TIDMECDC
RNS Number : 8634J
European Convergence Develop. CoPLC
18 June 2014
18 June 2014
EuroPean convergence development company plc
("ECDC" OR "THE COMPANY")
Final Results for the Year ended 31 December 2013
European Convergence Development Company plc ("ECDC", the
"Company" or the "Group") announces its final results for the year
ended 31 December 2013.
For further information please contact:
European Convergence Development +44 (0)1624
Company plc 640200
Anderson Whamond
+44 (0)207
Charlemagne Capital 518 2100
Varda Lotan
+44 (0)1624
Galileo Fund Services Limited 692600
Ian Dungate, Company Secretary
+44 (0)20
Panmure Gordon 7886 2500
Hugh Morgan
+44 (0)20
Smithfield Consultants 7360 4900
Ged Brumby
Henry Wallers
Website: www.europeanconvergencedevelopment.com
Chairman's Statement
Financial Performance
The Report and Accounts of European Convergence Development
Company PLC (ECDC) set out the financial performance for the year
ended 31st December, 2013, along with the ongoing development and
management of its commercial assets.
The audited NAV per share at the 31st December, 2013 was
EUR0.2883 (2012:EUR0.3010) a reduction of EUR 0.0127 per share.
With the post balance sheet event of AREOF delisting its shares and
the Iasi asset being placed into administration the Board believe
that it is prudent to reduce the carrying value of the investments
in Iasi and Oradea to Nil. It should be stressed that this does not
mean that the Manager will reduce efforts to recover the investment
and return but the Board are of the opinion that the carrying value
of the put option against the parent company needs to reflect the
higher perceived risk of non-recovery.
The Consolidated Income Statement for the year to 31st December
2013 indicates a loss attributable to equity shareholders of EUR
0.0131 per share (2012: EUR0.0078).
The liquidity in the Company's shares has been disappointing.
Excluding two large cross trades, the average daily volume over the
last 6 months has been c.106,000 shares or c. EUR 6,000 per
day.
Dividend
The Board of Directors resolved not to pay a dividend but retain
the funds within the company to protect its current
investments.
Operating Activities
As you are aware, the Company was set up in 2006 to invest in
commercial, retail, residential and industrial property in South
East Europe, with a view to taking advantage of the potential for
capital appreciation. The target countries were Bulgaria, Romania
and Turkey. The opportunities to invest in projects came from
Romania and Bulgaria, which was consistent with the Company's
research and in line with the general level of investor appetite
for projects in this region. Both of these regions suffered, and
continue to suffer badly following the global economic crisis in
2008, a downturn that neither the Company, the Manager nor indeed
investors could have predicted. Although there have recently been
signs of stability returning to the market, any semblance of
recovery has been thwarted by the Greek banking crisis in 2012
which has impacted the lending carried out by the banks which the
Company would normally rely upon and thus limiting the credit
available to the Company. Further our communications with a number
of Shareholders suggest there is little or no enthusiasm for a
reinvestment cycle in these regions. Therefore the Directors
believe that it is not in the best interests of the Shareholders to
invest in any new projects.
The Directors and the Manager believe that consideration of the
future of the Company needs to begin well in advance of the
requirement of Shareholders to vote at the Annual General Meeting
in 2016 as to whether to continue or cease the Company, in
accordance with the Memorandum and Articles of Association of the
Company.
For the year ending December 2013 the Board discussed with the
Manager whether it was in the best interests of shareholders to
incur significant costs to undertake independent valuations of the
property assets held at the year end. The Manager having reviewed
various broker reports is of the opinion that there had been little
movement in investment yields and asset values during 2013 in
Romania and in land in Bulgaria. The Board undertook a valuation of
a parcel of land in Plovdiv which supported the view.. The Board,
supported by the Auditors decided to maintain the 2012 valuations
in the 2013 financial statements.
Outlook
The Directors together with the Manager, wish to confirm to
Shareholders the Company's commitment not to invest in any new
projects unless there is a need to protect existing investment. The
Directors also commit to the distribution of free cash to
shareholders and to reduce the operating cost of the Company
wherever possible. In summary, the Board is recommending to
shareholders the following initial steps:
1. The cancellation of the admission of the Company's shares to
trading on AIM in order to reduce costs;
2. A change to investment policy to make it clear that no
further investments into new businesses will be made and
distributing free cash to shareholders in the most tax and cost
efficient way for individual
shareholders ;
Please note that for the successful implementation of the above,
it will be necessary to ask Shareholders to vote in favour of the
delisting at the AGM in 2014.
1. Costs & Delisting
Listing Status
The Directors have analysed the costs of the Company's quoted
status and consider that maintaining the Company's admission to
trading on AIM, including the costs of retaining a nominated
adviser, is a considerable administrative burden, is a cost that is
not proportionate to the advantage of continuing its listed status
and therefore not in the interests of the Shareholders.
The cost implications aside, there are other advantages to
delisting, such as allowing a more open line of communication with
Shareholders and less concentration on the issue of disclosure
requirements and apprehensions in respect of market sensitivity.
The Directors are also of the opinion that at this stage of the
investment cycle it is no longer necessarily appropriate for the
Company to be listed.
2. Investment Policy
The Company will commit to not making further new investments
and be restricted to making investments in projects or assets
already existing within the Company. Such further investments (into
existing projects) will only be made where to do so is in the best
interests of the Company and its Shareholders. Any such investment
will be notified to Shareholders by way of the quarterly update
reports.
3. Distribution
As and when assets are realised subject to being above de
minimus value, cash will be returned to Shareholders either as
capital distribution, or by dividend or as a combination of the
two.
Anderson Whamond
Chairman
17 June 2014
REPORT OF THE MANAGER
ROMANIA
In Q4, Gross Domestic Product (GDP) in Romania expanded 1.6%
over the previous quarter and 5.6% year - on - year exceeding
market consensus forecasts significantly. The Q4 performance took
the full year growth rate to 3.5%, one of the fastest growth rates
in the EU and the highest growth achieved in Romania since 2008.
The main drivers of this growth came from an 8% increase in
industrial output and a 23.4% increase in agricultural output. With
farming output unlikely to match 2013's performance, Romania's
economic growth is expected to slow to around 2.2% for 2014.
In December the annual inflation rate fell by 0.2% to 1.6%
mainly as a result of a favourable statistical base effect.
Inflation is projected to decline further in the first quarter of
2014 although some forecasters are anticipating a pick up over the
remainder of the year ending 2014 within the range of 3.0% to 3.5%.
These forecasts would be at the top end of the Central Bank's
tolerance margin of plus/minus 1.0% around its target of 2.5%. The
Central Bank forecast is for inflation to end 2014 at 3.0% as a
result of already factored increase in excise tax on fuels due in
April and by the erosion of the favourable statistical base
effects.
At the end of December interest rate stood at 4.0% representing
a decline of 1.25% since the beginning of July and is at
historically low rates. Interest rates are forecast to decline
further during 2014 with the Central Bank currently forecasting
further declines in inflation and expressing concerns over the
"negative growth of lending to the private sector". The reference
rate is estimated to reach 3.50% by the end of 2014.
The consolidated budget deficit for 2013 amounted to 2.5% of GDP
which was in line with the full year target for 2013 agreed with
the IMF. The IMF Executive Board approved the first and the second
review of the precautionary Stand By Agreement ("SBA") concluded in
September 2013. The government had agreed with both the IMF and the
EU as part of an aid plan, a 2.2% budget deficit for 2014 but
confirmed that it does not intend draw down the EUR4.0 billion
available. The plan for 2014 will include the introduction of new
taxes and a raising of the minimum wage in two stages to RON 900
(EUR200) whilst most government employees will receive minor salary
increases and pensions will be indexed at 3.75%.
Employment in Romania does not appear to have followed the
increase in industrial production in 2013. Industrial production
increased 7.8% in 2013 when compared to 2012 which ensured that
Romania had the second highest growth rate in the EU. However, the
unemployment rate in 2013 increased from 7% to 7.3% by the year
end. Subsequently the rate has declined 0.1% in 2014 and is
forecast to decline further during 2014 to a year- end figure of
7.1%. Consumer spending in quarter 4 increased to RON 28.5 billion,
the highest since the beginning of 2009 and in first two months of
2014 seasonally adjusted sales were 5% and 7.5% up year on year in
January and February respectively. Confidence levels have increased
and there is a sense of optimism in the retail market that a
sustainable upward trend may be forming but Romania obtained a
score of 67 points in a recent Nielson survey placing it in the
bottom quartile and well below the global average of 96 points.
Recent events in Ukraine are a potential risk to foreign capital
inflows into Romania and the country's exports to Russia given the
depreciation of the Rouble. In addition, Romania's reliance on
trade to the EU (a recipient of 70% of its exports) implies that
current deflationary pressures across the union are also a risk to
its export sector. The upcoming presidential election meanwhile may
undermine the country's political stability. If these risks can be
avoided, Romania's solid economic fundamentals should ensure robust
growth in the medium term
BULGARIA
The government continued to work under the daily pressure of
protests which started in June 2013. With more than six months of
continuous daily protests in front of the Parliament building,
students barricaded in Sofia's main university since October and a
rising tide of ultra-nationalism and intolerance, many feared that
Bulgaria would collapse. The protests did not continue into Q1,
2014 and political life focused on the European Elections in May
2014. The underperforming economy has continued to suffer with the
spectre of deflation hanging over the country.
In 2013 Bulgarian statistics reported stabilization in some
macroeconomic indicators and according to the European Bank for
Reconstruction and Development (EBRD) the Bulgarian economy
indicated tentative signs of recovery. The Manager believes it is
too early to talk about sustainable recovery, especially given the
deflationary pressures and high unemployment in the country and the
slow global economic growth and increasing regional geopolitical
uncertainty.
The Bulgarian economy expanded by 0.9% in 2013, with Q4 seeing
an acceleration to 1.2%, the highest quarterly performance since
2012. Net foreign trade was the main driver of growth in 2013 as
exports expanded 8.9%, ahead of imports of 5.7%. The momentum
continues to build as confirmed by double-digit growth of exports
in Q4 and is spreading to the domestic economy,
with firms increasing capacity in response to higher orders from
abroad. Confidence is also an important reason behind accelerating
activity, with March economic sentiment at the highest level since
December 2010. Consumption decreased by 1.6% as households were
cautious and cut their discretionary spending in favour of
precautionary savings, which increased by 9.5% in 2013. This trend,
however, was offset by increased government expenditure. Investment
in fixed capital also expanded in Q4 up 2.5% year on year, with the
largest increase in manufacturing.
Industrial production remained flat in December 2013 as compared
to December 2012. Manufacturing output in December saw a slight
increase of 0.5% year on year driven mainly by export industries.
The surprise was a 28.4% year on year increase in mining and
quarrying output which was driven by a 25.4% annual rise in coal
production and a 43% jump in iron ore output. Total exports
decreased slightly in January compared to December 2013. Industrial
production increased 2.3% year on year in January 2014 whilst
manufacturing production increased 1.7% year on year in the same
month.
The unemployment rate in Q4 2013 increased to 11.4% from 10.9%
in Q3, mainly caused by an end of seasonal factors such as
agriculture and tourism and subsidized employment programs. The
increase in unemployment in Q4 ended three quarters of continuous
decline from a recent high of 13.8% at the beginning of Q1.
The annual inflation in December was negative 1.6% representing
the fourth consecutive month of a deflationary cycle which
continued into 2014 with all four months to April indicating
negative inflation on the back of lower energy and food prices.
Households' purchasing power is being additionally boosted by an
increase in the minimum wage at the start of 2014 as well as the
fiscal stimulus included in the 2014 budget. Consumer spending is
therefore expected to rebound strongly in 2014 after a weak 2013.
Month on month inflation was 0.3% between November and December.
General government debt stood at 18.4% of GDP at the end of
February 2014. The government debt increased during the last couple
of years from 16.3% in 2011 but remains relatively low compared to
most of the other EU countries.
PROPERTY MARKETS
ROMANIA
Office
Only one new Grade A building was delivered in Q 4 2013 -
Floreasca Park, in Barbu Vacarescu in the north of Bucharest,
developed by Portland Trust, with a total net leasable area of
37,500sqm. Oracle pre let 25,000 sqm as its new HQ premises. Total
supply for the year was approximately 120,000 sqm, almost 2.5 times
more than 2012 with approximately 80% concentrated in Barbu
Vacarescu. Modern stock in Bucharest is estimated at approximately
2.1 million sqm.
Recent activity has been concentrated in the Floreasca - Barbu
Vacarescu corridor but new areas in the central western and
southern regions of Bucharest are emerging as new business areas
located within densely populated residential areas. Some of the
buildings coming up for completion in 2014 in these areas are:
Green Gate (30,000sqm), Afi Business Park phases 2 and 3
(24,000sqm) and City Offices (25,000sqm). Total delivery in 2014 is
forecast at a similar figure to 2013.
The overall vacancy rate in Bucharest is estimated to between
14.5% and 15.0% representing a 70 bsp reduction quarter on quarter.
It is important to highlight the considerable differences in
vacancy rates between one district and another which can be as low
as 4% in the west to 35% in Pipera North and Baneasa. It is hoped
that the increase in activity will lead to further reductions in
the vacancy rates.
Prime headline rent remained unchanged over the last 12 months
at EUR18.00 to EUR18.50 per sqm per month. The market is still
tenant-led with landlords required to offer incentives in order to
attract and retain tenants although there is some evidence of the
packages tightening. As always it depends on the letting market in
a particular district which will have a direct impact upon the
incentive packages offered. These are applicable to lease
requirements exceeding 2,000-3,000 sqm for existing buildings where
previously it would have been applicable to larger pre-leases.
In quarter 4 the total gross take-up was between 80,000 and
85,000 sqm, while gross take up for 2013 was approximately 300,000
sqm, the highest level since 2008 and 22% higher than 2012.
Pre-lets fell, but volumes were supported by rising new leases and
renewals. Encouragingly, expansion driven occupier activity
increased by 54%. New demand generated 48,500 sqm of new leases.
The largest transactions in Q 4 were the leasing of c. 6,000sqm by
P&G in Iride Business Park, the prelease of 12,000 sqm by
Electronic Arts in the AFI business park and the largest single
deal, the 10 year, 26,000 sqm renewal of HP's headquarters in Novo
Park. ITC companies were the most active generating 60% of the
total leasing activity.
The 2014 pipeline remains stable with an estimated
120,000sqm-140,000sqm to be delivered. Take-up is expected to
increase compared to previous years driven mainly by new leases. On
short term the impact on rents is not expected to be material but a
declining pipeline together with the estimated pick up of the
economy would lead to an estimated firming up of the rent levels
currently experienced by the market.
Q 4 typified the majority of 2013 with no significant deals
closing. There is limited interest from investors with
opportunistic buyers the only ones really looking for potential
opportunities that may come out of banks restructuring their non
performing loans and off-loading some real estate. Liquidity levels
will remain low and improve once a more sustained performance in
the occupier market is noted. Prime yields remain at around 8.50%
although against limited transactions, but once the market gains
momentum compression should follow shortly.
Retail
Q4 was a relatively busy period in Romania with three
developments opened, the biggest being the Promenada scheme in
Bucharest developed by Raiffeisen Evolution the other two were AFI
Palace (29,000 sqm of GLA) in Ploiesti and Galati Shopping City
(27,000 sqm) in Galati. New shopping centre stock opened in 2013
totalled approximately 140,000 sqm of Gross Lettable Area (GLA),
representing the lowest figure in eight years. There are a total of
144,000 sqm of shopping centre GLA under construction. Total modern
retail space in Bucharest is estimated at 900,000 sqm and 1.7
million sqm in the rest of the country.
A few retailers without a presence in the country are actively
looking at the market, with Tchibo, Kazar, Jumbo and H&M Home
opening their first units in Q4. D&G also opened their first
local shop in the Grand Avenue, Marriott's retail gallery. H&M
also pioneered the opening of the first major fashion retailer shop
in the old centre of Bucharest.
Rental levels in Bucharest for both prime shopping centres and
prime high street units remained at EUR55-65/sqm/month. In
Bucharest the highest rents are being achieved in Baneasa Shopping
City and AFI Palace Cotroceni which are considered the two most
prominent retail schemes in Bucharest and Romania.
In 2014 only two projects have been announced for delivery, both
developed by NEPI: Vulcan Value Center (35,000sqm) in Bucharest,
and Shopping City Targu Jiu (27,000sqm) in Targu Jiu.
Residential
A significant shift was recorded during the summer months when
the Government announced the cancellation of the Prima Casa, the
Government backed mortgage lending scheme. The Government, in close
cooperation with the Central Bank stopped supporting the EUR
denominated lending scheme and replaced it with support for a RON
denominated programme. This measure together with the decision of
the largest commercial bank, BCR, (20% of the market by assets) to
only finance RON denominated mortgages put significant pressure on
market prices.
Following the reduction in the monetary policy rate in July
2013, BCR announced an effective mortgage interest rate of 5.5% on
both its EUR and RON denominated mortgages. At 5.5% it is the
cheapest mortgage rate seen in the Romanian market and it was
thought that the reduction would act as a strong stimulus for the
market. However, transaction volumes stabilised at fairly low
levels suggesting that there was reluctance on the part of sellers
who were not under pressure to dispose of their assets, to adjust
to further price decreases. In the first quarter of 2014 volumes
improved slightly but mainly on the back of a better overall
economic performance rather than an improving market.
BULGARIA
Retail
No modern shopping centres were opened in Bulgaria in Q4 2013.
The GLA of all the operational shopping malls is approximately
735,000 sqm, with a GLA per 1,000 residents standing at slightly
over 100 sqm. Three projects in Sofia currently under construction
and forecast to open during 2014 will provide an additional 120,000
sqm. The only shopping centre outside Sofia planned for delivery in
2014 is Panorama Pleven with a GLA of 17,000 sqm. With the opening
of these malls, the modern retail space per 1,000 inhabitants for
Bulgaria will increase to approximately 120 sqm compared to 250 sqm
for Europe as a whole and 200 sqm for CEE.
Occupancy in shopping centres in Bulgaria was well below
satisfactory levels and the year ended with vacancy rates in Sofia
of approximately 12% and approximately 20% in secondary cities.
Such continued low occupancy is the result of a long and continuous
downward spiral not helped by declining consumer spending.
Average rental levels for modern retail space in Bulgaria did
not improve during Q4 2013 and because occupancy levels were low
landlords were forced to extend rent free periods and provide
fit-out contributions to retain and support tenants and it remains
a tenant's market. Average rental levels in Sofia for Q4 declined
further to approximately EUR21 per sqm per month from EUR25 per sqm
per month at the end of the first half of 2013. It is unlikely that
the market will see any notable increase in rents until there is a
period of higher consumer spending and occupancy levels return to
satisfactory levels. Though there is no statistical evidence it is
thought that without the continued support of banks in
renegotiating loans and interest rates many of the Malls would have
no option but to close.
The investment market remained stagnant with no investment deals
in the retail sector in the second half of the year. It is highly
unlikely that the investment market will return for some time to
come as banks and funding institutions are not prepared to finance
new acquisitions.
Individual projects
Cascade
Currently the building is fully leased generating positive cash
flow after meeting all its financial obligations from an
operational and banking point of view. All financial obligations
are up to date with no collection delays on the revenue side. A
small extension on the ground floor of the building was completed
inQ4 allowing for further improvement in the income profile of the
building.
Oradea and Iasi Shopping Centres
Following the notice for repayment issued by the Company with
respect to the investments in both Oradea and Iasi, the Manager
entered into negotiations over a possible restructuring of the
repayment. Since the year end Argo Real Estate Opportunities Fund
(AREOF) announced that it was delisting its shares from AIM with
effect from 3rd March, 2014. The main reason given was that the
complexity of the loan restructuring and bank negotiations was not
conducive to and made it very difficult for the company to meet the
public reporting requirements. Further, AREOF believed that this
was not to the benefit of the shareholders and may hinder the bank
renegotiations being undertaken.
Oradea Shopping Centre
Following the loss of a court case brought by the general
contractor that built the asset, ConstructiiBihor, and following
aggressive action by ContructiiBihor in order to secure its claims
against the local SPV, AREOF decided that the best course of action
would be to seek protection from the creditors and filled for
insolvency at the end of November. The case was admitted and a
judicial administrator was appointed for the company in agreement
with the senior lenders of the project.
The Lenders and AREOF agreed that a judicial administrator
should be appointed from Omilos Oradea, its main secured creditor
and its stakeholders, the Banks, would appoint their own
administrator. The Consortium of judicial administrators was formed
from V.F. Insolventa and TZA to observe the activity of the
company. The loan was accelerated prior to the company going into
administration and therefore the company does not have to pay
interest on its loans and any other finance costs. There were no
significant tenant movements following this action.
The Era Home Centre area of the Mall offering the largest
selection of home decoration and furnishings in the region
continued to perform in line with tenants' expectations. A new
lease was signed with LEMS for a new 2,000 sqm furniture store
which opened for trading in September. The Manager also finalized a
lease with RDS to install photovoltaic panels on the roof of the
mall which were forecast to reduce the electricity costs for the
Mall by around EUR70,000 per annum however Lenders' approval was
never received and the supplier left.
Despite increasing numbers of visitors sales for non-Carrefour
tenants remained low throughout the second half of 2013 when
compared to AREOF's other centres. New local retailers Studio Blu,
Berge and Schneider opened small stores and there were pending
negotiations with local fashion retailers, a children's store and
pet shop. Stock House, the large shoes discount retailer opened at
the end of 2013. Vacancy rates at the end of the year were around
9%.
Iasi Shopping Centre
Competition from 3 other centres within the city continued to
impact footfall and sales for the gallery tenants during the second
six months of 2013. Significant road works being undertaken within
the city also deterred customers from travelling to the shopping
centre. Retailers in other schemes reported declining sales
indicating a general decline in consumption within the city.
Moldova Mall, a 9,500 sqm GLA scheme located in downtown Iasi, was
sold to a private Romanian investor for an estimated EUR15.5
million in Q1 2014 and the new owner has stated that he intends to
redevelop the upper floors of the shopping centre, which is located
in the new dominant shopping destination of Palas, into office
space which, if delivered should represent a boost to the retail
market.
The drop in customers visiting ERA was especially noticeable
between Monday and Wednesday however, Carrefour registered a small
increase in turnover. Marketing activities were largely focused on
sales promotions to drive traffic to the gallery tenants, which was
a reasonable defensive strategy whilst the road works remain
underway. It is believed that on completion of the road works in
late 2014 the situation will improve.
Construction of the 28,000 sqm Mall extension and negotiations
to sell land plots continue to be delayed until the situation with
Bank of Cyprus has been resolved. A EUR77m development facility to
be provided by EFG, Banca Romanesca, Bancpost and Bank of Cyprus is
in place however, the restructuring of the existing facility
continues to be delayed until the reorganisation of Bank of Cyprus
has been completed. Upon finalisation of the restructuring the
current construction program is expected to deliver Phase 1 of
15,000 sqm within 15 months and Phase 2 within 18 months of
starting.
The Romanian Praktiker business, which represents a major space
user on the site was acquired by a Turkish retailer who is looking
to renegotiate lease agreements enabling him to partially
recapitalise the business Those negotiations are ongoing for a
restructuring as are the collection of the outstanding rental and
service charge debts.
The low visitor numbers and relatively high vacancy rates,
especially in the new section and the competition from three town
centre schemes had a detrimental impact on discussions with
potential tenants. Unit availability within the competing projects
continues to represent a significant competitive threat to Iasi and
is unlikely to change in the immediate future. The situation may
improve if ongoing negotiations with some additional anchor tenants
could be finalized but generally leasing continued to be slow
during the later part of 2013 reflecting the local retail
climate.
All terms negotiated with the banks were put on hold reflecting
the issues affecting Bank of Cyprus in Romania and the ongoing
performance of the Oradea scheme. As the Bank of Cyprus was due to
provide the majority of the debt facility for Iasi, there is a risk
that construction debt finance will not be forthcoming.
Plovdiv
At the end of 2013 occupancy levels had declined to 62% of GLA.
Replacing these tenants continued to be a challenge as the business
did not have a reputable property manager, a credible leasing
strategy, and above all - no funds with which to pay fitting out
contributions to prospective tenants.
During Q4 the contract with the international property
consultant was terminated because of lack of support by one of the
project partners. As a result there was no coordinated leasing
strategy for the Mall which directly impacted on prospective tenant
motivation. No agreement has been reached with Carrefour and the
initial negotiations with several prospective international tenants
have, in effect been frozen as there is no credible operator able
to take forward the discussions.
The discussions with the bank to restructure the banking
facility continued up to the end of the year with the local partner
appointed by the shareholders to lead the negotiations. However, no
progress could be made on reaching mutually acceptable
restructuring terms and at the beginning of 2014 the bank nominated
a property investment company to undertake full due
diligence of the scheme. The Manager is extremely disappointed
by this development as it had previously negotiated the key terms
to underpin an agreement where the Shareholders and the Bank would
support the development with additional funding. Unfortunately
circumstances were such that not all of the shareholders could
provide enough evidence to fulfil their financial obligations which
rendered the strategy unachievable and resulted in the leasing
consultant contract being terminated
As previously reported, there is no property manager and the
technical manager was appointed to carry out the day to day
management of the Mall. The Mall had a monthly operational cash
deficit and was unable to meet all of its obligations from the
collected rental and service charge revenue. This has led to
increasing overdue payments to service providers and to the fiscal
authorities. Unless the business restructuring is resolved quickly
and fresh cash made available to cover operational needs, the
company faces serious liquidity problems which obviously threatens
its operations. The Manager is also of the opinion that the market
value of the asset is considerably less than the current bank debt
and without the ongoing support of the bank the Mall would be
unable to continue its business.
Mega Mall Rousse
In addition to the previously reported series of aggressive
actions and the defaulting of the entire loan in April 2013, the
Bank has filed an application for insolvency against Mega Mall
Rousse in January 2014. The Rousse District Court appointed a
temporary receiver to control certain functions of the business.
The first court hearing of the insolvency case is scheduled for the
end of May 2014.
During Q1, occupancy dropped from 48% to 43% after the closing
of several tenants, including an international pharmaceutical
company, which anchored the ground floor. Less than 10 tenants
remain trading, including the supermarket, Chinese retailer, the
bowling, the go-kart, and some other smaller shops. The occupancy
over the three trading floors, excluding the go-karting, is c. 33%,
which is well below any critical mass necessary to keep the Mall
open. In view of the pending insolvency case, leasing is proving
impossible. The expectations are that other tenants will follow
those that have already closed and will leave the retail centre
soon.
The Project continues to face liquidity problems, payments to
key service providers are in delay. The power supply to the
building was cut off for one day in March and finally turned off in
April. The company experiences constant challenges in paying for
key consumables and at present there is still a risk that some of
the key service providers will stop the provision of services,
which poses a further threat to the operation. The Management is
working hard to keep the building open for trading however, the low
and decreasing occupancy and the liquidity problems in paying to
key service providers make it probable that the building will be
closed for an indefinite period.
As previously reported, the Manager has been in negotiations
with some interested parties to invest in the Project in case of a
suitable bank debt restructuring and reduction; however, after the
filing of the application for insolvency, the discussions were
discontinued.
In April the Mall was shut as the electricity supply was
switched off. Request to the Bank to pay the outstanding
electricity costs was submitted and unless the Bank injects further
funds there was no other course of action but to close the mall
altogether.
Trade Centre Sliven
There has been no change in the position regarding the
development itself since the last report and the Manager is
discussing with the partner how best to take the development of the
site forward. All options are being considered including an exit
from the development and splitting the assets of the company
between the shareholders.
Bourgas Retail Park
There has been no further progress made with this site as it is
very much linked to the developments in Plovdiv
Charlemagne Capital (IOM) Limited
17 June 2014.
REPORT OF THE DIRECTORS
The Directors hereby submit their annual report together with
the audited consolidated financial statements of European
Convergence Development Company plc (the "Company") and its
subsidiaries and joint venture associates (together, the "Group")
for the year ended 31 December 2013.
The Company
The Company is incorporated in the Isle of Man and was
established to enable investors to take advantage of opportunities
that exist in the property markets of South-East Europe.
Results and Dividends
The results and position of the Group and the Company at the
year-end are set out on pages 18 to 43 of the financial
statements.
The Directors will decide in respect of any 12 month accounting
period as to what percentage of the Company's realised net profits
available for distribution (if any) they will recommend as the sum
for payment as a dividend. This decision will take into account the
opportunities available to the Company for further investment. The
Directors may pay half-yearly interim dividends if they believe
that the financial position of the Company justifies it. If the
Company's funds are fully invested, the Directors may re-invest
some of the Company's profits into the maintenance of the Company's
property portfolio.
The Directors do not intend to declare a dividend at this
time.
Directors
The Directors during the year and up to the date of this Report
were:
James Rosapepe
Donald McCrickard
Anderson Whamond
Directors' and Other Interests
Anderson Whamond is a non-executive director of the Manager, and
a shareholder of Charlemagne Capital Limited ("CCL"), the parent of
the Manager and Placing Agent. Additionally, Mr Whamond has an
indirect family interest in shares of CCL. There are no service
agreements between Mr Whamond and CCL that are not determinable
within one year.
None of the Directors have a direct or indirect interest of the
shares in the Company.
Charlemagne Capital (Investments) Limited (a subsidiary of
Charlemagne Capital Limited), holds 125,000 shares of the Company.
A number of companies managed by the Manager had holdings in the
Company during the year.
Save as disclosed above, none of the Directors had any interest
during the year in any material contract for the provision of
services which was significant to the business of the Company.
Independent Auditors
Our auditors, Greystone LLC, being eligible, have expressed a
willingness to continue in office.
Going Concern
The directors have a reasonable expectation that the company and
the Group have adequate resources to continue in existence for the
next 12 months and indeed the foreseeable future. Accordingly they
continue to adopt the going concern basis in preparing the annual
report and accounts.
Corporate Governance
The Company is not required to follow the provisions of the
Combined Code as set out in the UK Financial Conduct Authority
Listing Rules, however, the Board is committed to high standards of
corporate governance and a summary of the main elements of
corporate governance are described below:
Board of Directors
The composition of the Board is set out above. The Board
currently comprises a non-executive chairman and two other
non-executive directors.
The Board meets regularly and is provided with relevant
information on financial, business and corporate matters prior to
meetings.
Audit Committee
The Audit Committee consists of the Board members. To be
quorate, at least two offshore Directors must be present, with the
majority of the committee also being independent of the management
of the Company. The Committee overviews the adequacy of the
Company's internal controls, accounting policies and financial
reporting and provides a forum through which the Company's external
auditors report to the Company.
Internal Control
The Directors are responsible for establishing and maintaining
the Company's system of internal control. This system of internal
control is designed to safeguard the Company's assets and to ensure
that proper accounting records are maintained and that financial
information produced by the Company is reliable. There are inherent
limitations in any system of internal control and such a system can
provide only reasonable, but not absolute, assurances against
material misstatement or loss. The Directors, through the Audit
Committee, have reviewed the effectiveness of the Company's system
of internal controls.
Principal Risks and Uncertainties
The directors consider that all principal risks and
uncertainties have been addressed within note 4.1 of these
financial statements.
Future Developments
A review of the current operating activities and future outlook
of the Group is included within the Chairman's statement.
On behalf of the Board
Anderson Whamond
Chairman
17 June 2014
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Directors'
Report and the Consolidated Financial Statements in accordance with
applicable law and regulations. In addition, the Directors have
elected to prepare the Group and Parent Company financial
statements in accordance with International Financial Reporting
Standards as adopted by the EU.
The Group and Parent Company's financial statements are required
to give a true and fair view of the state of affairs of the Group
and the Parent Company and of the profit or loss of the Group for
that period.
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with
International Financial Reporting Standards as adopted by the EU;
and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and Parent
Company will continue in business.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Parent
Company's transactions and disclose with reasonable accuracy at any
time its financial position. They have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation governing the preparation and
dissemination of financial statements may differ from one
jurisdiction to another.
On behalf of the Board
Anderson Whamond
Chairman
17 June 2014
Report of the Independent Auditors, Greystone LLC, to the
members of European Convergence Development Company plc
We have audited the consolidated financial statements of
European Convergence Development Company plc for the year ended 31
December 2013 which comprise the Consolidated Income Statement,
Consolidated Statement of Comprehensive Income, the Consolidated
and Company Statements of Financial Position, the Consolidated
Statement of Changes in Equity and the Consolidated Statement of
Cash Flows and the related notes. The financial reporting framework
that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by
the EU.
This report is made solely to the Company's members, as a body.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's 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 and the Company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Statement of Directors'
Responsibilities set out on page 15, the Directors are responsible
for the preparation of consolidated financial statements that give
a true and fair view. Our responsibility is to audit, and express
an opinion on, the consolidated financial statements in accordance
with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the consolidated financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the consolidated financial statements sufficient to
give reasonable assurance that the consolidated financial
statements are free from material misstatement, whether caused by
fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group's circumstances
and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors and the overall presentation of the financial statements.
We read all the financial and non-financial information to identify
material inconsistencies with the audited financial statements. If
we become aware of any apparent material misstatements or
inconsistencies we consider the implications for the audit
report.
Opinion on the consolidated financial statements
In our opinion the consolidated financial statements:
-- give a true and fair view of the state of the Group's and
Parent Company's affairs as at 31 December 2013 and of the Group's
loss for the year then ended; and
-- have been properly prepared in accordance with IFRSs as adopted by the EU.
Emphasis of matter
Without qualifying our audit opinion we draw to your attention
the following matters:
As disclosed in note 4.1 to these consolidated financial
statements, the economic environment in the jurisdictions within
which the Group operates have increased the intensity of the risk
factors to which the Group is exposed. In particular, there is
increased uncertainty as to the valuation of property assets held
by equity accounted investees, due to a significant reduction in
the availability of loan finance and because of the lack of
activity in the local property market.
Emphasis of matter continued
The ability of the equity accounted investees to secure
continued funding is a significant factor influencing the estimates
derived.
Other Matter
The financial statements of the prior period were audited by a
predecessor auditor. The predecessor auditor expressed an
unqualified opinion in their report dated 24(th) June 2013
Greystone LLC
Chartered Accountants, Talbot Chambers, 18 Athol Street,
Douglas, Isle of Man IM1 1JA
17 June 2014
Consolidated Income Statement
Note Year ended Year ended
31 December 2013 31 December 2012
EUR'000 EUR'000
--------------------------------------------------- ----- ------------------ ------------------
Annual management fees 7.3 (490) (472)
Audit fees 8.4 (61) (163)
Legal and professional fees (41) (67)
Directors' fees 15 (72) (72)
Administration fees 8.2 (57) (57)
Other operating expenses 8.3 (283) (371)
Administrative expenses (1,004) (1,202)
--------------------------------------------------- ----- ------------------ ------------------
Net operating loss before net financing income (1,004) (1,202)
--------------------------------------------------- ----- ------------------ ------------------
Financial income 12 33
Financial expenses - -
--------------------------------------------------- ----- ------------------ ------------------
Net financing income 5 12 33
--------------------------------------------------- ----- ------------------ ------------------
Share of profit of equity accounted investees 9 102 448
Impairment in value of equity accounted investees 9 (1,782) (1,234)
Uplift in value of equity accounted investees 9 1,501 1,258
--------------------------------------------------- ----- ------------------ ------------------
Loss before tax (1,171) (697)
--------------------------------------------------- ----- ------------------ ------------------
Income tax expense 16 (1) (4)
Retained loss for the year (1,172) (701)
--------------------------------------------------- ----- ------------------ ------------------
Basic and diluted loss per share (EUR) 12 (0.0131) (0.0078)
--------------------------------------------------- ----- ------------------ ------------------
The Directors consider that all results derive from continuing
activities.
Consolidated Statement of Comprehensive Income
Note Year ended Year ended
31 December 31 December
2013 2012
EUR'000 EUR'000
------------------------------------- ------------- -------------
Loss for the year (1,172) (701)
Other comprehensive income
Items that may subsequently
be
Reclassified to profit
and loss:
Currency translation 13 -
differences
------------------------------ ------ ------------- -------------
Total comprehensive loss
for the year (1,159) (701)
-------------------------------------- ------------- -------------
Note At 31 December 2013 At 31 December 2012
EUR'000 EUR'000
------------------------------------------ ----- -------------------- --------------------
Investment in equity accounted investees 9 22,836 23,185
Property, plant and equipment - 1
Total non-current assets 22,836 23,186
Loans to third parties 10 90 330
Trade and other receivables 50 58
Cash and cash equivalents 4.4 3,065 3,677
------------------------------------------ ----- -------------------- --------------------
Total current assets 3,205 4,065
------------------------------------------ ----- -------------------- --------------------
Total assets 26,041 27,251
------------------------------------------ ----- -------------------- --------------------
Issued share capital 11 71,564 71,644
Share premium 10,654 10,577
Foreign currency translation reserve 17 4
Retained losses (56,444) (55,272)
------------------------------------------ ----- -------------------- --------------------
Total equity 25,791 26,953
------------------------------------------ ----- -------------------- --------------------
Trade and other payables 13 250 298
Total current liabilities 250 298
------------------------------------------ ----- -------------------- --------------------
Total liabilities 250 298
------------------------------------------ ----- -------------------- --------------------
Total equity & liabilities 26,041 27,251
------------------------------------------ ----- -------------------- --------------------
Approved by the Board of Directors on 17 June 2014
Company Statement of Financial Position
Director Director
Note At 31 December 2013 At 31 December 2012
EUR'000 EUR'000
------------------------------------------ ----- -------------------- --------------------
Investment in equity accounted investees 9 511 2,163
------------------------------------------ ----- -------------------- --------------------
Total non-current assets 511 2,163
------------------------------------------ ----- -------------------- --------------------
Intragroup balances 7.5 25,285 24,826
Trade and other receivables 15 13
Cash and cash equivalents 4.4 39 43
------------------------------------------ ----- -------------------- --------------------
Total current assets 25,339 24,882
------------------------------------------ ----- -------------------- --------------------
Total assets 25,850 27,045
------------------------------------------ ----- -------------------- --------------------
Issued share capital 11 71,564 71,644
Share premium 10,654 10,577
Retained losses (56,427) (55,268)
------------------------------------------ ----- -------------------- --------------------
Total equity 25,791 26,953
------------------------------------------ ----- -------------------- --------------------
Trade and other payables 13 59 92
------------------------------------------ ----- -------------------- --------------------
Total current liabilities 59 92
------------------------------------------ ----- -------------------- --------------------
Total liabilities 59 92
------------------------------------------ ----- -------------------- --------------------
Total equity & liabilities 25,850 27,045
------------------------------------------ ----- -------------------- --------------------
The loss made by the Company for the year ended 31 December 2013
was EUR1,159,000after an impairment charge against intragroup
balances amounting to EUR1.5 million (primarily a result of the
provisions made against the investments held by the Company's
subsidiaries) (2012: EUR701,000 loss with an impairment charge of
EUR1.7 million).
Approved by the Board of Directors on 17 June 2014
Director Director
Consolidated Statement of Changes in Equity
Share capital Share premium Foreign currency Retained earnings Total
translation reserve
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 1 January 2012 72,412 9,841 4 (54,571) 27,686
Loss for the year - - - (701) (701)
Other comprehensive income
Foreign exchange - - - - -
translation differences
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Total comprehensive loss - - - (701) (701)
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Shares cancelled following
market purchases (768) 736 - - (32)
Total transactions with
owners in the year (768) 736 - - (32)
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 31 December
2012 71,644 10,577 4 (55,272) 26,953
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 1 January 2013 71,644 10,577 4 (55,272) 26,953
Loss for the year (1,172) (1,172)
Other comprehensive income - - - - -
Foreign exchange translation differences - - 13 - 13
--------------------------------------------- ------- ------- --- --------- --------
Total comprehensive loss - - 13 (1,172) (1,159)
--------------------------------------------- ------- ------- --- --------- --------
Shares cancelled following market purchases (80) 77 - - (3)
Total transactions with owners in the year (80) 77 - - (3)
--------------------------------------------- ------- ------- --- --------- --------
Balance at 31 December 2013 71,564 10,654 17 (56,444) 25,791
--------------------------------------------- ------- ------- --- --------- --------
Consolidated Statement of Cash Flows
Note Year ended Year ended
31 December 2013 31 December 2012
EUR'000 EUR'000
------------------------------------------------------------------ ----- ------------------ ------------------
Operating activities
Group loss for the year (1,172) (701)
Adjustments for:
Net financial income (12) (33)
Net rent and related income - -
Income tax expense 1 4
Share of gain of equity accounted investees 9 (102) (448)
Net impairment/(uplift) in value of equity accounted investees 9 281 (24)
Operating loss before changes in
working capital (1,004) (1,202)
Decrease in trade and other receivables 8 9
(Decrease)/increase in trade and other payables (48) 59
Cash used in operations (1,044) (1,134)
Financial income received 12 33
Dividend received 199 -
Tax paid (1) (4)
------------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in operating activities (834) (1,105)
------------------------------------------------------------------ ----- ------------------ ------------------
Investing activities
Disposal/(acquisition) of equity accounted investees 9 - -
Increase in loans to equity accounted investees 9 (29) (630)
Decrease/(increase) in loans to third parties 10 240 (17)
Disposal of property, plant & equipment 1 -
------------------------------------------------------------------ ----- ------------------ ------------------
Cash flows generated from/(used in) investing activities 212 (647)
------------------------------------------------------------------ ----- ------------------ ------------------
Financing activities
Proceeds from the issue of ordinary share capital - -
Purchase of own shares 11 (3) (32)
Share issue expenses - -
------------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in financing activities (3) (32)
------------------------------------------------------------------ ----- ------------------ ------------------
Net decrease in cash and cash equivalents (625) (1,784)
Cash and cash equivalents at beginning of year 3,677 5,461
Foreign exchange gains on cash and cash equivalents 13 -
------------------------------------------------------------------ ----- ------------------ ------------------
Cash and cash equivalents at end of year 3,065 3,677
------------------------------------------------------------------ ----- ------------------ ------------------
Notes to the Consolidated Financial Statements
1 The Company
European Convergence Development Company plc (the "Company") was
incorporated and registered in the Isle of Man under the Isle of
Man Companies Acts 1931 to 2004 on 26 July 2006 as a public company
with registered number 117309C. On 3 March 2008 the Company was
de-registered as an Isle of Man 1931-2004 company and re-registered
as a company governed by the Isle of Man Companies Act 2006 with
registered number 002391v.
Following the close of the Company's first placing of Ordinary
Shares on 12 September 2006 38,071,000 shares were issued. On 21
September 2007, a further 63,157,894 Ordinary Shares were issued
and placed, bringing the Company's total issued share capital to
101,228,894 Ordinary Shares.
During the year to 31 December 2008 the Company purchased
9,593,424 of its own shares for cancellation at an average price of
EUR0.52. On 6 March 2009 the Company purchased a further 1,120,000
of its own shares for cancellation at an average price of EUR0.18.
During the year to 31 December 2012 the Company purchased 960,000
of its own shares for cancellation at an average price of EUR0.033.
During the year to 31 December 2013 the Company purchased 100,000
of its own shares at a price of EUR0.0325 at the end of the year
the Company had 89,455,470 shares in issue.
The Company's agents and the Manager perform all significant
functions. Accordingly, the Company itself has no employees.
Duration
In accordance with the Company's Articles of Association,
Shareholders will be given the opportunity to vote on the continued
life of the Company at the Company's annual general meeting to be
held in 2016.
Dividend Policy
The Directors will decide in respect of any 12 month accounting
period as to what percentage of the Company's realised net profits
available for distribution (if any) they will recommend as the sum
for payment as a dividend. This decision will take into account the
opportunities available to the Company for further investment. The
Directors may pay half-yearly interim dividends if they believe
that the financial position of the Company justifies it. If the
Company's funds are fully invested, the Directors may re-invest
some of the Company's profits into the maintenance of the Group
property portfolio.
Financial Year End
The financial year end of the Company is 31 December in each
year.
2 The Subsidiaries
For efficient portfolio management purposes, the Company
established the following subsidiary companies:
Country of Incorporation Percentage of shares held
--------------------------------------------------- -------------------------- --------------------------
European Property Development Corporation SRL Romania 100%
European Convergence Development (Cayman) Limited Cayman 100%
Convergence Development (Cyprus) Limited Cyprus 100%
European Convergence Development (Malta) Limited Malta 100%
European Real Estate Development Invest SRL Romania 100%
European Property Acquisitions EOOD Bulgaria 100%
Asmita Holdings Limited Cyprus 100%
ECD Management (Cayman) Limited Cayman 100%
RD Management (Cayman) Limited Cayman 100%
--------------------------------------------------- -------------------------- --------------------------
3 Joint Ventures ("JV")
The Group as at the date of this document had acquired an
interest in the following companies:
Country of Incorporation Percentage of shares held
------------------------------------ -------------------------- --------------------------
Asmita Gardens SRL Romania 50%
Cascade Park Plaza SRL Romania 39%
Convergence Development Invest SRL Romania 50%
Galleria Plovdiv AD Bulgaria 50%
Mega Mall Rousse AD Bulgaria 50%
Trade Centre Sliven EAD Bulgaria 42.5%
Turgovski Park Kraimorie AD Bulgaria 70%
NEF3 (IOM) 1 Limited Isle of Man 55%
NEF3 (IOM) 2 Limited Isle of Man 55%
NEF3 (IOM) 3 Limited Isle of Man 55%
------------------------------------ -------------------------- --------------------------
Notwithstanding the Group's percentage holdings, the above
companies have not been consolidated as the Group's control is
restricted by Joint Venture Agreements.
4 Significant Accounting Policies
The principal accounting policies adopted in the preparation of
the consolidated financial statements are set out below.
The annual report of the Company for the year ended 31 December
2013 comprises the Company, its subsidiaries and joint ventures
(together referred to as the "Group").
The annual report was authorised for issue by the Directors on
17 June 2014.
4.1 Basis of presentation
These financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") promulgated by
the International Accounting Standards Board and as adopted by the
European Union. Management has concluded that the report fairly
represents the Group's financial position, financial performance
and cash flows.
The preparation of the financial statements in conformity with
IFRS as adopted by the EU requires the use of certain critical
accounting estimates. Actual results may differ from these
estimates. It also requires the Board of Directors to exercise its
judgement in the process of applying the Company's accounting
policies. The Directors consider that the valuation of the Group
investments in equity accounted associates is an area where
critical accounting estimates are required. Further detail on the
valuation of the investments can be found in notes 9 and 17.
The activities of the Group, including its equity accounted
investees, are subject to a number of risk factors. Romania and
Bulgaria in which the company holds projects suffered badly during
the global economic crisis of 2008. Since that time, despite
periods of stability and growth, chances of recovery have been
thwarted by the Greek banking crisis in 2012 limiting the
availability of credit. This environment has increased the
intensity of these risk factors and presents specific challenges in
terms of the significant reduction in the volume of property
transactions in the jurisdictions within which the Group operates,
the significant reduction in the availability of loan finance for
property transactions in those jurisdictions and the consequent
impact on the valuations of property held by equity accounted
investees.
In the prevailing market conditions, there is a greater degree
of uncertainty as to the valuation of property assets than that
which exists in a more active and stronger market. These factors
have adversely impacted the compliance of equity accounted
investees with their borrowing covenants and a number of these
facilities have been renegotiated. Collectively, these factors
contribute to a greater degree of uncertainty as to the valuation
of holdings in equity accounted investees.
These factors have also impacted on the ability of joint venture
partners to repay loans made by the Group and as a result have
caused repayment terms for these facilities to be
re-negotiated.
The valuations of property held by the equity accounted
investees are based on a number of assumptions, including those in
respect of projected occupancy levels and rental yields achievable,
along with the ability of the Group to renegotiate funding to allow
the equity accounted investees to continue in operation. In light
of the challenging economic climate, the ultimate outcomes of these
estimates remains uncertain and therefore further impairments
against the Group's holding in equity accounted investees may be
necessary.
The financial statements have been prepared on a going concern
basis, due to the level of cash and cash equivalents held by the
Group being considered adequate to meet operating expenses and the
level of capital commitments to joint venture entities for the next
12 months and the foreseeable future.
4.2 Functional and presentation currency and foreign currency translation
Euro (EUR) is the currency of the primary economic environment
in which the entity operates (the "functional currency"). This is
also the functional currency of the subsidiaries.
Euro is also the currency in which the annual financial
statements are presented (the "presentation currency").
Monetary assets and liabilities denominated in foreign
currencies as at the date of these financial statements are
translated to EUR
at exchange rates prevailing on that date. Realised and
unrealised gains and losses on foreign currency translations are
charged or credited to the income statement as foreign currency
gains and losses. Transactions in foreign currencies are translated
into EUR based on exchange rates on the date of the
transaction.
Components of equity are translated at the date of the relevant
transaction and not retranslated. All resulting exchange
differences are recognised in equity.
4.3 Deposit interest
Deposit interest is accounted for on an accruals basis.
4.4 Cash and cash equivalents
Cash and cash equivalents comprise cash deposited with banks and
bank overdrafts repayable on demand.
4.5 Revenue and expense recognition
Interest income is recognised in the financial statements on an
accruals basis. Dividend income is recorded when the right to
receive payment is established.
Rental income from investment property leased out under an
operating lease is recognised in the income statement on a
straight-line basis over the term of the lease.
Expenses are accounted for on an accrual basis. Expenses are
charged to the income statement except for expenses incurred on the
acquisition of an investment property which are included within the
cost of that investment. Expenses arising on the disposal of an
investment property are deducted from the disposal proceeds.
4.6 Basis of consolidation
Subsidiaries
Subsidiaries are those enterprises controlled by the Company.
Control exists where the Company has the power, directly or
indirectly, to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities. The
financial statements of subsidiaries are included in the
consolidated financial statements from the date that control
effectively commences until the date that control effectively
ceases.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised gains
arising from intra-group transactions, are eliminated in preparing
the consolidated financial statements.
Joint ventures (equity accounted investees)
Investments in joint ventures are initially recognised at cost.
Joint ventures are those entities over whose activities the Group
has joint control, established by contractual agreement and
requiring unanimous consent for strategic financial and operating
decisions. Associates and joint ventures are accounted for using
the equity method (equity accounted investees). The consolidated
financial statements include the Group's share of the income and
expenses of the equity accounted investees, after adjustments to
align the accounting policies with those of the Group, from the
date that significant influence or joint control commences until
the date that significant influence or joint control ceases. When
the Group's share of losses exceeds its interest in an equity
accounted investee, the carrying amount of that interest (including
any long-term investment) is reduced to nil and the recognition of
further losses is discontinued except to the extent that the Group
has an obligation or has made payments on behalf of the
investee.
Unrealised gains on transactions between the Company and its
equity accounted investees are eliminated to the extent of the
Company's interest in the equity accounted investees. Unrealised
losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred. Accounting policies have
been changed where necessary to ensure consistency with the
policies adopted by the Company. In particular, borrowing costs
related directly to the acquisition or construction of qualifying
assets are capitalised.
Investments in joint ventures and associates are kept under
review for impairment. Where, in the opinion of the directors, the
net realisable value of an investment falls below the carrying
value, a provision is made against the investment and charged to
the income statement.
Financial statements of foreign operations
The assets and liabilities of foreign operations, including
goodwill and fair value adjustments arising on consolidation, are
translated to EUR at the foreign currency exchange rates ruling at
the statement of financial position date. Foreign exchange
differences arising on translation are recognised directly in
equity.
4.7 Dividends
Dividends are recognised as a liability in the year in which
they are declared and approved. Any interim dividends declared do
not need to be approved by the members. There was no dividend
declared as at 31 December 2013 (2012: EUR Nil).
4.8 Financial assets
The Group classifies its financial assets in the following
categories: at fair value through profit or loss, loans and
receivables, cash and cash equivalents, and available-for-sale. The
classification depends on the purpose for which the financial
assets were acquired. Management determines the classification of
its financial assets at initial recognition.
Financial assets at fair value through profit or loss are
recognised on the trade date - the date on which the Group becomes
a party to the contractual provision of the investment. Investments
are initially recognised at fair value and transaction costs for
all financial assets at fair value through profit or loss are
expensed as incurred in the income statement. Subsequent to initial
recognition, all financial assets at fair value through profit or
loss are measured at fair value based on quoted prices. All related
realised and unrealised gains and losses arising from changes in
fair value of the financial asset are included in the income
statement in the period in which they arise, net of transaction
costs. The computation of realised gains and losses on sale of
investments is made on the average cost basis.
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are included in current assets, except where their
maturities are greater than 12 months after the statement of
financial position date. These are classified as non-current
assets. The Group's loans and receivables comprise 'loans to third
parties' and 'trade and other receivables' in the balance
sheet.
A financial asset not classified as at fair value through profit
or loss, including an interest in an equity-accounted investee, is
assessed at each reporting date to determine whether there is
objective evidence that it is impaired. A financial asset is
impaired if there is objective evidence of impairment as a result
of one or more events that occurred after the initial recognition
of the asset, and that event(s) had an impact on the estimated
future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired includes
default or delinquency by a debtor, restructuring of an amount due
to the Group on terms that the Group would not consider otherwise,
indications that a debtor or issuer will enter bankruptcy, adverse
changes in the payment status of borrowers or issuers, economic
conditions that correlate with defaults or the disappearance of an
active market for a security.
4.9 Trade and other receivables
Trade and other receivables and loans to third parties are
stated at their cost, less any impairment losses.
4.10 Trade and other payables
Trade and other payables are stated at their cost.
4.11 Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair
value, less attributable transaction costs. Subsequent to initial
recognition, interest-bearing borrowings are stated at amortised
cost with any difference between cost and redemption value being
recognised in the income statement over the period of the
borrowings on an effective interest basis.
Borrowing costs directly attributable to assets in the course of
construction are capitalised.
4.12 Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of ordinary shares are
recognised as a deduction from equity, net of any tax effect.
When share capital recognised as equity is repurchased, the
amount of the consideration paid, which includes any directly
attributable costs, net of any tax effects, is recognised as a
deduction from equity. Any resulting surplus or deficit on the
transaction is presented in share premium.
4.13 Segmental reporting
The Company has one segment focusing on maximising total returns
through investing in the property markets of South East Europe.
Further analysis of the Group's exposure in this region is provided
in notes 9 and 10. No additional disclosure is required in relation
to segment reporting, as the Company's activities are limited to
one business and geographic segment.
4.14 Adoption of new and revised International Financial Reporting Standards (IFRSs)
a) The Group has adopted the following amendments to IFRSs that
were effective for the first time and were required to be applied
for annual reporting periods beginning on 1 January 2013:
Disclosures - Transfers of Financial Assets (Amendments to IFRS
7) - Makes amendments to IFRS 7 Financial Instruments: Disclosures
resulting from the IASB's comprehensive review of off balance sheet
activities.
Presentation of Items of Other Comprehensive Income (Amendments
to IAS 1) - The amendments require that an entity present
separately the items of OCI that may be reclassified to profit or
loss in the future from those that would never be reclassified to
profit or loss.
b) The Group has not applied the following new and revised IFRSs
that have been issued but are not yet effective in these financial
statements:
IFRS 10 Consolidated Financial Statements: Insights into IFRS -
Part of a new suite of standards on consolidation and related
standards, replacing the existing accounting for subsidiaries and
joint ventures (now joint arrangements), and making limited
amendments in relation to associates.
IFRS 10 supersedes IAS 27 Consolidated and Separate Financial
Statements and SIC-12 Consolidation - Special Purpose Entities. It
provides a single model to be applied in the control analysis for
all investees, including entities that currently are SPEs in the
scope of SIC-12.
IFRS 11 Joint Arrangements: Insights into IFRS - Part of a new
suite of standards on consolidation and related standards,
replacing the existing accounting for subsidiaries and joint
ventures (now joint arrangements), and making limited amendments in
relation to associates.
IFRS 12 Disclosure of Interests in Other Entities: Insights into
IFRS - Part of a new suite of standards on consolidation and
related standards, replacing the existing accounting for
subsidiaries and joint ventures (now joint arrangements), and
making limited amendments in relation to associates.
Contains the disclosure requirements for entities that have
interests in subsidiaries, joint arrangements (i.e. joint
operations or joint ventures), associates and/or unconsolidated
structured entities.
IFRS 13 Fair Value Measurements - New standard to replace
existing guidance on fair value measurement in different IFRSs with
a single definition of fair value, a framework for measuring fair
values and disclosures about fair value measurements.
Standard applies to assets, liabilities and an entity's own
equity instruments that, under other IFRSs, are required or
permitted to be measured at fair value or when disclosure of fair
value is provided.
Fair value defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, i.e. an exit
price.
IAS 28 Investments in Associates and Joint Ventures (2011) - IAS
28 is amended to clarify the disclosures required by an investor in
an associate that accounts for its investment in an associate at
fair value through profit or loss in accordance with IAS 39.
IAS 28 is amended to clarify how to account for impairment
losses and reversals on an investment in an associate.
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)
- The amendments exempt an investment entity from the requirement
to consolidate the investments that it controls. Instead, it
accounts for these investments at fair value through profit or
loss.
IFRS 9 Financial Instruments: Insights into IFRS - First
chapters of new standard on accounting for financial instruments
which will replace IAS 39 Financial Instruments: Recognition and
Measurement.
The standard contains two primary measurement categories for
financial assets:
- amortised cost; and
- fair value.
The Directors do not expect the adoption of the standards and
interpretations to have a material impact on the Company's
financial statements in the period of initial application.
5 Net Financing Income
Net financing income consists of bank interest earned of
EUR12,252 (2012: EUR32,983) and loan arrangement fees of EURnil
(2012: EURnil).
6 Net Asset Value per Share
The net asset value per share as at 31 December 2013 is
EUR0.2883 (2012: EUR0.3010) based on 89,455,470 (2012: 89,555,470)
ordinary shares in issue as at that date.
7 Related Party Transactions
7.1 Directors of the Company
Anderson Whamond is a non-executive director of the Manager, and
a shareholder of Charlemagne Capital Limited ("CCL"), the parent of
the Manager and Placing Agent. Additionally, Mr Whamond has an
indirect family interest in shares of CCL. There are no service
agreements between Mr Whamond and CCL that are not determinable
within one year.
A subsidiary company of the Manager, Charlemagne Capital
(Investments) Limited, holds 125,000 shares of the Company and
holds 356,751 shares in Trade Center Sliven (coinvested with the
Group and a JV partner). Charlemagne BRIC Plus Property Company
plc, an investment company also managed by the Manager, holds
218,014 shares in Trade Center Sliven.
Charlemagne Global Opportunities Limited, The Templeton World
Charity Foundation and Magna UAF Fund, investment companies also
managed by the Manager, hold 7,626,320, 1,981,359 and 165,000
shares respectively in the Company at 31 December 2013.
CCL, a company incorporated in the Cayman Islands, is listed on
the Alternative Investment Market ('AIM') of the London Stock
Exchange.
Save as disclosed above, none of the Directors had any interest
during the year in any material contract for the provision of
services which was significant to the business of the Company.
7.2 Directors of the Subsidiaries
Certain directors of the Manager have been appointed as
directors of some of the subsidiaries. In compliance with local
regulations, certain subsidiaries have appointed directors who are
employees of or are associated with, the relevant registered office
service provider.
7.3 Manager fees
Annual fees
The Manager is entitled to an annual management fee of 2% of the
net asset value of the Company, payable quarterly in arrears.
The Manager shall also be entitled to recharge to the Company
all and any costs and disbursements reasonably incurred by it in
the performance of its duties including costs of travel save to the
extent that such costs are staff costs or other internal costs of
the Manager. Accordingly, the Company shall be responsible for
paying all the fees and expenses of all valuers, surveyors, legal
advisers and other external advisers to the Company in connection
with any investments made on its behalf. All amounts payable to the
Manager by the Company shall be paid together with any value added
tax, if applicable.
Annual management fees payable during the year ended 31 December
2013 amounted to EUR489,908 (2012: EUR472,396).
Performance fees
The Manager is entitled to a performance fee payable at the end
of each financial year following the first listing of the Ordinary
Shares on AIM or any other stock exchange of an amount equal to 15%
of any excess of the net asset value per Ordinary Share (with any
dividends added back) over the Benchmark Net Asset Value per
Ordinary Share multiplied by the time weighted average number of
shares in issue during that financial year. For these purposes the
Benchmark Net Asset Value shall be equal to the higher of (i) the
subscription price per Ordinary Share on the first listing of the
Ordinary Shares; (ii) 0.80 Euros increased by 20% per annum
compound from the closing of the Placing until a Listing; and (iii)
the highest net asset value per Ordinary Share following a Listing
and giving rise to the payment of a performance fee.
The Manager's annual fees and any performance fees shall be
borne by a subsidiary of the Company.
Performance fees payable during the year ended 31 December 2013
amounted to EURnil (2012: EURnil).
7.4 Transactions and balances with Joint Venture companies and partners
The Group has made loans to Joint Venture Companies totalling
EUR45,732,000 (2012: EUR44,731,000) and to Joint Venture Partners
totalling EUR6,116,000 (2012: EUR5,990,000). Details of the terms
and applicable interest rates for these loans are more fully shown
in note 9 and note 10. With the exception of the loan to Cascade
Park Plaza all loans have been fully provided against.
7.5 Intragroup balances
Intragroup balances are repayable on demand and bear interest at
commercial rates. Loans to subsidiaries outstanding at the year-end
are held at fair value.
8 Charges and Fees
8.1 Nominated Adviser and Broker fees
As Nominated Adviser and Broker to the Company for the purposes
of the AIM Rules, the nominated advisor and broker is entitled to
receive an annual fee of GBP25,000, payable twice yearly in
advance.
Advisory fees payable to the Nominated Adviser and Broker for
the year ended 31 December 2013 amounted to EUR35,780 (31 December
2012: EUR38,466).
8.2 Administrator and Registrar fees
The Administrator is entitled to receive a fee of 8 basis points
of the net assets of the Company, subject to a minimum monthly fee
of EUR4,000, payable quarterly in arrears.
The Administrator shall assist in the preparation of the
financial statements of the Company for which it shall receive a
fee of EUR2,500 per set.
The Administrator shall provide general secretarial services to
the Company for which it shall receive a minimum annual fee of
EUR3,750. Additional fees based on time and charges, will apply
where the number of Board meetings exceeds four p.a. For attendance
at meetings not held in the Isle of Man, an attendance fee of
EUR750 per day or part thereof will be charged.
The Administrator may utilise the services of a CREST accredited
registrar for the purposes of settling share transactions through
CREST. The cost of this service will be borne by the Company. It is
anticipated that the cost will be in the region of GBP6,000 per
annum subject to the number of CREST settled transactions
undertaken.
The Administrator expects to review and, subject to written
agreement between the Company and the Administrator, may amend the
foregoing fees six months after closure of the initial offering
period and annually thereafter.
Administration fees payable for the year ended 31 December 2013
amounted to EUR57,600 (2012: EUR56,769).
8.3 Other operating expenses
The costs associated with maintaining the Company's
subsidiaries, including the costs of incorporation and third party
service providers, shall be chargeable to each subsidiary and
payable by the Company.
8.4 Audit fees
Audit fees payable for the year ended 31 December 2013 amounted
to EUR60,882 (2012: EUR162,891).
9 Investment in Equity Accounted Investments
Group 31 December 2013 31 December 2012
EUR'000 EUR'000
------------------------------------------------------------------ ----------------- -----------------
At beginning of year 23,185 22,083
Dividend received (199) -
Recovery in loans to investments 29 630
Share of profit of equity accounted investment 102 448
Net (impairment)/uplift on value of equity accounted investments (281) 24
Balance at end of year 22,836 23,185
------------------------------------------------------------------ ----------------- -----------------
The loans to equity accounted investees, before deduction of
provisions, are as follows:
Name Term Maturity date Interest Rate 31 December 2013
EUR'000
------------------------------------- ---------------------- -------------- -----------------
Asmita Gardens SRL * * 6% 17,451
Galleria Plovdiv AD * * 0%** 10,000
Convergence Development Invest SRL 4,592
Cascade Park Plaza SRL * * *** 4,510
Turgovski Park Kraimorie AD * * 0%** 9,179
------------------------------------ ------- --------------- -------------- -----------------
* Loans are due to be repaid after the project sale.
** Interest is nil until the loan is due for payment. In case of
default interest will be charged at a rate of 3M EURIBOR plus
10%.
*** Interest is nil, but in return for the provision of the
loan, the Group is entitled to be paid a penalty at an Internal
Rate of Return equating to 20% by the Group's partner in
Cascade.
At the previous year end, the loans to equity accounted
investees were as follows:
Name Term Maturity date Interest Rate 31 December 2012
EUR'000
-------------------------------------------------------------- -------------- -----------------
Asmita Gardens SRL * 31 December 2012 6% 16,681
Galleria Plovdiv AD * * 0%** 10,000
Convergence Development Invest SRL 4,361
Cascade Park Plaza SRL * * *** 4,510
Turgovski Park Kraimorie AD * * 0%** 9,179
------------------------------------ ------ ------------------ -------------- -----------------
* Loans are due to be repaid after the project sale.
** Interest is nil until the loan is due for payment. In case of
default interest will be charged at a rate of 3M EURIBOR plus
10%.
*** Interest is nil, but in return for the provision of the
loan, the Group is entitled to be paid a penalty at an Internal
Rate of Return equating to 20% by the Group's partner in Cascade.
With the exception of the loan to Cascade Park Plaza all the above
loans have been fully provided against.
The carrying values of the Group's equity accounted investments
are as follows:-
Name Value at 31 December 2013 Value at 31 December 2012
EUR'000 EUR'000
----------------------------- -------------------------- --------------------------
Cascade Park Plaza SRL 17,285 15,783
Galleria Plovdiv AD 1,500 1,500
Mega Mall Rousse - -
Trade Centre Sliven EAD 1,677 1,876
Turgovski Park Kraimorie AD 1,863 1,863
NEF3 (IOM) 1 Limited* - 1,158
NEF3 (IOM) 2 Limited* 511 409
NEF3 (IOM) 3 Limited* - 1,438
Impairment provision - (842)
----------------------------- -------------------------- --------------------------
22,836 23,185
----------------------------- -------------------------- --------------------------
* held directly by the Company.
9 Investment in Equity Accounted Investments continued
Valuation of Assets as at 31 December 2013
All the properties were subject to external and independent
valuations for the year ended 31 December 2011. This resulted in
the impairment of some properties since valuations were below
outstanding bank loans. The situation in respect of these
properties has been closely monitored during the financial years
since then and given the continuing difficult economic conditions
it is felt appropriate that the bases for these impairments still
exist. In the cases where carrying values are still relevant
external and independent valuations were carried out as at 31
December 2012 and in the view of this only one valuation was
carried out as at 31 December 2013 this being the land in
municipality of Maritsa Plovdiv Region. The Board and the Manager
believed that there had been little movement in investment yields
and therefore asset values during 2013 in Romania and little
movement in land values in Bulgaria but to ensure that this view
was correct, the Board requested an independent valuation of the
land in the municipality of Maritsa, Plovdiv Region. The value of
this asset had not depreciated materially during 2013 and the Board
therefore decided to maintain the 2012 valuations in the 2013
financial statements.
All the valuations were carried out by independent firms of
international valuers with a local presence in the region. They
were each asked to provide the current market value for each
property under latest International Valuation Standards published
in 2012. These state that three main approaches can be used in real
estate valuation: the cost approach, the income approach, and the
sales comparison approach. All three are based on the economic
principles of price equilibrium, anticipated benefits, and
substitution. The final choice related to the methodology to be
applied was determined by the valuer after the property inspection
was conducted.
Impairment provision in 2012 was in respect of accrued interest
due from equity accounted investees.
BULGARIA
Galleria Plovdiv
The value of Galleria Plovdiv was impaired as at 31 December
2011 following the valuation carried out by Colliers International
S.R.L. which included an estimated current market value of
EUR49.7m. This valuation fell below the outstanding bank loan and
therefore indicated a nil value realisable from this investment
itself. As at the beginning of 2014 occupancy was dropping as
several smaller tenants closed for trading and left their premises.
Replacing tenants continues to be challenging and is highly
dependent upon the successful implementation of the leasing
strategy developed by the international consultant. The
shareholders have provided very limited funding to support the
project in 2013 mainly for the temporary extension of the interim
asset manager until the end of April. However unless the business
restructure is resolved quickly and fresh cash made available the
company is going to struggle to meet its financial obligations. The
impairment in value therefore still applies.
EUR1.5m of the shareholder loans to Galleria are guaranteed by
land collateral from the Joint Venture partner. This land, of circa
35,000 sqm is also in Plovdiv; however it is not as central as
Galleria and is more fragmented. The land was valued at EUR1.51m by
a local valuer as at February 2014. Therefore Management have kept
the value of the group's investment in Galleria Plovdiv at
EUR1.5m.
Mega Mall Rousse
The Board decided to impair this asset down to nil as at 31
December 2011 following a valuation by SHM Smith Hodgkinson at
EUR17.9m which is below the bank loan.
The occupancy of the Mall dropped to 43% at end of quarter 1
2014 and in April the Mall was shut as the electricity supply was
switched off due to non-payment. Due to the defaulting of the
entire loan in April 2013, the bank has filed an application for
insolvency against Mega Mall Rousse in January 2014.
Bourgas (Trade Park Kramoire)
This development is on hold and the Manager is looking for a
suitable way of realising the underlying asset value and returning
the proceeds to the Group.
The Manager had the property valued by an independent surveyor
as at 31 December 2012 who has valued the land at EUR3.9m. Other
than the land and shareholder loans there are no other major assets
or liabilities. In recent months there has been no further progress
made with this site and it is very much linked to the developments
in Plovdiv.
The Group nominally holds 60% of Bourgas, however, as part of
the original financing of this deal, the group provided loan
finance to the JV partner Sienit (who is also our partner on
Plovdiv) which was secured against Sienit's 40% holding in
Bourgas.
Therefore in terms of valuing our holding in Bourgas the Board
feel that it should adopt the lower value of;
-- If the loan is repaid: 60% of Bourgas, being EUR2.3m, plus
the loan repayment (currently standing at EUR2.4m inclusive of
interest), which is EUR4.7m or,
-- If the loan is not repaid, then the Group will secure 100% of
the shareholding by exercising its security, and therefore adopt
100% of the land value being EUR3.9 m.
The Group therefore values its holding in Bourgas at the lower
figure of EUR3.9 m.
At the time the JV purchased the land there was a covenant which
imposed a timescale on the beginning and end of the development
phase of the project. This timescale for completion elapsed in
2010, and as a result the JV is contractually bound to pay a
penalty of EUR2.0m.
Whilst it may be possible to re-negotiate the actual amount
paid, the Board has taken the conservative approach and assumed the
full amount of EUR2.0m will need to be paid and has therefore
provided for this amount against the EUR3.9m value of the land.
This therefore reduces the current carrying value of the investment
to EUR1.9m for 2013 (2012: EUR1.9m).
The loan to Sienit, of EUR2.4m including accrued interest, has
been 100% provided for.
Trade Centre Sliven
Due to the change in the global economic conditions the
development of the project in the city of Sliven, Trade Centre
Sliven ("Sliven") has not progressed. The Group has a 42.5% equity
holding in Sliven.
Sliven has two main assets; being cash of EUR2.9m and land which
was valued as at 31 December 2012 at EUR1.1m. There are no major
liabilities in the company, so the NAV for the JV is EUR4.04m,
valuing the Group's investment (of 42.5%) at EUR1.7m
(2012 EUR1.9m)
As part of the purchase the Group also made a loan to the JV
partner of EUR500k. During 2009 EUR160k of this loan was repaid,
with a further EUR23k being repaid during 2010. The loan is secured
against the wider assets of the partner. At the annual shareholders
meeting on 16(th) April 2013 it was agreed that the project company
will make a distribution of retained profits which enabled our
partner to pay an amount of EUR247k which has brought down the
balance as at December 2013 to EUR90k.
ROMANIA
Cascade
Colliers International S.R.L valued Cascade at EUR50.1m as at 31
December 2012. Due to knowledge of property market movements it was
considered that the valuation was still valid and there was no need
for a more up to date one.
The property is now almost fully let. Following the repayment of
the external loan, and an additional contribution of EUR0.5m the
sale distribution waterfall would ensure that the Group would
receive proceeds of EUR17.2m, a gain of EUR1.5 m over the 2012
carrying value of EUR15.84m in the event of a sale of the property
at valuation.
NEF3
The underlying NEF 3 investments are in Iasi (EUR0.9m), Oradea
(EUR0.7m) and Cascade (EUR0.3m). These are all fixed term
investments in the form of preference shares in respect of Iasi and
Oradea and a loan in respect of Cascade with a priority return. The
investments are reported at their net asset value which includes
the net return accruing to date on the investment.
The latest valuation of the Cascade property provides the Board
with comfort as to the carrying value of the investment in Cascade.
The return for the Iasi and Oradea are supported with a put and
call option with Argo Real Estate Opportunities Fund ('AREOF' ). On
12th April 2013, the Company through its investment vehicle issued
Put notices to AREOF requiring AREOF to purchase all of the
respective shares relating to the investments in Iasi and Oradea
and make payment of a preferred return at the expiration of the
notice period. The Put option period expired 6 months from the date
of the notice with no payments being made by AREOF. Discussions
between the manager and AREOF regarding alternative arrangements
are ongoing.
AREOF has been in negotiations since the middle of last year to
restructure its bank borrowings having breached loan covenants with
its lending banks. With effect from 3(RD) March 2014 AREOF
announced that it was delisting its shares from AIM. The main
reason given by Argo was the complexity of the loan restructuring
and bank negotiations which were not conducive to, and made it very
difficult to meet the public reporting requirements of AIM. Argo
also stated that the disclosure requirements were not to the
benefit of the shareholders and may hinder the current bank
renegotiations that AREOF are undertaking.
The above matters indicate the existence of material
uncertainties which may cast significant doubt about the AREOF
Group's ability to meet the obligations of the put option. . The
Board has taken the view that it would be prudent to provide in
full against the total cost of the investment plus all interest due
as at 31 December 2013, in the year ended 31 December 2012 a
general provision was made to include interest accrued to date.
The results, assets and liabilities of the equity accounted
companies are as follows:
Name Country Assets Liabilities Revenues Profit/ % interest
of (Loss)
Incorporation
EUR'000 EUR'000 EUR'000 EUR'000
---------------------------------------- -------- ------------ --------- -------- -----------
Cascade Park Plaza
SRL Romania 52,298 39,810 4,960 (265) 40
Trade Centre Sliven
EAD Bulgaria 3,992 4 48 38 42.5
Turgovski Park
Kraimorie AD Bulgaria 3,866 13,241 2 (32) 60
Isle
NEF3 (IOM) 1 Limited* of Man 10 35 - (2,913) 55
Isle
NEF3 (IOM) 2 Limited of Man 3,910 472 835 676 55
Isle
NEF3 (IOM) 3 Limited of Man 1 51 - (3,635) 55
----------------------- ---------------- -------- ------------ --------- -------- -----------
*The results and balances for NEF (IOM) 1 Ltd shown above only
include amounts in respect of those investments which the Company
has an interest in.
The Shareholders of Cascade Park Plaza SRL have pledged their
shareholding as security against the external loans to these
companies.
The figures in the tables above do not include adjustments made
for the purposes of these consolidated financial statements in
order to align the accounting policies of the equity accounted
investees with those of the Company's.
10 Loans to third parties
Loans to third parties of the Group includes loans to Joint
Venture Partners as follows:
2013 Term Maturity Date Interest Rate Amount
Name EUR'000
----------------------------------------------------------- ------------------------------------------- --------
Sienit Holding AD* Overdue Overdue EURIBOR plus 5%, plus 10% penalty interest 2,430
Property Capital Group** Overdue Overdue EURIBOR plus 5% 90
Dickau Investments Limited*** Overdue Overdue 10% 3,596
------------------------------- --------- --------------- ------------------------------------------- --------
* Sienit Holding AD is the Group's joint venture partner in
Galleria Plovdiv AD and Turgovski Park Kraimorie AD. The loan is
overdue for repayment and in 2008 the Group deemed it prudent to
provide for the loan in full.
**Property Capital Group is the Group's joint venture partner in
Trade Center Sliven EAD. The Group considers this loan fully
recoverable.
***Dickau Investments Limited ("Dickau") is the Group's joint
venture partner in Convergence Development Invest Srl ('CDI'). The
above loan was provided to Dickau as part of the Group's package of
investment in CDI, and, as a result of the Group's decision to
fully provide against the Group's investment in CDI in 2008, the
Group also considered it prudent to retain full provision for the
loan to Dickau.
2012 Term Maturity Date Interest Rate Amount
Name EUR'000
----------------------------------------------------------- ------------------------------------------- --------
Sienit Holding AD* Overdue Overdue EURIBOR plus 5%, plus 10% penalty interest 2,277
Property Capital Group** Overdue Overdue EURIBOR plus 5% 330
Dickau Investments Limited*** Overdue Overdue 10% 3,384
------------------------------- --------- --------------- ------------------------------------------- --------
11 Capital and Reserves
Share Capital
2013 2013
Number EUR'000
-------------------------------------------- ----------- --------
Ordinary Shares of EUR0.80 each
In issue at 1 January and 31 December 2013 89,555,470 71,644
Shares cancelled during the year (100,000) (80)
In issue at 31 December 2013 89,455,470 71,564
-------------------------------------------- ----------- --------
2012 2012
Number EUR'000
-------------------------------------------- ----------- --------
Ordinary Shares of EUR0.80 each
In issue at 1 January and 31 December 2012 90,515,470 72,412
Shares cancelled during the year (960,000) (768)
In issue at 31 December 2012 89,555,470 71,644
-------------------------------------------- ----------- --------
At incorporation the authorised share capital of the Company was
EUR240 million divided into 300 million Ordinary Shares of EUR0.80
each.
During the year, the Company bought 100,000 shares for a total
consideration of EUR3,250 (2012: 960,000 shares).
The holders of ordinary shares are entitled to receive dividends
as declared from time to time and are entitled to one vote per
share at meetings of the Company. All shares rank equally with
regard to the Company's residual assets.
Capital Management
The Board's original policy was to maintain a strong capital
base so as to maintain investor, creditor and market confidence and
to sustain future development of the business. However in line with
the Chairman's statement there will be no further investments into
new business.The Board manages the Group's affairs to achieve
shareholder returns through capital growth rather than income, and
monitors the achievement of this through growth in net asset value
per share.
Group capital comprises share capital, share premium and
reserves.
Neither the Company nor any of its subsidiaries are subject to
externally imposed capital requirements.
No changes were made in respect of the objectives, policies or
processes in respect of capital management during the years ended
31 December 2013 and 2012.
12 Basic and Diluted Earnings per Share
Basic and diluted earnings per share are calculated by dividing
the gain/(loss) attributable to equity holders of the Company by
the weighted average number of ordinary shares in issue during the
year.
2013 2012
----------------------------------------------------------------- -------- -------
Loss attributable to equity holders of the Company (EUR'000) (1,172) (701)
Weighted average number of ordinary shares in issue (thousands) 89,456 90,426
----------------------------------------------------------------- -------- -------
Basic and diluted loss per share (Euro cent per share) (1.31) (0.78)
----------------------------------------------------------------- -------- -------
13 Trade and Other Payables
Group 31 December 2013 31 December 2012
EUR'000 EUR'000
----------------- ----------------- -----------------
Withholding tax 6 5
Trade creditors 44 70
Accruals 200 223
----------------- ----------------- -----------------
Total 250 298
----------------- ----------------- -----------------
Company 31 December 2013 31 December 2012
EUR'000 EUR'000
---------- ----------------- -----------------
Accruals 59 92
---------- ----------------- -----------------
Total 59 92
---------- ----------------- -----------------
14 Exchange Rates
The following exchange rates were used to translate assets and
liabilities into the reporting currency at 31 December 2013:
RON 4.4847
BGN 1.9558
15 Directors' Remuneration
The Company
The maximum amount of remuneration payable to the Directors
permitted under the Articles of Association is EUR300,000 p.a. Each
Director currently is paid a fee of EUR22,500 p.a. The Directors
are each entitled to receive reimbursement of any expenses incurred
in relation to their appointment. Total fees and expenses paid to
the Directors for the year ended 31 December 2013 amounted to
EUR72,000 (2012: EUR72,000).
The Subsidiaries
No fees are paid to the Directors of the subsidiaries except in
circumstances where a director is appointed in compliance with
local regulations and in such cases the fees payable are
nominal.
16 Taxation
Isle of Man
The Isle of Man has introduced a general zero per cent. tax rate
for companies with effect from 6 April 2006, with the exception of
certain banking income and income from Isle of Man land and
property, which is taxed at 10 per cent.
There are no capital gains or inheritance taxes payable in the
Isle of Man.
No Isle of Man stamp duty or stamp duty reserve tax will be
payable on the issue, transfer, conversion or redemption of
Ordinary Shares.
Shareholders resident outside the Isle of Man will not suffer
any income tax in the Isle of Man on any income distributions to
them.
Shareholders resident in the Isle of Man will, depending upon
their particular circumstances, be liable to Manx income tax on
dividends received from the Company.
United Kingdom
The affairs of the Company are conducted so that the central
management and control of the Company is not exercised in the UK
and so that the Company does not carry out any trade in the UK
(whether or not through a permanent establishment situated there).
On this basis, the Company should not be liable for UK taxation on
its income and gains, other than certain income deriving from a UK
source.
Other
The subsidiaries of the Company are taxed in accordance with the
applicable tax laws in the countries in which they are
incorporated.
17 Financial Instruments
The Group's activities expose it to a variety of financial
risks: market risk (including currency risk, cash flow risk,
interest rate risk and price risk), credit risk and liquidity
risk.
Market price risk
The Company's strategy for the management of market price risk
is driven by the Company's investment objective. The Company has
been established to invest primarily in early stage property
developments in South East Europe. The main objective of the
Company is to take advantage of the potential for capital
appreciation of these investments. The Company's market risk is
monitored by the Manager on a day to day basis and by the Directors
at Board Meetings.
The Group is exposed to market price risk through movements in
property prices and property rental rates. The Group's strategy is
to develop property assets and then sell them for gain: however as
a result of current global economic conditions (see note 4.1), the
property market in Romania and Bulgaria has declined. The Group
therefore expects that it may hold some assets for a substantial
period post completion. This further exposes the Group to movements
in property rental rates and property prices.
Foreign exchange risk
The Group's operations are conducted in jurisdictions which
generate revenue, expenses, assets and liabilities in currencies
other than the Euro (the functional currency). The currency the
Group is primarily exposed to is the Romanian Lei, as the Bulgarian
Lev is pegged to the Euro. As a result, the Group is subject to the
effects of exchange rate fluctuations with respect to these
currencies.
The Group may invest in financial instruments and enter into
transactions denominated in currencies other than the functional
currency. Consequently, the Group is exposed to risks that the
exchange rate of its currency relative to other foreign currencies
may change in a manner that has an adverse affect on the value of
that portion of the Group's assets or liabilities denominated in
currencies other than the functional currency.
The Group's policy is not to enter into any currency hedging
transactions as foreign currency exposure is not significant.
The following table sets out the Group's total exposure to
foreign currency risk and the net exposure to foreign currencies of
the assets and liabilities:
31 December 2013 Assets Liabilities Net assets
EUR'000 EUR'000 EUR'000
------------------ -------- ------------ -----------
Romanian Lei 34 (5) 29
Bulgarian Lev 1 (3) (2)
Euro 26,006 (242) 25,764
26,041 (250) 25,791
------------------ -------- ------------ -----------
31 December 2012 Assets Liabilities Net assets
EUR'000 EUR'000 EUR'000
------------------ -------- ------------ -----------
Romanian Lei 49 (2) 47
Bulgarian Lev 2 (9) (7)
Euro 27,200 (287) 26,913
27,251 (298) 26,953
------------------ -------- ------------ -----------
At 31 December 2013, had the Euro strengthened/weakened by 5% in
relation to the Romanian Lei, with all other variables held
constant, net assets attributable to equity holders of the Group
and the profit for the year would have decreased/increased by
EUR1,450 (2012: 5% EUR2,400).
Interest rate risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates. Cash held by the Group is
invested at short-term market interest rates. The Group has
interest-bearing loans, with interest at fixed rates (note 10). As
a result, the Company is exposed to fair value interest rate risk
due to fluctuations in the prevailing levels of market interest
rates. It is also exposed to interest rate cash flow risk.
The table below summarises the Group's exposure to interest rate
risks. It includes the Group's financial assets and liabilities at
the earlier of contractual re-pricing or maturity date, measured by
the carrying values of assets and liabilities:
31 December Average interest Less 1-3 3 1-5 Over 5 Non-interest Total
2013 rates than 1 months months years years bearing
month to 1
year
------------- -------- -------- -------- -------- -------- ------------- --------
Fixed Variable
------------- --------- --------- -------- -------- -------- -------- -------- ------------- --------
% % EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Financial
assets
Loans to
third Euribor
parties - + 5% 90 - - - - - 90
Trade and
other
receivables n/a n/a - - - - - 50 50
Cash and
cash
equivalents - 0.1% 3,065 - - - - - 3,065
------------- --------- --------- -------- -------- -------- -------- -------- ------------- --------
Total financial assets 3,155 - - - - 50 3,205
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
Financial
liabilities
Trade and other
payables - - - - - (250) (250)
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
Total financial
liabilities - - - - - (250) (250)
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
Total interest rate 3,155 - - - - - -
sensitivity gap
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
31 December Average interest Less 1-3 3 months 1-5 years Over 5 Non-interest Total
2012 rates than 1 months to 1 years bearing
month year
------------- --------- --------- --------- ---------- --------- ------------- --------
Fixed Variable
------------- ----------- --------- --------- --------- --------- ---------- --------- ------------- --------
% % EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Financial
assets
Loans to
third Euribor
parties - + 5% 330 - - - - - 330
Trade and
other
receivables n/a n/a - - - - - 58 58
Cash and
cash
equivalents - 0.1% 3,677 - - - - - 3,677
------------- ----------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total financial assets 4,007 - - - - 58 4,065
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Financial
liabilities
Trade and other payables - - - - - (298) (298)
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total financial
liabilities - - - - - (298) (298)
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total interest rate 4,007 - - - - - -
sensitivity gap
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
At 31 December 2013, should the interest rates have
increased/decreased by 15 basis points with all other variables
remaining constant, the decrease/increase in net assets
attributable to shareholders for the year would amount to
approximately EUR4,733 (2012: 15 basis points EUR6,010).
Credit risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Group.
The carrying amounts of financial assets best represent the
maximum credit risk exposure at the balance sheet date, net of
provisions already made. This relates also to financial assets
carried at amortised cost.
At the reporting date, the Group's financial assets exposed to
credit risk, net of provisions and excluding loans which are
included within the balance of equity accounted investments,
amounted to the following:
31 December 2013 31 December 2012
EUR'000 EUR'000
---------------------------------- ----------------- -----------------
Loans to third parties (note 10) 90 330
Trade and other receivables 50 58
Cash at bank 3,065 3,677
---------------------------------- ----------------- -----------------
3,205 4,065
---------------------------------- ----------------- -----------------
The Group manages its credit risk by monitoring the
creditworthiness of counterparties regularly. It does not expect
any counterparty other than those debtors against which specific
provisions have been made to fail to meet its obligations (see
notes 9 and 10).
Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its obligations as they fall due. The Group manages its
liquidity risk by maintaining sufficient cash balances for working
capital and its joint venture associates obtain secured bank loans
to fund purchases of investment property. During the year and since
the year end, a number of the Group's JV's have been in technical
breach of their bank loan financing agreements. The Group completed
renegotiation of some of these financing arrangements during the
year and since the year end. The Group expects that further limited
capital injections may be required to maintain shareholder value
but has expressed that no new financing arrangements will be made
available. The Group has not guaranteed loan financing for any of
its subsidiaries. The Group's liquidity position is monitored by
the Manager and the Board of Directors.
Residual undiscounted contractual maturities of financial
liabilities:
Trade and other payables at 31 December 2013 and 31 December
2012 represent trade creditors due within one month.
Fair values
The carrying amounts of all the Group's financial assets and
financial liabilities at the statement of financial position date
approximated to their fair values.
Fair value estimates are made at a specific point in time, based
on market conditions and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement (e.g., interest
rates, volatility, estimated cash flows, etc.) and therefore cannot
be determined with precision.
18 Investment Policy
European Convergence Development Company plc is an Isle of Man
company originally established to take advantage of opportunities
that exist in the property markets of South-East Europe. The
principal target countries were Bulgaria, Romania and Turkey, with
the ability to invest in Croatia and Slovakia.
The Company has made investments in commercial, retail,
residential and industrial property, with a view to taking
advantage of the potential for capital appreciation. The Company
may also continue to hold and operate completed developments for a
substantial period post-completion at the sole discretion of the
Board. The Board must believe that it is in the long term benefit
of the investors to hold completed developments.
A proportion of the Group's portfolio may be held in cash or
cash-equivalent investments from time to time.
The Company established a subsidiary structure which primarily
invested equity and debt financing of development projects with the
use of local special purpose vehicles ("SPVs").
The Company's intention was to invest in early stage projects
with a construction period of 2 to 4 years. Whilst the Company
intended to exit from such assets post-completion, depending on
prevailing market conditions, it may be in the best interests of
the Company to hold the operating asset post completion until
market conditions are such that the Company can obtain a suitable
price for the asset. In line with the Chairman's statement there
will be no new investments in further businesses.
The Company will return any proceeds of sale of any properties
or return the capital or profits to Shareholders depending on
market conditions prevailing at the relevant time. Shareholders
will be given the opportunity to vote on the continued life of the
Company at the Company's annual general meeting to be held in 2016.
If the resolution to curtail the life of the Company is not passed,
a similar resolution will be proposed at every fifth annual general
meeting thereafter.
19 Commitments at the Balance Sheet Date
At the statement of financial position date the Group had no
outstanding commitments.
20 Post Balance Sheet Events
As at 10 January 2014 Charlemagne Global Opportunities Limited
sold its entire holding of 7,626,320 of the Ordinary Shares in the
Company at a price of EUR 0.0535 per share.
As at 10 January 2014 Magna UAF Fund sold its entire holding of
165,000 of the Ordinary Shares in the Company at a price of EUR
0.0535 per share.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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Eur.Conv.Dev (LSE:ECDC)
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