For immediate release on 15 May 2009
CQS RIG FINANCE FUND LIMITED
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30
SEPTEMBER 2008
Chairman's Statement
Introduction
I present the Company's annual report for the twelve months from 1
October 2007 to 30 September 2008. The Company has faced difficulties
towards the end of the period and the Financial Statements as at 30
September 2008, while representative of the position as of 30
September 2008 do not reflect the extent of deterioration that has
happened since that date and the decisions the Board and the
Investment Manager have taken subsequently.
Investment Performance
The Company's performance for the year under review was extremely
disappointing. Despite generally supportive fundamentals in the
offshore exploration and production of oil and natural gas, the
turmoil in financial markets impacted substantially on the Company's
net asset value and share price.
The Company's net asset value declined from 99 pence per ordinary
share on 30 September 2007 to 73 pence per ordinary share on 30
September 2008. The price of ordinary shares declined from a closing
price of 102 pence on 30 September 2007 to 57.75 pence on 30
September 2008, representing a negative return (including dividends)
of (38.3)%. The ordinary shares ended the year at a 21% discount to
the net asset value.
The Company's NAV was affected by both events specific to particular
portfolio holdings and especially, by the rapid deterioration in
financial markets overall. At the portfolio level holdings in two
issuers had a particularly negative impact. These were Viking
Drilling ASA and MPU Offshore Lift ASA.
The collapse in credit markets leading up to and following the
failure of Lehman Brothers led to a market wide deleveraging and
significant selling of high yield bonds by market participants. Rig
bonds were not immune to this and all of the Company's holdings were
subject to substantial mark downs in price. Mindful of increasing
market risk, the terms of the Company's financing agreement and with
a desire to reduce leverage, the Company sold positions.
Post Year End
October proved to be an exceptionally challenging month for the
Company. It was recognised that the continuing deterioration in
market conditions through September had resulted in a significant NAV
decline during September 2008. The Company sought to relock its
committed financing with the secured lender, but because of the
prevailing market conditions, found the secured lender unwilling to
do so. Nonetheless, the secured lender indicated a willingness to
continue to support the Company. The secured lender was able to
implement an increase of 100 basis points to the cost of the
Company's financing as it sought to cover its own financing cost
increases during this period.
The Company sought to respond to the continuing challenging market
conditions in a number of ways.
It continued to reduce risk and debt through the orderly sale of
assets reducing the debt burden by a further amount equivalent to
GBP32.8 million (the value of these assets included on the year end
balance sheet was GBP39.9 million) in October 2008.
On 24 October 2008 the Company announced it had entered into an
unsecured facility agreement with RBC Cees Trustee Limited under
which US$6 million (GBP3.4 million) was made available to the Company
for short term working capital. The facility has been provided by
RBS in its capacity as trustee of certain assets for the benefit of
Michael Hintze, Chief Executive of CQS, who holds a majority interest
in CQS Cayman LP, the Company's Investment Manager. The unsecured
term loan carries an interest rate of LIBOR plus 5 per cent per annum
and per the agreement is repayable at the earliest of 23 October 2009
or a date 90 days after receipt of cancellation by the lender.
However, the unsecured lender has subsequently confirmed that it has
no current intention to seek his contractual right to repayment until
the secured lender has been repaid in full.
The Company also announced its intention to seek a placing of new
equity to provide stability and a more appropriate capital structure.
However, a potential issuance of securities was not able to proceed
as securing sufficient new capital and/or committed finance was not
possible in the face of continued deterioration of the NAV and the
financial markets which were effectively closed to financing.
NAV per share fell rapidly through the month ending at 30.76 pence as
at 30 October 2008. That continued rapid decline in the NAV moved the
Company to a position of expected margin deficit and, on the basis of
this anticipated material change in the financial condition of the
Company, the Company announced on 30 October 2008 it had requested
that trading in its shares on AIM and the CISX be suspended with
immediate effect pending clarification of the Company's financial
position. That request was granted.
Over the course of the remainder of the calendar year the asset
prices and liquidity conditions in the markets continued to
deteriorate. The NAV declined to 11.67 pence per share on 24 November
2008 and on 1 December 2008 the Company announced that in light of
the lack of liquidity and visibility in the high yield bond markets,
the Company no longer considered that the methodology used to
calculate the NAV provided an accurate indication of value and that
it had therefore decided to defer publication of the NAV until more
normal market conditions returned.
November also saw the resignation of Mark Conway, the senior
portfolio manager, as announced on 24 November 2008. The Investment
Adviser confirmed that it continued to have an appropriately skilled
and experienced team to manage the portfolio. The Company sold
further assets for the equivalent of GBP10 million (the value of
these assets included on the year end balance sheet was GBP14.7
million) as it continued to seek to reduce risk and debt.
During December the Company moved initially to a position of negative
NAV, where the long market value of securities was less than the sum
of both secured and unsecured debt and subsequently, the long market
value of the assets fell below that of the secured debt. During the
month there was no substantive disposal of assets. There was some
small change in the portfolio where the Company saw the opportunity
to enhance the expected recovery profile of the portfolio through
selective sale and purchase of positions as sanctioned by the secured
lender.
Throughout the last few months of the Company's 2008 financial year
and post year end, both the Company and the Investment Adviser have
had a continuous dialogue with the secured lender. Post the
suspension of trading there has been an ongoing discussion with the
secured lender with respect to a clarification of the Company's
financial position and a continued exploration of options to achieve
financial stability and a more appropriate capital structure.
I am pleased to note that, as announced on 22 April 2009, the Company
has successfully renegotiated its committed financing terms with its
lender.
The key terms are:
The secured lender agrees to provide financing for 18 months. There
can be no increase in the net USD value of the secured debt. The
financing cost is LIBOR + 400 basis points. There is a USD2.8m fee
for the facility payable at the earliest of the end of 18 months and
the point at which the secured lender is repaid.
During the period of the facility;
* all cash receipts, net of agreed operating expenses, are
used to pay down the secured lender's debt (including fee) and, if
achieved,
* all cash receipts thereafter, net of agreed operating
expenses, are used to pay down the unsecured lender's principal and
interest and, if achieved,
* all cash receipts thereafter, net of agreed operating
expenses, and remaining portfolio assets are available for
distribution to share holders.
There are some conditions under which the secured lender may, but is
not obliged to, withdraw the facility. The primary condition is one
where the cumulative cash recovered from assets, that have
crystallised through maturity, early redemption, or from the
conclusion of realisation scenarios, falls short of the total
expected aggregate level of recoverable cash for the whole of the
portfolio as agreed with the secured lender at the date of execution
of the facility, by an amount greater than or equal to 20% of that
total expected recoverable cash. Such expected aggregate level of
recoverable cash agreed with the secured lender at the date of
execution of the facility is substantially higher then the long
market value of the securities as at that date.
The Company believes it should be able to operate within the terms of
this new financing agreement based on its cash forecasts and
projections.
Outlook
For shareholders the return to a positive NAV is of primary interest.
This remains both a function of the debt which the Company will seek
to reduce, and of the value ascribed to the portfolio by the markets
over which the Company has no control. Most commentators see a
prolonged period of financial/credit market dislocation combined
with, at least short term, weakness in energy demand and on that
basis it is difficult to envisage a rapid return to a positive NAV.
Nonetheless, we believe that the longer term possibility of sharing
in any upside remains for shareholders.
The Company is exploring options with regards to recommencing trading
on AIM and CISX. However, it remains a possibility that this may not
occur. The Board is looking to resolve this issue as soon as
possible.
Dividends
The Company met its target for dividend distributions during the
year. Total dividends paid during the year to 30 September 2008 were
7.89 pence per ordinary share. A dividend of 1.95 pence per ordinary
share was paid on 17 December 2007, a dividend of 1.98 pence per
ordinary share was paid on 10 March 2008, a dividend of 1.98 pence
per ordinary share was paid on 10 June 2008 and a dividend of 1.98
pence per ordinary share was paid on 15 September 2008. The Company
has suspended payments of further dividends and no dividend payable
was declared in December 2008. It is unlikely that the Company will
re commence dividend payments in the 2009 financial year.
Annual General Meeting
The Company's Annual General Meeting will be held at the offices of
Kleinwort Benson (Channel Islands) Fund Services Limited on 9 June
2009.
Michael Salter
Chairman
Date: 15 May 2009
Investment Manager's Report
Energy Markets
Crude oil prices were strong during the first nine months of the
financial year under review reflecting persistent supply concerns.
WTI crude oil prices rose from US$82 per barrel at the end of
September 2007 to US$145 on 3 July 2008. However subsequently, oil
prices weakened significantly in response to growing concerns
regarding a potential decline in demand for oil in response to
evidence of sharply weakening global economic growth, with WTI crude
oil prices having declined to US$101 by 30 September 2008.
On 13 March 2009 the IEA projected global oil product demand figures
for 2009 was 84.4 million barrels per day, down 1.5% from the
previous year following large downward revisions to global GDP
forecasts by the IMF and continued signs of demand weakness in the
OECD.
Financial Markets
As the Company's financial year progressed global equity and credit
market weakness gave way, in September 2008, to one of the most
volatile and challenging trading environments ever observed in
financial markets. The catalyst for the severe market declines
appeared to be the failure of Lehman Brothers resulting in investor
panic and major concerns about many financial institutions and indeed
the financial system itself. As a result, many global regulators
introduced short-selling restrictions, primarily in financial shares,
and globally authorities encouraged consolidations and rescues of
many major financial institutions and introduced a range of bailout
programmes designed to support the financial system. Simultaneously,
pressure in the banking system forced Libor spreads to widen
dramatically and the effects were to drive financing costs higher for
companies and the general decline in asset prices was exacerbated by
forced selling in many asset classes.
The Portfolio
During the first half of the year under review the portfolio held up
relatively well. This was in part due to the fundamentals underlying
the oil and gas sector and the companies in whose bonds the Company
was invested, as well as continued corporate activity in the sector.
As in other markets, there appeared to be a flight to quality within
the offshore oil and gas infrastructure bond market. However, in the
second half of the Company's financial year, and as the turmoil in
financial markets gathered pace, selling pressure appeared among
those market participants who were leveraged and/or required
liquidity. This was consistent with what we believe occurred in the
broader credit markets and bonds held in the Company's portfolio were
generally marked down across-the-board and indiscriminately. In such
a market environment, the Company's portfolio continued to be
impacted by forced selling and market liquidity factors, which we
believe was a reflection of a further significant markdown in high
yield bond markets.
Given the largely US dollar denominated asset base and matching US
dollar funding, the rapid depreciation of sterling against the dollar
generated an increase in the Company's borrowings in sterling terms.
These factors combined to increase the leverage in the portfolio,
which the Company took steps to reduce.
As at 30th April 2009, the remaining assets in the portfolio divide
into three broad categories by function.
Analysed by face value, drilling rigs are the largest category
accounting for 50% of the assets. These rigs break down into two
main sub categories: jack up drilling rigs (29%) and are
semisubmersible drilling rigs (21%). The majority of the jack up rigs
(23%) are regarded as "giant jack-ups" which are targeted at
particular water depths and demanding environmental conditions, such
as the Norwegian Continental Shelf, setting them apart from the
general jack up market which is much better supplied and very
competitive.
Production focused equipment, the majority being Floating Production
Storage and Offloading (FPSO) vessels, is the second largest category
accounting for 32% of assets. FPSO vessels are customised to meet the
particular chemical/physical characteristics of a target oil
reservoir to which they are then likely to be contracted for many
years. While this customisation takes time and can be costly, it also
makes it difficult to switch a vessel from one field to another at
short notice. The current level of oil prices and associated
softening in the capital expenditure plans of oil companies means
that FPSO's built on a speculative basis will find it harder to get
employment in the short term.
The remaining 18% of the portfolio assets are oil service related
equipment.
Analysed by type of security, 30% of the assets are first lien
secured while the remaining 70% have second lien security over the
underlying assets built or being built. Construction is complete on
approximately 23% of the portfolio and some 38% of the assets (built
and under construction) have contracts of varying tenors in place
Outlook
Since the end of the Company's financial year the price of oil
continued to fall reaching a low of US$37.41 a barrel on 18 February
2009 despite the agreed and proposed production cuts by OPEC. Since
then, oil prices have staged a recovery, closing at US$56.71 on 7 May
2009. It is clear that much of the developed world is experiencing
very challenging economic conditions. The decline in GDP and the
associated collapse in world trade in both raw material and finished
goods, has caused a significant reduction in the demand for energy
and in particular oil and gas. We believe that offsetting the
supply/demand driven fall in oil prices, is the decline in production
capacity as existing fields continue to be depleted at rates in
excess of the rate at which new capacity comes on stream.
Since the Company's financial year end, the financial markets
continued to deteriorate significantly and deleverage. Selling
continues across the high yield bond markets driving down asset
prices. The ongoing and increasing scarcity of available credit
continues to be the primary cause of stress in the portfolio. It is
against this
backdrop that we see a continuing vulnerability of all construction
projects where completion was predicated on the ability to raise
further debt and / or equity finance even as the construction risk
diminishes.
The portfolio continues to generate income and capital repayments.
Under the terms of the financing facility all cash receipts net of
agreed operating expenses, are required to be applied to repay the
borrowing from the secured lender. Once that borrowing has been
repaid together with the facility fee, the Company will be required
to apply such cash receipts to repay the borrowing, and accrued
interest, from the unsecured lender. Thereafter, any further such
cash receipts and remaining portfolio assets are available for
distribution to shareholders. There is consequently, no expectation
that dividends will be paid over the course of this financial year.
The projected income and capital repayments over the next 18 months
are expected to repay a material proportion of the debt to the
secured lender. Leading up to the end of the 18 months, the Company
will review its options to extend or replace its financing, or issue
new equity to repay some or all of the residual debt. Furthermore,
it may be that by then asset values have recovered to a point where
the sale of assets to repay the residual debt also represents an
attractive option.
All WTI price data sourced from Bloomberg
All share price data sourced from Bloomberg
CQS Cayman Limited Partnership
Date: 15 May 2009
Income Statement for the year ended 30 September 2008
For the Period from
year ended 8 Nov 2006 to
30 Sep 2008 30 Sep 2007
Notes GBP GBP
Operating (loss)/income 3 (14,468,181) 5,670,122
Operating expenses
Other operating expenses 4 (1,787,798) (847,201)
Finance costs (4,321,565) (1,960,641)
Total operating expenses (6,109,363) (2,807,842)
Net (loss)/profit (20,577,544) 2,862,280
(Loss)/Earnings per Ordinary
Share
Basic and Diluted 5 (24.55p) 5.72p
All items in the above statement are derived from continuing
operations.
All income is attributable to the Ordinary Shareholders of the
Company.
The accompanying notes (available on the Company's website) form an
integral part of the financial statements.
Statement of Changes in Shareholders' Equity for the year ended 30
September 2008
Share Share Other Accumulated Total
Capital Premium Reserve Losses
Notes GBP GBP) GBP GBP) GBP)
Balance at 1
October 2007 - - 48,724,675 777,280) 49,501,955)
Net loss for
the year - - - (20,577,544) (20,577,544)
Total recognised
income and
expense plus
equity brought
forward - - 48,724,675 (19,800,264) 28,924,411
Conversion
of C Shares 49,018,863
into
Ordinary
Shares 11 - - - 49,018,863
Transfer to (49,018,863) 49,018,863
other
reserve 11 - - -
Dividends
paid to
Shareholders 15 - - (6,761,154) - (6,761,154)
Balance at 30 90,982,384
September 2008 - - (19,800,264) 71,182,120
For the period from 8 November 2006 (date of incorporation) to 30
September 2007
Share Share Other Accumulated Total
Capital Premium Reserve Profits
Notes GBP GBP) GBP GBP GBP)
Balance at 8
November 2006 - - - - -
Net profit -
for the
period - - 2,862,280 2,862,280
Total recognised - -
income and
expense plus
equity brought
forward - 2,862,280 2,862,280
Issuance of
Ordinary
Shares 11 - 50,000,000 - - 50,000,000
Cost related
to the
issuance of
Ordinary
Shares 11 - (1,275,325) (1,275,325)
Transfer to (48,724,675)
other reserve 11 - 48,724,675 - -
Dividends -
paid to
Shareholders 15 - - (2,085,000) (2,085,000)
Balance at 30 48,724,675
September 2007 - - 777,280 49,501,955
The accompanying notes (available on the Company's website) form an
integral part of the financial statements.
Balance Sheet as at 30 September 2008
30 Sep 2008 30 Sep 2007
Notes GBP GBP
Assets
Non-current assets
Investments at fair value through 6 158,024,503 104,367,052
profit or loss
Current assets
Derivative financial assets -
unrealised gain on forward
exchange contracts 7 - 971,825
Receivable for securities sold 2,769,402 -
Cash and cash equivalents 97,888 -
2,867,290 971,825
Total assets 160,891,793 105,338,877
Equity and liabilities
Equity
Share capital 10 - -
Share premium account 11 - -
Other reserve 11 90,982,384 48,724,675
Accumulated (losses)/profits (19,800,264) 777,280
71,182,120 49,501,955
Current liabilities
Interest-bearing borrowings 8 77,164,899 53,751,884
Payable for securities purchased 1,288,008 1,586,660
Derivative financial liabilities -
unrealised loss on
forward exchange
contracts 7 10,722,889 -
Other liabilities and payables 9 533,877 498,378
Total liabilities 89,709,673 55,836,922
Total equity and liabilities 160,891,793 105,338,877
Net Asset Value per Share 73.07p 99.00p
The accompanying notes (available on the Company's website) form an
integral part of the financial statements.
Cash Flow Statement for the year ended 30 September 2008
For the Period from
year ended 8 Nov 2006 to
30 Sep 2008 30 Sep 2007
Notes GBP GBP)
Net cash outflow from 12
operating activities (51,037,278) (98,725,770)
Financing activities
Proceeds from issuance 11
of Shares 50,000,000 50,000,000)
Costs related to 11
issuance of Shares (981,137) (1,275,325)
Interest expense paid (4,245,297) (1,709,108)
Increase in 8
interest-bearing borrowings 13,122,754 53,795,203)
Dividends paid to 15
shareholders (6,761,154) (2,085,000)
Cash inflows from financing
activities 51,135,166 98,725,770)
Net increase in cash 97,888 -
Reconciliation of net cash
flow to movement in net cash
Net increase in cash and cash
equivalents 97,888 -
Effect of exchange rate
fluctuation on cash and cash
equivalents - -
Cash and cash equivalents at
start of year - -
Cash and cash equivalents at
end of year 97,888 -
The accompanying notes (available on the Company's website) form an
integral part of the financial statements.
The Annual Report and Accounts for the year ended 30 September 2008
will be posted to shareholders shortly and in accordance with AIM
Rule 26 a copy is available to view and download from the Company's
website at www.cqsrigfinance.com.
Enquiries:
Lynette Le Prevost
Kleinwort Benson (Channel Islands) Fund Services Limited
Telephone (01481) 752515
NOMAD and Broker
Arbuthnot Securities Limited
Alastair Moreton
Telephone 020 7012 2000
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