14 Dec 2009 07:00
Formation Group Plc ("Formation")
New Joint Venture regarding Aldgate East property development and a Related Party Transaction.
Overview
The Board is pleased to announce that a settlement has been reached by Julius Properties Limited ("JPL") with the Administrators of Heritable Bank plc ("Heritable") regarding the property development above Aldgate East station, London ("Aldgate").
£32.9 million of funds was outstanding from JPL to Heritable at the date of the settlement. Formation also announces its participation in a joint venture with JV Finance Limited in order to complete the development.
The terms of the settlement are summarised as follows;
£11 million (the "Settlement") has been agreed as full and final settlement against the indebtedness of £32.9 million to be paid by JPL to Heritable
Formation and JV Finance Limited will each inject £5.5 million into JV Finance Ventures Limited and this will be paid to JPL in return for any profits generated in respect of the Aldgate development
£7 million was paid by JV Finance Ventures Limited to JPL on Friday 11 Dec 2009 and this has been paid by JPL to the Administrator
The balance of the Settlement of £4 million will be paid by JV Finance Ventures Limited to JPL and then paid by JPL to the Administrator in full and final settlement by 31 March 2010
Heritable Bank plc (a subsidiary of Landsbanki) went into Administration in October 2008 which placed uncertainty over the future of the development. Subject to new development funding being secured, the Board believes that this Settlement will allow the development of Aldgate to now continue in accordance with the original plans.
Joint Venture
Formation and JV Finance Limited have created a special purpose vehicle called JV Finance Ventures Limited, incorporated in Guernsey, in which they will each own 50% of the issued share capital and have both entered into a joint venture agreement (the "Joint Venture Agreement") to which JPL is also a party.
Upon completion of the Settlement, JV Finance Ventures Limited will have a first ranking charge over the land and buildings at Aldgate. In addition, JV Finance Ventures Limited has become (with immediate effect) the developer of Aldgate and will subsequently benefit from all of the development profits derived from the project in the future.
There is no change to the guarantee which Formation has previously made to certain Loan Note holders of the Aldgate East Property Company Limited ("AEPC") and the Board believes that the joint venture represents a significant and positive step forward towards the repayment of those Loan Notes.
JV Finance Limited is viewed as a related party given its relationship with the Kennedy Family Trust, who are also the majority shareholder in Formation and as defined by the AIM Rules, the directors independent to the transaction are therefore required to consider, having consulted with the Company's Nominated Adviser, that the terms of the transaction are fair and reasonable.
The independent directors consider, having consulted with Zeus Capital in its capacity as the Company's nominated adviser, that the terms of these transactions are fair and reasonable insofar as shareholders of Formation are concerned.
Background
As previously announced in August 2007, Formation acted as investment adviser to AEPC which raised £19.8 million through the issue of Junior Unsecured Loan Notes and Subordinated Junior Unsecured Loan Notes (the "Loan Notes") to retail investors, including clients of Formation's asset management company, Formation Asset Management Limited.
The proceeds from the issue of the Loan Notes, along with a proportion of a £93.0 million funding facility provided by Heritable were used by the developer; JPL, to acquire land at 1 Commercial Street, London E1 and commence the development of a building on the site. In performing its duties as investment adviser and providing underwriting facilities, Formation was paid an initial fee of £1.8m with a further fee (to be calculated by reference to the total profit from the development), payable on completion of the development. As part of the profit sharing arrangement, Formation and Balchan Management Limited ("Balchan") as Trustee of the Impala Discretionary Settlement ("Impala"), each conditionally undertook to pay 50% of the Junior Unsecured Loan Notes including interest accrued thereon, to the extent that JPL did not have sufficient funds to do so.
In October 2008, Ernst & Young LLP was appointed as Heritable's administrator ("Administrator"). The administration of Heritable resulted in JPL being unable to continue funding the Aldgate Development, therefore construction did not progress. Aldgate consists of 105,000 square feet of office and retail space and 212 residential units of which 74 have already been sold as affordable housing units. Prior to the appointment of the Administrator construction had reached the 15th out of 22 floors.
Under the terms of the agreements entered into in respect of the Loan Notes between JPL and AEPC, in the event that the Aldgate development is not completed before 28 August 2011 when the Loan Notes become redeemable, or earlier if certain construction and sales conditions are not met including cessation of construction by JPL, and then only upon the request of the issuer (AEPC), Formation may be liable to assist JPL with any shortfall in repaying AEPC the initial funding and interest due by AEPC from its issue of the Loan Notes. Formation's maximum liability under this arrangement is £11.6 million, a sum previously disclosed as a contingent liability in its financial accounts.
Terms of the Joint Venture Agreement
JPL was incorporated on the 26th June 2006 as a special purpose vehicle to acquire the land and commence the Aldgate development. It is owned by Impala, however the profits derived from Aldgate were to be split 22.5% to Formation and 77.5% to JPL.
In return for JV Finance Ventures Limited providing the funding to discharge the loan obligations associated with Aldgate, JPL have agreed that the profit from the Aldgate development will belong solely to JV Finance Ventures Limited. As such Formation will now benefit from 50% of the Aldgate development profit through its 50% shareholding in JV Finance Ventures Limited. In addition, upon full settlement with the Administrators of Heritable on 31 March 2010, a first debenture over Aldgate will be established for the benefit of JV Finance Ventures Limited.
Balchan will conduct the day to day management of the development after consultation with both Formation and JV Finance Limited.
The provision of finance to develop Aldgate shall be provided on such terms as the parties to the joint venture agreement agree or by loans from a bank or by both. It is expected that JV Finance Ventures Limited will require working capital during the development of Aldgate and if Formation is unable or chooses not to contribute to the funding requirement, JV Finance Limited has agreed that it will make an excess contribution to make up the difference. If such an event in the future were to happen, JV Finance Ventures Limited will be offered an option by way of security over the profits which Formation is entitled to from the Whitechapel development which is a similar development scheme at 52 - 58 Commercial Road, London E1, involving Formation and the Kennedy Family Trust. The Whitechapel development is nearing completion and upon realisation of the remaining units therein the amount of Formation's share of profits will be determined.
Debenture
Once all of the £11m Settlement has been paid to the Administrators, JV Finance Ventures Limited will have a first ranking debenture over Aldgate.
Fair Value Write Downs.
Given the commercial position of JPL, Formation has resolved to write down the value of any monies owed to them by JPL to zero, reflecting, in their opinion, the fair value of that obligation.
Summary
This is an excellent Settlement by JPL with the Administrators and an important step towards the completion of Aldgate which has a number of positive implications for Formation, including now a 50% profit share in the development, improved chances of removing the Loan Note guarantee once the Loan Note holders are repaid; and possible additional profits from the project management of the development once Formation Design & Build Limited (Formation's construction project management business) is awarded the management contract. The next step is for J V Finance Ventures Limited to secure the additional funds (anticipated to be in the region of £55 million) to build out the development to completion.
Although this additional funding will be required by JV Finance Ventures Limited to fund the development costs in the future, the Board of Formation is happy that by entering into this JV agreement, Formation has a good chance of realising profit from Aldgate through its shareholding in JV Finance Ventures Limited, whilst at the same time being in a much better position to address the potential contingent liability it has on its balance sheet.
The independent directors consider, having consulted with Zeus Capital in its capacity as the Company's nominated adviser, that terms of these transactions are fair and reasonable insofar as Shareholders of the Company are concerned.
John Lawrence MBE, Non-Executive Chairman, Formation said; "The board has been working hard with JPL who in turn has held numerous meetings with Ernst & Young since Heritable Bank's Administration Order in October 2008. The culmination of these discussions and negotiations will, we anticipate, generate both development and site construction management profits for Formation whilst at the same time, enabling us to address the commitment made to the development's Loan Note holders. The Settlement amount of £11 million against the indebtedness of almost £33 million represents a substantial saving.
Concerted efforts to secure new funding will now ensue and we will continue to update both shareholders and the Loan Note holders as we progress. The board would like to thank all concerned with this development for their patience in what has been a time of uncertainty dictated by events none of us could have predicted. There is still much to do and Formation remains committed to seeking a satisfactory conclusion and an enhanced position for its shareholders".
Enquiries:
Formation Group PLC Tel: 020 7930 7590
John Lawrence MBE
Mike Wallwork
Zeus Capital Tel: 0161 831 1512
Alex Clarkson
Ross Andrews