Global Investments

ANNOUNCEMENT OF THE FORWARD SALE OF THE COMPANY’S TWO BOEING 757-200 AIRCRAFT

http://info.sgx.com/webcoranncatth.nsf/V...30081E0E3/$file/27_20111212AnnouncementOfTheForwardSaleOfTheCompanyTwoBoeing757-200Aircraft.pdf?openelement [SGX Announcement]

The 2 aircraft (manufactured in 1993) are currently on lease to Thomson Airways to April 2013 generating quarterly rental revenue of approx $1.2 mil. It is great that the issue of re-delivery post 2013 has been settled with a forward sale to Fedex upon lease expiration in April 2013 (depending on the condition of the aircraft). The sale will lead to a net gain of $2.65 million in FY 13. It is likely that the debt will be repaid which will result in GIL becoming a debt-free investment company with additional $18 million worth of cash realized from the sale.

9M 2011 - 2 Aircraft

Revenue: $3.55 mil
Depreciation: $0.96 mil ($1.34 mil debt repaid)
Interest: $1.0 mil (7.0% interest rate)
PBT: $1.59 mil (distributable income lesser due to debt amortization)

Annualized PBT: $2.12 mil
Aircraft: $32.2 mil
Asset yield: 6.6%

Share price currently trading at 14.5 cents which translates to a dividend yield of 10.3%.

(Vested)

FLY Leasing Declares Fourth Quarter Dividend of $0.20 Per Share

http://www.flyleasing.com/contentDetail.asp?id=9155 [Press Release]

GIL has 4.1% stake in this aircraft leasing firm. FLY maintained its 4Q 2011 dividends and this should be booked into GIL's 1Q 2012 revenue. FLY dividends contributed 6.4% to GIL revenue in 9M 2011. FLY share price has appreciated over the last quarter so revaluation losses in the previous result will be partially recovered (on paper). If GIL succeed in selling its stake at 5% discount to the last traded price of $13.42, it would translate to a value of 3.0 SG cents per GIL share.

GIL share price closed at 15.2 cents and its results should be out in Feb 2012.

(Vested)

Note: GIL is not the usual 'yield' investment (like REITs etc) so do your own research.

GIL has provided a series of announcement of the outmost importance this evening - i) Release of FY 2011 results and declaration of 2H dividend and ii) Proposed Rights Issue.

i) GIL RECORDED A JUMP IN PROFIT OF 84.8% FOR THE FULL YEAR 2011

http://info.sgx.com/webcoranncatth.nsf/V...D00333C75/$file/01a_20120207_GIL_FY2011_ResultsAnnouncement.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...D00333C75/$file/01a_20120207_GIL_FY2011_ResultsAnnouncement.pdf?openelement [SGX Report]

http://info.sgx.com/webcoranncatth.nsf/V...D00333C75/$file/01c_20120207Declarationofdividend2H2011.pdf?openelement [Dividend]

http://info.sgx.com/webcoranncatth.nsf/V...D0033FFF2/$file/02b_20120207CurrentAssetReview4Q11.pdf?openelement [Asset Review]

http://info.sgx.com/webcoranncatth.nsf/V...D0033FFF2/$file/02a_120207_GIL_FY2011Presentation.pdf?openelement [PPT Slides]

A fairly steady result from GIL with rental income from its 2 aircraft, dividend income from its FLY Leasing shares and interest income from its legacy assets and recently purchased CLO and CDOs. GIL generated net operating cash-flow of $12.56 million and after servicing debt interest and debt principal repayment, it generated free cash-flow of $9.43 million of which $8.25 million was used to pay the dividend of 1.5 SG cents per share. It also made $22.0 million worth of acquisitions (primarily CDO and CLOs) while divesting $4.1 million worth of assets and received principal repayment of $14.8 million. This is one aspect of GIL which caught my eyes initially - dividends are generated from operating cash solely. There is no worry of self-liquidating as principal repayments are retained at Group level (barring defaults).

The B/S has remained healthy with $42.2 million worth of cash and $16.9 million worth of debt. The cash pile was inflated by the A$8.0 million redemption of Pepper Note 6 in Dec 2011. In addition to the current cash position, GIL had also signed agreements with FEDEX to divest its 2 aircraft currently on lease to Thomson Airways in April 2013 for US$2.65 million gain (book value: S$31.85 million). This means that by end of 2Q 2013 barring any new investments, the cash position will be significantly increased while the revenue will drop due to loss of income from Pepper Note 6 and the 2 aircraft (but partially offset by reduction of interest expense if loans are repaid). It does seem that STAM is trying to 'renovate' the Fund completely judging by the hoarding of cash and divestment of legacy assets and this brings us to the second part of the announcement...

ii) PROPOSED RENOUNCEABLE NON-UNDERWRITTEN RIGHTS ISSUE OF UP TO 275,104,260 NEW ORDINARY SHARES IN THE CAPITAL OF THE COMPANY (THE “RIGHTS SHARES”) AT AN ISSUE PRICE OF S$0.128 FOR EACH RIGHTS SHARE, ON THE BASIS OF ONE (1) RIGHTS SHARE FOR EVERY TWO (2) EXISTING ORDINARY SHARES IN THE CAPITAL OF THE COMPANY HELD BY SHAREHOLDERS OF THE COMPANY AS AT A BOOKS CLOSURE DATE TO BE DETERMINED, FRACTIONAL ENTITLEMENTS TO BE DISREGARDED

http://info.sgx.com/webcoranncatth.nsf/V...D00350145/$file/03_20120207ProposedRenounceableRI.pdf?openelement [Announcement]

Personally, I was shocked to see this as GIL doesn't have any outstanding debt and have a pretty large cash pile. This was an unexpected development and I look forward to more details on utilization of the proceeds. The only SSH (and Chairman) has agreed to take up his share of the rights. This is the second rights issue in 14 months from GIL. Granted, the first rights issue was fairly successful judging by the increase in DPU from 1.00 cents to 1.50 cents but I am not sure whether can it repeat this feat since the current dividend yield > 9.5%. The rationale of the rights:

Quote:Assuming that the Rights Issue is fully subscribed, the estimated gross proceeds of the Rights Issue is approximately S$35.2 million and the net proceeds of the Rights Issue, after deducting estimated expenses of approximately S$220,000, will amount to approximately S$35.0 million (“Net Proceeds”).

In view of the purpose of the Rights Issue as set out in further detail below, and in the reasonable opinion of the Directors, there is no minimum amount which must be raised from the Rights Issue.

On 5 December 2011, Shareholders approved the expansion of the Company’s investment policy to include investments in assets in different sectors through different means which include but are not limited to direct asset ownership, swaps, credit default swaps, debts, warrants, options, convertibles, preference shares, equity, guarantees of assets and performance, securities lending and participating loan agreements (but excluding direct investments in real estate and commodities).

In light of the Company’s expanded investment policy, the Net Proceeds will provide the Company with a ready source of funds which can be deployed for such investments. Some of the investment opportunities that the Company come across involve larger outlay per item, compared to past investments made in 2010 and 2011. It is with this in mind that the Board is once again approaching shareholders for a rights issue to build a bigger war chest to take advantage of the current disruption in the world markets and opportunities that may arise.

The rationale of the rights issue coupled with the expansion of the investment mandate in Dec 2011 SGM points to clinching of potential mega deals (relative to its currrent size) in 2012 which could transform GIL. However, without any details of such an investment (if any) or plans to utilize the $25 million net cash (and $30+ million sale proceeds in Apr 2013) and the drop in revenue from the redemption of Pepper Note 6 and sale of two aircraft in 2013, I am pretty apprehensive of a potential dividend decline.

Ultimately, the fate of funds like GIL and MIIF boils down to managerial ability hence STAM plays a pivotal role here. The Management is paid to add value into the Fund by buying low and selling high while trying to maintain a sustainable dividend profile with minimal (or no) debt. Assuming full subscription of the rights shares and the successful sale of the aircraft Apr 2013, STAM would have in excess of $100 million cash to invest. I will be watching this Fund closely. I wonder how the Market will react to this tomorrow.

(Vested)

PS: This is not the usual yield trust/fund.

Thanks for the update Nick, you pretty much covered all the bases here.

I would just add this though - I think the rights issue was coming. As I said in post #11, it is strongly in management's incentive to do raise AUM, and market cap to increase their fees. Remember that they also manage about S$3B in their funds under Temasek, so frankly, this small $100M GIL is paying them peanuts. The managers will understandably want to have higher fees from GIL to justify their commitment to it.

Assuming that they are going to have a rights issue at some point in time, I would prefer if they do it in a depressed market with lots of investment opportunities than in a bullish market where everything looks expensive. Granted, the share price might be below NTA during a depressed market and they might not be able to raise as much money. But as an investor, what I care about is my fund manager giving me good returns on my investment. If they raise funds during a depressed market and put it to good use, the better ROI attained should theoretically filter into upward share price action.

So I guess the question to ask is, is this a good time to put money into investment securities? I don't know what opportunity sets they are looking at, but if they are thinking of dipping their toes into equity markets...

Actually the 3-mth rally has been quite fierce for many asset classes: emerging market equities, high yield bonds, gold, distressed debt, penny stocks, European equities etc. So I'm not sure where they are seeing the opportunities for investment. But then again, that's why they are "professionals" and I'm just someone making noise in a web forum.

Yea...they probably want to raise the AUM. I am guessing this is why STAM has been hoarding cash in 2011 since it might be bearish ? The funny thing is that it might just continue to purchase 4-5% yielding instruments like the previous rights issue. In that case, the rights issue will be yield negative but it will make the Fund safer ? Is Stam forcing a yield compression ? I was thinking that if STAM just used its $100 mil cash (in Apr 2013) to just buy singtel stock - it would be yield negative, but wouldn't the fund trade at < 8% yield due to arbitrage ? So if GIL keeps buying 'safer' and lower yielding assets, wouldn't there will a yield compression and hence capital appreciation (and performance fees) ? What do you think ?

GIL is currently trading at 15.3 cents with 4.103 million shares traded.

(07-02-2012, 11:09 PM)Nick Wrote: This is the second rights issue in 14 months from GIL. Granted, the first rights issue was fairly successful judging by the increase in DPU from 1.00 cents to 1.50 cents but I am not sure whether can it repeat this feat since the current dividend yield > 9.5%.

They didn't even bother to round up the odd lots in the first rights issue. This would be a great chance to square things up.

I tried to relate "yield" to Cityspring. Both give about 10%, prone to rights, government backed, but the ease of valuing the underlying assets is very different.

(08-02-2012, 11:15 AM)Nick Wrote: The funny thing is that it might just continue to purchase 4-5% yielding instruments like the previous rights issue. In that case, the rights issue will be yield negative but it will make the Fund safer ? Is Stam forcing a yield compression ?

GIL reminds me a little of all the subprime mortgages packaged together with the prime ones into CDOs...
I do not think they are forcing a yield compression - because a rational market will supply adjust its price to get the same yield? (unless the Market is convinced that the dividend is MORE sustainable, less risky and hence demands a much lower yield)

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(08-02-2012, 11:50 AM)cif5000 Wrote: I tried to relate "yield" to Cityspring. Both give about 10%, prone to rights, government backed, but the ease of valuing the underlying assets is very different.

Correct me if i am wrong but i did a quick check in GIL's AR2010 and i do not see any gov entities (unlike Citispring) in the top20 shareholders. The biggest shareholder is the chairman (8%), don't tell me he is the trustee for Temasek/GIC?? hahaha

Hi Weijian,

STAM used the previous rights issue to purchase CLOs yielding 3-4% interest (lower risk I guess) and a single high yield (14%) product which I guess is much higher in risk. In Dec 2011, shareholders approved an expansion of the investment mandate to include convertible bonds, preference shares, warrants, unsecured debt, equities etc (but not commodities and real estate). These asset class are more liquid and may carry less risk ie investing $50 million in Singtel shares vs $50 million in a 7% CDO. Of course, this is very speculative but judging by the implied dividend yield currently, STAM needs to either make highly risky investment to prevent the DPU yield from dropping OR it buys less risky assets and hope the Market rates it higher. Either way, assuming no investments are made, by Apr 2013, cash will be its single largest asset class ! How they deploy it will make or break the Fund. Guess, have to wait and see...no point speculating. GIL is managed by STAM, a wholly owned subsidiary of Temasek Holdings. The only substantial shareholder is the Chairman of the GIL. Temasek has no direct stake in GIL.

(09-02-2012, 03:43 PM)weijian Wrote:

(08-02-2012, 11:50 AM)cif5000 Wrote: I tried to relate "yield" to Cityspring. Both give about 10%, prone to rights, government backed, but the ease of valuing the underlying assets is very different.

Correct me if i am wrong but i did a quick check in GIL's AR2010 and i do not see any gov entities (unlike Citispring) in the top20 shareholders. The biggest shareholder is the chairman (8%), don't tell me he is the trustee for Temasek/GIC?? hahaha

Sorry. Didn't mean backed by equity. Was referring to STAM.

(08-02-2012, 11:15 AM)Nick Wrote: Is Stam forcing a yield compression ?

That's an interesting thought. Certainly a risk worth thinking about if you were an investor!

My attitude towards this is very simple: if I were a shareholder of GIL, I would want STAM to be generating outsized returns on equity. I'm thinking at least about 10% unlevered since they have a wide mandate. It's another question altogether if they are levered.

From management's perspective, if they force a yield compression, they may attain high incentive fees in the short term - in fact, the threshold for incentive fees is easier to hit than the threshold for higher base fee rate of 1.5%, and after this rights issue, they are probably just another rights issue away from hitting their threshold for incentive fees.

But if they take the short-term, yield-compression approach to getting incentive fees quickly, that's a cigar butt approach that will not give them substantial incentive fees in the long term. Remember, they have to hit a 8% benchmark return before they can get an incentive fee. Besides, I feel it is easier to make the market adjust the share price upwards for a stock that is generating high returns, than close the NAV-share price gap of a flagging one (4% or so returns). And lastly, it would be bad for their reputation if they were managing a fund that only returned 4-6% a year.

So personally, if I were them, I would rather go for the long-term approach and aim for >8% yield so that my incentive fees can keep on coming, rather than treat the fund as a cigar butt and smoke the last puff.