APN's Euro property group expected to breach contracts

APN Funds Management (APN) expects its APN European Retail Property Group (AEZ) to breach several of its financial covenants following significant property value declines and a drop in the value of AEZ’s hedging contracts.

APN, as responsible entity for AEZ, said the AEZ has not defaulted and is not expected to default on interest payments under its loan facilities. However, in a statement to the Australian Securities Exchange (ASX), APN said the breaches relate to loan-to-value and balance sheet ratios and interest cover ratios (ICRs), although they “remain comfortably above relevant ICR covenant levels”.

The announcement followed the revaluation of AEZ’s property portfolio as at December 31, 2008, which left property assets in the investment portfolio valued at $1,281 million, a decline in value of 14.3 per cent since the end of June 2008.

APN also noted that movements in relevant exchange and interest rates “have caused an unrealised mark-to-market change in the value” of AEZ’s hedging contracts, designed to hedge the group’s exposure to changes in exchange rates and base interest rates in its loan facilities. At the end of December last year, the mark-to-market value of the hedging contracts was a net liability of $94.3 million.

APN has made proposals to financiers Deutsche Bank and Royal Bank of Scotland (RBS) to “restructure AEZ’s covenants in conjunction with AEZ’s previously announced debt reduction and capital management strategy”. In their discussions with the banks, APN has requested responses in advance of AEZ’s half-year results announcement on February 25.

In the meantime, AEZ is still “aggressively” pursuing its previously announced capital management initiatives, including asset sales.

“Given AEZ continues to be supported by its financiers, it is not a forced seller of any asset,” the statement noted.

APN said AEZ is complying “with all other financial covenants to which it (or any of its controlled entities) is subject”.

AEZ’s board has also begun a strategic review of the group’s debt and equity capital base.

“This review will consider the financing challenges AEZ continues to face in the new emerging global economic landscape and will review all available options to source capital,” the statement said.

APN is under advice from JP Morgan and Goldman Sachs JBWere on the strategic review, which should be completed by the end of April this year.