Tower Group A/S hereby publishes interim release covering material events during the period 1 January 2011 to 31 March 2011 according to §27 (8) of the Danish Securities Trading Act.
The Company's agreements with its banks and the Company's financial position
During the 1st quarter 2011, Tower Group A/S (“the Company”) has seen no changes to its capital structure. However, as already announced in the annual report 2009/2010 the Company was during the 1st quarter 2011 unable to generate sufficient cash flows from operations (the Company's medium-term goal) to cover debt service requirements. As a result of cash flows which were lower than expected, the Company was still in breach of some of the covenants (default clauses) agreed with the senior banks in connection with the reconstruction in March 2010.
Under a “Wohlverhaltenserklärung” (good faith declaration) between the Company and the senior lenders at the end of December 2010, the senior lenders agreed to waive all events of default and to postpone repayments for the 4th quarter of 2010 and the 1st quarter of 2011. In March 2011, the agreement was extended to include the 2nd quarter of 2011 and now runs until the end of June 2011.
The agreement was made in order to enable the Company to continue the restructuring process. The Company has therefore been working actively with the lenders to create a business were the Company has a sustainable capital and repayment structure, which can be observed on the basis of realistic operational goals for the Company.
As part of the ”Wohlverhaltenserklärung”, the majority shareholder of the Company, BXR Tower B.V., supported the Company with two bridge loans in December 2010 and in March 2011, respectively, to cover operational and restructuring costs, including interest payments to senior banks at a total amount of EUR 3.9 million. A third bridge loan was on 18 May 2011 issued, increasing the total amount of the loans to EUR 5.0 million.
In the 1st quarter of 2011 the Company requested Ernst & Young to issue an opinion, based on IDW S6, a German high-level standard for restructuring statements as a confirmation of the actions taken to date, and to propose further restructuring elements which can be undertaken with banks and other stakeholders.
The Company expects that this process will be completed during the 2nd quarter of 2011 and that this opinion will provide the basis for a financial agreement between the company and the senior banks regarding continued support for the Company's restructuring. An integral step in this process is a second capital increase which the majority shareholder, BXR Tower B.V., has indicated its willingness to underwrite conditionally, and which is expected to be implemented by the end of the 2nd quarter of 2011.
If BXR Tower B.V. exercises its subscription rights in connection with the planned pre-emptive rights issue at the end of the 2nd quarter of 2011, the bridge loans granted will form part of the payment in the form of debt conversion.
The company's organisation
During the 1st quarter 2011, the Company has seen no changes to the organisation, and no material changes are planned for the rest of 2011.
With the recruitment of Friedrich Thiele as new CEO and Kai Wolfram as new CFO of the German operating companies, and ongoing management support from BXR Group, the organisational restructuring in Germany has now been completed on the management side.
The process of insourcing all management functions and all property administration to the headquarters in Berlin and the Wuppertal Branch has also been completed during the 1st quarter of 2011 and the management is now working on the implementation of new processes and new responsibilities.
Activities
The new management has initiated – and completed – several operational changes and improvements during the 1st quarter 2011, such as:
- Integration of a functional legal department with one full-time and one part-time lawyer specialising in real estate
- Recruitment of an HR specialist to create a functional HR department
- Completion of the data clearing process to identify all missing contract data in the property management IT system
- Establishing a functional dunning, collection and eviction process with the company's own people in Berlin in charge
- Establishing a functional dunning and collection process implemented by external advisors in Wuppertal
- Completion of the physical inspection of all empty apartments and improvement of unit repair and maintenance processes through implementation of the IT program TowerIS
- Reorganization of the letting and marketing department including recruitment of new head of letting and marketing
- Appointment of a new branch manager in Wuppertal with focus on asset management and third-party services
- Increasing the capacity in asset management, reporting and control tools.
During the 1st quarter of 2011, the management was able to show favourable results based on management focus on letting, unit repair and maintenance, dunning and collection and further data clearing:
- New letting exceeded notices by more than 120 tenants (net increase)
- Reducing backlog on repair and maintenance of approx. 320 units in the 1st quarter of 2011 with an average contract value of EUR 4,250
- Cash effect of collection and eviction procedures of t EUR 300 and a reduction of new provisions for uncollectible rent, before evictions, to about 5%
- Reducing vacancy rate by 0.8 percentage points from 14.8% to 14.0% at the end of March
On the basis of these first favourable results of the restructuring process, the management and the Board note that the company is moving in the right direction in achieving a turnaround in 2011. Based on the expectation of a favourable IDW S6 opinion from Ernst and Young, and the expected favourable result of the negotiations with Company's banks during the 2nd quarter and the expected successful implementation of the planned pre-emptive rights issue, the Company will in future have stronger liquid reserves and a financial basis for financing and initiating repairs and maintenance and for making capital investments to improve the value of the portfolio.
Other aspects
During the 1st quarter of 2011, the management decided to sell a property project under construction in Hamburg, Luruper Hauptstrasse. The Company started the negotiations at the end of January 2011. These negotiations were completed in the course of March/April 2011, and the property project was subsequently sold. The market value of the property project has been regulated so that the value is in accordance with the actual sales price of EUR 3.2 million (corresponding to DKK 23.9 million). As a consequence of the sale, the Company was able to reduce the debt by EUR 2.3 million and close a swap position of EUR 320,000.
The Danish Commerce and Companies Agency, which functions as the secretariat of the Danish Securities Council, has in a hearing letter of 27 November 2009 informed the Company that the Company's Annual Report for 2008/09 had been selected for accounting control. The Securities Council is in charge of checking that companies with securities adopted for trading on a regulated market observe the current accounting regulations in their annual and interim reports.
In addition to the letter of 27 November 2009, the Company has received a letter of 26 January 2010 from the Commerce and Companies Agency, in which the Agency asks additional questions and requests additional comments. The above letter also stated that this completes the accounting control.
The Company answered the Commerce and Companies Agency on 2 December 2009 and 29 January 2010, respectively. Five of six items in the accounting control case have now been solved; only the question regarding the valuation model remains, where the Company has used a "Discounted Cash Flow (DCF) model. After a meeting with the Commerce and Companies Agency on 2 May 2011, the Company and the Agency agreed on an interpretation of the decision of the Securities Council which led to an agreement to the effect that the Company was to present new argumentation, including complete arguments for the choice of certain parameters in the DCF model, which has been presented to the Agency.
Expectations for the future
Since the accounting year 2011 is still expected to be impacted by the implementation of the restructuring, the expectations for the year is a profit of DKK 0.0 to 10.0 million before tax and value adjustments.
Best regards
Tower Group A/S
Martin Coté
CEO
For questions regarding this announcement, please contact Martin Coté, tel. +420 725 716 755.
