Share PriceUpdate
13 June 2008
Key Points
A thorough review of the Group's business by new CEO Steve Hartley has been taking place. While this review has not been completed, the Board wanted to release the initial findings without delay. These may be summarised as follows:
- Independent 'Big 4' firm has reviewed accounting treatment of complex receivables under IAS39
- An impairment charge of approximately £6 million will be necessary against certain receivables within the venture finance portfolio
- A restatement of 2007 preliminary results
- The impairment charge would lead to a breach of certain covenants with the Group's committed bank facilities. The Group has approached its bankers and is in constructive discussions with the intention to obtain a waiver from any such breaches.
- Any potential impairment would not effect the Company's short term cash position
- Action is being taken to reduce the Group's cost base
- The Group's asset finance and property finance divisions continue to trade profitably
- A further announcement will be made following the completion of the review.
Strategic Review
Following his appointment on 28 March 2008 as Group Chief Executive, Steve Hartley was asked by the Board to lead a thorough review of the Group's business and the existing client portfolios. The Board considers that it is appropriate to disclose the following preliminary conclusions of the review and further updates will be given to the market once the review has been concluded.
Preliminary conclusions
The Commercial Asset Finance division provides conventional hire purchase and lease finance to SMEs and its portfolio at 31 May 2008 of £18 million is performing in line with expectations. New business opportunities remain strong. Lending criteria have been tightened to reflect the credit risk in the current negative economic climate. The loan book continues to grow. Norton Folgate, the Group's asset finance brokerage, continues to make progress. The Board would like to see this business broaden its skill and product base over the next twelve months.
The Property Finance division is operating on a standstill basis with advances at 31 May 2008 of £10 million. New business is being advanced but on the basis of recycling collections within the existing portfolio and against reduced loan to value ratios and to clients with stronger financial covenants.
Historically part of the Venture Finance division's business model has been predicated on the probability of clients listing or refinancing in order to redeem the secured General Capital loans. In addition to loan receivables, the Group carries investments in a number of client companies which have historically realised additional profits.
The announcement of preliminary unaudited results for the year ended 31 December 2007 made on 28th March 2008 referred to worsening market conditions for refinancings and IPOs. In the Board's view, market conditions affecting some of the Group's client sectors have deteriorated further. Additionally, some of the venture finance business written in 2007 included loans to a number of early stage businesses. The Board considers that the risk in these is greater than previous levels and a number of these companies have been unable to generate sufficient revenues to meet their commitments to the Group and short term prospects of refinancing have weakened.
On a more positive note, three clients have successfully raised equity in the past 10 weeks allowing repayment of debt and profitable realisation of an equity position.
There are 92 clients in the Venture Finance portfolio with a gross value of the portfolio before provisions of approximately £26 million at 31 May 2008. As a result of the review the Board believes that a reduction of the carrying values will be required for 10 of these accounts, together with a small increase in the Group's collective impairment provision. The additional provision proposed against the Venture Finance book to those figures announced on 28 March 2008 is expected to be approximately £6 million.
As part of the review, the Board commissioned an independent Big 4 firm of accountants to review the accounting treatment of the receivables instruments and the investments. Having considered the results of this review, the Board has deemed that no changes are required in respect of the application of the complex provisions of IFRS and IAS 39. The review also confirmed the Board's view that evidence since the year-end warrants further review of the impairment provisions before completion of the 2007 Annual Report.
Future Business Activities
The Board has determined to discontinue writing new Venture Finance business for the foreseeable future and will work to reduce the related cost base. So far as the existing Venture Finance portfolio is concerned, the Group will continue to assist its clients in their efforts to re-finance and thereby to recover outstanding balances and fees due to the Group.
The Board believes that the tightening in the availability of credit from primary lenders continues to create opportunities for secondary lenders such as General Capital. Consequently, the Commercial Asset Finance division and Property Finance division will continue to write new business within credit guidelines revised appropriately to reflect the current economic climate and outlook.
Banking Facilities
The Group has committed three year £40 million senior debt facilities from HBOS plc and NM Rothschild & Sons Limited in place until March 2010. The proposed write down of the carrying values of the Venture Finance portfolio, whilst not affecting the Group's short term cash position, would cause a breach of three of the Group's banking covenants relating to interest cover and gross and net receivables cover. The remaining covenants, relating to gearing, net worth, portfolio spread, ageing and arrears are not likely to be breached.
The Group has approached its bankers and will require a formal waiver letter confirming that the proposed write downs may be treated as an exceptional accounting adjustment and that the forward covenants are set appropriately for the ongoing business. HBOS and Rothschild have been notified and they have indicated their intention to continue constructive discussions with the Group, subject to the independent accountants' further review of the provisions and projected future covenant performance.
A further announcement will be made on completion of the independent accountants' review and confirmation of the Group's lending bankers' position.
Current Trading and Outlook
In addition to completion of the Strategic Review, internal controls have been reviewed and, where appropriate, strengthened and the operating cost base has also been reduced. The business remains cautious on all new lending opportunities but expects continued steady growth in Asset Finance and the broking business through the rest of 2008.
The Commercial Asset Finance division and the Property Finance division continue to trade profitably and, excepting the accounting write down in the Venture Finance division, the Group is trading profitably and is cash flow positive. However, due to the decision to discontinue writing new Venture Finance business for the foreseeable future and the proposed revised accounting treatment described above the Board expects pre-tax profits for the year to December 31 2008 to be significantly below market expectations. However, opportunities to realise additional future gains from our residual equity holdings remain.
The Board expects to be able to finalise the report and accounts of the Group for the financial year ended 31 December 2007 following receipt of the waiver letters being sought from the banks. At that point, the Company will make a further statement to the market.
For further information:
| General Capital Group Plc |
|
| Steve Hartley, CEO | Tel: +44 (0) 1603 610610 |
| www.generalcapital.co.uk | |
| Collins Stewart Europe Ltd | |
| Mark Connelly / Adam Cowen | Tel: +44 (0) 20 7523 8350 |
| www.collins-stewart.com |
Media Enquiries:
| Abchurch Communications | Tel: +44 (0) 20 7398 7700 |
| Heather Salmond / George Parker | Tel: +44 (0) 20 7398 7704 |
| heather.salmond@abchurch-group.com | Tel: +44 (0) 20 7398 7719 |
| george.parker@abchurch-group.com | www.abchurch-group.com |