Argo Group Regulatory News (ARGO)

Argo Group Limited

("Argo" or the "Company")

Interim Results for the six months ended 30 June 2015

Argo today announces its interim results for the six months ended 30 June 2015.

The Company will today make available its interim report for the six month period ended 30 June 2015 on the Company's website www.argogrouplimited.com.

Key highlights for the six month period ended 30 June 2015

- Revenues US$3.1 million (six months to 30 June 2014: US$3.9 million)

- Operating profit US$0.2 million (six months to 30 June 2014: loss US$0.5 million)

- Loss before tax US$4.2 million (six months to 30 June 2014: loss US$0.5 million)

- Net assets US$21.5 million (31 December 2014: US$26.0 million)

Commenting on the results and outlook, Kyriakos Rialas, Chief Executive of Argo said:

"Such is the downward pressure in Emerging Markets that even the US Federal Reserve hesitated in raising interest rates at its last meeting. The old BRIC nations have experienced huge investment outflows reflected mainly in the currencies of Brazil, Russia and now China. Against this challenging backdrop Argo has not been very active in sovereign credit, concentrating instead on creating liquidity on its private equity assets. We are pleased to report that we can see light at the end of the tunnel for a couple of these positions."

Enquiries

Argo Group Limited

Andreas Rialas

020 7016 7660

Panmure Gordon

Dominic Morley

020 7886 2500

CHAIRMAN'S STATEMENT

The Group and its investment objective

Argo's investment objective is to provide investors with absolute returns in the funds that it manages by investing in, inter alia, fixed income, special situations, local currencies and interest rate strategies, private equity, real estate, quoted equities, high yield corporate debt and distressed debt, although not every fund invests in each of these asset classes.

Argo was listed on the AIM market in November 2008 and has a performance track record dating back to 2000.

Business and operational review

This report sets out the interim results of Argo Group Limited for the half year ended 30 June 2015.

For the six month period ended 30 June 2015 the Group generated revenues of US$3.1 million (six months to 30 June 2014: US$3.9 million) with management fees accounting for US$2.8 million (six months to 30 June 2014: US$3.5 million). The Group did not generate incentive fees during the current or prior period.

Total core operating costs for the period are US$1.7 million compared to US$2.7 million for the six months to 30 June 2014 as a result of cost cutting initiatives implemented in the first half of 2014. Total operating costs have fallen by US$1.5 million to US$2.9 million (six months to 30 June 2014: US$4.4 million) after bad debt provision. During the period the Group provided against management fees of US$1,117,000 (€1,000,000) (six months to 30 June 2014: US$1,371,000 (€1,000,000)) due from Argo Real Estate Opportunities Fund Limited ("AREOF").

Overall, the financial statements show an operating profit for the period of US$0.2 million (six months to 30 June 2014: loss US$0.5 million) and a loss before tax of US$4.2 million (six months to 30 June 2014: loss US$0.5 million) reflecting the unrealised loss on non-current asset investments of US$4.5 million (six months to 30 June 2014: unrealised loss US$0.1 million).

At the period end, the Group had net assets of US$21.5 million (31 December 2014: US$26.0 million). The Group did not pay a dividend during the period. 

Net assets include investments in The Argo Fund Limited, AREOF and Argo Special Situations Fund LP at fair values of US$13.8 million (31 December 2014: US$18.2 million), US$0.1 million (31 December 2014: US$0.2 million) and US$0.06 million (31 December 2014: US$0.07 million) respectively. Our continued investment in our funds supports the liquidity of those funds and demonstrates the commitment of the Group towards its fund investors. This close alignment results in a high correlation between the performance of the Company and the performance of its funds. It should be noted, however, that the Group does not intend to and may not be able to realise these investments in the immediate future due to the illiquid nature of the assets held by these funds.

At the period end the Argo funds (excluding AREOF) owed the Group total management fees of US$4,014,731 (31 December 2014: US$2,361,599) after a bad debt provision of US$1,300,000 (31 December 2014: US$1,300,000). These funds have a substantial asset base with few liabilities. They are currently facing a short term liquidity issue which is being remedied and whilst a bad debt provision has been raised against these management fees the directors are confident that they are fully recoverable.

The Argo funds (excluding AREOF) ended the period with Assets under Management ("AUM") at US$165.7 million, 6.6% lower than at the beginning of the period. The current level of AUM remains below that required to ensure sustainable profits on a recurring management fee basis in the absence of performance fees. In line with last year the Group's cost base will remain under constant review ensuring that the operational framework remains intact and that it retains the capacity to manage additional fund inflows as and when they arise.

The number of employees of the Group at 30 June 2015 was 24 (30 June 2014: 30).

The Group has provided AREOF with a notice of deferral in relation to amounts due from the provision of investment management services, under which it will not demand payment of such amounts until the Group judges that AREOF is in a position to pay the outstanding liability. These amounts accrued or receivable at 30 June 2015 total US$ Nil (31 December 2014: Nil) after a bad debt provision of US$6,178,809 (€5,569,505) (31 December 2014: US$5,554,234 (€4,569,505)). AREOF continues to meet part of this obligation to the Argo Group as and when liquidity allows. The AREOF management contract has a fixed term expiring on 31 July 2018. In November 2013 AREOF offered Argo Group Limited additional security for the continued support in the form of debentures and guarantees by underlying intermediate companies.

Fund performance

Argo Funds

* NAV only officially measured once a year in September.

Emerging markets had a mixed start to the year with currencies being particularly affected. A combination of factors including the continuation of the Ukrainian conflict, the low but stabilizing oil prices and the continued strength of the US economy saw further falls in emerging currencies. By the end of the period emerging markets were impacted by persistent fears over the consequences of volatility in the Chinese stock markets and expectations of slower global growth with the ever present risk of another Euro crisis precipitated by a Greek default on their unsustainable debt level.

Against this varied and challenging economic and market backdrop, fund performance was lacklustre with all of the Argo funds finishing behind at the period end. By comparison, the main hedge fund indices showed a small positive return of 0.6% for the same period.

During the period we progressed our discussions with a number of investors in relation to various illiquid assets. Despite difficult market conditions we are pleased to report that we expect The Argo Fund Limited, Argo Distressed Credit Fund Limited and Argo Special Situations Fund LP shortly to complete the sale of an important asset with an interested buyer. On receipt of the proceeds of sale, this would create a liquidity event for our investors. The carrying value of the Group's investments in these funds is based on the agreed sale price.

While macroeconomic conditions continue to improve, the effects on the two core markets where AREOF operates remain mixed. In Romania we are encouraged by economic growth in the first half of the year compared to the same period in 2014 whilst continuing political and economic uncertainty are impacting the Ukraine market.

Following on from AREOF's delisting from AIM on 3 March 2014 the Group's NAV is officially measured once a year in September. AREOF's adjusted Net Asset Value was minus US$6.7 million (minus €5.3 million) as at 30 September 2014, compared with US$65.7 million (€47.8 million) as at 31 March 2014. The adjusted Net Asset Value per share at 30 September 2014 was minus US$0.01 (minus €0.01) (31 March 2014: US$0.11 (€0.08)). Although AREOF's balance sheet indicates the company is insolvent on a consolidated basis, the structural ring-fencing of the underlying SPV's limits the impact on the Group of negative equity at subsidiary level. On this basis a restatement of the Net Asset Value per share would be US$0.05 (€0.04) at 30 September 2014.

The reduced level of cash flow within AREOF, while being proactively managed, has resulted in breaches of terms and covenants on certain loans. This situation is being addressed by regular communication and negotiation with the lending banks with a view to restructuring the debt commitments to better align these to the current level of the AREOF Group's cash flow. While discussions with the relevant banks are ongoing to find an agreeable solution for all parties AREOF continues to enjoy the support of its banks. In the view of the directors discussions with the banks are continuing satisfactorily and they have therefore concluded that AREOF is a going concern.

AREOF'S ordinary shares on AIM were suspended on 30 August 2013 following breach of a loan covenant and the subsequent loan termination by the lending bank. On 3 March 2014 AREOF delisted from AIM to allow loan restructuring discussions to proceed outside of the extensive disclosure requirements that an AIM listing entails. The valuation of the investment in AREOF held by Argo Group Limited and the Argo funds has been based on the equity price of 2.0 cents prevailing at the time of the suspension with a 50% discount rate applied to that price.

Dividends

Argo is working towards the payment of a dividend which will ultimately depend on the success of the initiatives described above. The directors did not recommend a final dividend in respect of the year ended 31 December 2014 but intend to pay an interim dividend as soon as these initiatives are complete. Going forward, the Company intends, subject to its financial performance, to pay a final dividend each year.

Outlook

As investor sentiment is hit by Chinese volatility and expectations of slower global growth the Board remains optimistic about the Group's prospects. An increase in AUM is still required to ensure sustainable profits on a recurring management fee basis and the Group is well placed with capacity to absorb a significant increase in AUM with negligible impact on operational costs.

Our strategy remains unchanged. The top priority in the next six months will be to continue with our program to monetise certain of our investments. In the very near term our growth rate will be heavily influenced by the success of this program as well as events in Europe and the Far East. Over the longer term the Board believes there is significant opportunity for growth in assets and profits and remains committed to ensuring the Group's investment management capabilities and resources are appropriate to meet its key objective of achieving a consistent positive investment performance in the emerging markets sector.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE 2015

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2015

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2015

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE 2015

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the six months ended 30 June 2015

1. CORPORATE INFORMATION

The Company is domiciled in the Isle of Man under the Companies Act 2006. Its registered office is at 33-37 Athol Street, Douglas, Isle of Man, IM1 1LB. The condensed consolidated interim financial statements of the Company as at and for the six months ended 30 June 2015 comprise the Company and its subsidiaries (together referred to as the "Group").

The consolidated financial statements of the Group as at and for the year ended 31 December 2014 are available upon request from the Company's registered office or at www.argogrouplimited.com.

The principal activity of the Company is that of a holding company and the principal activity of the wider Group is that of an investment management business. The functional and presentational currency of the Group undertakings is US dollars. The Group has 24 employees.

Wholly owned subsidiaries Country of incorporation

2. ACCOUNTING POLICIES

(a) Basis of preparation

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2014.

The Directors have carried out a rigorous assessment of all the factors affecting the business in deciding to adopt the going concern basis for the preparation of the accounts. They have reviewed and examined the Group's financial and other processes including the annual budgeting process and expect the Group to have sufficient cash resources available in the foreseeable future. This has included the preparation of forecast financial information focussed on cash flow requirements through to at least September 2016. These forecasts reflect current cost patterns of the Group and take into consideration current liquidity constraints of funds under management and therefore their ability to settle management fees and other receivables (refer to notes 9 and 10).

On the basis of review of this forecast financial information, the liquid assets currently held and forecast inflows during the period, the Directors are confident that the Group has adequate financial resources available to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis for preparing the accounts. The key assumptions within the forecast financial information include the conclusion of a sale transaction for which a share purchase agreement has been signed since the period end and settlement of management fee arrears.

The accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2014.

These condensed consolidated interim financial statements were approved by the Board of Directors on 29 September 2015.

b) Financial instruments and fair value hierarchy

The following represents the fair value hierarchy of financial instruments measured at fair value in the Statement of Financial Position. The hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement

3. SEGMENTAL ANALYSIS

The Group operates as a single asset management business.

The operating results of the companies set out in note 1 above are regularly reviewed by the directors of the Group for the purposes of making decisions about resources to be allocated to each company and to assess performance. The following summary analyses revenues, profit or loss, assets and liabilities:

4. SHARE-BASED INCENTIVE PLANS

On 14 March 2011 the Group granted options over 5,900,000 shares to directors and employees under The Argo Group Limited Employee Stock Option Plan. All options are exercisable in four equal tranches over a period of four years at an exercise price of 24p per share.

The fair value of the options granted was measured at the grant date using a Black-Scholes model that takes into account the effect of certain financial assumptions, including the option exercise price, current share price and volatility, dividend yield and the risk-free interest rate. The fair value of the options granted is spread over the vesting period of the scheme and the value is adjusted to reflect the actual number of shares that are expected to vest.

The principal assumptions for valuing the options are:

The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The total charge to employee costs in respect of this incentive plan is nil due to the differential in exercise price and share price.

The number and weighted average exercise price of the share options during the period is as follows:

The options outstanding at 30 June 2015 have an exercise price of 24p and a weighted average contractual life of 10 years, with the fourth and final tranche of shares being exercisable on or after 1 May 2015. Outstanding share options are contingent upon the option holder remaining an employee of the Group. They expire after 10 years.

No share options were issued during the period.

5. TAXATION

Taxation rates applicable to the parent company and the Cypriot, UK, Luxembourg, Cayman and Romanian subsidiaries range from 0% to 22% (2014: 0% to 23%).

The charge for the period can be reconciled to the loss shown on the Condensed Consolidated Statement of Comprehensive Income as follows:

6. EARNINGS PER SHARE

Earnings per share is calculated by dividing the net loss for the period by the weighted average number of shares outstanding during the period.

7. FIXTURES, FITTINGS AND EQUIPMENT

8. INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

The Argo Fund Limited holds a concentrated portfolio of Level 2 and Level 3 assets that are valued based on inputs other than quoted prices in active markets. Inherently the assumptions backing these valuations are subject to additional risks that can have a positive or negative impact on valuation. The audit report in respect of The Argo Fund Limited for the year ended 30 June 2014 was modified in respect of investment valuations.

On 3 March 2014 Argo Real Estate Opportunities Fund Limited ("AREOF") delisted from AIM as a result of default notices on its loans creating uncertainty. At the period end it is carried at a 50% discount of the last quoted bid price on AIM from August 2013. This investment is classified as level 3 under IFRS fair value hierarchy reflecting the non-market observable inputs to its valuation. The audit report in respect of AREOF for the year ended 30 September 2014 was qualified in respect of investment property valuations and modified in respect of going concern.

The investments held by the Group have been made in support of the Group's funds under management and in support of their liquidity profiles and as such they may not be realisable in the immediate future. The valuations are subject to uncertain events, for example, liquidity events or debt refinancing that may not be wholly within the Group's control. We expect The Argo Fund Limited, Argo Distressed Credit Fund Limited and Argo Special Situations Fund LP shortly to complete the sale of an important asset with an interested buyer. The carrying value of the Group's investments in these funds is based on the agreed sale price. During the period the carrying value of investments was reduced by USD4,482,405.

9. TRADE AND OTHER RECEIVABLES

The directors consider that the carrying amount of trade and other receivables approximates their fair value. All trade receivable balances are recoverable within one year from the balance sheet date except as disclosed below.

The Group has provided Argo Real Estate Opportunities Fund Limited ("AREOF") with a notice of deferral in relation to the amounts due from the provision of investment management services, under which it will not demand payment of such amounts until the Group judges that AREOF is in a position to pay the outstanding liability. These amounts accrued or receivable at 30 June 2015 total US$ Nil (31 December 2014: Nil) after a bad debt provision of US$6,178,809 (€5,569,505) (31 December 2014: US$5,554,234, €4,569,505). AREOF continues to meet part of this obligation to the Argo Group as and when liquidity allows. In November 2013 AREOF offered Argo Group Limited additional security for the continued support in the form of debentures and guarantees by underlying intermediate companies. In the Directors' view these amounts are fully recoverable although they have concluded that it would not be appropriate to continue to recognise income without provision from these investment management services as the timing of such receipts may be outside the control of the Company and AREOF.

At the period end The Argo Fund Limited, Argo Special Situations Fund LP, Argo Distressed Credit Fund Limited and Argo Local Markets Fund Limited owed the Group total management fees of US$4,014,731 (31 December 2014: US$2,361,599) after a bad debt provision of US$1,300,000 (2014: US$1,300,000). These funds have a substantial asset base with few liabilities. They are currently facing liquidity issues which management continue to work to remedy and whilst a bad debt provision has been raised against these management fees the Directors are confident that they may be recovered in the future.

In the audited financial statements of AREOF at 30 September 2014 a material uncertainty surrounding the refinancing of bank debts was referred to in relation to the basis of preparation of the financial statements. In the view of the directors of AREOF, discussions with the banks are continuing satisfactorily and they have therefore concluded that it is appropriate to prepare those financial statements on a going concern basis.

10. LOANS AND ADVANCES RECEIVABLE

(a) In 2013 Argo Group advanced US$1,109,400 (€1,000,000) to Bel Rom Trei ("Bel Rom"), an AREOF Group entity based in Romania that owns Sibiu Shopping City, in order to assist with its operational cash requirements. Challenging trading conditions have impacted Bel Rom's cash flow and its ability to meet payments due to lending banks as and when they fall due. The situation is being addressed by way of discussions with the lending banks with a view to restructuring these loans. While these discussions are on-going to find an agreeable solution for both parties, Bel Rom continues to enjoy the support of its banks. The loan is repayable on demand and accrues interest at 12%. The full amount of the loan and accrued interest amounting to US$1,394,987 (€1,257,424) remains outstanding at the period end. The Directors consider this loan to be fully recoverable on the basis that conditional offers to buy the centre have been received that indicate a value in excess of the debt attached to the project. Notwithstanding its repayable on demand terms, the Directors have classified this amount as non-current within the financial statements as it is not their intention to demand repayment in the immediate future and it is unlikely that Bel Rom will repay the amount in the next 12 months even if it were demanded.

(b) On 21 November 2013 the Argo Group provided a loan of US$431,512 (€388,960) to AREOF to enable the company to service interest payments under a bank loan agreement. The loan is repayable on demand and accrues interest at 10%. The full amount of the loan and accrued interest amounting to USD500,908 (€451,513) remains outstanding at the period end and is secured by debentures and guarantees from underlying intermediate companies in the AREOF Group

The Argo Group provided further loans totalling US$55,597 (€50,114) to AREOF to assist with its operational cash requirements. These loans are repayable on demand and accrue interest at 7%. The full amount of these loans remain outstanding at the period end.

(c) On 5 December 2014 the Argo Group provided a loan of USD150,000 to The Argo Fund Limited to assist with its operational cash requirements. This was followed by a further loan of USD180,000 on 24 March 2015. Both loans are repayable on demand, accrue interest at 5% and remain outstanding at the period end.

(d) At the period end the Argo Group was owed USD93,329 (€84,126) by various AREOF Group entities being loans provided to assist those entities with their operational cash requirements. The loans are repayable on demand, accrue interest at 7% and remain fully outstanding at the period end.

11. SHARE CAPITAL

The Company's authorised share capital is unlimited with a nominal value of US$0.01.

The directors did not recommend the payment of a final dividend for the year ended 31 December 2014 and do not recommend an interim dividend in respect of the current period.

12. RECONCILIATION OF NET CASH OUTFLOW FROM OPERATING ACTIVITIES TO LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION

13. FAIR VALUE HIERARCY

The table below analyses financial instruments measured at fair value at the end of the reporting period by the level of the fair value hierarchy (note 2).

At 30 June 2015

At 31 December 2014

14. RELATED PARTY TRANSACTIONS

All Group revenues derive from funds or entities in which two of the Company's directors, Andreas Rialas and Kyriakos Rialas, have an influence through directorships and the provision of investment advisory services.

At the balance sheet date the Company holds investments in The Argo Fund Limited, Argo Real Estate Opportunities Fund Limited ("AREOF") and Argo Special Situations Fund LP. These investments are reflected in the accounts at a fair value of US$13,773,333, US$119,366 and US$59,514 respectively.

The Group has provided AREOF with a notice of deferral in relation to the amounts due from the provision of investment management services, under which it will not demand payment of such amounts until the Group judges that AREOF is in a position to pay the outstanding liability. These amounts accrued or receivable at 30 June 2015 total US$ Nil (31 December 2014: US$ Nil) after a bad debt provision of US$6,178,809 (€5,569,505) (31 December 2014: US$5,554,234, €4,569,505). AREOF continues to meet part of this obligation to the Argo Group as and when liquidity allows. In November 2013 AREOF offered Argo Group Limited additional security for the continued support in the form of debentures and guarantees by underlying intermediate companies. The AREOF management contract has a fixed term expiring on 31 July 2018.

At the period end Argo Group was owed US$1,394,986 (€1,257,425) including interest of US$285,586 (€257,424) by Bel Rom Trei Srl ("Bel Rom"), an AREOF Group entity based in Romania that owns Sibiu Shopping City. The full amount of the loan and accrued interest remains outstanding at the period end. The Directors consider this loan to be fully recoverable on the basis that conditional offers to buy the centre have been received that indicate a value in excess of the debt attached to the project. Notwithstanding its repayable on demand terms, the Directors have classified this amount as non-current within the financial statements as it is not their intention to demand repayment in the immediate future and it is unlikely that Bel Rom will repay the amount in the next 12 months even if it were demanded. The loan is repayable on demand and accrues interest at 12%.

At the period end Argo Group was owed a total balance of US$556,505 (€501,627) including interest of US$69,396 (€62,553) by AREOF. This balance comprises various loans that are all repayable on demand and accrue interest at 7% and 10%. Of this balance US$500,908 (€451,513) is secured by debentures and guarantees from underlying intermediate companies in the AREOF Group. At the period end the Argo Group was owed a further USD93,329 (€84,126) by various other AREOF Group entities. This balance comprises loans that are all repayable on demand and accrue interest at 7%.

At the period end the Argo Group was owed USD330,000 by The Argo Fund Limited. The loan is repayable on demand and accrues interest at 5%.

In the audited financial statements of AREOF at 30 September 2014 a material uncertainty surrounding the refinancing of bank debts was referred to in relation to the basis of preparation of the financial statements. In the view of the directors of AREOF, discussions with the banks are continuing satisfactorily and they have therefore concluded that it is appropriate to prepare those financial statements on a going concern basis.

David Fisher, a non-executive director of the Company, is also a non-executive director of AREOF.