30th May 2007 07:03
Kensington Group PLC30 May 2007 For immediate release 30 May 2007 Trading update for the 5 months to 30 April 2007 Trading conditions have been challenging in the first five months to 30 April2007. This has primarily been caused by intense competition from otherproviders, particularly those with access to lower cost funding, puttingadditional pressure on margins. In addition, more customers are redeemingoutside the early redemption charge (ERC) period which has reduced the value ofnew business and the amount of income expected from business already written.As a result, the short-term outlook for the business has deteriorated and 2007total revenue is expected to be significantly below 2006. Key operational highlights • Total new business completions for the Group (including KensingtonMortgages (KM), MPL, and Start) were over £1.5bn, which is in line with the sameperiod in 2006, with the total offer pipeline up 4% over the same period in 2006to £607m. Kensington has retained its risk based pricing principles and notchased volume growth. The mortgage book was £7.1bn at the end of April 2007,compared to £7.2bn at the end of November 2006. • Annualised net interest income as a percentage of average assets undermanagement was 2.1% in the period, compared to 2.6% in the year ended November2006. The Board expects that there will be continued pressure on the Group's netinterest margin as existing higher margin mortgages redeem and are replaced bythe lower margin loans currently being written. • Average Group gross reversionary margins on first charge new businessin the period were 2.6% down from 2.9% in the same period last year. The levelof interest received from borrowers in the initial lending period continues tobe significantly reduced by the current high levels of "teaser" discountsprevalent in the UK market. • The trend for more customers to wait until the end of the ERC periodto repay their mortgage has continued and the lower income from ERC receipts isreflected in the reduction in net interest income margin above. Average ERCincome received from ERC's in the period was 2.73% down from 3.46% in the sameperiod in 2006. • Asset quality across the Group portfolio remains strong. Thepercentage of accounts 90 days or more in arrears at the end of April was 9.25%,down from 10.46% at the end of April 2006 despite the impact of a maturingportfolio and higher levels of whole loan sales. Crystallised loan losses inthe five months were £13.6m, compared to £13.8m in the same period last year.The loan impairment charge for the period was £14.3m, compared to £22.9m in thesame period last year. At 30 April 2007, the weighted average indexedloan-to-value ratio (LTV) of the UK portfolio remained low at 67% (30 April2006, 69%) and 59% of mortgage assets under management had a debt service ratiobelow 25%. • The new broader product range at KM has been well received by themarket and KM's new business pipeline was £457m at the end of April, an increaseof 7% over the same period last year. Approximately 26% of the pipeline relatedto KM's specialist prime first-charge mortgage range which is at lower marginsthan the core adverse business, and which is covered by the recently announcedforward flow arrangement with Bradford & Bingley. • MPL has had a challenging start to the year, with completions in theperiod down by 24% compared to the prior period and the first charge pipeline at30 April 2007 44% lower than at the same time last year. MPL was loss making inthe period. In May 2007, MPL entered into a forward flow arrangement with athird party to originate a broad range of products including a range of highadverse/high LTV mortgages, which are outside the Kensington Group's riskcriteria. Kensington is evaluating a possible impairment in the carrying valueof the Group's investment in MPL, which at 30 April 2007 was approximately £27mincluding debt. • Start Mortgages, our mortgage business in Ireland, has once againperformed strongly, generating attractive profits. The business continues togrow, with an increase in completions to €303m in the period compared to €208min the same period last year, and margins remain strong. • Bluestep, a specialist lender in Sweden in which the Group has a 15%interest, performed in line with management's expectations. • The sale of TML, Kensington's direct to consumer mortgage business,was completed in April 2007. As previously reported, an exceptional charge ofapproximately £8m will be recognised this year. • During the period, £462m of mainly near prime business was soldthrough the established whole loan sale (WLS) programme. The average net returnon WLS's during the period was 1.16% which was significantly lower than the 2.2%average net return received in the first half of 2006, reflecting the change invalue of the loans, and slightly below the average net return achieved in thesecond half of 2006 at 1.3%. An additional £226m of specialist prime was soldin the period. • In March, the UK business completed a securitisation issuance underthe new KMS programme totalling £800 million which included collateraloriginated by KM and MPL. Demand among investors was strong, notwithstandingthe issues affecting the US sub- prime market. Capital requirements Kensington's principal source of funding working capital has been to raise debtsecured against the Group's retained interests in its securitised mortgage book. This funding has been used to support writing new business, contribute toGroup overheads and finance investments in new initiatives. Historically, on completion of a securitisation, the Group was able to raisedebt to cover all of the origination costs of the mortgages and thesecuritisation costs including a contribution of collateral to thesecuritisation vehicles. As the value of new business has reduced, the Group isno longer able to raise sufficient debt to cover all of these initial costs andtherefore requires working capital to be found from other sources. As a resultof this financing constraint, the Group has increased the proportion of wholeloan sales, which generate cash on disposal. The Board expects that in theregion of 60% of the Group's lending in 2007 will be sold (approximately 25% in2006). One consequence of the business review is that the Board has come to the viewthat, as an independent entity, the Group may not be able to raise sufficientcapital in the debt markets to support significant growth in the size of themanaged loan book. As at 25 May 2007, Kensington had outstanding debt including bank loans of£256.8m (£334.6m on 30 November 2006) secured against the Group's interests inits securitised mortgage book. The group also has a further £125m of subordinated debt which is due forrepayment in 2015. Business review The business review announced on 23 March 2007 is seeking to address thechallenges the business faces from increased competition, pressure on newbusiness margins, lower ERC income and a cost base which is too high as apercentage of income. In addition, restrictions under the Group's warehousefunding arrangements have limited the Group's ability to develop new productlines. The business review, which is ongoing, has identified a number ofimmediate initiatives: • A cost reduction programme targeting annualised savings in the regionof £8m to be delivered by the end of two years, including the elimination ofcertain duplicated functions across the Group and the automation of certainbusiness processes. • A £9m capital investment in information technology to increaseautomation, enhance efficiency and improve competitiveness at the point of sale. • Entry into a number of market segments where, subject to makingappropriate funding arrangements, Kensington will be able to leverage itsexisting distribution platform and underwriting skills. Initial estimates are that the one-off costs associated with the businessreview, implementation of the cost efficiency programme (including a propertyrental provision and related costs of approximately £6m) and a write-off ofcapitalised technology will be in the range of £20-25m and will be charged inthe current year. This estimate is before any potential impairment in thecarrying value of Kensington's investment in MPL and the approximately £8mexceptional charge in respect of TML. Outlook The Board is cautious about the short-term prospects for the Group and expects2007 total revenue to be significantly below 2006. The Boards of Kensington and Investec have reached agreement on the terms of arecommended offer for Kensington. Under the terms of the offer, each Kensingtonshareholder will receive 0.7 Investec shares plus a special dividend of 26 pence(payable by Kensington) for each Kensington share, valuing each Kensington shareat 519.5 pence per share based on an Investec share price of 705 pence per shareon 29 May 2007. The Board is unanimously recommending this offer from Investec, a specialistbanking group, which secures Kensington's future as part of a stronger groupwith complementary capabilities at a fair price. The Board believes that the combination of Investec's stronger balance sheet,access to lower cost of funding, and capital markets expertise, together withKensington's recognised brand, established distribution, innovative productrange, prudent risk management and track record for service excellence, create astrong combination for the growing non-standard mortgage marketplace. As the consideration for Kensington is primarily in the form of shares,Kensington's shareholders will have an opportunity to share in value createdfrom the combination, and will also benefit from Investec's broader franchiseacross a range of markets and geographies. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Investec