The disappointment in the distribution cut is not the issue.
The threat of possible cash calls on the fx hedging is the concern. Couple that with the cash required to pay down the 18% or so of borrowings coming up to maturity.
The drop in the AUD produces a big increase in the AUD NTA of assets, less the loss on the fx contracts. In this case, there is a slight overall increase in AUD NTA, because the full value of the Japanese assets/future income isn't hedged.
While the NTA increase is good, the bad news is that the fx counterparty is likely to require a cash call be made on the fx contract - if the terms are breached (which the announcement suggests they could well be).
Only guessing on the terms as we don't know the contract details, but if the fx loss is currently $128m, you're likely looking at a cash call of 10's of millions.
IMO probably still ok if some property is sold in a hurry. The basics of the problems was predictable. The same issue will apply to other fx hedged Japanese funds.
A little surprised the market appears so surprised, but hope this is useful and good luck to holders.
PE
GJT Price at posting:
$3.40 Sentiment: None Disclosure: Not Held
