DJ REA Finance B.V.: Annual accounts for 2018
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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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DJ REA Finance B.V.: Annual accounts for 2018 -2-
Indonesia. In the recent past Indonesia has been stable and the Indonesian
economy has continued to grow. In addition the group has never been
adversely affected by political unrest. The introduction of exchange
controls or other restrictions on foreign owned operations in Indonesia
could lead to restrictions on the transfer of profits from Indonesia to the
UK with potential negative implications for the servicing of the obligations
in relation to the sterling notes but the group is not aware that there are
any plans for this under current political conditions. Mandatory reduction
of foreign ownership of Indonesian plantation operations could lead to
forced divestment of interests in Indonesia. However, while the group
accepts there is a significant possibility that foreign owners may be
required over time to partially divest ownership of Indonesian oil palm
operations, it has no reason to believe that such divestment would be at
anything other than market value.
Risk management objectives
In carrying out its financing activities, it is the policy of the Company to
minimize exposure to interest and exchange rate fluctuations by ensuring
that loans are denominated in the same currency as the financing sources
from which such loans are funded and that interest receivable on such loans
is based on a formula from which the Company derives a fixed margin over the
cost of funding. In addition, the Company relies on the arrangements
described under "Risks and uncertainties" above to limit its exposure to
loss.
The Company does not enter into or trade other financial instruments for any
purpose.
The Company's overheads are denominated mostly in euros and sterling. The
fixed margin referred to above, which is derived in sterling, is formulated
to cover all the overheads and to leave a residual margin as compensation
for assuming the limited risk under the LRA. The Company does not seek to
hedge the minimal foreign currency risk implicit in these arrangements.
The principal credit risk is described in detail under "Risks and
uncertainties" above. Deposits of surplus cash resources are only made with
banks with high credit ratings.
Employees
During 2018, the Company did not employ personnel nor in the previous years.
Research and development
The Company does not perform any research and development.
Audit Committee
In August 2008 the Dutch Act on the Supervision of Accounting Firms (Wet
Toezicht Accountantsorganisaties) ("ASAF") was amended. This resulted in a
wider definition of a public interest entity (organisatie van openbaar
belang) ("PIE"). All Dutch entities which have issued listed debt are now
considered to be PIEs. In addition on August 8, 2008, an implementing
regulation (algemene maatregel van bestuur) ("IR") came into force in the
Netherlands, enacting Article 41 of European Directive no. 2006/43/EG (the
"ED"), regarding legislative supervision of annual reports and consolidated
financial statements. This IR obliges all PIEs to establish an audit
committee ("AC").
The AC is formed by members of the Company's supervisory board ("SB") or by
non-executive management board members. Because the Company falls within the
definition of a PIE it is in principle obliged to establish an AC. Although
the ED provides certain exemptions for establishing an AC for securitisation
vehicles ("SVs"), under the IR the Company is not considered to be a SV and
therefore can not make use of the exemption to install an AC.
In the light of extensive research and discussions between, amongst others,
the Dutch Authority for the Financial Markets (Autoriteit Financiële
Markten) and several legal advisors and audit firms, there are certain
matters to be considered with respect to the requirement to establish an AC:
* The activities of the Company and those of a SV are very similar;
* Under the ED the Company qualifies as a SV and would thus be exempted from
the obligation to establish an AC;
* The Company does not have a SB or non-executive members of the board. The
establishment of a SB would require an amendment to the Company's Articles
of Association;
* It remains unclear why the IR contains a more stringent definition of a SV
than the ED.
The general view in the Netherlands is that it could not have been the
legislators' intention for financing vehicles, such as the Company, not to
fall within the description of a SV and thus not be exempted. In view of the
above reasons, management currently does not consider it to be in the
Company's best interest, nor has it taken steps, to implement an AC.
Future outlook
Management is of the opinion that the present level of activities will be
maintained during the next financial year. Management expects that the
average number of employees will not change during the next financial year.
Management representation statement
Management declares that, to the best of its knowledge, the annual accounts
prepared in accordance with the applicable set of accounting standards give
a true and fair view of the assets, liabilities, financial position and
profit or loss of the Company and that the Report of the management includes
a fair review of the development and performance of the business and the
financial position of the Company, together with a description of the
principal risks and uncertainties it faces.
Financial Statements
Balance sheet as at 31 December 2018
(After appropriation of results)
Notes 2018 2017
GBP GBP
Fixed assets
Financial fixed assets
- Loan to 1 31,3 32,3
parent 27,0 27,0
company 00 00
Total fixed assets 31,3 32,3
27,0 27,0
00 00
Current assets
Receivables
Receivable from parent company 2 418, 448,
167 836
Taxation receivable 3 11,8 7,01
56 4
Cash and cash equivalents 4 87,9 15,0
35 38
Total 517, 470,
current 958 888
assets
Current liabilities
Creditors 471 -
Taxation 5 300 1,41
payable 7
Accruals 6 28,0 24,3
82 21
Total current liabilities 28,8 25,7
53 38
Current assets less current 489, 445,
liabilities 105 150
Total assets less current 31,8 32,7
liabilities 16,1 72,1
05 50
Long term liabilities
2020 sterling notes 7 30,8 31,8
52,0 52,0
00 00
Total long 30,8 31,8
term 52,0 52,0
liabilities 00 00
Shareholder's equity 8
Paid-up and called-up share 16,2 15,0
capital 10 25
Share premium 475, 475,
000 000
Translation reserve (3,9 (2,8
86) 01)
Other reserves 476, 432,
881 926
964, 920,
105 150
Total long term liabilities and 31,8 32,7
shareholder's equity 16,1 72,1
05 50
The accompanying notes are an integral part of this balance sheet.
Profit and loss account for the year ended 31 December 2018
Notes 2018 2017
GBP GBP
Operating expenses
General and administrative 9 (67, (73,
expenses 617) 915)
Operating result (67, (73,
617) 915)
Financial income and expenditure
Interest income on loan to parent 10 2,86 3,89
company 5,14 8,01
4 9
Interest expense on loan from parent 11 - (202
company ,850
)
Other income 12 23,7 32,1
65 80
Interest expense sterling 13 (2,7 (3,5
notes 66,3 72,7
64) 45)
Currency translation results 14 16 (12,
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043)
Total financial income and expenditure 122, 142,
561 561
Result before taxation 54,9 68,6
44 46
Corporate income tax 15 (10, (12,
989) 116)
Net result 43,9 56,5
55 30
The accompanying notes are an integral part of this profit and loss account.
Notes to the annual accounts for the year 2018
General
The Company was incorporated as a private company with limited liability
under the laws of the Netherlands on 7 November 2006 and has its statutory
seat in Amsterdam, The Netherlands. The ultimate holding company is R.E.A.
Holdings plc in London, United Kingdom. The principal activity of the
Company is to act as a finance company, and its place of business is at
Amstelveenseweg 760, 1081 JK Amsterdam, The Netherlands.
The functional currency of the Company is GBP, which is also the
presentation currency of the accounts.
Basis of presentation
The accompanying accounts have been prepared in accordance with accounting
principles generally accepted in The Netherlands and with the financial
reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code.
The most significant accounting principles are as follows:
a) Foreign currencies
Assets and liabilities in foreign currencies are converted into pounds
sterling at the exchange rates prevailing on the balance sheet date.
Transactions in foreign currencies are translated into pounds sterling at
the exchange rates in effect at the time of the transactions. The resulting
exchange rate differences are taken to the profit and loss account, with the
exception of the share capital which is included in Capital and reserves
under Translation reserve.
The exchange rates used in the annual accounts 31.12.18 31.12.17
are:
1 GBP (pound sterling) = EUR 1.11 1.20
b) Loan to parent company and 2020 sterling notes
The loan to parent company and 2020 sterling notes are stated at amortized
cost, less an allowance for any possible uncollectible amounts.
c) Other assets and liabilities
Other assets and liabilities are at amortized cost, less an allowance for
any possible uncollectible amounts.
d) Recognition of income
Income and expenses, including taxation, are recognized and reported on the
accruals basis.
e) Corporate income tax
Taxation on the result for the period comprises both current taxation
payable and deferred taxation. No current taxation is provided if, and to
the extent that, profits can be offset against losses brought forward from
previous periods. Deferred tax assets on losses are recognized to the extent
that it is probable that taxable profits will be available against which the
deferred tax assets can be utilized. Current tax liabilities are computed
taking into account all available tax credits.
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.
Cash flow statement
The annual accounts for 2018 of the Company's ultimate holding company
(REAH) include a consolidated cash flow statement for the group as a whole.
Accordingly, the Company has elected to use the exemption provided under RJ
360.104 and does not present its own cash flow statement. The annual report
of REAH can be obtained from the website www.rea.co.uk
Related party transactions
All transactions with the shareholder (REAH) are related party transactions
and are performed at arm's length.
Notes to the specific items of the balance sheet
1. Fixed Assets - Loan to parent company
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