Trinity Capital Regulatory News (TRC)

Trinity Capital PLC

Consolidated financial statements for the period ended 30 September 2014

Trinity Capital PLC (AIM: TRC), a fund created for investing in Indian real estate and infrastructure, announces its Interim Results for the period ended 30 September 2014.

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Chairman's Report

Dear Shareholder

During the six month period ended 30 September 2014, Trinity Capital plc ("Trinity") completed the sale of the Jodhana investment, sold shares in SKIL Infrastructure and distributed £5.3 million to shareholders.

The Company's net asset value fell from £28.1 million (13.4p per share) on 31 March 2014 to £19.9 million (9.4p per share) at 30 September 2014. The decline was due mainly to the distribution to investors of 2.5p per share and losses (both realised and unrealised) of 1.3p per share from the holdings in SKIL Infrastructure compared with the value of that asset at the beginning of the period.

At 30 September 2014, Trinity continued to hold interests in four investments in India, which were valued, after allowing for minorities, at a total of £16.1 million, equivalent to 7.6p per share. The Company holds shares in SKIL Infrastructure, a company listed on the National Stock Exchange of India and the Calcutta Stock Exchange, and three investments jointly with the two funds managed by SachsenFonds: Lokhandwala, Uppals IT and DB (BKC) Realtors (formerly MK Malls).

The Jodhana sale in July 2014 to the promoters generated net proceeds after fees and costs for Trinity of £3.1 million, which approximated the last carrying value.

Since May 2014, Trinity has sold in the market 88% of its original holding of 4.5 million shares in SKIL Infrastructure, generating net proceeds after costs and fees of £1.2 million. Approximately 53% of the original holding was sold in the period to 30 September 2014, generating net proceeds after costs and fees of £1.2 million. The market for shares in SKIL Infrastructure remains very illiquid, with daily volumes averaging 63,000 shares during the period. SKIL Infrastructure's share price has fallen from Rs. 106 on 31 March 2014 (and Rs. 65 in May when we were able to start selling our shares) to Rs. 30 per share on 30 September 2014. The promoters and board of SKIL Infrastructure do not appear concerned at the mounting losses incurred by the company's shareholders since listing and have made no attempt to remedy the original default in respect of our put option. As and when Trinity's actual losses have crystallised, our Mauritius subsidiary will have the right to seek damages against SKIL Infrastructure and its promoters. The promoters of the SKIL group have, for many years, raised capital from foreign investors and lenders to finance the growth of their businesses, including listing a company on the AIM section of the London Stock Exchange. It is, therefore, all the more surprising that the promoters appear to have done nothing to prevent their reputations being sullied and integrity questioned through such unfriendly actions towards minority shareholders.

There has been no material progress in the development of the site owned by Uppals IT and given continuing low local demand for IT and related services for which our site is designated, we do not believe profitable development opportunities will exist in the foreseeable future. As I noted in my last Chairman's letter, our wholly owned subsidiary, Trinity Capital Mauritius Limited ("TCML"), has commenced a winding up proceeding against TC1, the special purpose company that owns Uppals IT, because it has been unable to repay the £7.5 million loan provided by TCML. The courts in Mauritius had been due to hold a preliminary hearing in October 2014 in respect of the bankruptcy application by TCML. Although the hearing was rescheduled to 2015 at the request of the funds managed by SachsenFonds, we are hopeful that TC1 will be wound up in the near future.

TCML has agreed in principle the terms of sale of the mezzanine debt securities issued by DB (BKC) Realtors. The two Indian funds managed by SachsenFonds and our lawyers are working on the documentation and approval processes required to complete the transaction.

Construction of the high rise residential project in Mahalaxmi, a prime location in Mumbai, managed by the Lokhandwala group remains challenging. If the municipal authorities issue all of the development approvals, the Minerva tower will be amongst the highest buildings in Mumbai. This has significant technical and therefore potential cost implications. With continuing sluggish demand from end-buyers, the financial requirements of the project significantly exceed the original business plan. Our view remains that an early sale of the investment is preferable, but so far we have been unable to agree terms with SachsenFonds.

SachsenFonds' appeal of the Mauritius lower court's dismissal on jurisdictional grounds of their case against Trinity was finally heard in November 2014. The hearing was then adjourned but no date for a fresh hearing has yet been fixed. We expect that the Mauritius appellate court will affirm the lower court's order of dismissal.

We have resumed direct discussions with SachsenFonds and Deutsche Fonds Holding and are hopeful that a framework can be agreed to resolve the differences between Trinity and their two funds with whom we have joint ventured.

Business sentiment in India has improved since the election in May 2014 of Prime Minister Narendra Modi. The Indian stock markets have rallied, inflation has fallen and the exchange rate has stabilised. However, the feel-good factor has yet to spill over to the real estate sector and excess supply of properties remains in many sectors. Nevertheless, the Company will endeavour to capitalise on any improvement in the property market.

Yours faithfully

Martin M. Adams

Chairman

Investment Manager Report

Indian Real Estate Overview

The Indian economy has outperformed the central bank's estimate for the first quarter of the financial year to March 2015. The real GDP growth rate stood at 5.7%, with a projected growth rate of above 6% for the current financial year. Inflation eased to a 5 year low of 2.4% in September 2014 due to a softening of vegetable and food prices and a cooling off of international oil and commodity prices. However, the challenge remains to be able to sustain the same. Equity markets continue to remain buoyant and they have broken all time high records, though some volatility continues. Fiscal and current account deficits are also improving, although they still remain high. On the whole, a pro reforms government at the centre is helping to improve sentiment.

Although fundamental changes in the economy are appearing, it is early days yet. The optimism has not percolated to all aspects of the economy, especially the real estate sector, while the BSE index has risen 34% in the first eleven months of 2014, the BSE realty index has risen only 16% during the same period.

Residential real estate update

The slowdown in the residential market continues, with the piling up of unsold inventory remaining a serious concern. While high-end luxury products continue to face pressure both in terms of sales velocity and pricing (for example in Mumbai and especially in the micro-market where the Lokhandwala project is located), the mass market and mid-market products in some cities (e.g. Bangalore) have witnessed a slightly increased interest from the buyers. Actual translation of this into sales is, however, taking more time than anticipated. Developers have reduced new launches to concentrate on sales in ongoing projects.

Commercial real estate update

On a pan-India basis, there has been some improvement in leasing performance over the past few months - the supply demand gap is narrowing resulting in a drop in vacancy. However, the situation varies across different sub markets in different regions. The occupiers continue to be cautious in their expansion and this is expected to continue till the early indications of economic recovery become more sustained. As regards the Greater Noida, the region continues to be plagued by a severe oversupply of office space, with around two-thirds of completed stock remaining vacant.

Trinity's investments are also impacted by the macro-economic and regulatory factors. We provide below a detailed update on each asset.

Summary of Investments

Uppals IT Park "Tech Oasis"

\* TCML also provided £7.5 million of mezzanine debt to TC1 in October 2008.

Market overview

The Greater Noida office market continues to be plagued with over supply and high vacancy levels, with the situation expected to worsen going forward due to upcoming oversupply.

Construction work continues in the region after the court's decision upholding the land acquisition and re-approval of the region's master plan by the government planning board, as has been mentioned in the previous updates. However, some farmers continue to pursue the matter with higher courts.

Project location overview

The project land is located in Greater Noida and has frontage on the Yamuna expressway (a fully operational 165 km long access controlled six lane expressway connecting NCR with Agra, a major northern Indian city of Uttar Pradesh). It is also located very close to the Formula 1 race track. Over-supply of both residential and commercial projects in the region has resulted in the absorption being limited.

Partner/ promoter overview

There is no Indian partner / promoter in this project.

Development overview

The project land is zoned for the IT/ITES industry. The requisite lease premium has been paid to the local authority.

The current product mix (as per the zoning and approvals received) does not justify any development, given the market conditions. This has been the case since inception, and consequently the land remains undeveloped. (In any case, between October 2011 and August 2012, no construction work was permitted by the authorities due to the requirement for re-validation of the area's master plan.) Subsequent to the re-validation, Uppals IT obtained approval for construction of a boundary wall. The design of the boundary wall had been frozen, the necessary building material requirements drawn up and the contractor had been appointed. The construction of the boundary wall is now in progress. This will further help in protecting land value and securing the site.

As no development has taken place on site to date, the approval originally received as a Special Economic Zone (SEZ) from the Indian government has not been extended. However, the site continues to remain an IT/ITES plot.

As regards the farmer issue with the higher courts, apart from the risk as to status of ownership, there is a possibility that landowners such as Uppals IT will be asked by the authority to share in making enhanced compensation payments to the farmers. However, this is considered to be a remote risk.

Exit/ realisation strategy

The Manager has been evaluating possible realisation strategies, but nothing substantive has emerged as yet. Any exit decision would need to be taken in consultation with Immobilien Development Indien I GmbH & Co. KG ("Immobilien I") and by Immobilien Development Indien II GmbH & Co. KG ("Immobilien II").

In October 2013, TCML demanded repayment of its outstanding advance to TC1 of £7.5 million. As TC1 did not have the funds to repay, TCML commenced bankruptcy proceedings in Mauritius with a view to an independent liquidator selling TC1's assets (principally the holding in Uppal IT) and using the proceeds to repay TCML's loan, with any residual being available to TC1's shareholders. The courts in Mauritius had been due to hold a preliminary hearing in October 2014 in respect of the bankruptcy application by TCML. The hearing was rescheduled to 2015 at the request of the funds managed by SachsenFonds.

A few preliminary expressions of interest to acquire the land have been received but none of these have been fruitful.

SKIL Infrastructure (formerly Horizon)

Market overview

The Indian logistics sector continues to hold a lot of promise considering the current unorganised nature of the industry and the demand being seen from both domestic and international players.

Project location overview

SKIL Infrastructure Limited's projects include container freight stations, free trade warehousing zones, inland container depots and logistics and warehousing facilities located in different cities across the country.

Partner/ promoter overview

SKIL Group, the promoter shareholder of the company, is a leading player in the Indian infrastructure industry and has executed large scale projects nationwide. It is the SKIL group's expertise which will enable execution of Horizon's projects and creation of value.

Exit/ realisation strategy

TC-4 was allotted listed shares after the merger of Horizon Countrywide Logistics Limited with another listed entity of the SKIL group.

SKIL defaulted on the acquisition of TC-4's shares when the put option was exercised in September 2013. Given that a negotiated settlement with promoters did not work out, Trinity and the TC-4 board decided to progress with a sale of shares in the open market which is continuing to date. The realisation price continues to be low, partly as a result of the stock being illiquid. The Company will consider legal action in India to seek damages against SKIL and its promoters.

Since the end of the financial year (i.e. from April 1, 2014), 87% of TC-4 holding has been sold at a weighted average price of INR 42.5 per share compared with a market price at the end of March 2014 of INR 106.5 per share, resulting in a total realization of INR 168 million.

Lokhandwala

Market overview

Mahalaxmi is a premium high-rise residential location in South/Central Mumbai, which is well connected to other parts of the city and suburbs through rail and road linkages. The micro market has the presence of a number of established Mumbai developers and hence has seen a significant rise in construction as well as ready supply. Most of these projects are targeted at the luxury residential segment and hence the micro market has been one of the worst hit in the recent real estate slow down owing to very high cost of apartments in this region. The supply demand mismatch continues and oversupply has led to severe pressure on sales velocity and pricing.

Project location overview

The micro market boasts top quality infrastructure with premium hotels such as Four Seasons and the Palladium, and an up-market high street development known as Phoenix Mills. The area also has several well known office buildings/ complexes such as as Indiabulls Financial Centre, Peninsula Corporate Park, Peninsula Business Park, and One Indiabulls Centre in the vicinity.

Promoter/ partner overview

Lokhandwala Infrastructure, a large Mumbai based developer having a strong presence in the slum rehabilitation / redevelopment space, is the majority partner in the joint venture, and is leading the project development. The Lokhandwala Group has developed over 10 million sq. ft. of other projects in Mumbai, including slum redevelopments.

Development overview

The challenges, both regulatory and commercial, continue to be faced by the project. The 'Floor Area Ratio' construction density approval (which is presently approved at 25% below plan) is still pending. The final environmental clearance of the Minerva tower is also yet to come. The sales velocity remains under pressure with no sales witnessed over the past few months. The construction costs have increased significantly over those projected on account of an increase in prices of raw materials, labour and financing costs. The project had taken further debt to enable continuing construction, which is now also nearly exhausted.

As regards the status on site, the 2,100 slums that were at the site have been cleared and re-located. The construction of the slum rehab building is nearing completion. Larsen and Toubro (one of India's foremost contractors) had been appointed for construction of the free-sale area, which is ongoing after having been delayed due to several reasons by over 2 years.

Exit/ realisation strategy

Several realisation alternatives are being evaluated, including a strategic sale/ developer buyback during the development phase of the project.

Any exit decision would need to be taken in consultation with Immobilien I who are partners in TC5 and this may pose several challenges in realising a timely exit.

DB (BKC) Realtors

TC10's investment in DB (BKC) Realtors Private Limited (MK Malls) consists of (a) equity; (b) redeemable optionally convertible cumulative preference shares (ROCCPS); and (c) compulsorily convertible preference shares (CCPS). In 2007 and 2008, the capital structure of TC10 was reorganised such that the shares acquired by Immobilien I and Immobilien II in TC10 provided the economic interest in the equity and ROCCPS. TCML was issued with shares in TC10 which provide the economic interest in the CCPS, with a return on equity capped at an IRR of 20%.

MK Malls is engaged in a commercial office development in the Bandra Kurla Complex business district of Mumbai.

The amount due to TC10 on exercise of the right to sell all CCPS (in which TCML has economic interest) after the expiry of three years from the date of allotment has still not been paid by the promoters. The Manager is engaged in dialogue with the promoters with the objective of providing an exit to TCML. Discussions on a strategic sale/ developer buy back at an appropriate value in order to provide a timely exit to TCML are ongoing.

Consolidated Statement of Comprehensive Incomefor the period ended 30 September 2014

Consolidated Statement of Financial Positionat 30 September 2014

These financial statements were approved by the Board on 18 December 2014 and signed on their behalf by

Stephen Coe Graham Smith

Director Director

Consolidated Statements of Changes in Equityfor the period ended 30 September 2014

Consolidated Statement of Cash Flowsfor the period ended 30 September 2014

Notes to the Financial Statementsfor the period ended 30 September 2014

The Company is a closed-end investment company incorporated on 7 March 2006 in the Isle of Man as a public limited company. The Company is listed on the Alternative Investment Market (AIM) of the London Stock Exchange. 

The Company and its subsidiaries (together the "Group") invest in real estate and real estate related entities in India, primarily in commercial development in the office and business space, residential, retail, hospitality and infrastructure sectors deriving returns from development, long-term capital appreciation and income. Following a decision of the shareholders in March 2009, the Company's investment policy is to dispose of all of its existing assets in an orderly fashion and promptly, but having due regard to all applicable legal, governmental and regulatory restraints and with a view to maximising Shareholder value.

The Group has no employees.

These interim consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all of 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 March 2014.

The consolidated financial statements of the Group as at and for the year ended 31 March 2014 are available upon request from the Company's registered office at IOMA House, Hope Street, Douglas, Isle of Man or at www.trinitycapitalplc.com.

These interim consolidated financial statements were approved by the Board of Directors on 18 December 2014.

The accounting policies applied in these interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 March 2014.

There are no IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact to the Company.

The preparation of condensed consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates, and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results for which form the basis of making the judgements about carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

In preparing these condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies were the same as those that applied to the consolidated financial statements for the year ended 31 March 2014.

The principal risks and uncertainties are consistent with those disclosed in preparation of the Group's annual financial statements for the year ended 31 March 2014.

The authorised share capital at 30 September 2014 and 31 March 2014 and the issued and fully paid share capital at the same dates were as follows:

The basic loss per ordinary share is calculated by dividing the net loss attributable to the ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the period.

The Company has no potential dilutive ordinary shares; the diluted loss per share is the same as the basic loss per share.

On 29 July 2014 the Company made a distribution to shareholders of 2.5 pence per share, equivalent to £5,261,000.

The Investment Management Agreement with Indiareit Investment Management Company ("Indiareit") expired on 31 December 2013. However, Indiareit continues to provide investment management services to the Company. Periodic investment management fees are paid at the rate of US$198,000 per annum. Incentive fees are negotiated from time to time and on an ad hoc basis. During the period a total of £702,000 was paid to Indiareit, £60,000 being periodic investment management fees and £642,000 as a one-off incentive fee. This incentive fee is included in the net proceeds from disposals of properties (see note 12).

The Group holds full or partial ownership interests in a number of unquoted Indian companies, and in one quoted Indian company.

CB Richard Ellis ("CBRE") conducted an independent valuation (acting as external valuers) of the development properties owned by one of the unquoted companies as at 30 September 2014. Based on CBRE's valuation of the development property, which was carried out in accordance with the valuation guidelines of The Royal Institution of Chartered Surveyors, the Directors valued the Group's interest in the equity interests held in this unquoted company. CBRE also carried out certain Agreed Upon Procedures to test these computations of the fair value of Group's interest in the Indian company. 

At March 2014, the valuation process as described above had been applied to one other unquoted company, (not counting the one which was sold in the six months to September 2014). The valuation exercise was not carried out for this company at September 2014, because the Directors considered that there had been no material change in its fair value since March 2014. In the accounts for September 2014 it is therefore stated at the same value as at March 2014.

The Directors' valuations (as at both March 2014 and September 2014) are based on a discounted cash flow methodology. The methodology uses the cash flow data generated by CBRE (which in turn is partially based on company-generated cash flows) and observable market data on interest rates and equity returns. The discount rates used for valuing equity securities are based on historic equity returns for other entities operating in the same industry for which market returns are observable. The observed equity returns are adjusted to reflect the actual debt/equity financing structure of the investment. The discount rate applied varies from project to project to take account of the estimated risk and ranges between 19.9% and 26.0%. There will likely be significant reduction in value if the approvals from municipal authorities are not issued.

The valuation of the investment in Uppals IT Project Pvt. Ltd has been prepared on the assumption that relevant lease extensions will be obtained from the local government development authority. The Board believes that such extensions will be forthcoming (and the valuation of the investment has been prepared on this basis) but there is no guarantee that this will take place. If such extensions were not obtained then the land value of this investment would be materially lower.

The DB (BKC) Realtors Private Limited (MK Malls) valuation is based on the discounted nominal value of the compulsorily convertible preference shares (excluding any interest).

The valuation of SKIL Infrastructure Limited is based on the closing share price on the National Stock Exchange of India.

With the exception of the investment in SKIL Infrastructure Ltd., the investments are in projects for which there is very little or no market comparable information. Consequently the valuations are dependent on assumptions which are the subject of judgement, and a large range of possible valuations can be deduced. Due to the inherent uncertainty associated with the determination of the valuations, the amount realised on disposal may differ materially from the carrying amount in the financial statements. The impact of such uncertainty cannot be quantified.

Investments are recorded at fair value are as follows:

The fair value movement on investments shown in the income statement of £5,456,000 is made up of the fair value adjustment of £975,000, less the £6,431,000 reversal of previous unrealised write-downs of the investment in Jodhana and SKIL, and which form part of the realised loss of £7,742,000 as shown in note 12.

Fair value hierarchy of investments

The financial assets measured at fair value are valued using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurements, as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Those involving inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).

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

All the Company's investments measured at fair value have been valued on the basis of Level 3 described above, except for SKIL Infrastructure Limited which is based on quoted market prices and therefore classified as Level 1.

The Group disposed of all of its holding in Jodhana and part of its holding in SKIL during the period:

On 12 January 2011 the Company received a notification of claim from Immobilien I and Immobilien II. In addition to the Company, the notification was addressed to TCML, Trikona Advisers Ltd. ("TAL", the former investment adviser of the Company,) private persons who together controlled TAL, and TSF Advisers Mauritius Limited (a joint venture between TAL and SachsenFonds Asset Management GmbH). On 13 July 2011, the Supreme Court in Mauritius set aside the claim lodged by Immobilien I and Immobilien II. Immobilien I and Immobilien II appealed against that decision on 26 July 2011. The appeal of the Mauritius lower court's dismissal on jurisdictional grounds of their case against Trinity was finally heard in November 2014. The hearing was then adjourned but no date for a fresh hearing has yet been fixed.

By way of background, in November 2007 and May 2008 Immobilien I and Immobilien II purchased from TCML interests in various Mauritian companies (the "TC Companies") which in turn owned equity stakes in Indian investment vehicles (the "Indian Companies") which held certain of the Company's development projects in India (the "Transactions"). Accordingly, Immobilien I and/or Immobilien II were partners with TCML in various Mauritian companies in respect of five development projects in India. One Mauritian TC Company was sold in its entirety to Immobilien I and Immobilien II. In aggregate, Immobilien I and Immobilien II paid £86.4 million for investments in which the Company had invested £41.8 million. The contracts included legal provisions in the relevant documentation whereby the Group would be obliged to make good to the acquirer the economic loss which would arise upon the non-fulfilment of certain conditions in the contractual arrangements. 

The amount claimed by Immobilien I and Immobilien II in the original pleading was their original cost of the investments, being nearly €116 million, plus amounts to compensate for prejudice, trouble, annoyance, interest and costs.

The Board remains fully committed to defending the claims made by Immobilien I and Immobilien II. The Directors do not consider it necessary to provide for the claims in the financial statements, but the Company maintains a provision of £2 million for future legal costs to defend the actions.

Graham Smith is a Director of the Company and of the Administrator. The fees paid to the Administrator for the period amounted to £50,000 (six months ended 30 September 2013: £50,000). Mr Smith was not paid a Director's fee during the period.

Since the financial period end, Trinity Capital (Four) Limited sold 74% of its remaining holding of 2.1 million shares in SKIL Infrastructure Ltd at a weighted average price of INR 32 per share compared with a market price at 30 September 2014 of INR 30.