TIDMECDC
RNS Number : 7071E
European Convergence Develop. CoPLC
06 June 2012
06 June 2012
EuroPean convergence development company plc
("ECDC" OR "THE COMPANY")
Final Results for the Year ended 31 December 2011
European Convergence Development Company plc ("ECDC", the
"Company" or the "Group"), a property company focused on investing
in commercial, retail and industrial property in South-East Europe,
announces its final results for the year ended 31 December
2011.
For further information please contact:
European Convergence Development Company
plc +44 (0)1624 640200
Anderson Whamond
+44 (0)207 518
Charlemagne Capital 2100
Varda Lotan / Christopher Fitzwilliam Lay
Galileo Fund Services Limited +44 (0)1624 692600
Ian Dungate, Company Secretary
44 (0)20 7459
Panmure Gordon 3600
Hugh Morgan
Grishma Patel
+44 (0)20 7360
Smithfield Consultants 4900
John Kiely
Gemma Froggatt
Chairman's Statement
Overview
Romania and Bulgaria both appear to be showing some very early
signs of recovery from the crisis years since 2008. However, both
countries are very reliant on the European Union as their major
trading partner which may signify a turbulent period ahead for both
exports and banking.
During the year a number of financial institutions in Western
Europe stated that they would be withdrawing from the property
markets and would extend no further credit to Eastern Europe
property markets as they continue to shore up their own balance
sheets. At the same time the markets remain to a certain extent
reliant upon the Greek banks for maintaining credit facilities in
the Balkans.
Economic Review
In Bulgaria Gross Domestic Product grew 1.7% in 2011, inflation
appears to be on the retreat having fallen from 4.4% at the end of
2010 to 2.0% at the end of 2011 and exports grew almost 30% leading
to a reduction in the budget deficit. However Foreign Direct
Investment was woefully low at EUR1.3 billion, down almost 18%
against 2010. The decline continued into the first two months of
2012 with a 75% reduction compared to the same two months at the
beginning of 2011. Liquidity in the country is extremely tight with
very little or no bank debt available. The other main concern is
that personal savings increased almost 13% by the end of the year
and loans to households declined slightly suggesting a fall in
consumption which will have an impact on retailers.
Romania followed a similar path to Bulgaria with improving GDP,
up 2.5% for the year, falling unemployment and tumbling inflation
down from 8.0% at the beginning of the year to 3.1% at the end of
2011. During the year the IMF successfully completed three reviews
of Romania's economic performance under the two year Stand-By
Arrangement (SBA) approved on 25 March 2011 for the amount of
Special Drawing Rights (SDR) 3.1 billion (about EUR 3.6 billion).
Though the country can draw under the facility officials have
indicated that it is currently not their intention to do so. Fitch,
the rating agency upgraded Romania's sovereign debt rating to
investment grade, the first time in three years. However, FDI
maintained the trend started in 2009 with a further 27% decline to
EUR1.9 billion in 2011.
Property Market Review
The markets of Romania and Bulgaria have stabilised at best
during 2011. The retail markets have been buoyed by the arrival of
some very prominent international retailers such as H&M and
Inditex. H&M are setting ambitious expansion plans in both
countries whilst Inditex, Zara fashion brands are expanding into
Bulgaria. This is a sign of confidence in the country and is
leading to other European brands looking to obtain footholds in the
region. The residential market has continued the decline started in
2010 in Romania with up to a 20% reduction in prices being seen in
some parts of Bucharest and new buildings coming onto the market in
the capital city declined 23% during the year. However, residential
mortgages did increase 12% during 2011 but this was only with the
ongoing support of the Government mortgage protection scheme, Prima
Casa. The only real bright point in the markets was the office
sector in Bucharest where prime, well located buildings started to
see some improvement in the rental package, either by stabilised
rental positions or less support needed to be given to tenants.
Vacancy rates were less than 10% in the central areas and there is
little prospect of increased levels of supply because the bank
finance is not readily available.
The Investment markets appeared to improve but further analysis
would indicate a limited number of transactions with most
transactions being below EUR20 million reflecting the low activity
of Western investment funds. The overall value of transactions in
Romania amounted to EUR150 million of which only EUR45 million were
from classic investment deals. In Bulgaria a similar value of
transactions were undertaken but dominated by the two acquisitions
by Europa Capital who acquired Mall of Sofia for EUR100 million and
Retail Park Plovdiv for EUR20 million.
ECDC Operations.
It has been a disappointing year for ECDC. On the one hand the
residential asset at Asmita Gardens was put into insolvency by the
lending Bank with debts exceeding the likely market value of the
remaining unsold apartments and on the other hand there has been
continued letting up of office space in Cascade Plaza. With yields
remaining stable at circa 8% this asset has been revalued following
an independent valuation. The two assets in Iasi and Oradea are
performing to plan but the retail developments in Bulgaria give
cause for concern. The Managers report which form part of these
financial statements goes into considerably more detail on the
performance of each asset.
Cash Position
The Board has made every effort to maintain the cash position of
the Group to ensure that should any opportunities arise which it
felt would be worthy of investment there would be an ability to
participate. However, during 2011 the Group did not invest in any
new developments and only invested limited additional funds where
it was absolutely necessary to protect the existing investments.
After the year end the Board agreed to a further investment in
Cascade Plaza as part of a combined refinancing enabling the
settlement of the Arbitration award to Martifer.
Valuation and NAV
As part of the year end process the Board appointed independent
international firms of surveyors to undertake property valuations
of the Company's developments. This process has resulted in some of
the carrying values being fully impaired whilst Cascade Plaza has
seen an uplift in value. As a result the audited NAV at the year
end was EUR0.3059 per share representing a decrease of EUR 0.0620
per share from the year end 31 December 2010 value of EUR 0.3679
per share. During the period under review, the Group made a loss
before tax of EUR 5.8 million.
The Board will not declare a dividend for the year.
Anderson Whamond
Chairman
1 June 2012
Report of the Manager
Region Overview
The region's economic conditions have not improved significantly
over the year and this has been reflected in the valuations,
particularly in Bulgaria. The Group has been unable to reduce its
reliance upon the Greek banks for debt funding as a number of
financial institutions are withdrawing lending facilities to both
the region and real estate and as a result there remains the
possibility that a potential banking crisis in Greece may have an
impact on the Company's projects.
Economic Update
Romania
The unpopular austerity measures introduced as part of the IMF
arrangements resulted in widespread social dissatisfaction against
the Government and at the beginning of 2012 the Prime Minister
resigned and a new coalition has recently been formed ahead of the
parliamentary elections to be held in November 2012.
With the fall of the previous government the IMF and the
European Commission suspended discussion with Romania and these are
now expected to resume with the new government assuring IMF
representatives that Romania is stable and can fulfil its
obligations.
Inflation at the beginning of 2011 was at 8.0% and increased
steadily to a peak of 8.4% in May. From that date it has fallen
consistently to 3.1% at December 2011 and is currently 2.4% as of
March 2012. The 2012 full year target is 2%.
The benchmark interest rate remained unchanged for most of 2011
at 6.25% however in an apparent response to the falling inflation
rate and to stimulate the market, it was reduced to 6.00% in
November. In the first four months of 2012 the rate has been cut
three times down to 5.25%.
2011 saw a GDP increase of 2.5% which was slightly ahead of the
consensus view and is a direct result of strong growth in exports
and agriculture. However bad weather at the beginning of 2012 as
well as concerns with its major trading partners led to forecasts
for GDP growth of between 0.5% and 1.0% for 2012.
Bulgaria
The economy has seen mixed trends during the year, and the
economy remains fragile with external factors in the region and
Europe having a great influence on the country.
GDP grew by 1.7% in 2011 which made Bulgaria one of the fastest
growing economies in Europe, however the majority of Bulgaria's
exports are into Europe and with continued concerns over the
Eurozone, the Government has reduced its full year GDP forecast for
2012 from 3.7% to 2.3%.
Bulgaria had a budget deficit of 2.1% for 2011, and Government
borrowing stood at around 15.9% of GDP at the end of December 2011
which compares favourably to other European countries. For 2012 the
Government is forecasting a budget deficit of between 1.0% and 1.3%
of GDP.
Unemployment rose from 9.2% at the start of the year to 11.4% by
the end of the year. This increase reflects ongoing economic
restructuring during the year as job reductions helped to increase
per capita productivity, although early signs in 2012 show that
productivity has declined. These trends are reflected by an
increase in business confidence combined with a decrease in
consumer confidence towards the end of the year.
Inflation has remained low and ended the year 2% down on the
previous December.
Foreign Direct Investment fell to EUR 1.1 billion in 2011, which
is 40% down on 2010.
Property Market Overview
Romanian Real Estate Market
Office Market
In total, nine buildings were completed during 2011 and modern
office supply in Bucharest increased by 90,000 sqm. The increase in
Gross Lettable Area (GLA) was 65% down on 2010 and the lowest level
of supply in the last six years. Conversely take up during 2011
amounted to approximately 200,000 sqm which is the first time since
2008 that take up has exceeded supply. As a result it is expected
that there will be an increase in pre-leasing during 2012.
Headline rents which remained stable for most of the year,
improving slightly towards the end of 2011 with slow rental growth
being forecast for 2012 due mainly to the shortage of prime supply
in established business districts. Vacancy levels decreased
slightly with the largest areas of vacant space now located in
decentralised submarkets such as Baneasa and Pipera North.
For 2012 the delivery pipeline is estimated at 130,000 sqm in
already announced projects, such as Raiffeisen Evolution's Sky
Tower, or the first phase of AFI Offices of which approximately
45,000 sqm is pre-let or owner occupied. For 2013 the supply
remains limited to c. 70,000 sqm.
Retail Property
The retail market in Romania recorded one of its best years in
2011 with the opening of nine retail schemes and 7 extensions
totalling over 300,000 sqm. Currently 170,000 sqm of space is under
construction and due for delivery during 2012 and the forecast for
2013 is approximately 110,000 sqm.
Demand continues to be fuelled by international operators.
H&M and Inditex continued their expansion in both modern retail
schemes but also on high street location. Supermarket retailers and
hard discounters such as Lidl, Mega Image, Profi, Carrefour
Express, continue their aggressive expansion plans taking advantage
of the current level of high street retail rents.
Rental levels for prime shopping centres in Bucharest stands at
EUR 65-70 sqm / month, with noticeably higher levels for units less
than 100 sqm. Rent free periods and fit-out contributions are still
a key driver in the leasing process of less dominant shopping
centres. The gap between prime and poor quality shopping schemes is
likely to continue to widen.
Bulgaria Real Estate Market
Retail Property
While 2011 saw a reduction in high street retail rents in Sofia,
the rental levels in shopping centres remained relatively stable
during 2011. This was in part due to increasing retail
concentrations in the new malls, but 2011 also saw large
international brands, such as H&M and Indetex, taking advantage
of the lower rentals in Bulgaria to launch their operations.
H&M has already secured locations in Sofia, Varna and Burgas
with further stores likely in other cities. Other international
fashion, DIY and sports good operators are setting plans for
expansion in Bulgaria.
Furniture giant Ikea was the largest new development completed
and opened in 2011, although there were other positive signs with
two large developments beginning construction during 2011 after
being on hold for two years. There are other retail centres under
construction and these are expected to come on line during 2012/
2013.
In 2011, Bulgaria's real estate transactions reached EUR 186m,
the highest level since 2008 when EUR 400m of transactions were
concluded. Mainly due to the lack of sizeable and stable income
producing assets, turnover in 2012 is not expected to exceed 2011
levels. Yields are expected to remain stable and as of January 2012
there were no signs of deteriorating loan terms though margins are
still around the 300 to 350 bps.
Detailed Project Reports
Romanian Assets
Cascade
The property is now 92% let with another 1% coming under lease
later in the year and significant interest being shown in the
remaining space.
As previously mentioned the company lost the arbitration case in
Switzerland which resulted in a significant additional liability
for the company which was not covered by its bank facility.
Negotiations to reduce the liability with the sub-contractor have
been finalised and the company has also reached agreement with its
financing banks on how to discharge this liability. This required
additional funding from the company's shareholders with the amount
required from ECDC being EUR 510,000.
The company has also reached agreement with the financing banks
on how to discharge this liability. The bank has agreed to meet
half the requirement with the shareholders financing the remainder.
The final settlement is expected to complete during May 2012.
Oradea Shopping Centre
The Oradea construction bank loan facility is fully drawn, with
the fit-out funds remaining to be drawn to assist lease up.
The construction of Phase 2 of the Shopping Mall is fully
complete.
The centre is 82% leased which is broken down as follows:
-- The shopping gallery is 94% let,
-- Phase 1 of the Shopping Mall is 95% let,
-- Phase 2 of the Shopping Mall is 62% let.
There is considerable interest in the vacant space with more
than 8,000 sqm under negotiation.
Collection rates in Oradea at the end of Quarter 1 2012 were
over 80%.
Iasi Shopping Centre
The financing documentation has been finalised and is expected
to be completed by the end of June 2012.
The existing shopping gallery in Iasi is 96% leased and there is
considerable interest for the remaining 1,900 sqm of vacant
spaces.
Collection rates were also over 80% in Iasi at the end of March
2012.
Marketing activities to increase visitor numbers are on -going
and have achieved good results.
Asmita Gardens
The insolvency of the company is being undertaken by the Legal
Administrator according to the Romanian insolvency law. The
Manager, representing the shareholders in ECDC will be part of the
creditor committee and will play an active role in the
re-organisation process. The Manager will keep Shareholders
informed of progress.
Baneasa
There have been no significant developments in this project.
Bulgarian Assets
Galleria Plovdiv
2011 saw occupancy levels relatively stable finishing the year
at 62%, 1% up on the start for the year. The leasing of new space
has been and remains difficult with prospective tenants looking for
incentives such as capital contributions towards fitting out costs.
In 2012 negotiations are ongoing with some key international anchor
fashion brands and initial feedback has been positive.
The company has recently employed an international retail
consultant to assist in setting the strategic plan for the Mall. In
March 2012 the consultant completed and presented his strategic
plan with the overall goal of optimising the scheme, returning it
to sustainable profitability and enhancing capital value. The
shareholders approved the plan which has been presented to the
funding bank as part of initial negotiations. The plan was in
principle accepted by the Bank and on this basis the company has
started negotiations with the bank to restructure the banking
facility, which is presently in default.
Due to the continued economic uncertainty the Group employed an
international and independent firm of valuers to value the
property. They indicated a current market value of EUR49.7m, which
falls below the outstanding bank loan of EUR51.1m.
However, EUR1.5m of the ECDC shareholder loans to Galleria
Plovdiv is 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 EUR1.75m in August 2009.
The Board has decided to impair the value of Galleria Plovdiv
down to EUR1.5m from the previous year end carrying value of
EUR8.7m.
Mega Mall Rousse
Occupancy levels for the Mall rose over the year to 53% at the
end of the year, although this has since fallen back slightly to
51% during 2012. The leasing process continues to be difficult for
similar reasons as Galleria Plovdiv and additional tenants are
being secured but at a slower rate than previously forecast and at
lower rents.
There is retailer interest in the development but in order to
convert this interest into signed leases, an additional investment
in fit-out contributions will be necessary.
At the end of 2011 Mega Mall Rousse was valued by an
international and independent firm of valuers at EUR17.9m. This is
below the bank loan of EUR19.6m and so it has been decided to fully
provide against this asset.
Trade Centre Sliven
There has been no change in the position regarding this
development opportunity. The Partner has paid all the interest due
on his loan to the end of October and is in discussions on how best
to start repaying back the remaining interest and loan.
Bourgas Retail Park
There has been no further progress made with this development as
there has been no marked improvement in either the banking or
retail market.
Charlemagne Capital (IOM) Limited
1 June 2012.
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 2011.
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 15 to 41 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 or on further investments.
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 also have holdings in
the Company.
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, KPMG Audit LLC, being eligible, have expressed a
willingness to continue in office.
Corporate Governance
The Company is not required to follow the provisions of the
Combined Code as set out in the UK Financial Services 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.
On behalf of the Board
Anderson Whamond
Chairman
1 June 2012
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.
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 applicable International Financial Reporting
Standards have been followed; 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 Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Parent Company. 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
1 June 2012
Report of the Independent Auditors, KPMG Audit 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 2011 which comprise the Consolidated Income Statement,
Consolidated Statement of Comprehensive Income, the Consolidated
and Company Statements of Financial Position, the Consolidated
Statement of Cash Flows and the Consolidated Statement of Changes
in Equity and the related notes. The financial reporting framework
that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs).
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 Directors' Responsibilities
Statement set out on page 13, 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.
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 2011 and of the Group's
loss for the year then ended; and
-- have been properly prepared in accordance with IFRSs.
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 global financial crisis and the deteriorating
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 now increased
uncertainty as to the valuation of property assets held by equity
accounted investees, along with the recoverability of loans made by
the Group to third parties. Further, a significant reduction in the
availability of loan finance has resulted in equity accounted
investees needing to re-negotiate terms with banks and to seek
additional capital contributions from the Group in order that
ongoing projects can be completed. The Board have made a number of
estimates and assumptions in respect of future events, the outcome
of which remains uncertain in light of the challenging economic
climate and further impairments may be necessary. The ability of
the equity accounted investees to secure continued funding is a
significant factor influencing the estimates derived.
KPMG Audit LLC
Chartered Accountants, Heritage Court, 41 Athol Street, Douglas,
Isle of Man IM99 1HN
1 June 2012
Consolidated Income Statement
Note Year ended Year ended
31 December 2011 31 December 2010
EUR'000 EUR'000
----------------------------------------------------------------------- ----- ------------------ ------------------
Net changes in fair value on financial assets at fair value through - -
profit or loss
Annual management fees 7.3 (606) (962)
Audit fees 8.4 (75) (76)
Legal and professional fees (115) (125)
Directors' fees 15 (75) (104)
Administration fees 8.2 (58) (57)
Other operating expenses 8.3 (295) (430)
Administrative expenses (1,224) (1,754)
----------------------------------------------------------------------- ----- ------------------ ------------------
Net operating income/(loss) before net financing income (1,224) (1,754)
----------------------------------------------------------------------- ----- ------------------ ------------------
Financial income 38 28
Financial expenses - -
----------------------------------------------------------------------- ----- ------------------ ------------------
Net financing income 5 38 28
----------------------------------------------------------------------- ----- ------------------ ------------------
Share of profit/(loss) of equity accounted investees 9 289 (1,712)
Impairment in value of equity accounted investees 9 (10,557) (21,591)
Uplift in value of equity accounted investees 9 5,669
----------------------------------------------------------------------- ----- ------------------ ------------------
Loss before tax (5,785) (25,029)
----------------------------------------------------------------------- ----- ------------------ ------------------
Income tax credit/(expense) 16 167 (1)
Retained loss for the year (5,618) (25,030)
----------------------------------------------------------------------- ----- ------------------ ------------------
Basic and diluted loss per share (EUR) 12 (0.0621) (0.2765)
----------------------------------------------------------------------- ----- ------------------ ------------------
The Directors consider that all results derive from continuing
activities.
Consolidated Statement of Comprehensive Income
Note Year ended Year ended
31 December 31 December 2010
2011
EUR'000 EUR'000
----------------------------------------- ------------- ------------------
Loss for the year (5,618) (25,030)
Other comprehensive income
Currency translation differences - (4)
------------------------------------------ ------------- ------------------
Total comprehensive loss for
the year (5,618) (25,034)
------------------------------------------ ------------- ------------------
Consolidated Statement of Financial Position
Note At 31 December 2011 At 31 December 2010
EUR'000 EUR'000
------------------------------------------ ----- -------------------- --------------------
Investment in equity accounted investees 9 22,083 26,370
Property, plant and equipment 1 2
Total non-current assets 22,084 26,372
Loans to third parties 10 313 324
Trade and other receivables 67 53
Cash and cash equivalents 4.4 5,461 7,025
------------------------------------------ ----- -------------------- --------------------
Total current assets 5,841 7,402
------------------------------------------ ----- -------------------- --------------------
Total assets 27,925 33,774
------------------------------------------ ----- -------------------- --------------------
Issued share capital 11 72,412 72,412
Share premium 9,841 9,841
Foreign currency translation reserve 4 4
Retained losses (54,571) (48,953)
------------------------------------------ ----- -------------------- --------------------
Total equity 27,686 33,304
------------------------------------------ ----- -------------------- --------------------
Trade and other payables 13 239 470
Total current liabilities 239 470
------------------------------------------ ----- -------------------- --------------------
Total liabilities 239 470
------------------------------------------ ----- -------------------- --------------------
Total equity & liabilities 27,925 33,774
------------------------------------------ ----- -------------------- --------------------
Approved by the Board of Directors on 1 June 2012
Director Director
Company Statement of Financial Position
Note At 31 December 2011 At 31 December 2010
EUR'000 EUR'000
------------------------------------------ ----- -------------------- --------------------
Investment in equity accounted investees 9 2,557 1,920
------------------------------------------ ----- -------------------- --------------------
Total non-current assets 2,557 1,920
------------------------------------------ ----- -------------------- --------------------
Intragroup balances 7.5 25,156 31,287
Trade and other receivables 16 13
Cash and cash equivalents 4.4 30 153
------------------------------------------ ----- -------------------- --------------------
Total current assets 25,202 31,453
------------------------------------------ ----- -------------------- --------------------
Total assets 27,759 33,373
------------------------------------------ ----- -------------------- --------------------
Issued share capital 11 72,412 72,412
Share premium 9,841 9,841
Retained losses (54,567) (48,949)
------------------------------------------ ----- -------------------- --------------------
Total equity 27,686 33,304
------------------------------------------ ----- -------------------- --------------------
Trade and other payables 13 73 69
------------------------------------------ ----- -------------------- --------------------
Total current liabilities 73 69
------------------------------------------ ----- -------------------- --------------------
Total liabilities 73 69
------------------------------------------ ----- -------------------- --------------------
Total equity & liabilities 27,759 33,373
------------------------------------------ ----- -------------------- --------------------
The loss made by the Company for the year ended 31 December 2011
was EUR5.6 million after an impairment charge against intragroup
balances amounting to EUR7.1 million (primarily a result of the
provisions made against the investments held by the Company's
subsidiaries) (2010: EUR25.0 million loss with an impairment charge
of EUR27.9 million).
Approved by the Board of Directors on 1 June 2012
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 2010 72,412 9,841 8 (23,923) 58,338
Loss for the year - - - (25,030) (25,030)
Other comprehensive income
Foreign exchange
translation differences - - (4) - (4)
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Total comprehensive loss - - (4) (25,030) (25,034)
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Shares cancelled following - - - - -
market purchases
Total transactions with - - - - -
owners in the year
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Balance at 31 December
2010 72,412 9,841 4 (48,953) 33,304
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Balance at 1 January 2011 72,412 9,841 4 (48,953) 33,304
Loss for the year - - - (5,618) (5,618)
Other comprehensive income
Foreign exchange - - - - -
translation differences
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Total comprehensive loss - - - (5,618) (5,618)
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Shares cancelled following - - - - -
market purchases
Total transactions with - - - - -
owners in the year
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Balance at 31 December
2011 72,412 9,841 4 (54,571) (27,686)
--------------------------- -------------- -------------- -------------------------- ------------------ ---------
Consolidated Statement of Cash Flows
Note Year ended Year ended
31 December 2011 31 December 2010
EUR'000 EUR'000
------------------------------------------------------------ ----- ------------------ ------------------
Operating activities
Group loss for the year (5,618) (25,030)
Adjustments for:
Net financial income (38) (28)
Net rent and related income - -
Income tax (credit)/expense (167) 1
Share of (gaint)/loss of equity accounted investees 9 (289) 1,712
Net impairment in value of equity accounted investees 9 4,888 21,591
Operating loss before changes in
working capital (1,224) (1,754)
(Increase)/decrease in trade and other receivables (14) 69
Decrease in trade and other payables (231) (341)
Cash used in operations (1,469) (2,026)
Financial income received 38 28
Tax reclaimed 167 -
------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in operating activities (1,264) (1,998)
------------------------------------------------------------ ----- ------------------ ------------------
Investing activities
Acquisition of equity accounted investees 9 (278) (12,126)
(Increase)/decrease in loans to equity accounted investees 9 (34) 7,602
Decrease in loans to third parties 11 11 36
Disposal of property, plant & equipment 1 -
------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in investing activities (300) (4,488)
------------------------------------------------------------ ----- ------------------ ------------------
Financing activities
Proceeds from the issue of ordinary share capital - -
Purchase of own shares 12 - -
Share issue expenses - -
------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in financing activities - -
------------------------------------------------------------ ----- ------------------ ------------------
Net decrease in cash and cash equivalents (1,564) (6,486)
Cash and cash equivalents at beginning of year 7,025 13,511
------------------------------------------------------------ ----- ------------------ ------------------
Cash and cash equivalents at end of year 5,461 7,025
------------------------------------------------------------ ----- ------------------ ------------------
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.
At the year end the Company had 90,515,470 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 life of
the Company after approximately 10 years.
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 Company's
property portfolio or on further investments.
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 has acquired an
interest in the following companies:
Country of Incorporation Percentage of shares held
------------------------------------ -------------------------- --------------------------
Asmita Gardens SRL Romania 50%
Cascade Park Plaza SRL Romania 40%
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 60%
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
2011 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 1
June 2012.
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. 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 requires the use of certain critical accounting 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 Company's 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 18.
The activities of the Group are subject to a number of risk
factors. The global financial crisis and the deteriorating economic
environment in the jurisdictions within which the Group operates
have increased the intensity of these risk factors. The future
economic outlook 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, whilst the Group has made
additional capital available to certain entities in order that
ongoing projects can be completed. 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.
4 Significant Accounting Policies continued
4.1 Basis of presentation continued
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, taking into account the level of cash and cash equivalents
held by the Group and the level of capital commitments to joint
venture entities.
The Company is denominated in Euros ("EUR") and therefore the
amounts shown in these financial statements are presented in
EUR.
4.2 Foreign currency translation
Euro 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 transactions are
charged or credited to the income statement as foreign currency
gains and losses. Expenses are translated into EUR based on
exchange rates on the date of the transaction.
The accounts are presented in Euros by translating the assets
and liabilities at the exchange rate prevailing at the balance
sheet date. Items of revenue and expense are translated at exchange
rates on the date of the relevant transactions. 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 declared.
Rental income from investment property leased out under
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 Significant Accounting Policies continued
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 carried at cost (adjusted for
the Group's share of the income and expenses of the equity
accounted investees according to the equity method of accounting
for joint ventures). 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 cost, 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 balance sheet 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 2011 (2010: EUR Nil).
4 Significant Accounting Policies continued
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 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 trade date - the date on which the Company commits to
purchase or sell 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 for maturities greater than
12 months after the balance sheet 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.
4.9 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.
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 11. No additional disclosure is required in relation
to segment reporting, as the Company's activities are limited to
one business and geographic segment.
4 Significant Accounting Policies continued
4.14 Adoption of new and revised International Financial Reporting Standards (IFRSs)
Standards affecting amounts reported in the current year (and/or
prior and future years)
a) The following new standards and amendments to standards are
mandatory for the first time for the financial year beginning 1
January 2011.
Revised IAS 24 (revised), 'Related party disclosures', issued in
November 2009. It supersedes IAS 24, 'Related party disclosures',
issued in 2003. IAS 24 (revised) is mandatory for periods beginning
on or after 1 January 2011. Earlier application, in whole or in
part, is permitted. However, the standard has not yet been endorsed
by the EU. The revised standard clarifies and simplifies the
definition of a related party and removes the requirement for
government-related entities to disclose details of all transactions
with the government and other government-related entities. The
Group will apply the revised standard from 1 January 2011. When the
revised standard is applied, the group and the parent will need to
disclose any transactions between its subsidiaries and its
associates. The Group is currently putting systems in place to
capture the necessary information. It is, therefore, not possible
at this stage to disclose the impact, if any, of the revised
standard on the related party disclosures.
'Classification of rights issues' (amendment to IAS 32), issued
in October 2009. The amendment applies to annual periods beginning
on or after 1 February 2010. Earlier application is permitted. The
amendment addresses the accounting for rights issues that are
denominated in a currency other than the functional currency of the
issuer. Provided certain conditions are met, such rights issues are
now classified as equity regardless of the currency in which the
exercise price is denominated. Previously, these issues had to be
accounted for as derivative liabilities. The amendment applies
retrospectively in accordance with IAS 8 'Accounting policies,
changes in accounting estimates and errors'. The Group will apply
the amended standard from 1 January 2011.
IFRIC 19, 'Extinguishing financial liabilities with equity
instruments', effective 1 July 2010. The interpretation clarifies
the accounting by an entity when the terms of a financial liability
are renegotiated and result in the entity issuing equity
instruments to a creditor of the entity to extinguish all or part
of the financial liability (debt for equity swap). It requires a
gain or loss to be recognised in profit or loss, which is measured
as the difference between the carrying amount of the financial
liability and the fair value of the equity instruments issued. If
the fair value of the equity instruments issued cannot be reliably
measured, the equity instruments should be measured to reflect the
fair value of the financial liability extinguished. The Group will
apply the interpretation from 1 January 2011, subject to
endorsement by the EU. It is not expected to have any impact on the
Group or the parent entity's financial statements.
IFRS 7, 'Financial instruments', effective 1 January 2011.
Emphasises the interaction between quantitative and qualitative
disclosures about the nature and extent of risks associated with
financial instruments.
IAS 1, 'Presentation of financial statements', effective 1
January 2011. Clarifies that an entity will present an analysis of
other comprehensive income for each component of equity, either in
the statement of changes in equity or in the notes to the financial
statements.
IAS 27, 'Consolidated and separate financial statements',
applicable to annual periods beginning on or after 1 July 2010.
Clarifies that the consequential amendments from IAS 27 made to IAS
21, 'The effect of changes in foreign exchange rates',
IAS 28, 'Investments in associates', and IAS 31, 'Interests in
joint ventures', apply prospectively for annual periods beginning
on or after 1 July 2010, or earlier when IAS 27 is applied
earlier.
4 Significant Accounting Policies continued
4.14 Adoption of new and revised International Financial
Reporting Standards (IFRSs) continued
Standards affecting amounts reported in the current year (and/or
prior and future years) continued
b) Standards, amendments and interpretations to existing
standards relevant to the Group, that are not yet effective and
have not been early adopted by the Group.
IFRS 9, 'Financial instruments', issued in November 2009. This
standard is the first step in the process to replace IAS 39,
'Financial instruments: recognition and measurement'. IFRS 9
retains but simplifies the mixed measurement model and establishes
two primary categories for financial assets: amortised cost and
fair value. The basis of classification depends on the entity's
business model and the contractual cash flow characteristics of the
financial asset. The standard is not applicable until 1 January
2013 but is available for early adoption. However, the standard has
not yet been endorsed by the EU. The Group is yet to assess IFRS
9's full impact.
IFRS 10, 'Consolidated financial statements', issued in May
2011. This standard builds on existing principles by identifying
the concept of control as the determining factor in whether an
entity should be included within the consolidated financial
statements. The standard provides additional guidance to assist in
determining control where this is difficult to assess. This
standard is applicable for periods beginning on or after 1 January
2013. The Group is yet to assess the full impact of IFRS 10, but
the adoption may change the entities that are consolidated as
subsidiaries from 1 January 2013. This standard has not yet been
endorsed by the EU.
IFRS 12, 'Disclosure of interests in other entities', issued in
May 2011. This standard includes the disclosure requirements for
all forms of interests in other entities, including joint
arrangements, associates, special purpose vehicles and other off
balance sheet vehicles. This standard will be applicable for
periods beginning or after 1 January 2013. The Group, subject to EU
endorsement, will adopt this standard from 1 January 2013. It is
not expected to have a significant impact on the Group.
IFRS 13, 'Fair value measurement', issued in May 2011. This
standard aims to improve consistency and reduce complexity by
providing a precise definition of fair value and a single source of
fair value measurement and disclosure requirements for use across
IFRSs. The requirements, which are largely aligned between IFRSs
and US GAAP, do not extend the use of fair value accounting but
provide guidance on how it should be applied where its use is
already required or permitted by other standards within IFRSs or US
GAAP. This standard is applicable for periods beginning on or after
1 January 2013. The Group is yet to assess IFRS 13's full impact.
This standard has not yet been endorsed by the EU.
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
EUR38,480 (2010: EUR28,412) and loan arrangement fees of EURnil
(2010: EURnil).
6 Net Asset Value per Share
The net asset value per share as at 31 December 2011 is
EUR0.3059 (2010: EUR0.3679) based on 90,515,470 (2010: 90,515,470)
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 436,028 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 2011.
CCL, a company incorporated in the Cayman Islands is listed on
the Alternative Investment Market 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
James Houghton and Jane Bates are directors of the Manager. 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
2011 amounted to EUR605,800 (2010: EUR961,545).
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 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 2011
amounted to EURnil (2010: EURnil).
7.4 Transactions and balances with Joint Venture companies and partners
The Company has made loans to Joint Venture Companies totalling
EUR43,174,000 (2010: EUR40,915,000) and to Joint Venture Partners
totalling EUR5,553,000 (2010: EUR4,700,000). Details of the terms
and applicable interest rates for these loans are more fully shown
in note 9 and note 11.
7.5 Intragroup balances
Intragroup balances are repayable on demand and bear interest at
commercial rates. Loans to subsidiaries outstanding at the year end
have been impaired to 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 2011 amounted to EUR35,786 (31 December
2010: EUR34,873).
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 EUR2,875 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 GBP5,500 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 2011
amounted to EUR57,600 (2010: EUR56,813).
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 2011 amounted
to EUR75,559 (2010: EUR76,411).
9 Investment in Equity Accounted Investments
Group 31 December 2011 31 December 2010
EUR'000 EUR'000
----------------------------------------------------- ----------------- -----------------
At beginning of year 26,370 45,149
Acquisition of equity accounted investment 278 12,126
Recovery/(write down) in loans to investments 34 (7,602)
Share of gain/(loss) of equity accounted investment 289 (1,712)
Write down of value of equity accounted investments (4,888) (21,591)
Balance at end of year 22,083 26,370
----------------------------------------------------- ----------------- -----------------
The loans to equity accounted investees, before deduction of
provisions, are as follows:
Name Term Term Interest Rate 31 December 2011
EUR'000
-------------------------------------------------------------- -------------- -----------------
Asmita Gardens SRL * 31 December 2012 6% 15,909
Galleria Plovdiv AD * * 0%** 10,000
Convergence Development Invest SRL 4,129
Cascade Park Plaza SRL * * *** 4,000
Turgovski Park Kraimorie AD * * 0%** 9,136
------------------------------------ ------ ------------------ -------------- -----------------
* 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 Term Interest Rate 31 December 2010
EUR'000
-------------------------------------------------------------- -------------- -----------------
Asmita Gardens SRL * 31 December 2012 6% 14,370
Galleria Plovdiv AD * * 0%** 10,000
Convergence Development Invest SRL 3,444
Cascade Park Plaza SRL * * *** 4,000
Turgovski Park Kraimorie AD * * 0%** 9,101
------------------------------------ ------ ------------------ -------------- -----------------
* 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.
The carrying values of the Group's equity accounted investments
are as follows:-
Name Value at 31 December 2011 Value at 31 December 2010
EUR'000 EUR'000
----------------------------- -------------------------- --------------------------
Cascade Park Plaza SRL 14,015 8,356
Galleria Plovdiv AD 1,500 8,720
Mega Mall Rousse - 2,974
Trade Centre Sliven EAD 1,876 2,300
Turgovski Park Kraimorie AD 2,135 2,100
NEF3 (IOM) 1 Limited* 983 720
NEF3 (IOM) 2 Limited* 357 300
NEF3 (IOM) 3 Limited* 1,217 900
----------------------------- -------------------------- --------------------------
22,083 26,370
----------------------------- -------------------------- --------------------------
* held directly by the Company.
9 Investment in Equity Accounted Investments continued
Valuation of Assets as at 31 December 2011
As most of the developed properties have been open for over a
year, albeit with below optimum occupancy levels and also due to
the continued economic uncertainty in the region, it was felt that
all the properties should be subject to external and independent
valuations for the year ended 31 December 2011.
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 2011. 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 property inspection was
conducted.
BULGARIA
Galleria Plovdiv
The Board has decided to impair the value of Galleria Plovdiv
down to EUR1.5m from previous year end carrying value of EUR8.7m, a
net impairment of EUR7.2m.
This impairment follows the latest valuation carried out by
Colliers which indicates a current market value of EUR49.7m. This
valuation falls below the outstanding bank loan.
However, EUR1.5m of the ECDC shareholder loans to Plovdiv 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
EUR1.75m in August 2009.
Management feel that while there will have been some diminution
in the land value over that time, the value should still materially
cover the EUR1.5m guarantee. For comparative purposes the land on
which Galleria is built is valued at EUR150 per sqm, and in order
to cover the guarantee the land would have to sell for EUR42 per
sqm. Therefore Management have reduced the value of ECDC's
investment in Galleria Plovdiv down to EUR1.5m.
Although the Mall has been written down for 2011, the Manager
believes there may potentially be some future value in the
property. Galleria is a 46,500 sqm regional shopping centre and its
only real competition is on the other side of the city which is the
circa 20,000 sqm Mall of Plovdiv, a smaller mall in the centre of
the city which is also experiencing difficulty in attracting
tenants. As there are no other new malls under construction in the
second city of Bulgaria, Galleria is well positioned to benefit
from a pick up in the retail market over the next three years.
An external consultant has been employed to help develop the
future strategy of the Mall. The strategy recommends a mid-level
investment to quickly drive up initial tenant occupancy, introduce
an entertainment / leisure centre and create a fashion hub to
consolidate many of the smaller fashion retailers with a major
fashion anchor. The bank appears supportive of this strategy and
discussions are taking place regarding the restructuring of the
loan facility.
Mega Mall Rousse
The Board have decided to impair this asset down to nil from the
previous year end's carrying value of EUR3.0m.
Mega Mall Rousse was valued by SHM Smith Hodgkinson at EUR17.9m.
This is below the bank loan and so it has been decided to fully
provide against this asset.
The Mall is approximately 51% let, however the leasing process
continues to be difficult for similar reasons as Galleria Plovdiv.
Additional tenants are being secured but at a slower rate than
previously forecast and at lower rents. There is retailer interest
in
9 Investment in Equity Accounted Investments continued
Mega Mall Rousse continued
the development space but in order to convert this interest into
signed leases, an additional investment in fit-out contributions
will be necessary.
The company is continuing its discussions with the bank and is
hopeful that a satisfactory solution will be found in the near
future which will provide the funds to increase the occupancy
rates.
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 has had the property valued by an independent
surveyor who has valued the land at EUR4.1m. Other than the
shareholder loans there are no other major assets or
liabilities.
ECDC nominally holds 60% of Bourgas, however, as part of the
original financing of this deal, ECDC 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 EUR2.5m, plus
the loan repayment (currently standing at EUR2.1m inclusive of
interest), which is EUR4.6m or,
-- If the loan is not repaid, then the Company will secure 100%
of the shareholding by exercising its security, and therefore adopt
100% of the land value being EUR4.1m.
The Company therefore values its holding in Bourgas at the lower
figure of EUR4.1m.
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 EUR4.1m value of the land.
This therefore reduces the current carrying value of the land to
EUR2.1m for 2011 (2010; EUR2.1m).
The loan to Sienit, of EUR2.1m 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 Company has a 42.5%
equity holding in Sliven.
Sliven has two main assets; being cash of EUR3.3m and land which
was recently valued at EUR1.1m. There are no major liabilities in
the company, so the NAV for the JV is EUR4.4m, valuing ECDC's
investment (of 42.5%) at EUR1.9m (2010; EUR2.3m).
As part of the purchase the Company 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. The Manager is in
communication with the JV partner who has recently paid off the
interest outstanding on the loan and has expressed his
9 Investment in Equity Accounted Investments continued
Trade Centre Sliven continued
intention to repay the loan in full and the Board expects full
recovery of the balance. If it was felt that the partner would not
complete the loan repayment then the Manager would recommend that
the Company exercise its security to recover the loan. At present
the Manager's view is that this is not necessary.
ROMANIA
Cascade
Colliers have valued Cascade at EUR49.8m, which is slightly up
from last year's valuation of EUR46.3m. The main reason for the
uplift is the annual indexation on rentals which has effectively
added EUR2m to the value based on last year's exit yield of 8.25%.
In addition the valuer has used a slightly improved exit yield of
8.0% which accounts for the remaining uplift.
The property is now 92% let with another 1% coming under lease
later in the year and significant interest being shown in the
remaining space. Now that the property is close to being fully let
there have also been some expressions of interest in the
property.
Following the repayment of the external loan, and the revised
Martifer settlement the distribution waterfall would ensure that
the company would receive proceeds of EUR14.0m, a gain of EUR5.6m
over last year's carrying value of EUR8.4m.
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 with a guaranteed
return. The investments are reported at their net asset value which
includes the net return accruing to date on the investment.
The return for Iasi and Oradea are supported with a put and call
option over the assets of a Group holding company, and the latest
valuation of the Cascade property provides the Board with comfort
as to the carrying value of the investment in Cascade.
Argo, the fund manager, has merged the Iasi and Oradea assets
into one its listed funds; Argo Real Estate Opportunities Fund
("AREOF"). It was felt that that the other assets held by the
listed fund are of a higher quality and should provide a greater
protection to ECDC's returns.
AREOF's recent accounts have disclosed that they are in breach
of a loan covenant with one of its lending banks, the effect of
this breach could allow the lending bank to accelerate the
repayment of the debt which if effected would impact the going
concern of the Group. However, the company is having discussions
with the bank with a view to reaching a consensual restructuring of
this debt. The Board takes the view that as the accounts are
prepared on a going concern basis and given AREOF's ongoing
relationship with the lending bank that no impairment is required
at this stage.
9 Investment in Equity Accounted Investments continued
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 39,248 (40,632) 3,637 (563) 40
Trade Centre Sliven
EAD Bulgaria 4,887 (19) 131 - 42.5
Turgovski Park Kraimorie
AD Bulgaria 4,223 (13,169) 990 (7) 60
Isle of
NEF3 (IOM) 1 Limited Man 2,547 (97) 623 491 55
Isle of
NEF3 (IOM) 2 Limited Man 2,448 (107) 407 265 55
Isle of
NEF3 (IOM) 3 Limited Man 3,154 (120) 778 625 55
-------------------------- ---------------- -------- ------------ --------- -------- -----------
The Shareholders 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 Group.
10 Loans to third parties
Loans to third parties for the Group includes loans to Joint
Venture Partners as follows
2011 Term Maturity Date Interest Rate Amount
Name EUR'000
------------------------------------------------------------- ------------------------------------------- --------
Sienit Holding AD* Overdue Overdue EURIBOR plus 5%, plus 10% penalty interest 2,069
Property Capital Group** Overdue Overdue EURIBOR plus 5% 313
Dickau Investments Limited*** 60 months 14 Sept 2012 10% 3,171
------------------------------- ----------- --------------- ------------------------------------------- --------
* Sienit Holding AD is the Group's joint venture partner in
Galleria Plovdiv AD (the Galleria Plovdiv project) and Turgovski
Park Kraimorie AD (the Bourgas Retail Park project). 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
the Trade Center Sliven EAD (the Sliven Project). Although the loan
from Property Capital Group is overdue for repayment, the partner
has been making regular instalment payments. The Group considers
this loan fully recoverable.
***Dickau Investments Limited ("Dickau") is the Group's joint
venture partner in Convergence Development Invest Srl. 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.
2010 Term Maturity Date Interest Rate Amount
Name EUR'000
------------------------------------------------------------- ------------------------------------------- --------
Sienit Holding AD* Overdue Overdue EURIBOR plus 5%, plus 10% penalty interest 1,851
Property Capital Group** Overdue Overdue EURIBOR plus 5% 324
Dickau Investments Limited*** 60 months 14 Sept 2012 10% 2,525
------------------------------- ----------- --------------- ------------------------------------------- --------
11 Capital and Reserves
Share Capital
2011 2011
Number EUR'000
-------------------------------------------- ----------- --------
Ordinary Shares of EUR0.80 each
In issue at 1 January and 31 December 2011 90,515,470 72,412
Shares cancelled during the year - -
In issue at 31 December 2011 90,515,470 72,412
-------------------------------------------- ----------- --------
2010 2010
Number EUR'000
-------------------------------------------- ----------- --------
Ordinary Shares of EUR0.80 each
In issue at 1 January and 31 December 2010 90,515,470 72,412
Shares cancelled during the year - -
In issue at 31 December 2010 90,515,470 72,412
-------------------------------------------- ----------- --------
At incorporation the authorised share capital of the Company was
EUR240 million divided into 300 million Ordinary Shares of EUR0.80
each.
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 assets.
Capital Management
The Board's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the 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.
Gearing may be employed by the Group with the aim of enhancing
shareholder returns. This would be in the form of bank borrowings,
secured on the investment portfolio.
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 2010 and 2011.
12 Basic and Diluted Loss per Share
Basic and diluted loss per share are calculated by dividing the
loss attributable to equity holders of the Company by the weighted
average number of ordinary shares in issue during the year.
2011 2010
----------------------------------------------------------------- -------- ---------
Loss attributable to equity holders of the Company (EUR'000) (5,618) (25,030)
Weighted average number of ordinary shares in issue (thousands) 90,515 90,515
----------------------------------------------------------------- -------- ---------
Basic and diluted loss per share (Euro cent per share) (6.21) (27.65)
----------------------------------------------------------------- -------- ---------
13 Trade and Other Payables
Group 31 December 2011 31 December 2010
EUR'000 EUR'000
----------------- ----------------- -----------------
Withholding tax 4 1
Trade creditors 52 18
Accruals 183 451
----------------- ----------------- -----------------
Total 239 470
----------------- ----------------- -----------------
Company 31 December 2011 31 December 2010
EUR'000 EUR'000
---------- ----------------- -----------------
Accruals 73 69
---------- ----------------- -----------------
Total 73 69
---------- ----------------- -----------------
14 Exchange Rates
The following exchange rates were used to translate assets and
liabilities into the reporting currency at 31 December 2011:
ROL 4.3197
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 2011 amounted to
EUR74,415 (2010: EUR103,860).
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, cashflow risk,
interest rate risk and price risk), credit risk and liquidity
risk.
Market price risk
The Company's strategy on 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 property price and property rental risk.
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 property rental risk.
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). As a result, the
Group is subject to the effects of exchange rate fluctuations with
respect to these currencies. The currency giving rise to this risk
is primarily Romanian Lei, as the Bulgarian Lev is pegged to the
Euro.
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
17 Financial Instruments continued
Foreign exchange risk continued
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.
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 2011 Assets Liabilities Net assets
EUR'000 EUR'000 EUR'000
------------------ -------- ------------ -----------
Romanian Lei 49 (1) 48
Bulgarian Lev 18 (1) 17
Euro 27,858 (237) 27,621
27,925 (239) 27,686
------------------ -------- ------------ -----------
31 December 2010 Assets Liabilities Net assets
EUR'000 EUR'000 EUR'000
------------------ -------- ------------ -----------
Romanian Lei 43 (2) 41
Bulgarian Lev 11 (3) 8
Euro 33,720 (465) 33,255
33,774 (470) 33,304
------------------ -------- ------------ -----------
At 31 December 2011, 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
EUR2,400 (2010: 5% EUR2,000).
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 11). 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.
17 Financial Instruments continued
Interest rate risk continued
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
2011 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% 313 - - - - - 313
Trade and other
receivables n/a n/a - - - - - 67 67
Cash and cash
equivalents - 0.1% 5,461 - - - - - 5,461
---------------- --------- --------- -------- -------- -------- -------- -------- ------------- --------
Total financial assets 5,774 - - - - 67 5,841
--------------------------- --------- -------- -------- -------- -------- -------- ------------- --------
Financial
liabilities
Trade and other payables - - - - - (239) (239)
--------------------------- --------- -------- -------- -------- -------- -------- ------------- --------
Total financial
liabilities - - - - - (239) (239)
--------------------------- --------- -------- -------- -------- -------- -------- ------------- --------
Total interest rate 5,774 - - - - - -
sensitivity gap
--------------------------- --------- -------- -------- -------- -------- -------- ------------- --------
31 December Average interest Less 1-3 3 months 1-5 years Over 5 Non-interest Total
2010 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% 324 - - - - - 324
Trade and
other
receivables n/a n/a - - - - - 53 53
Cash and
cash
equivalents - 0.1% 7,025 - - - - - 7,025
------------- ----------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total financial assets 7,349 - - - - 53 7,402
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Financial
liabilities
Trade and other payables - - - - - (470) (470)
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total financial
liabilities - - - - - (470) (470)
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total interest rate 7,349 - - - - - -
sensitivity gap
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
At 31 December 2011, should the interest rates have
increased/decreased by 25 basis points with all other variables
remaining constant, the decrease/increase in net assets
attributable to shareholders for the year would amount to
approximately EUR14,435 (2010: 25 basis points EUR18,373).
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.
17 Financial Instruments continued
Credit risk continued
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 2011 31 December 2010
EUR'000 EUR'000
---------------------------------- ----------------- -----------------
Loans to third parties (note 11) 313 324
Trade and other receivables 67 53
Cash at bank 5,461 7,025
---------------------------------- ----------------- -----------------
5,841 7,402
---------------------------------- ----------------- -----------------
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 11).
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 capital
injections may be required to support financing arrangements for
the joint venture companies. 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 2011 and 31 December
2010 represent trade creditors due within one month.
Fair values
The carrying amounts of all the Company's financial assets and
financial liabilities at the balance sheet 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 established to take advantage of opportunities that exist
in the property markets of South-East Europe. The principal target
countries are Bulgaria, Romania and Turkey, with the ability to
invest in Croatia and Slovakia.
The Company may invest in commercial, retail, residential and
industrial property, with a view to taking advantage of the
potential for capital appreciation. The Company primarily seeks to
invest in early stage developments; however it may also invest in
partially completed assets and 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.
18 Investment Policy continued
A proportion of the Group's portfolio may be held in cash or
cash-equivalent investments from time to time.
The Company will establish a subsidiary structure which will
primarily invest equity and debt financing of development projects
with the use of local special purpose vehicles ("SPVs"). The
Company intends that its SPV investments will be in the form of
partnerships with local or international property developers.
Pending investment, cash held will be invested in bank deposits
or fixed income securities issued by governments or banks but not
corporate bonds.
It may be advantageous for the Company to borrow at the level of
its SPV subsidiaries. The Company may negotiate suitable borrowing
facilities with one or more lenders. The Directors do not intend
the Company or its SPVs to borrow in respect of any property more
than 75 per cent of its value on completion.
The Company expects to invest in early stage projects with a
construction period of 2 to 4 years. Whilst the Company intends 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.
The Company may reinvest the 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.
It is anticipated that the Group's investment portfolio will be
between 6 to 12 investments. Upon completion of the investment
programme, it is anticipated that, at that time, no single
investment will represent more than 50 per cent of the Company's
total capital. In exceptional circumstances the Company may make an
investment which represents in excess of 50 per cent of the
Company's total capital. In such circumstances the anticipated
investment portfolio may be correspondingly reduced below the
number of investments described above.
19 Fair Value Information
The equity accounted joint venture companies' property
developments are carried at cost adjusted thereafter for the
Company's share of changes in the joint venture's net assets. The
remainder of the Company's financial assets and financial
liabilities at the balance sheet date were stated at fair
value.
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.
20 Commitments at the Balance Sheet Date
At the balance sheet date the Group had no outstanding
commitments.
21 Post Balance Sheet Events
Negotiations to reduce the liability with the sub-contractor of
Cascade Plaza have been finalised and the company has also reached
agreement with its financing banks on how to discharge this
liability. This required additional funding from the company's
shareholders with the amount required from ECDC being EUR
510,000.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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