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REA Finance B.V. (RE20)
REA Finance B.V.: Annual accounts for 2018
30-Apr-2019 / 12:45 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
Report of the management
Management herewith presents to the shareholder the audited accounts of REA
Finance B.V. (hereinafter "the Company") for the year 2018.
General
The Company is a private company with limited liability incorporated under
the laws of the Netherlands and acts as a finance company. The ultimate
holding company is R.E.A. Holdings plc (hereinafter "REAH"), London, United
Kingdom. The REAH group is principally engaged in the cultivation of oil
palms in the province of East Kalimantan in Indonesia and in the production
of crude palm oil ("CPO") and by-products from fruit harvested from its oil
palms.
Overview of activities
At 1 January 2018 the Company had outstanding GBP31,852,000 8.75 per cent
guaranteed sterling notes 2020 (the "2020 sterling notes").
At 1 January 2018 the Company also had a loan receivable from REAH (the
"Loan") of GBP32,327,000 bearing interest at 8.9283 per cent and repayable on
20 August 2020.
During the period under review the Company received interest on the Loan
from the Company to REAH and paid interest to the note holders of the 2020
sterling notes.
On 5 October 2018 REAH purchased for cancellation GBP1,000,000 of the 2020
sterling notes reducing the Loan by that amount.
At 31 December 2018 the Company had outstanding GBP30,852,000 2020 sterling
notes and the Loan of GBP31,327,000 to REAH bearing interest at 8.9283 per
cent. The 2020 sterling notes and the Loan are repayable on 20 August 2020.
Results
The net asset value of the Company as at 31 December 2018 amounts to
GBP964,105 (31 December 2017: GBP920,150 ). The result for 2018 is a profit of
GBP43,955 (2017: profit of GBP56,530).
Going concern
Finance section of the Strategic report
In the Finance section of the Strategic Report included in the 2018 Annual
Report of REAH the directors have made the following statement regarding
future viability:
"Liquidity and financing adequacy
Although the group reported an increased operational loss in 2018 ($10.7
million against $2.2 million in the preceding year), operational performance
was much improved year on year with a 51 per cent increase in FFB
production. Accordingly, the loss principally reflected the serious down
turn in the CPO market in the second half of the year although, as noted
under "Group results" above, estate operating costs were to an extent
inflated by temporary additional workers undertaking remedial upkeep and
unusually high despatch costs.
In both 2018 and 2017, the group had to contend with a level of financing
charges disproportionate to the profitability of the group, a problem that
would be resolved by higher CPO prices. The net prices being realised by the
group for sales of its CPO (net, FOB East Kalimantan port) have already
recovered from a low of $349 per tonne in November 2018 to an estimated
level of $475 per tonne in April 2019. Further recovery is widely predicted
with vegetable oil consumption exceeding supply and stocks of CPO beginning
to fall. With the Indonesian export levy now reduced to nil at prices below
$575 per tonne (CIF Rotterdam) and increasing only to the level of $20 tonne
at higher prices, the group can expect that increased CPO prices will
materially increase group revenues and result in the group becoming
increasingly cash generative and better able to sustain its financing costs.
Cash generation will be assisted by further increases in FFB production.
Crop collection for 2019 is running ahead of budget and bunch census figures
(through to July) indicate that FFB production will continue to run in line
with budget and support the projection of FFB production of some 900,000
tonnes for 2019. Although some limited further revenue expenditure on
upgrading mill maintenance will be required, on the estates remedial works
are now substantially complete so that the projected increase in crop should
not entail a proportionate increase in operating costs. Indeed, with
operational performance now converging with group expectations, the group
believes that cost savings can now be found in several areas.
In order to ensure availability of sufficient mill capacity to meet
projected increases in FFB mill throughput, the group is proceeding in 2019
with the extension of its newest oil mill and some works to enhance the
efficiency of the two older mills. However, following the sale of PBJ, no
further mills will be required for the foreseeable future. Moreover, until
CPO prices recover further, the group's extension planting programme has
been deferred. As a result, future levels of annual capital expenditure can
be expected to be significantly lower than those of recent years. This
should mean that as cash flows recover, increased cash generation can be
used to reduce debt levels. Planned resumption of mining at the Kota Bangun
coal concession should provide an additional source of cash through the
repayment of the loan due to the group.
The group had hoped that in reorganising its local bank borrowings it would
be possible to convert Indonesian rupiah borrowings to dollar borrowings
which attract a lower rate of interest than rupiah borrowings. In the event,
this did not prove immediately possible but the group's bankers have
acknowledged that the group wishes to replace rupiah borrowings with dollar
borrowings and have indicated that they are open to agreeing to this
provided that the group can demonstrate that the dollar can properly be
regarded as the group's functional currency for the purposes of Bank
Indonesia rules. Discussions to this end are continuing.
As noted under "Capital structure" above, as at 31 December 2018, the group
held cash of $26.3 million but against that had material indebtedness, in
the form of bank loans and listed notes. Some $9.1 million of bank term
indebtedness falls due for repayment during 2019 and a further $52.3 million
in 2020 to 2022. In August 2020, GBP31.9 million ($40.2 million) of 2020
sterling notes will become repayable and in December 2022, $24 million of
2022 dollar notes.
The group is at an advanced stage in discussions with its Indonesian bankers
for a new term loan of $11 million to fund the planned capital expenditure
on mills in 2019. This loan would, in effect, refinance the bank loan
repayments falling due in 2019. Provided that CPO prices continue to
recover, the group believes future Indonesian term loan repayments can be
aligned with the group's cash generation capabilities.
Consideration will be given later in 2019 to submission of proposals to the
holders of the 2020 sterling notes to refinance these with securities of
longer tenor. A decision regarding the 2022 dollar notes will be taken in
early 2022 in the light of the group's financial position at that time.
The group recognises that it may need to seek additional equity funding if
CPO prices recover at a slower rate than it expects.
The group's oil palms fruit continuously throughout the year and there is
therefore no material seasonality in the funding requirements of the
agricultural operations in their ordinary course of business. It is not
expected that development of the stone and coal operations will cause any
material swings in the group's utilisation of cash for the funding of its
routine activities."
Conclusion
Based on the foregoing, having made due enquiries, the directors reasonably
expect that the company and the group have adequate resources to continue in
operational existence for at least twelve months from the date of approval
of the financial statements, and therefore they continue to adopt the going
concern basis of accounting in preparing the financial statements.
Accordingly, the directors have a reasonable expectation that the company
and the group have adequate resources to continue in operational existence
for the period to 31 December 2022 and to remain viable during that period.
Risks and uncertainties
The principal risks and uncertainties facing the Company relate to the due
performance by REAH of its obligations under the loan agreement with the
Company. Any shortfall in performance would impact negatively on the
Company's ability to meet its obligations to the holders of the 2020
sterling notes. The exposure of the Company is limited by:
* the guarantee given by REAH and R.E.A. Services Limited ("REAS"), a
subsidiary company of REAH incorporated in the United Kingdom, in favour of
the note holders; and
* the Limited Recourse Agreement dated 29 November 2010 and made between the
Company, REAH and REAS (the "LRA").
The LRA reflects the intention of the parties thereto that the Company, in
relation to its financing activities, should (i) meet the minimum risk
requirements of article 8c, paragraph 2, of the Dutch Corporate Income Tax
Act and (ii) not be exposed to risk in excess of the Minimum Risk Amount
("MRA"). For these purposes the MRA is 1 per cent of the aggregate amounts
outstanding under the loan agreement between the Company and REAH. In
relation to point (i) above, the Company's capital and reserves as at 31
December 2018 complied with the minimum risk requirements of article 8c,
paragraph 2, of the Dutch Corporate Income Tax Act. In addition, pursuant to
the LRA, REAH and REAS limited their rights of recourse against the Company
in respect of any calls upon their guarantee of the 2020 sterling notes.
Risks and uncertainties with respect to the group's operations are low. All
of the group's operations are located in Indonesia and the group is
therefore significantly dependent on economic and political conditions in
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