aspen raising questions now answered

Answers to the liquidity questions

I have now found out the answers to the questions raised in my original posting Aspen Equity Raising – Unanswered Questions. The questions went to the central issue of Aspen’s ability to continue with its core activities without a) running out of cash, or b) tripping loan covenants in the two loans to the head stock (NAB and Bendigo Bank). Broadly the answers, details of which are set out below, are generally to the positive. I am less concerned about Aspen being a going concern or future equity raiser, and for me it’s now a question of the potential uplift based on NTA compared to other opportunities in the AREIT sector. But at 17 cents or lower I am interested.

a) Can Aspen use the new Telstra convertible note facility for general working capital purposes, or is its use restricted to the ATO building, as the Macquarie Research note says? The answer is the facility is not restricted to the ATO building and it can be used by Aspen to fund working capital. That’s a relief!

b) What does the $55m guarantee to the Development Fund relate to? This is important because the future values of development projects by their nature can swing materially, and any money Aspen has to pay out under the guarantee may not be recoverable from the realisation of the Development Fund’s assets. The answer is - $30m of the $55m is a guarantee of the Development Fund’s NAB $37m loan. It’s true that development asset values are volatile, but at an LVR of 49%, the probability is that NAB will be repaid in full and so Aspen will not be called on its guarantee. The other $15m relates to insurance bonds given in connection with the Adelaide ATO development. The insurance bonds could relate purely to practical completion or include the defects period, but regardless given the tone of the disclosure relating to this project (“on time and on budget”) the probability is the $15m will not be called.

c) The deal struck with NAB includes a $37m amortisation requirement across Aspen and its Funds. The question was - has NAB set a schedule prescribing where the amounts have to be paid down, or can Aspen pay down where it chooses so long as its $37m in aggregate? The answer is there is a schedule and NAB requires particular pay-downs across a number of the NAB facilities, including the facilities of the Funds, but the breakdown is confidential. The good news is there is no obligation on Aspen (head stock) to provide the amortisation amounts to any of the Funds, should a Fund not be able to meet its amortisation obligations from its own means (notwithstanding commercially it maybe in the best interests of the Aspen to do so). So the risk of eroding NTA is mitigated. The bad news is the question remains how much of the $37m has to be made off the Aspen (head stock) facility. This is now more pertinent because it can no longer be presumed that the proceeds from the recent sale of the industrial asset in the Diversified Fund ($17m) can count towards the $37m target. I’m guessing here, but allowing for a fair spread of the $37m across the various NAB facilities, a figure of $27m for the main Aspen NAB facility sounds reasonable/conservative. The settlement of the St Leonards sale will realise $7m, so that leaves a $20m target to be achieved by 30 June 2013. Although it’s tight this could be met by the $26m of excess liquidity afforded principally through the new Telstra note facility, or alternatively a sale of the Victorian industrial asset, foir example, would do it.

d) Are there cross defaults in the Aspen head facilities (NAB and Bendigo Bank)? The answer is there is a cross default provision in the Bendigo facility, but there is no cross default provision in the NAB facility either in relation to a possible default under the Bendigo facility or the NAB facilities down at the Fund level. This is good to know, as it confirms that Aspen will not get tripped up by a covenant breach occurring in one of its Funds or the Bendigo facility.

e) Is there any prohibition on Aspen using funds (eg using the convertible note facility) to pay down the Bendigo facility to avoid a possible future LVR breach? I don’t know the specifics, but I do know it is problematic and that the Bendigo loan needs to be looked at solely in relation to the realisation of the assets secured against it. That said, a breach of LVR covenant would not trip up Aspen’s NAB loan (see point (d) above), so it’s a less critical issue than previously thought. And while it seems that not all the secured asset are included in the LVR calculation, when you include the assets classified as “assets held for sale” along with the Ballina assets, it’s an LVR of 34% a position that should enable relations with Bendigo Bank to stay on track.