit of the joint venture, of course, in our guidance for 2017. And in our guidance, we have included an FFO contribution for 2017 of EUR5 million — for EUR1.9 million, sorry, for 2017. Thats the first positive FFO contribution, mainly coming from a tax effect. And in 2018 we have incorporated EUR5 million FFO. And for 2019, we have also guided for the CapEx program an FFO contribution of around EUR8 million.


Marc Mozzi, Societe Generale – Analyst [27]


Okay. Thank you. And my third question is if I look at your maintenance CapEx, meaning expensed, in Q4 it jumped from an average of EUR15 million per quarter to EUR27 million per quarter. Should we expect those EUR20 million to be something recurring over the next four quarters for 2017 and 2018 and so on?

And I would like to understand, why is it expensed and not capitalized? Is it a backlog of CapEx which you have to catch up with, especially from the portfolio you acquired? And in fact when youre buying at a high yield, we should deduct a 1.5%, 2% of CapEx from that yield because it needs CapEx to generate growth?


Eckhard Schultz, LEG Immobilien AG – CFO [28]


Well, first of all, you cannot extrapolate the higher CapEx ratio in Q4, so I think you have always a seasonality. And we also guided that you can expect a capitalization ratio of around 50% also for the years to come.

You are right — and then we — with taking into consideration the additional CapEx program, I think that it is clear that the CapEx ratio will rise because these modernization measures, these comprehensive modernization measures, have usually a capitalization ratio of close to 90%/100%.

You are right that the recently acquired portfolios require an above average maintenance CapEx. That is the reason why we have increased our average CapEx maintenance spending from EUR16 to EUR18 last year. But this is paying off, as Thomas said.

If you look at the development of our acquired portfolios, you can see that we have reached like-for-like rental growth in these portfolios since the IPO of 3.9%. If you look at the Vitus portfolio, for example, we have achieved a rental growth of 10.1% within 28 months, which translates into a CAGR of 4.2%. And if you look at the Charlie portfolio we have bought from Vonovia, we have achieved just within 11 months, a rent increase of 6.4%. And in this respect, we are very happy that we have bought the non-core portfolios from Vonovia.

And I think we have shown, with this impressive performance, that we are, in North Rhine-Westphalia, obviously able to extract the value also from portfolios in the higher-yielding and the stable market.


Marc Mozzi, Societe Generale – Analyst [29]


And a follow-up question would be mechanically, should we expect this CapEx to translate into higher capital growth?


Eckhard Schultz, LEG Immobilien AG – CFO [30]


Yes, of course.


Marc Mozzi, Societe Generale – Analyst [31]


Thank you.


Eckhard Schultz, LEG Immobilien AG – CFO [32]


Yes, especially for the CapEx program I think we have clear return requirements. And thats the reason why we are not friends of a large-scale modernization program. We have exercised an in-depth analysis and we only invest into projects where we can create value with our investments. And thats a clear intention, that the increased CapEx program clearly translates into increasing values, of course.


Marc Mozzi, Societe Generale – Analyst [33]


Very clear. Thank you very much indeed.


Operator [34]


The next question comes from the line of Thomas Rothausler of Jefferies. Please go ahead.


Thomas Rothausler, Jefferies – Analyst [35]


Hi. Good morning. Just a follow-up on the modernization program, just to understand. You announced recently the EUR200 million CapEx program and youre talking now about extending that. Is that right or –? And if yes, at what extent and whats the focus of these additional CapEx measures?


Eckhard Schultz, LEG Immobilien AG – CFO [36]


Well, yes, as we announced in Q3, we have announced the EUR200 million. So EUR40 million in 2017 and EUR80 million each in 2018 and 2019. The reason why we have communicated the EUR200 million was simply that we have already backed this EUR200 million with concrete projects. And clearly, we selected the projects in the most attractive regions first, but there is more potential and we see an unchanged positive development in the market. And against that backdrop I think we believe that there is more potential for further expansion of the CapEx program.

But we have just started a bottom-up analysis for this additional program, and our target is to identify assets that are also suitable for aggressive repositioning. And this implies more upside for organic rental growth. Thats the intention. But please understand we cant provide more detail now, but we will keep you posted on the outcome in our next earnings call.

And thats how we proceed. We do our homework and our analysis first and then I think we can give you a clearer picture in the Q1 earnings call, latest, in the Q2 earnings call.


Thomas Rothausler, Jefferies – Analyst [37]


Okay. Thanks. Just a follow-up on another issue. Its politics. Any regulation risks from the elections in North Rhine-Westphalia, or any potential impacts you can see from there?


Thomas Hegel, LEG Immobilien AG – CEO [38]


This is Thomas speaking. We dont see any impacts at the moment because the politicians are still discussing the effects of their reign. There is no certain decision on politics so far. And as you know, we will not be highly affected from any measurements, so far, as we can see it, in the discussion.

But the most important sentence is that there is still discussions. We dont know whether the grand coalition is deciding on a certain track or a certain route to go forward. Thats one important sentence.

And the other thing is we dont see the outcome of the election so far. In many terms — There might be many various outcomes and that might influence, at the end, the decisions of the politicians so far. We dont see, at the moment, a certain risk for LEG.


Thomas Rothausler, Jefferies – Analyst [39]


Okay. Thank you.


Operator [40]


The next question comes from the line of Jamie McDevitt of Kempen amp; Co. Please go ahead.


Jamie McDevitt, Kempen and Co. – Analyst [41]


Good morning, guys. Thanks for the update and your patience for going through all this Qamp;A. But I actually, incredibly, have three questions as well. Can you just discuss a bit about the churn rate? We have — Im just interested in where the churn rate was one year ago versus today, and is it possible to break that out by subsidized units versus the non-subsidized? Thats question one.

And question two is — and I apologize if I missed this, but did you publish a shadow valuation? Its something that I believe was discussed in the past and I was just wondering if you guys undertook that, if thats something that youre planning on doing in H1.

And lastly, the — another related question to the acquisitions. If I recall, previously you guys suggested that you would not gear up ahead of yield compression. Has the thinking on that changed at all, particularly with you guys expecting yield compression to come in H1? And would you be willing to temporarily go over that 50% target knowing that the revaluations are due to come, particularly on some of the Bamp;T higher yielding areas?


Holger Hentschel, LEG Immobilien AG – COO [42]


Its Holger speaking. I would like to start with the turnover rate. So we saw in the last year a positive development of this quote. So we started a few years ago with [12%]. At the moment, for 2016, we are on the level of 10% turnover. And the split into the free finance units, about 11%, and in the subsidized units, 7.9%.

So we are, on the other hand, very happy about 11% in the free finance sector because in so cities, like the swarm cities, Munster and Dusseldorf, we can use this turnover to increase the rents in this area. So that is a good sign in this area.

On the other hand, on the subsidized units, its very clear that there are much cheaper rents for these units and so the tenants would like to stay in these units.


Eckhard Schultz, LEG Immobilien AG – CFO [43]


Yes. Regarding your question to the LTV, so in the past we said that we dont want to cross an LTV of 50%. Now we have slightly adjusted that. Weve said now the new target range is 45% to 50% maximum, which we view as a reasonable level in the current state of the real estate cycle. As were going to finance acquisitions with 50% equity, I think there is no reason to — even temporarily, to cross the 50%.

So I think if we see a further yield compression in the course of the year, I think the direction will be more to reduce that level slightly. So clear statement, we are not going to cross the 50%. Currently, the LTV stands at 44.9%. And if nothing else happens automatically with the regular valuation uplift, this LTV will come down. And as you know, we have also issued a call for convertible bonds in 2019, which would reduce the LTV by another 340 basis points. So I think its more the different direction.

And your second question, I havent — Im afraid I have not really understood that about a shadow evaluation. So we dont have a shadow evaluation. So we do an internal evaluation, and this internal evaluation is 100% double checked by CBRE. And so we have a full confirmation of our evaluation.

And what we are doing now, we have a valuation system and now we are doing a thorough analysis. We have to collect all the data and then we feed our valuation model. We observe the market and comparable sections and then we will derive the next evaluation as of end of Q2.

But Im not sure if I understood your question rightly.


Jamie McDevitt, Kempen and Co. – Analyst [44]


Yes, it was along those lines. And the — when you look at some of your peers, the value per square meter is higher despite the fact that the quality is lower. And some of them use (inaudible) myself, for instance, and obviously you guys are using CBRE. And theres a bit of a mismatch between how the valuers see the same kit. And granted, that happens everywhere, but the — but it was just — from what I recall, I thought you guys were a bit frustrated with the valuations not moving in line with the market and some of the — some of your peers having higher valuations despite lower quality assets. So I was wondering if you did explore a shadow valuation and if theres any changes on that front.


Eckhard Schultz, LEG Immobilien AG – CFO [45]


Yes. First of all, we cant comment on peers and we cant comment on the quality of the assets, so thats not on us to comment. We dont have a shadow valuation. I think we have a clear view. We are real estate professionals, so we have a clear view on the market, on the valuation.

We also have a strict cost discipline. The expansion of our operating margin is the reason of a strict cost discipline and we dont want to trigger unnecessary cost for a second or a third valuation opinion. I think we are in a position to find the right argument with CBRE.

I think its a good situation that all the major companies, Deutsche Wohnen, Vonovia, are all valued by the same appraisal. That gives us some comfort that there are not different levels from different valuers.

So we dont — we are not frustrated. We see it as a challenge also to convince also our valuer that the market reality sometimes maybe shows other levels than we have currently reflected in our books.


Jamie McDevitt, Kempen and Co. – Analyst [46]


Thats perfect. Thanks, guys.


Operator [47]


The next question comes from the line of Ben Richford of Credit Suisse. Please go ahead.


Ben Richford, Credit Suisse – Analyst [48]


Hi gents. Sorry to go on about the valuation again, but I find it a little confusing because youre saying you prepare your own valuation and its then checked by CBRE, who does the other big companies. But, therefore, youre saying that your valuation is quite a bit below market 15% to 20%. How can that be the case?


Eckhard Schultz, LEG Immobilien AG – CFO [49]


First of all, if you look how valuation works, valuation always takes into consideration data from the past. So we are looking at the so-called good (spoken in a foreign language), so the official available data. And if you have a very dynamic market development, valuation is by definition, always lagging behind reality. So thats the first point.

If you have a very dynamic price development, as you have seen now recently in the Deutsche Wohnen deal, its very difficult and, systemically, not possible to really use the actual data in your IFRS valuation. So thats the first point.

And the second point is also that you usually do not reflect in every valuation really the current latest market dynamic in your books. So thats also more a part of value development.

And what we have seen now, not at LEG, but in some of our peers, that this has now accelerated a little bit. And, therefore, I think this is something we consider to reflect that also.

But the most reason is certainly that the database is 12 to 18 months old and so it does not reflect really, especially in the current very dynamic market development, the latest reality in the transaction market.


Ben Richford, Credit Suisse – Analyst [50]


I must admit, I dont fully get that. Your valuation was as at 70 days ago, so it should be at that date and rather than 12 to 18 months old data being used. So can you give us some help then? Youre saying that in H1 youre going to do a half-year valuation, which you didnt do in the past. What sort of valuation uplift are you expecting then, please?


Eckhard Schultz, LEG Immobilien AG – CFO [51]


So if we do a valuation as of end of June, so we cannot forecast the outcome of the valuation because we have now February or March and so we cannot give a guidance. We have — so thats simply not possible.

So what we can — basically you can — you have different parameters. You have some market development. You have yield compression, which you can derive from the transactions in the market. We have shown a very moderate yield compression, which is reflected in a decrease of the discount rate from 5.70% to 5.52% to 18 basis points decrease.

But the second important parameter is the development of rents. And if you get our valuations, the most important driver of the revaluation uplift was the development of rents. And if we observe in the market a stronger development of the rent, what we currently do, then we can then pencil in higher target rents in our models.

And thats what we are seeing, and my expectation would be that higher rents are — could be a driver for a revaluation uplift in Q2. But its too early to give you a clear indication. And thats always I think, in a prudent way, possible if you finalize the valuation in June. And then we can give you also a clear guidance about that and also the reasons for — or also the drivers of this valuation result.


Ben Richford, Credit Suisse – Analyst [52]


Okay. And just finally, so on page 7 youve helpfully given some extra detail around your geographic location relative to the bigger cities. Could the lack of valuation improvement compared to peers be because youre not so highly located in the inner-city centers of these cities where the biggest growth is? Maybe to frame that question again, maybe you could say what is the percentage within the inner ring roads of these cities rather than the wider commuting belt.


Eckhard Schultz, LEG Immobilien AG – CFO [53]


So I dont know this number out of my heart. But I think one thing you have mentioned, that we have our exposure, our portfolio located in 170 different locations in NRW. And what we are seeing is that we have very dynamic development also in the commuter belt, for example Duisburg.

Lets take Duisburg as an example. As I said, we have a like-for-like rental growth in Duisburg of 3.3%. And Duisburg is in the commuter belt of Dusseldorf and its only 10/15 kilometers away, 20 kilometers away from Dusseldorf. However, we havent shown a significant yield compression in Duisburg mainly because of a lack of transactional evidence. So thats a little bit a problem, that you need data.

And you have a clear advantage if you are located in a very liquid investment market, such as Munchen, Hamburg or Berlin, where you have a lot of transactional evidence and it is easy to incorporate that in the model. But if you are located in 170 different locations with very strong rental markets but more or less illiquid investment market, then its difficult to reflect the development, which is clearly positive there in the numbers.

And we have also to justify our evaluation with our auditor, with PWC. And we clearly also have to provide data. So thats a little bit a problem and maybe a structural disadvantage because we cannot show the development in cities, as I mentioned, such as Duisburg.

A good example is we have seen a yield compression in Kiel, in Kiel in Northern Germany, by 20%. 20%. And if you look at the macroeconomic environment, has anything changed in Kiel? Do they have a stronger purchase power? Do they have a lower unemployment rate? Is there a new industry? Nothing. Nothing, but a yield compression of 20%. We have transactional evidence, yes, but nobody could really explain to me why Kiel has a yield compression of 20% compared to Duisburg or Dortmund.

Dortmund is a nice example. We own 12,000 units in Dortmund, and Dortmund has — goes through a structural change. And with a strong university, which attracts a lot of new industry, and tech companies, we have a lot of attractive new business there. We have a completely change of the structure in Dortmund. But, however, we have a lower yield compression compared to Kiel or to [Huanheim]. Huanheim is a city —


Unidentified Company Representative [54]




Eckhard Schultz, LEG Immobilien AG – CFO [55]


Or Heidenheim, Heidenheim, which is a city, as long as I can see, also does not have improved fundamentals. And that is exactly the discussion we have with our appraiser, we have internally. And therefore, we believe that in North Rhine-Westphalia we have massive relative value compared to other markets and where we see cash potential.


Ben Richford, Credit Suisse – Analyst [56]


Yes. Thats really helpful color. Thank you very much.


Operator [57]


(Operator Instructions). We have a question from the line of Bianca Riemer of Morgan Stanley. Please go ahead.


Bianca Riemer, Morgan Stanley – Analyst [58]


Yes. Good morning. I have a follow-up question to what youve just explained. Why — whats the reason for the lack of transactional evidence in, say, Dortmund if its really such a high-growth market as youve just explained? Why would somebody buy something in Kiel where the fundamentals are so much worse than in Dortmund and not buy in Dortmund? And given that you have substantial parts of your portfolio in those cities in NRW that you say are growing very rapidly, why wouldnt you try and give some transactional evidence to the market by selling something?


Eckhard Schultz, LEG Immobilien AG – CFO [59]


Well, we have sold 4,000 units in higher-yielding markets. We sold 2,000 units from the Vonovia portfolio in Marl. We sold single assets in the more rural areas of our portfolio in order to clean up our portfolio and we achieved a book gain of 13%. So we did that. And we created some transactional evidence, but it sometimes difficult to get that transactional evidence accepted in your argumentation.

So thats exactly what we intended to do and I think we have provided evidence that there is upside in the valuation. And we are not going to now sell major parts. We could easily sell 1,000 or 2,000 units in Dortmund, but our intention is not to prove evidence that our evaluation is too low. I think then we would state the obvious.

Our intention is to grow the Company and not to reduce our exposure because we want to crystalize the benefit of the acquisitions. And, therefore, thats the reason why we have not planned, so far, any major disposals for 2017.


Bianca Riemer, Morgan Stanley – Analyst [60]


Okay. Thank you. And whats the reason for the valuer not taking the transactional evidence that you have provided into consideration for their evaluations?


Eckhard Schultz, LEG Immobilien AG – CFO [61]


Well, I think then you have to have this discussion with the valuer. So I think we can only provide the facts. And thats one point in the argumentation, but we cannot comment on the internal discussions with our valuer.


Bianca Riemer, Morgan Stanley – Analyst [62]


Okay. Thank you very much.


Operator [63]


We have a follow-up question from the line of Marc Mozzi of Societe Generale. Please go ahead.


Marc Mozzi, Societe Generale – Analyst [64]


Thank you. Im sorry to continue on that key point because I think this is very much what everyone is trying to understand. Referring to our own research, it seems very likely that there is a massive correlation between price increase, yield comprehension and, simply growth in population.

And just to quote some of the cities you mentioned, Dortmund, the growth in population has been 2.6% over the past five years. Kiel, the growth in population has been 6%. Dusseldorf, the population has been — growth has been 4.4%. And I think there is a direct correlation between how fast the population is growing in some cities and how slow its growing in other cities and far from what rental income growth is. Dont you think thats the main reason of why your valuers are struggling to compress yield on some of the cities you just mentioned such as Dortmund, compared to Kiel, or — and why in Munster — typically — tell us what has been the yield compression in Munster, where the growth in population has been 7%.


Eckhard Schultz, LEG Immobilien AG – CFO [65]


Well, I see youve compared segments. I dont know every city by heart, but I think the yield compression was 4% or 6%. And thank you very much that you can explain me that Kiel is a hotspot. That was not my impression and I know Germany quite well. And I dont really understand why Kiel has a yield compression, or a valuation uplift, not a yield compression, by 20%. And Munster, I cant provide you with the number, but its significantly below 10%.

So that is, firstly, not an explanation. And maybe just to give you an answer, Bianca, you know the discussion, what is accepted as transactional evidence, what is not accepted as transactional evidence. Clearly, share deals are not accepted as transactional evidence by the valuer.

The argument is quite simple. The valuer says, well, shared, you can have a strategic component. It might be — it might have a premium. It might have a discount. Therefore, share deals are not considered as transactional evidence. And from the 4,000 units alone, 2,000 units refer to the share deal in Marl, the 2,000 units.

In the meantime, Marc, I looked up the number in Munster. We have an increase of 8.1%, 8.1%, which is 12% lower than Kiel. And maybe, I dont know, if you see us tomorrow, you can explain me this. I would be very grateful for that.


Marc Mozzi, Societe Generale – Analyst [66]


Ill stick on the growth in population. But I think its the only reason from what we can see from outside. But thank you very much. Unfortunately I wont see you tomorrow. There will be too much German.


Eckhard Schultz, LEG Immobilien AG – CFO [67]


Okay. Okay.


Marc Mozzi, Societe Generale – Analyst [68]


Thank you.


Operator [69]


There are no further questions at this time. I would like to hand back to Burkhard Sawazki for closing comments.


Burkhard Sawazki, LEG Immobilien AG – IR [70]


Ladies and gentlemen, thank you for your participation. As you know, the IR team and I are available also after the call to answer your questions, so please feel free to give us a call or send us an email. Thank you.


Operator [71]


Ladies and gentlemen, the conference is now concluded and you may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.

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Adara Power, a privately-held Silicon Valley company committed to providing safe, reliable, intelligent, and connected energy storage, announces five financing options and a partnership with the Electric amp; Gas Industries Association (EGIA), a non-profit organization dedicated to advancing energy efficiency and renewable energy solutions through the home improvement and renewable energy industries.

San Jose, CA, USA (PRWEB) March 07, 2017

Adara Power, a privately-held Silicon Valley company committed to providing safe, reliable, intelligent, and connected energy storage, announces five financing options and a partnership with the Electric amp; Gas Industries Association (EGIA), a non-profit organization dedicated to advancing energy efficiency and renewable energy solutions through the home improvement and renewable energy industries. Through the EGIA, contractors can apply for third-party financing programs that are pre-approved for the Adara Power residential and commercial energy storage systems.

Partnering with the Electric amp; Gas Industries Association allows us to provide energy storage solutions to a wide range of property owners by leveraging the national network of contractors, while also extending financing opportunities through third parties to qualified customers, stated Greg Maguire, Co-founder and Vice President of Sales and Marketing, Adara Power. These financing opportunities mean that we are now able to provide property owners with everything they need to obtain energy storage: training, designing, installing commissioning, and financing.

Third-party financing programs offered through the EGIA include:

  • Renewable Express Loan Program: Adara Residential Energy Storage systems can be financed through this unsecured financing program. It is optimal for contractors new to financing and allows for unsecured installment loans up to $64,000 with terms up to 12 years and no interest or payment for up to 24 months.
  • Pace Financing: Adara Residential Energy Storage Systems now qualifies for PACE financing through Renovate Americas HERO program. The PACE Program is a community-based program that allows homeowners to finance energy-efficiency and renewable energy upgrades by repaying them along with their property tax bill. The PACE Program pays for 100% of a projects costs and is repaid over 20 years or less.
  • Benji Unsecured Financing: A complete unsecured financing platform that can be used with the HERO program, allowing for the combination of energy and non-energy efficient projects. This financing option offers loans up to $50,000 with payment terms of 5, 7 or 10 years with 6 and 12 interest-free and payment-free months.
  • Energy Wise Lease Program: Ideal for Adaras Commercial Energy Storage System, this program offers commercial businesses leases for facility upgrades on a term of 7 years or less. It offers lease amounts ranging from $20,000 to $99,999.99 with competitive interest rates.
  • Commercial Financing Program: This program is available for commercial businesses that are looking to finance larger comprehensive updates, such as the Adara Commercial Energy Storage System, to their facility. It offers terms up to 10 years with loan amounts up to $5,000,000.

Adara Power is a leader in the energy storage industry and shares our commitment to advancing energy efficiency and renewable energy solutions, said Bruce Matulich, CEO and Executive Director, Electric amp; Gas Industries Association. By introducing Adara Power to our national network of contractors and helping Adara set up financing options, we deliver on our mission as an association to provide innovative, financeable, clean technologies to our members.

Adaras Residential and Commercial Energy Storage Systems are powered by the companys iC3 Platform, which intelligently integrates battery and inverter controls with cloud-based software and a robust IoT connectivity solution. Adaras solutions are designed to support both homeowners and facility operators looking for energy storage solutions capable of performing dedicated peak shifting, back-up power, demand charge reduction, and energy efficiency, while also enabling participation in emerging transactive energy exchanges.

To learn more about EGIA and financing options for Adara Powers energy storage solutions please visit

# # #

About Adara Power

Founded in 2013, Adara Power is committed to providing safe, reliable, intelligent, and connected solar energy storage for renewable energy. Adara Powers Energy Storage Solutions are designed to support consumer self-consumption and enable a resilient, renewable energy grid in order to power a cleaner, sustainable planet. For more information, visit and follow us on Twitter: @adarapower.

About The Electric amp; Gas Industries Association

The Electric amp; Gas Industries Association (EGIA) is a non-profit organization dedicated to advancing energy efficiency and renewable energy solutions through the home improvement and renewable energy industries. EGIA serves a rapidly-growing nationwide network of contractors, regional distributors, product manufacturers and other trade allies delivering energy efficiency and renewable energy solutions to millions of homes and businesses. EGIA has facilitated the financing of over 200,000 residential and business projects valued in excess of $1.7 billion, and administered over $750 million in rebate payments. For more information, visit

For the original version on PRWeb visit:

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Credit Guarantee in tie-up with OCBC Al-Amin
Sunday, May 04th, 2014 | Author:

KUALA LUMPUR: Credit Guarantee Corp (M) Bhd (CGC)has joined hands with OCBC Al-Amin Bank Bhd to roll out the first tranche of wholesale guarantee unsecured business financing product valued at RM 250mil.

The agreement involves CGC and OCBC Al-Amin sharing the risks equally for five years.

CGC president and chief executive officer Datuk Wan Azhar Wan Ahmad said the product was first of its kind as the entire risk centred on the bank previously.

Leveraging on OCBC Al-Amins existing unsecured small and medium enterprise (SME) portfolio, we are confident that we are are able to meet the target, he said.

Through this new product, the financial institution was able to free up capital while mitigating risk, he added.

OCBC Al-Amin director and chief executive director Syed Abdull Aziz Syed Kechik said the latest product was developed for the increasing appetite from SMEs for unsecured term financing.

The lender had introduced unsecured financing since two years ago.

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(Menafn – Canada NewsWire via COMTEX)

Air Canada Successfully Completes US400 Million Unsecured Financing

MONTREAL, Apr 15, 2014 (Menafn – Canada NewsWire via COMTEX) –Air Canada announced today that it has completed its previously announced private offering of US400 million of 7.75% senior unsecured notes due 2021 (the Notes). Air Canada received net proceeds of approximately C432 million from the sale of the Notes and will use these proceeds for general corporate purposes.

The successful completion of our unsecured note offering is another significant transformational event for Air Canada as we enter a new phase of capital investment in our fleet and product, said Calin Rovinescu, President and Chief Executive Officer. I was especially pleased with the offerings reception. The capital markets have demonstrated their confidence in Air Canada by extending us credit on an unsecured basis on competitive terms, recognizing, among other things, Air Canadas improved leverage ratios, credit ratings and profitability, as well as the elimination of the pension deficit overhang. I would also like to recognize the work of our legal and finance teams in concluding this offering in a timely manner and on favourable terms.

The Notes were sold at par and provide for interest payable semi-annually. The Notes are senior unsecured obligations of Air Canada, and are guaranteed on a senior unsecured basis by one of Air Canadas subsidiaries.

The Notes were offered and sold in the United States only to qualified institutional buyers in reliance on Rule 144A under the US Securities Act of 1933, as amended (the Securities Act), and to certain non-US persons in transactions outside the United States in reliance on Regulation S under the Securities Act. The Notes have not been and will not be qualified for sale to the public under applicable Canadian securities laws and, accordingly, any offer and sale of the Notes in Canada will be made on a basis that is exempt from the prospectus requirement of such securities laws. The Notes have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and state securities laws.

This press release shall not constitute an offer to sell the Notes or the solicitation of an offer to buy the Notes, nor will there be any sale of the Notes in any state or jurisdiction where such offer, solicitation or sale is not permitted.

About Air Canada

Air Canada is Canadas largest domestic and international airline serving more than 180 destinations on five continents. Canadas flag carrier is among the 20 largest airlines in the world and in 2013 served more than 35 million customers. Air Canada provides scheduled passenger service directly to 60 Canadian cities, 49 destinations in the United States and 72 cities in Europe, the Middle East, Asia, Australia, the Caribbean, Mexico and South America. Air Canada is a founding member of Star Alliance, the worlds most comprehensive air transportation network serving 1,269 airports in 193 countries. Air Canada is the only international network carrier in North America to receive a Four-Star ranking according to independent UK research firm Skytrax that ranked Air Canada in a worldwide survey of more than 18 million airline passengers as Best Airline in North America in 2013 for the fourth consecutive year.

Caution Regarding Forward-Looking Information

Air Canadas public communications may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements, by their nature, are based on assumptions and are subject to important risks and uncertainties. Forward-looking statements cannot be relied upon due to, amongst other things, changing external events and general uncertainties of the business. Actual results may differ materially from results indicated in forward-looking statements due to a number of factors, including without limitation, industry, market, credit and economic conditions, the ability to reduce operating costs and secure financing, pension issues, energy prices, employee and labour relations, currency exchange and interest rates, competition, war, terrorist acts, epidemic diseases, environmental factors (including weather systems and other natural phenomena, and factors arising from man-made sources), insurance issues and costs, changes in demand due to the seasonal nature of the business, supply issues, changes in laws, regulatory developments or proceedings, pending and future litigation and actions by third parties as well as the factors identified throughout Air Canadas public disclosure file available at Any forward-looking statements contained in this news release represent Air Canadas expectations as of the date of this news release and are subject to change after such date. However, Air Canada disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.

SOURCE Air Canada

To view this news release in HTML formatting, please use the following URL:

SOURCE: Air Canada

SOURCE: Air Canada – Corporate – Finance

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KUALA LUMPUR: The Credit Guarantee Corp (M) Bhd (CGC) is expected to provide about RM400 million to small and medium enterprises (SMEs) this year under a wholesale guarantee for unsecured business financing.

The guarantee will help mitigate risks, improve lending capacity and augur well for the development of unsecured SMEs financing business in the country.

President and Chief Executive Officer Datuk Wan Azhar Wan Ahmad was confident that more banks would venture into unsecured financing as it provided a new edge for the banking industry.

Credit Guarantee Corporation Malaysia Bhd and OCBC Al-Amin Bank Bhd on Thursday inked the countrys first SME wholesale guarantee, marking a milestone in the development of Malaysias unsecured business financing efforts.

The guarantee, involving an initial tranche of RM250 million of OCBC Al-Amins existing unsecured SME portfolio, will see the ratio of risk involved in the financing business being shared equally between CGC and OCBC Al-Amin for a guarantee period of five years.

We are still in talks with other banks to venture into unsecured financing but it takes time, as we need to deliberate on the features of the product as it differed from one bank to another in terms of pricing.

However, Im not allowed to disclose which banks are actually discussing with us right now.

But, we do have few banks lined up for this product, he told reporters after the signing ceremony of the SME wholesale guarantee agreement witnessed by Bank Negara Malaysia Assistant Governor Bakaruddin Ishak.

The agreement involves CGC and OCBC Al-Amin sharing the risks equally for five years.

Wan Azhar said the product was the first of its kind as previously the entire risk centred on banks alone.

Leveraging on OCBC Al-Amins existing unsecured SME portfolio, we are confident that we will be able to meet the target, he said.

Through this new product, the financial institution will be able to free up capital while mitigating risk, he added.

Wan Azhar also said the company received many enquiries from the Middle-East on setting up a similar guarantee system in their country.

They are interested in the possibility of a collaboration between Malaysia and countries in the Middle-East. So we are looking at exploring the possibility of doing that right now, he added.

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Fitch Ratings has revised the Outlook on 18 EU state-sponsored banks#39; Long-term Issuer Default Ratings (IDR) to Negative from Stable, including Austria#39;s Volksbanken Verbund, a group made up of 63 banks. A further seven banks remain on Negative Outlook. The Outlook on 14 European banks#39; IDRs, including Zuercher Kantonalbank, the only bank in this commentary that is outside the EU, is Stable.

Fitch has also affirmed these banks#39; Long-term and Short-term IDRs, senior debt ratings (where assigned), Support Rating Floors (SRF, where assigned) and Support Ratings (SR). The rating action is in conjunction with other actions on support-based ratings taken today globally.

All of these banks#39; Long-term IDRs are driven by assumptions of sovereign support, as reflected in their own, their group#39;s or their parent banks#39; SRFs. While Fitch has today affirmed these banks#39; SRs and SRFs where assigned, for most of the banks these ratings are likely to be downgraded or revised downwards within the next one to two years. The likelihood of a downgrade or downward revision is based on further progress being made in implementing the legislative and practical aspects of enabling effective bank resolution frameworks, which is likely to reduce implicit sovereign support for banks in the EU.

In contrast to banks covered in a simultaneous commentary today Fitch Revises Outlooks on 18 EU Banks to Negative on Weakening Support, most banks covered in this commentary are unlikely to have their SRFs revised to #39;No Floor#39; within the next one to two years. In the majority of cases SRFs and support-driven IDRs are likely to remain in investment grade.

Outlooks on Long-term IDRs remain Stable for banks concentrated on a specific policy function and effectively operating as an arm of the state and for banks with state guarantees for all liabilities and/or solvency guarantees. SRs and SFRs for these banks are unlikely to be revised downwards within the next one to two years as we do not expect progress on resolution frameworks to affect sovereign support for these banks.

For the banks on Negative Outlook, the degree of downward revisions of SRFs will determine the extent of downgrades of their Long-term IDRs. Almost all of them will benefit from some form of continued state sponsorship or institutional support considerations that Fitch is likely to continue to factor into their SRs and, where applicable, SRFs. Some banks#39; SRs are likely to switch to being based on institutional rather than on state support and their SRFs (which only measure sovereign support) are consequently likely to be withdrawn.

A full list of rating actions with key drivers and sensitivities is provided in the attached spread-sheet, but in summary banks#39; IDRs are likely to continue to benefit from support mainly for the following three reasons: (i) policy or partial policy role (10 banks), (ii) state-sponsored run-down of business (seven banking groups), and (iii) other strategic ownership by a sovereign, German federal state or Swiss canton (nine banks and their subsidiaries, including Landesbanken, see below).

There are five entities we believe are likely to continue to benefit from support that do not fit into the categories above. These are: Hypothekenbank Frankfurt AG (Eurohypo), Hypothekenbank Frankfurt International SA (Eurohypo), Volksbanken Verbund, Deutsche Pfandbriefbank and Duesseldorfer Hypothekenbank.

Hypothekenbank Frankfurt AG (Eurohypo) is a subsidiary of Commerzbank AG. Its SR and SRF are currently driven by its systemic importance as a major Pfandbrief issuer, but its business is being run down to a much smaller level. Although Hypothekenbank Frankfurt AG (Eurohypo) is owned by Commerzbank and its unsecured financing comes almost exclusively from its parent, Fitch has based its SR to date on state support because of its size in relation to Commerzbank. During the next one to two years, we expect that Hypothekenbank Frankfurt AG (Eurohypo)#39;s balance sheet will have been run down to a much more manageable size for Commerzbank and, given strong integration, we expect to equalise the IDRs of the two banks. At that time, Commerzbank#39;s own SRF is likely to be revised to #39;No Floor#39;, which means that the IDRs for the two banks will likely be based on Commerzbank#39;s VR, subject to potential mitigating considerations mentioned in Fitch#39;s commentary Fitch Revises Outlooks on 18 EU Banks to Negative on Weakening Support.

Hypothekenbank Frankfurt International SA (Eurohypo) was sold earlier this week by Hypothekenbank Frankfurt AG to Commerzbank. This strengthens the linkage between Commerzbank and the Luxembourg subsidiary. We expect to equalise Hypothekenbank Frankfurt International SA (Eurohypo)#39;s IDRs with those of Commerzbank within the next one to two years.

Fitch will decide within the next one to two years whether or not any state support should be retained in Volksbanken Verbund#39;s SR and SRF. We may determine that its SR is downgraded to #39;5#39; and its SRF revised down to #39;No Floor#39;, and consequently a likely downgrade of the LT IDR to the level of the VR, which is currently #39;bb-#39;. Even if we decide to retain some support in the ratings, we would probably be slightly less convinced about it than we are for the Austrian banks that are in run-down, for example, so would likely keep the Long-term IDR just inside investment grade. The argument for retaining some support in the ratings is that Volksbanken Verbund#39;s central institution, Oesterreichische Volksbanken AG (OeVAG), is 43% owned by the Austrian state and will remain too large for the rest of the mutual group to support on their own until it is able to wind-down its non-core assets. In Fitch#39;s view the state will want to protect its investment until that point, also considering that a sale of its stake outside the Volksbanken Verbund group would face some political challenges.

Deutsche Pfandbriefbank is targeted for sale by end-2015 but we believe that it will be very difficult to find a buyer given the bank#39;s sizeable public-sector assets and potentially large senior unsecured refinancing needs. If it cannot be sold there is a high likelihood that the German Financial Market Stabilisation Fund (SoFFin) will assume ownership responsibility and would run the bank down. This contrasts with our opinion on banks in temporary and unwilling state ownership in several other countries. We would, therefore, likely maintain its SRF in investment grade, but in the #39;BBB#39; range. SoFFin owns 100% of Deutsche Pfandbriefbank#39;s owner, Hypo Real Estate Holding AG, whose Long-term IDR Outlook was also revised to Negative as part of this review.

While our view of state support for Duesseldorfer Hypothekenbank is likely to diminish to a #39;No Floor#39; level within the next one to two years, we believe that Germany#39;s Deposit Protection Fund (a voluntary deposit insurance scheme for Germany#39;s private-sector banks) is likely to step in and provide support if necessary. The Deposit Protection Fund would, in any case, be liable as guarantor for almost all of the bank#39;s unsecured liabilities and it has in the past opted to support small banks, including by taking over ownership. This would likely result in a Long Term IDR for the bank in the #39;BB#39; category.

The German Landesbanken fall under reason (iii) above for Fitch being likely to retain some support in banks#39; ratings. We have revised the Outlooks on the six Landesbanken, whose IDRs are driven by their SRFs, to Negative to reflect our expectation of further progress on the Bank Recovery and Resolution Directive (BRRD) and Banking Union within the next one to two years. Only one of the Landesbanken rated by Fitch, Landesbank Hessen-Thueringen, has IDRs that are not driven by state support, so were unaffected by today#39;s Outlook revisions, and has a Stable Outlook. As part of S – Finanzgruppe Hessen-Thueringen, a mutual support group with its regional savings banks, its Long-term IDR is driven by S – Finanzgruppe Hessen-Thueringen#39;s VR.

This new regulatory framework along with EU State Aid considerations will make it more challenging for a federal state to support its bank as a strategic owner. We are likely to switch the basis of our support considerations from systemic sovereign support via the owners to direct institutional support from the respective federal states (Laender) and savings bank owners, given that this would result in higher IDRs than the alternative likely #39;No Floor#39; from sovereign support, and so we would withdraw SRFs. Within the next one to two years, we will likely downgrade the support-driven Long-term IDRs of the six Landesbanken by one to two notches.


Policy roles, systemic importance and liability structures are key drivers behind the SRs and SRFs. In addition, SRs and SRFs of 12 entities from eight banking groups reflect their run-down status following approval from the European Commission under state ownership and/or with the assistance of state funding guarantees. LT and ST IDRs and senior debt ratings (including market-linked notes, where rated) are driven by banks#39; SRFs or those of their parents or mutual groups. Guaranteed debt ratings are driven by state guarantees. Key Drivers are summarised in the attached spread-sheet.


The Long-term IDRs, Long-term senior debt ratings, SRs and SRFs are either directly or indirectly sensitive to a weakening in Fitch#39;s assumptions around either the ability or propensity of relevant sovereigns to provide timely support.

For policy banks or state-guaranteed banks whose LT IDRs have Stable Outlooks and for guaranteed debt ratings, the greatest rating sensitivity is to a change in sovereign rating.

For those banks whose Long Term IDRs are on Negative Outlook, the greatest sensitivity is to a weakening of support propensity in respect of further progress being made in addressing legislative and practical impediments to effective bank resolution. In the EU, where the extent of legislative powers and the practical complexity of applying resolution tools vary by country, this is likely to occur through national implementation of the provisions of the BRRD, which has been tabled for a vote by the European Parliament next month.

Most of BRRD#39;s provisions have to be in place by end-2014, where not already available. Only the bail-in tool has a later, January 2016 deadline. Resolution and supervisory powers will also be enhanced in order to address practical impediments to resolution. While extraordinary support for banks will still be possible after implementation of the provisions of BRRD, the hurdles to provide support will be higher.

In Banking Union countries of the EU, where the vast majority of the banks covered in this commentary are based, the Single Supervisory Mechanism will reduce national influence over supervision and licensing decisions in favour of the European Central Bank (ECB). Reaching political consensus on the Single Resolution Mechanism (SRM) was more troublesome than was the case with BRRD. While still involving multiple parties in resolution decisions, the SRM will result in a dilution of national influence over resolution decisions for large banks.

Where SRFs are assigned, Fitch#39;s base case is that sufficient progress is likely to have been made for banks#39; Support Ratings and SRFs to be downgraded and revised downwards, respectively, within the next one to two years, likely to levels indicated in the attached spread-sheet. At this stage, this is likely to be some point in late 2014 or in 1H15 and could vary by country. The timing could also be influenced by idiosyncratic events, for example should there be risks to the availability of sovereign support for a bank that is likely to meet the conditions for resolution during 2014, whether as part of an asset quality review or another event.

The banks#39; Short-term IDRs and Short-term debt ratings are sensitive to downward revisions of SRFs apart from Caixa Geral de Depositos whose Viability Rating is at a level that could justify the current Short-term IDR and potentially some others if SRF revisions are kept to one notch and the banks#39; liquidity profiles and access are sufficiently strong.

The topic of bank resolution is explored in more detail in a Special Report entitled #39;Sovereign Support for Banks: Rating Path Expectations#39; and the support nuances of banks covered in this commentary are expanded upon in two accompanying Special Reports, #39;Rating Paths for EU State-sponsored Banks#39; and #39;#39;Various Support Rating Paths for German Banks#39;, which will all shortly be published on


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JPM Names New Chief of Midsize Business Banking
Tuesday, April 22nd, 2014 | Author:

JPMorgan Chase (JPM) has named John Simmons, 43, its head of middle-market commercial banking.

Hell take over from Steve Walker, 64, when Walker retires at yearend.

Starting in April, Simmons and Walker will jointly manage JPMorgans middle-market unit, which serves companies with annual revenues of $20 million to $500 million. It has 1,600 employees and serves more than 19,000 businesses.

Simmons has been the co-head of JPMorgans North American financial institutions group. He has more than 20 years of experience advising companies on raising capital, mergers and acquisitions, secured and unsecured financing and risk management.

Johns expertise and client relationships will bring tremendous value to our business, Doug Petno, JPMorgans commercial banking chief, said in a news release. Throughout his career, he has worked with clients across many industries, which prepares him well for the diverse nature of our middle-market banking clients.

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A recent bankruptcy court decision denying a royalty owner#39;s
motion for summary judgment is highly relevant to any investor that
currently owns a term royalty interest or is considering such an
investment. The United States Bankruptcy Court for the Southern
District of Texas found in NGP Capital Resources Co. v. ATP Oil
Gas Corp. (In re ATP Oil Gas Corp.), No. 12-3443,
2014 Bankr. LEXIS 33 (Bankr. SD Tex. Jan. 6, 2014) that issues of
material fact existed regarding whether certain prepetition term
overriding royalty transactions were properly characterized as debt
financings or real property transactions. While the court#39;s
conclusions in ATP were made in connection with a summary
judgment decision, the issues raised in the case are of
significance to parties currently involved in or considering
overriding royalty transactions because the court#39;s opinion
opens the door to the possibility that a bankruptcy trustee or
chapter 11 debtor-in-possession (DIP) may be able to
recharacterize such transactions as loans to the severe detriment
of the royalty owners.

Term Overriding Royalty Interests in Bankruptcy

Term overriding royalty interests are oil and gas interests in
which the owner receives a share of oil and gas produced at the
surface, free of the costs of production. Term overriding royalty
interests are limited interests in that they terminate upon the
occurrence of specified conditions, such as the achievement of a
particular volume of production or the realization of a specified
sum from the sale of oil or gas. Term overriding royalty interests
are often described in the industry as being similar to a
loan that is repaid through the production or
monetization of oil and gas. Even so, while term overriding royalty
interests may appear to have many characteristics of a loan, they
are generally characterized by state law as transfers of interests
in real property that have a limited duration or amount.

The real property transfer character of these transactions has
important implications in bankruptcy. If a prepetition overriding
royalty interest transaction is characterized as a transfer of real
property (ie, a sale), then the interest has effectively been
transferred from the debtor#39;s ownership and is not part of the
bankruptcy estate. See 11 USC. § 541(b)(4). The
trustee or DIP, therefore, has no power to sell, assign, or
transfer the interest. Additionally, if the transaction is
considered a sale that is substantially completed prepetition, the
transaction is not subject to the power of a trustee or DIP to
assume and assign or reject executory contracts. Thus, if an
overriding royalty transaction is considered a prepetition transfer
of real property, the transaction will be immune from many of the
powers of a bankruptcy trustee or DIP. 

Recognizing the real property transfer nature of an overriding
royalty interest, the Bankruptcy Code provides protection to owners
of certain categories of overriding royalty interests. For
instance, section 541(b)(4)(B) specifically excludes from property
of the estate any interest of the debtor in liquid or gaseous
hydrocarbons to the extent that … the debtor has transferred such
interest pursuant to a written conveyance of a production payment
[as defined by section 101(42A)] to an entity that does not
participate in the operation of the property from which such
production payment is transferred…. Because a
production payment is defined by section 101(42A) of
the Bankruptcy Code as a type of term overriding
royalty, this provision specifically excludes certain
overriding royalty interests from property of the estate. However,
the Bankruptcy Code is not the end of the analysis.

Even if an overriding royalty transaction does not fit strictly
within the Bankruptcy Code#39;s provisions related to certain
overriding royalty transactions, the transaction may nevertheless
be excluded from the debtor#39;s estate and therefore protected
based on state law. Conversely, even if a transaction appears to
fit within the Bankruptcy Code#39;s provisions excluding certain
overriding royalty interests from property of the estate, the
transaction may nevertheless fail to qualify as a
transfer of an interest of the debtor if
the court determines, as a threshold matter, that the overriding
royalty transaction is not a transfer, but rather a
disguised financing under applicable state law.

Parties frequently go to great lengths to include express
provisions demonstrating the real property transfer character of
the transaction in the underlying transactional documents (which
are typically styled as conveyances and/or purchase and sale
agreements). However, a recent bankruptcy court decision from the
Southern District of Texas calls into question the long-standing
treatment of these transactions as real property

NGP Capital Resources Co. v. ATP Oil Gas Corp. (In re
ATP Oil Gas Corp.)

In an uncommon move for an operator in chapter 11, ATP Oil
Gas Corporation (ATP) went on the offensive against its
royalty investors soon after the commencement of its bankruptcy
case, and it indicated that it would seek to recharacterize a
number of overriding royalty interest transactions as debt
financings. Before determining whether the overriding royalty
interests were excluded from property of ATP#39;s estate under the
terms of the Bankruptcy Code, the court first sought to determine
whether certain purported overriding royalty transactions were
actually real property conveyances (as the documents themselves
suggested) or whether they were debt instruments (based on the
economic substance of the transactions) under
applicable state law.  

Some of the contested transactions involved NGP Capital Resources
Company (NGP). Prepetition, ATP and NGP entered into a
series of agreements that the parties characterized as overriding
royalty transactions (the ORRI Transactions). Under the
ORRI Transactions, NGP purchased term overriding royalty interests
(Term ORRIs) related to six leases on two properties
for a total purchase price of $65 million. Pursuant to the relevant
documents, the Term ORRIs would remain in effect until the
cumulative royalty payments received by NGP equaled the original
purchase price plus interest at a Notional Rate of 13.2
percent per year. Further, if ATP was late in making payments, NGP
could impose a default rate of 14.5 percent per year. In effect,
these provisions virtually guaranteed NGP a certain rate of return
regardless of the rate of production, oil and gas prices, or
ATP#39;s interest in the leases. In fact, due to the structure of
the interest rate provisions, NGP actually stood to earn more from
the agreement if oil and gas production was low. In other words,
the interest rate provisions effectively shifted the risk of loss
on the investment to ATP. 

ATP argued, among other things, that the interest rate provisions
were inconsistent with the definition of a term overriding royalty
interest under Louisiana law. NGP countered that the text of the
Louisiana Mineral Code was broad enough to encompass a term
override with these types of provisions. The bankruptcy court
ultimately rejected NGP#39;s argument that Louisiana law was as
broad as NGP suggested and went on to examine the transaction#39;s
provisions in detail to determine whether they were consistent with
the transfer of an overriding royalty interest under Louisiana

As an initial matter, the court rejected the proposition that the
ORRI Transactions were secured financing transactions. However, the
court found that at least four aspects of the transactions
resembled an unsecured debt financing transaction. First, the
parties treated the NGP transaction like a loan, and NGP
represented it as one to the public. Second, the transaction had
several characteristics of a loan under accounting standards,
including GAAP. Third, the parties treated the transaction as a
loan for tax purposes. Fourth (and most importantly), because of
the interest rate provisions, income from the Term ORRIs did not
fluctuate based upon the revenues from the properties. Rather,
NGP#39;s rate of return remained relatively constant. Thus,
although the court found that ATP was expressly not obligated to
repay any amount to NGP and its obligation to make payments was, on
the face of the documents, entirely contingent on the production of
oil, it also concluded that the economic substance of the
transaction appeared to make the production condition an
artificial one. As the court noted: An ORRI that is
virtually certain to be satisfied in full from production is the
economic equivalent of an #39;obligation to repay#39; or an
unsecured loan.


While the court#39;s ruling in ATP was a denial of
NGP#39;s summary judgment motion and NGP may ultimately prevail at
trial, the issues raised in the case are of significance to parties
entering into overriding royalty transactions. Specifically, the
ATP decision suggests that despite artful drafting and the
long-standing treatment of such transactions as real property
transfers, a bankruptcy trustee or DIP may be able to
recharacterize a Term ORRI transaction as an unsecured financing,
to the detriment of the royalty owner. Further, given ATP#39;s
success in surviving a motion for summary judgment, there is the
potential that more debtors may take a similar approach,
potentially adding more uncertainty to transactions that were once
thought to be untouchable in the oil and gas industry.

ATP may eventually be regarded as an extraordinary
situation, but time will tell if there is indeed any lasting
precedent generated. Accordingly, parties entering into overriding
royalty transactions should review the court#39;s ruling in
ATP to better understand the risks, and structure their
transactions to minimize those risks.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

Category: Unsecured Financing  | Tags:  | Comments off
Aviation financing is in solid health
Tuesday, April 15th, 2014 | Author:

Boeing Capital Corporations VP of aircraft financial services, Tim Myers says: People are coming into the aviation finance market from all over the globe.

Supporting this, Thomas Hollahan, MD of Citi, believes: The banks are flush with cash across the market… We will continue to see a lot more deals financed, particularly for the airlines.

He notes a drop off in demand for pre-delivery payment (PDP) financing, which airlines have replaced with unsecured financing as they now have better liquidity.

Its [PDP] actually expensive financing and not as popular, he says.

In a poll of ISTAT delegates, the majority (43 per cent) believed commercial banks will fund 25 to 30 per cent of aircraft purchases in 2014. Commercial bank financing covered 28 per cent of orders in 2013, up 21 per cent from 2012.

The majority of delegates (37 per cent) believe the US Ex-Im bank will deliver $7bn to $10bn in aircraft loans this year; 30 per cent thought it will give $5bn to $7bn.

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