In short, ICR and LVR covenants are complied with as at 31 Dec....

In short, ICR and LVR covenants are complied with as at 31 Dec. 2008

both covenants may be breached at the next testing date 30 June 2009. However,

a. VPG is still able to service interest payment;
b. LVR might be lower than 60%, however still provides lenders with adequate security cover.

a and b meet the requirements of a lender as mentioned by Thinkinloudly in his posts as "rules of lending".

Hence, it is reasonable to expect a sucessful debt restructuring with the banks.

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ICR for 12 months to 31 Dec. 2008

Their total debt was AUD1.31bln as at 30 June 2008 (it was only AUD216mln at 30/6/2007) due to the Scarborough deal. If we assume an interest rate of 8% (which is on the slightly high side), interest expense is: AUD104.8mln pa from the date of the increased debt.

Also remember, covenant calculation is on a rolling 12 month basis, i.e. the covenant calculation as at 31 Dec will be for the period of 1 Jan-31Dec. 2008. In the first half of the year, there was not that much interest expense.

EBITDA in the 2H of FY2008 was good AUD150mln, I recall.
If we assume 1H2008 EBITDA to be only half of that i.e AUD75mln, which I doubt will be the case.

ICR will be: (150mln+75mln)/104.8=2.15x, above the covenanted min of 2.0x at group level.

Remember, non-cash writedowns are excluded from ICR calculation (I checked this with the CEO-Peter Hurley)

Hence, I expect the ICR covenant to be likely in compliance still.

The key is that they are still able to service debt, and should continue to be so with the recently announced cost cutting measures.

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LVR as at 31 Dec 2008

page 19 of the FY2008 presentation,
LVR of max. 60% for group and

40-65% at a project level.

it is noted that some have LVR of 1.1x, 1.3x-1.75x. I presume that is value to loan ratio.

If we assume
-AUD500mln writedowns to property assets,
-200mln writedown to goodwill,
-150mln book value to recent disposals
-200mln cash balance (last cash of 121mln+ earnings of HY+disposals)
-assuming no repayment made to loan outstanding of AUD1.3bln as at 30 June 2008, then assuming LVR at group level is defined as net Loan to total properties value.

LVR will be:

(1300mln-200)/(1430+1300-150-500mln-goodwill writedown of 200mln)=1100/1880=58.5%

LVR is still in compliance. (max. of 60%)

Can someone check this to see whether there is any loophole here? Obviously this is only an estimate. But I assumed cash proceeds from asset disposal + 1H09 cash earnings of only 80mln which is conservative.

This gives me some comfort that LVR at group level is likely to be still in compliance though close to the max. allowed.

However, on a project by project basis,there might be some LVR breaches, especially in Europe.

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ICR estimate for 12 months ending 30 June 2009.

PP23Red,

I agree that VPG is a fat lamb, and given the calculation I've done before. The banks can get all of their money back with residual of at least 20c/share for shareholders, assuming reasonable gsale even in a fire sale situation.

However, they are not in breach of covenant as at 31 Dec 2008 as yet. What happen is likely LVR covenant breach at the next testing date 30 June 2009, and possible ICR breach.

It depends on the provisions in the facility agreements whether banks could pull the plug as they wish or not.

There might be remedial period for covenant breach, or debt being made from asset sale.

I have done a group level estimated ICR calculation as shown below. It comes out with an ICR of 1.75x for 12 months ending 30 June 2009.

Anyone is welcome to correct my calculation/assumption. Personally, I am an outsider, and see it as harsh enough.

Despite the possibility of LVR and ICR covenant breach, VPG is still a going concern. It also has the flexibility to sell assets to meet debt amortisations and interests if necessary. It is no where near bankruptcy.

Hence, the situation is not that dire.

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Base information

FY2008 result presentation page 11.

Property ownership 124.7
Developing and trading 86.3
Fund management 139.2
VCS 68.8
Interest & other income 36.3
__________________________________
total: AUD455.3mln

Operating expenses AUD154.2
EBITDA AUD301.1mln

If we assume a 85% discount to property ownership AUD106mln
Developing & trading only 50% AUD43.2mln
Fund management 85% AUD118.3mln
VCS (loss offsetting gain) 0
Interest & other income 30% AUD10.9mln
--------------------------------------------------------
Total: AUD278.4mln
Operating expense: 85% (given director salary reduction, head count reduction, not that much developing, sales etc) AUD131.1mln
-----------------------------------------------------------
FY2009 estimated EBITDA: AUD147.3mln

interest expense:
debt: 1300-100 (conservative estimate of debt reduction from asset sale)
Average interest rate: 7% (reflecting the interest rate reductions since Sept 2008.)

Annual interst expense: AUD84mln

Group level Interest cover: AUD147.3mln/AUD84mln=1.75x.

Not that bad.