Interim Results
Intermediate Capital Group PLC
05 October 2004
INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 JULY 2004
Intermediate Capital Group PLC ('ICG'), the leading specialist European provider
of mezzanine finance, announces its results for the six months ended 31 July
2004.
Financial highlights:
• Core income up 23% to £34.8m (2003 : £28.4m)
• Gross capital gains up 49% to £23.7m (2003 : £15.9m)
• Pre-tax profits up 27% to £40.8m (2003: £32.1m)
• EPS up 10% to 39.9p (2003 : 36.3p)
• Proposed interim dividend up 12% to 11.8p per share
Operational highlights:
• New investments of £169m by ICG
• Repayment levels high at £190m
Commenting on the results, John Manser, Chairman of ICG said:
'I am pleased to report another good performance by ICG in our first half. We
have had satisfactory levels of new lending despite a more competitive market
and we are seeing some attractive lending opportunities in the second half. In
addition there is increasing investor interest in our sub-investment grade debt
fund management business which is an important area of future growth for ICG. We
continue to look forward to the future with confidence.'
Enquiries:
Tom Bartlam (020) 7628 9898
Managing Director, Intermediate Capital Group PLC
Tom Attwood (020) 7628 9898
Managing Director, Intermediate Capital Group PLC
Gill Ackers (020) 7404 5959
Brunswick Group Limited
CHAIRMAN'S STATEMENT
Introduction
I am pleased to report another good performance by ICG in the six months to 31
July 2004.
Core income rose by 23% to £34.8m compared to the first half of last year,
resulting from growth in both net interest income and fund management fees.
Capital gains increased significantly in the period and, after taking into
account provisions and the cost of incentive schemes, pre-tax profits for the
first half increased by 27% to £40.8m.
During the first six months of the year, we closed our latest Mezzanine fund
with €668m (£458m) of equity, which, with leverage, will have up to €1.5bn
(£1.01bn) available for investment.
While we have seen a good flow of mezzanine opportunities throughout Europe and
had satisfactory levels of new lending, we have been particularly selective in a
more competitive mezzanine market, rejecting more than the usual number of
potential deals on the grounds of leverage, structure and pricing. The level of
repayments was, as expected, unusually high. Consequently our loan book reduced
by 5% in the first half to £1.03bn.
The second half has started well with some attractive opportunities for new
lending including two particularly significant transactions. We are also having
an encouraging response to our increased marketing efforts for our
sub-investment grade debt fund management business.
Loan Portfolio
In the first half, due to our market position and coverage through our European
offices and teams, we have seen almost all the mezzanine opportunities in the
market. However, because we have been very selective, the level of new
investment is slightly below that in the first half of last year. We arranged or
underwrote £266m in fifteen new deals, with £169m being taken onto our own
balance sheet, £84m being taken by our fund management clients and the balance
being syndicated to third parties. Six of these new deals were in the UK, five
in France, with one each in Denmark, Netherlands, Sweden and Switzerland. Eight
of these loans were to finance buyouts, three were to refinance the debt of
companies to which we had already lent, and four were acquisition and
development capital, of which three were to existing portfolio companies.
During the last couple of years the level of repayments has been relatively low
as a number of borrowers were waiting for an improvement in the market for
repayments and exits. This year we are seeing such an improvement and
consequently there has been a significant increase in the level of repayments,
which in the first half amounted to £190m from eleven companies in our
portfolio, greater than the repayment level for the whole of last year.
The appreciation of sterling during the period reduced the value of the loan
book by £23m. As a result of this and the levels of new lending, repayments and
provisions the value of the loan book fell by 5% to £1.03bn.
While a small number of our investments continue to disappoint, overall, the
majority of our portfolio continues to trade well and we benefit from having a
well-diversified portfolio, both by sector and geography.
The European Mezzanine Market
The European buyout market continued to be strong in the first half of the year,
with its total value amounting to approximately £21bn, a 17% increase on the
level of buyouts in the first half of 2003. The market has seen strong
competition among financial buyers which has led to high prices being paid for
some companies.
Increasing levels of liquidity in the debt markets have resulted in banks being
more aggressive in the amount of senior debt they are prepared to offer to
finance some of the larger buyouts. The high yield bond market also saw
increased activity levels. However, there was still good demand for mezzanine
which accounted for approximately 8% of the total value of buyouts.
In the first half we have seen a lot of new money coming into the mezzanine
market, not just from banks and mezzanine funds, but also from hedge funds and
structured debt funds. We are now at that stage in the cycle when banks are
being tempted to reduce margins and increase leverage for some larger mezzanine
transactions, particularly in the London market, because they are confident they
can syndicate such assets to less sophisticated investors. A consequence of this
has been that the banks have increasingly been arranging mezzanine loans where,
in ICG's opinion, the terms did not adequately reflect the risk and in which,
accordingly, ICG refused to invest. Competitive pressures are however not so
great outside the larger transactions; and lenders, such as ICG, who have long
credit experience in the mezzanine market and the ability to structure complex
transactions coupled with pan European presence, remain well placed.
Asia Pacific
Despite an increasing flow of opportunities we did not complete any new
investments in the first half. There are a number of interesting lending
opportunities which we are currently pursuing.
Funds under management
We closed our new mezzanine fund in March with equity commitments of €668m
(£458m). We are currently arranging debt financing for the fund that should
enable it to reach its target size of €1.5bn (£1.01bn). This fund contributed
materially to fee income in the first half and at 31 July had invested €320m
(£218m). The portfolios of our other fully invested mezzanine funds reduced from
£290m at the beginning of the year to £230m at 31 July as a result of a high
level of repayments.
Our specialist sub-investment grade fund management business, investing
primarily in high yield bonds and loans, has continued to perform well. The
improvement in the high yield bond market seen at the end of last year has
continued into the first half and this has benefited the performance of our two
CDOs, both of which made distributions to their equity investors during the
period. Our three loan funds are also performing well and are almost fully
invested. We now manage assets of over €1.7bn (£1.15bn) for the five existing
funds and anticipate closing a new loan fund in the second half which should
take us over €2bn (£1.35bn).
Following the recruitment of an experienced marketing team earlier in the year
we have had meetings with a wide range of potential new sub-investment grade
debt fund management clients and have been encouraged by the interest they have
shown in this asset class. We are confident that we have the potential to
increase significantly the size of our fund management business in the years
ahead subject to the availability of attractive assets.
Core income
Core income, which is the key component of ICG's profitability and consists of
net interest and fee income less administrative expenses, rose by 23% to £34.8m
compared to the first half of last year.
Net interest income rose by 18% to £35.1m compared to the corresponding period
last year, despite the reduction in the loan book; primarily because of the
benefit of last autumn's equity raising and the continuing use of rolled-up
interest.
Fee income rose strongly by 40% to £12.5m. Fees from fund management, now
benefiting from our new mezzanine fund and increased investment by our loan
funds, rose from £5.1m to £8.6m, with arrangement and agency fees remaining
virtually unchanged at £3.9m.
Operating expenses, excluding the cost of the medium term incentive scheme,
increased to £9.8m from £7.8m for the similar period last year, primarily as a
result of increasing staff costs and the costs of the new offices in Madrid and
Stockholm.
Funding
In the early part of the year, we returned to the US private placement market to
raise additional funding. This market continues to be a reliable source of
funding for ICG and we raised $250m (£140m). A tap issue under our
securitisation programme raised a further £40m of funding for the balance sheet.
At the end of the period, ICG had £740m of debt, which resulted in a
comparatively low gearing ratio of 2.1:1.
Capital Gains
As the market for exits has improved, the level of capital gains increased
substantially in the first six months of the year. We made gains of £23.7m from
ten different companies, arising from four IPOs and six trade sales. In
addition, in respect of three of the IPOs, we hold, at nominal cost, shares with
a market value of £10m, which we were restricted from selling at the time of the
IPO but which will be a source of future capital gains.
Provisions
Provisions made against loans and investments during the period amounted to
£13.0m compared to a gross provision for the same period last year of a similar
amount and a net provision, after releases, of £9.0m. The charge to provisions
primarily relates to the recent significant underperformance of one of our
portfolio companies.
Dividends
The Board has declared an interim dividend of 11.8p per share, an increase of
12% over the interim dividend last year. This will be paid on 5 November 2004 to
shareholders on the register at 15 October 2004.
Board appointment
We announced at our Annual General Meeting in May that Dr Martin Kohlhaussen has
joined the Board as a non-executive director. Martin is Chairman of the
Supervisory Board of Commerzbank, having been its Chief Executive for many
years, and is also on the Supervisory Board of a number of other major German
companies as well as being a non-executive director of other international
entities.
His wealth of experience of German and international business at the highest
level will be of great benefit to ICG.
Prospects
The demand for mezzanine remains strong. We believe increased liquidity in the
European mezzanine market will continue to have an adverse influence on the
pricing and structuring of some larger mezzanine loans in the remainder of the
year. Consequently ICG will remain particularly selective in its new lending.
Nevertheless, we believe that, because of our reputation, pan European spread,
commitment to the market and our ability, together with our new mezzanine fund,
to underwrite and supply of large amounts of mezzanine, we will see a
satisfactory flow of attractive new lending opportunities.
Since the end of July we have made 2 new loans totalling £80m, with £50m being
taken to our own loan book and £30m by our fund management clients. We are
working on another significant transaction which we expect to close in the next
month, and have a satisfactory pipeline of prospective lending opportunities. We
expect the level of repayments to remain high, although probably at a lower
level than in the first half, and this will continue to temper loan book growth.
With our new fund management marketing team in place and increasing investor
interest in sub-investment grade debt, we expect to see a good increase in funds
under management in the next twelve months. Prospects for both net interest
income and fee income are therefore encouraging.
The outlook for capital gains in the second half is good, although it is not yet
possible to forecast the level of such gains. While there are a small number of
our investments whose performance gives us some concern, our portfolio overall
continues to do well.
We are seeing satisfactory levels of new deal flow and with the potential for
growth in our fund management business, we continue to look forward to the
future with confidence.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the six months ended 31 July 2004
Half year to 31 Half year to 31 Year to 31
July 2004 July 2003 January 2004
(unaudited) (unaudited) (audited)
£m £m £m
Interest and
dividend income 46.9 43.6 92.6
Capital gains 23.7 15.9 26.2
Fee and other
operating income 12.5 8.9 20.9
---------- ---------- ---------
83.1 68.4 139.7
Interest payable and
similar charges (11.8) (13.8) (27.8)
Provisions against
loans and investments (13.0) (9.0) (19.0)
Administrative expenses (17.5) (13.5) (28.3)
---------- ---------- ---------
Profit on ordinary
activities before taxation 40.8 32.1 64.6
Tax on profit on
ordinary activities (13.2) (10.6) (21.0)
---------- ---------- ---------
Profit on ordinary
activities after taxation 27.6 21.5 43.6
Dividends paid
and proposed -
ordinary shares (8.2) (6.3) (23.0)
---------- ---------- ---------
Retained profit
transferred to
reserves 19.4 15.2 20.6
========== ========== =========
Earnings per share 39.9p 36.3p 70.4p
========== ========== =========
The presentation of the results for the periods ending 31 July 2003 and 31
January 2004 has been modified as described in Note 4.
ANALYSIS OF PROFIT BEFORE TAX
for the six months ended 31 July 2004
Half year to 31 Half year to 31 Year to 31
July 2004 July 2003 January 2004
(unaudited) (unaudited) (audited)
£m £m £m
Income
Interest and
dividend income 46.9 43.6 92.6
Fee and other
operating income 12.5 8.9 20.9
----------- ---------- ---------
59.4 52.5 113.5
Less: Related expenses
Interest payable and
similar charges (11.8) (13.8) (27.8)
Administrative expenses -
Salaries and benefits (6.2) (4.8) (10.9)
Operating expenses (3.6) (3.0) (6.8)
Medium term incentive
scheme (3.0) (2.5) (5.8)
----------- ---------- ---------
Core Income 34.8 28.4 62.2
----------- ---------- ---------
Capital gains 23.7 15.9 26.2
Medium term
incentive scheme (4.7) (3.2) (4.8)
----------- ---------- ---------
Net Capital
Gains 19.0 12.7 21.4
----------- ---------- ---------
Provisions
again loans
and investments (13.0) (9.0) (19.0)
----------- ---------- ---------
Profit on ordinary
activities before
taxation 40.8 32.1 64.6
=========== ========== =========
CONSOLIDATED BALANCE SHEET
31 July 2004
31 July 2004 31 July 2003 31 January 2004
(unaudited) (unaudited) (audited)
£m £m £m
Fixed assets
Tangible assets 1.3 1.5 1.4
Loans and investments 1,033.5 1,036.7 1,093.5
Current assets
Debtors 25.5 41.2 19.2
Loans and investments 1.4 90.9 27.5
Cash at bank 83.3 48.7 38.6
--------- --------- --------
110.2 180.8 85.3
--------- --------- --------
Total assets 1,145.0 1,219.0 1,180.2
========= ========= ========
Capital and reserves
Called up share capital 13.9 11.9 13.8
Share premium account 172.4 89.1 170.0
Capital redemption reserve 1.4 1.4 1.4
Profit and loss account 157.0 132.2 137.6
--------- --------- --------
Equity shareholders' funds 344.7 234.6 322.8
Creditors: amounts falling due
after more than one year 649.3 815.2 730.0
Creditors: amounts falling due
within one year 151.0 169.2 127.4
--------- --------- --------
Total capital and liabilities 1,145.0 1,219.0 1,180.2
========= ========= ========
CONSOLIDATED CASH FLOW STATEMENT
for the six months ended 31 July 2004
Half year to 31 Half year to 31 Year to 31
July 2004 July2003 January 2004
(unaudited) (unaudited) (audited)
£m £m £m
Operating activities
Interest and dividends
received 47.0 36.8 81.6
Gain on disposals 23.7 15.9 26.2
Fee and other
operating income 9.0 6.1 19.4
Administrative
expenses (17.8) (18.3) (25.8)
--------- --------- --------
61.9 40.5 101.4
Interest paid (13.9) (23.0) (25.6)
--------- --------- --------
Net cash inflow from
operating activities 48.0 17.5 75.8
Taxation paid (11.6) (11.8) (20.8)
Capital expenditure
and financial investment
Loans and investments made (168.7) (181.7) (353.7)
Realisations of loans and
investments 190.3 59.7 160.9
Loans for syndication 26.1 (29.8) 25.7
--------- --------- --------
47.7 (151.8) (167.1)
Purchase of tangible fixed
assets (0.1) - (0.1)
--------- --------- --------
47.6 (151.8) (167.2)
--------- --------- --------
Equity dividends paid (16.7) (12.8) (19.1)
--------- --------- --------
Net cash inflow/(outflow)
before financing 67.3 (158.9) (131.3)
Financing
Increase in share capital 2.4 3.2 86.0
(Decrease)/increase in debt (34.4) 202.5 82.0
--------- --------- --------
Increase in cash 35.3 46.8 36.7
========= ========= ========
Notes
1. Basis of accounting
The interim financial statements have been prepared under the historical cost
convention and on the basis of the accounting policies set out in the statutory
accounts of the group for the year ended 31 January 2004.
2. Earnings per share
The calculation of earnings per share is based on earnings of £27.6 m (2003 -
£21.5m) and an average number of shares in issue throughout the period of
69,252,000 (2003 - 59,307,144).
3. Dividends
The interim dividend of 11.8p per share will be paid out to members registered
at the close of business on 15 October 2004.
4. Restatement of prior year
As a result of the increasing prominence of rolled-up interest in mezzanine, the
directors believe that it is now appropriate to modify the accounting
presentation of the amount payable under the medium term incentive scheme in
respect of rolled-up interest. It is now shown in full separately under
administrative expenses in the profit and loss account and creditors in the
balance sheet whereas previously, it was partially shown as a reduction to
interest income and investments.
As a result, both interest income and administrative expenses have increased by
£1.7m for the 6 months to 31 July 2003 and by £3.5m for the year to 31 January
2004. Investments and creditors have both increased by £6m at 31 July 2003 and
by £8m at 31 January 2004. There is no further impact in the current year.
Core income, profit before tax and net assets are unaffected in all periods.
5. Investments
The group's portfolio of warrants and listed shares is included in investments
at the lower of cost or net realisable value.
6. General
The interim financial statements for the half year to 31 July 2004 were approved
by the Board on 4 October 2004. These financial statements are unaudited, but
they have been reviewed by the auditors, having regard to the bulletin 'Review
of Interim Financial Information' issued by the Auditing Practices Board. The
comparative figures for the year ended 31 January 2004, as amended by the above
restatement, have been extracted from the group's statutory accounts which have
been delivered to the Registrar of Companies. The auditors' report on those
statements was unqualified and did not include a statement under Section 237 (2)
or (3) of the Companies Act 1985.
Copies of this statement are being sent to all shareholders. Copies are also
available at the registered office of the company.
INDEPENDENT REVIEW REPORT TO INTERMEDIATE CAPITAL GROUP PLC
We have been instructed by the company to review the financial information for
the six months ended 31 July 2004 which comprises the consolidated profit and
loss account, the analysis of profit before tax, the consolidated balance sheet
and cash flow statement and related notes 1 to 6. We have read the other
information contained in the interim report and considered whether it contains
any apparent misstatements or material inconsistencies with the financial
information.
This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
polices and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom auditing standards and therefore
provides a lower level of assurance than an audit. Accordingly, we do not
express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 July 2004.
Deloitte & Touche LLP
Chartered Accountants
4 October 2004
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