TIDMDNA3
RNS Number : 6649U
Doric Nimrod Air Three Limited
30 July 2020
DORIC NIMROD AIR THREE LIMITED
(Legal Entity Identifier: 213800BMYMCBKT5W8M49)
ANNUAL FINANCIAL REPORT
The Board of the Company is pleased to announce its results for
the year ended 31 March 2020.
To view the Company's Annual Financial Report please follow the
link below:
http://www.rns-pdf.londonstockexchange.com/rns/6649U_1-2020-7-30.pdf
In addition, to comply with DGTR 4.1 please find below the full
text of the annual financial report. The report will also shortly
be available on the Company's website, www.dnairthree.com .
ANNUAL GENERAL MEETING
Notice of the Annual General Meeting of the shareholders of the
Company (the "AGM") will be published in due course.
For further information, please contact:
For administrative and company information:
JTC Fund Solutions (Guernsey) Limited
+44 (0) 1481 702400
For shareholder information:
Nimrod Capital LLP
+44 (0) 20 7382 4565
OF ANNOUNCEMENT
E&OE - in transmission
Doric Nimrod Air Three Limited
Consolidated Annual
Financial Report
From 1 April 2019 to
31 March 2020
SUMMARY INFORMATION
Listing Specialist Fund Segment of the London
Stock Exchange's Main Market
Ticker DNA3
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Share Price 35.00 pence (as at 31 March 2020)
34.00 pence (as at 24 July 2020)
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Market Capitalisation GBP 74.80 million (as at 24 July 2020)
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Current / Future Anticipated Current dividends are 2.0625 pence
Dividend per quarter per share (8.25 pence per
annum) and it is anticipated that this
will continue until the aircraft leases
begin to terminate in 2025.
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Dividend Payment Dates April, July, October, January
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Currency Sterling
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Launch Date / Share Price 2 July 2013 / 100 pence
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Incorporation and Domicile Guernsey
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Aircraft Registration A6-EEK (29 August 2025),
Number A6-EEO (29 October 2025),
(Lease Expiry Dates including A6-EEM (14 November 2025),
2 year extension) A6-EEL (27 November 2025)
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Asset Manager Amedeo Management Limited
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Corporate and Shareholder Nimrod Capital LLP
Adviser
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Administrator JTC Fund Solutions (Guernsey) Limited
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Auditor Deloitte LLP
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Market Makers finnCap Ltd
Investec Bank
Jefferies International Ltd
Numis Securities Ltd
Shore Capital Limited
Winterflood Securities Ltd
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SEDOL, ISIN, LEI B92LHN5, GG00B92LHN58, 213800BMYMCBKT5W8M49
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Year End 31 March
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Stocks & Shares ISA Eligible
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Website www.dnairthree.com
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Please note that the Group has determined that the operating
leases on the Assets are for 12 years based on an initial term of
10 years followed by an extension term of 2 years. Should the
lessee choose to exit a lease at the end of the initial term of 10
years an early termination payment equal to the present value of
the Sterling rent that would have been payable for the extension
term of 2 years would be due. For the purpose of this report the
leases are all referred to as 12 year leases.
COMPANY OVERVIEW
Doric Nimrod Air Three Limited ("DNA3" or the "Company") is a
Guernsey company incorporated on 29 March 2012.
Pursuant to the Company's Prospectus dated 20 June 2013, the
Company, on 2 July 2013, offered its shares for issue by means of a
placing and raised approximately GBP211 million by the issue of
ordinary preference shares (the "Shares") at an issue price of 100
pence each (the "Placing"). The Company's Shares were admitted to
trading on the Specialist Fund Segment ("SFS") of the London Stock
Exchange's Main Market on 2 July 2013.
As at 24 July 2020, the last practicable date prior to the
publication of this report, the Company's total issued share
capital consisted of 220,000,000 Shares and these Shares were
trading at 34.00 pence per Share.
Investment Objectives and Policy
The Company's investment objective is to obtain income returns
and a capital return for its shareholders (the "Shareholders") by
acquiring, leasing and then selling aircraft (each an "Asset" or
"Assets" and together the "Assets or "Aircraft""). To pursue its
investment objective, the Company has used the net proceeds of
placings and other equity capital raisings, together with debt
facilities (or instruments), to initially acquire four Airbus A380
Aircraft which are leased to Emirates, the national carrier owned
by The Investment Corporation of Dubai based in Dubai, United Arab
Emirates.
DNA Alpha
The Company has one wholly-owned subsidiary: DNA Alpha Limited
("DNA Alpha") which holds the Assets for the Company. Together the
Company and DNA Alpha are known as the "Group".
The first Asset was acquired by DNA Alpha on 29 August 2013 for
a purchase price of $245 million. Upon delivery, DNA Alpha entered
into an operating lease with Emirates, pursuant to which the first
Asset has been leased to Emirates for an expected initial term of
10 years, ending August 2023, with an extension period of two years
ending August 2025, in which rental payments reduce. The present
value of the remaining rentals in the extension period at the end
of the initial 10 year lease must be paid even if the option is not
taken.
The second Asset was acquired by DNA Alpha on 29 October 2013
for a purchase price of $245 million. Upon delivery, DNA Alpha
entered into an operating lease with Emirates, pursuant to which
the second Asset has been leased to Emirates for an expected
initial term of twelve years, with fixed lease rentals for the
duration. The initial lease is for 10 years ending October 2023,
with an extension period of two years ending October 2025, in which
rental payments reduce. The present value of the remaining rentals
in the extension period at the end of the initial 10 year lease
term must be paid even if the option is not taken.
The third Asset was acquired by DNA Alpha on 14 November 2013
for a purchase price of $245 million. Upon delivery, DNA Alpha
entered into an operating lease with Emirates, pursuant to which
the third Asset has been leased to Emirates for an expected initial
term of twelve years, with fixed lease rentals for the duration.
The initial lease is for 10 years ending November 2023, with an
extension period of two years ending November 2025, in which rental
payments reduce. The present value of the remaining rentals in the
extension period at the end of the initial 10 year lease term must
be paid even if the option is not taken.
The fourth Asset was acquired by DNA Alpha on 27 November 2013
for a purchase price of $245 million. Upon delivery, DNA Alpha
entered into an operating lease with Emirates, pursu ant to which
the fourth Asset has been leased to Emirates for an expected
initial term of twelve years, with fixed lease rentals for the
duration. The initial lease is for 10 years ending November 2023,
with an extension period of two years ending November 2025, in
which rental payments reduce. The present value of the remaining
rentals in the extension period at the end of the initial 10 year
lease term must be paid even if the option is not taken.
DNA Alpha acquired the Assets, using a combination of a portion
of the proceeds of the issue of the Ordinary Shares by the Company
together with the proceeds of the sale of Equipment Notes issued by
DNA Alpha (the "Equipment Notes") and the initial rent payment
pursuant to the relevant operating leases. The Equipment Notes were
acquired by two separate pass through trusts using the proceeds of
their issue of enhanced equipment trust certificates (the "EETCs")
as detailed within the Offering Circular issued by DNA Alpha dated
10 July 2013.
Further information about the construction of these leases is
available in note 3 to the financial statements.
The EETCs, with an aggregate face amount of approximately $630
million, are admitted to the official list of the Euronext Dublin
and to trading on the Main Securities market thereof and will
mature on 30 May 2025.
Emirates bears all costs (including maintenance, repair; and
insurance) relating to the Aircraft during the lifetime of the
lease
Distribution Policy
The Company currently targets a distribution of 2.0625 pence per
Share per quarter.
There can be no guarantee that dividends will be paid to
Shareholders and, if dividends are paid, as to the timing and
amount of any such dividend. There can also be no guarantee that
the Company will, at all times, satisfy the solvency test required
to be satisfied pursuant to section 304 of The Companies (Guernsey)
Law, 2008, as amended (the "Law") enabling the Directors to effect
the payment of dividends.
Performance Overview
All payments by Emirates have, to date, been made in accordance
with the terms of the respective leases.
During the financial year under review and in accordance with
the Distribution Policy the Company declared four interim dividends
of 2.0625 pence per Share. Two interim dividends of 2.0625 pence
per Share have been declared after the reporting period. Further
details of dividend payments can be found on page 20.
Return of Capital
The Company intends to return to Shareholders the net capital
proceeds if and when the Company is wound up (pursuant to a
Shareholder resolution, including the Liquidation Resolution
below), subject to compliance with the Company's Articles of
Incorporation (the "Articles") and the applicable laws (including
any applicable requirements of the solvency test contained
therein).
Liquidation Resolution
Although the Company does not have a fixed life, the Articles
require that the Directors convene a general meeting of the Company
in November 2026 where an ordinary resolution will be proposed that
the Company proceed to an orderly wind-up at the end of the term of
the leases (the "Liquidation Resolution"). In the event that the
Liquidation Resolution is not passed, the Directors will consider
alternatives for the future of the Company, including re-leasing
the Assets, or selling the Assets and reinvesting the capital
received from the sale of the Assets in other aircraft.
CHAIRMAN'S STATEMENT
During the year from 1 April 2019 until 31 March 2020 (the
"Period") the Company has declared and paid four quarterly
dividends of 2.0625 pence per share, equivalent to 8.25 pence per
share per annum.
The Company's investment objective is to obtain income returns
and a capital return for its Shareholders by acquiring, leasing and
then selling aircraft. The Group owns four Assets. Upon the
purchase of each aircraft, the Company's subsidiary entered into
operating leases on the Assets for 12 years based on an initial
term of 10 years followed by an extension term of 2 years. Should
the lessee choose to exit a lease at the end of the initial term of
10 years an early termination payment equal to the present value of
the Sterling rent that would have been payable for the extension
term of 2 years would be due. For the purpose of this report the
leases are all referred to as 12 year leases.
The debt portion of the funding will be fully amortised over the
term of each lease, which will leave the Aircraft unencumbered on
the conclusion of the lease. Emirates bears all costs (including
maintenance, repair and insurance) relating to the aircraft during
the lifetime of the leases and all payments thus far by Emirates
have been made in accordance with the terms of the leases. At 24
July 2020, the latest practical date prior to this report, the
Company had outstanding debt associated with the aircraft totaling
USD 167.2 million (36% of the initial balance) as well as
unencumbered cash resources of GBP 7.5 million. The Company's first
lease expiry falls due in August 2025.
All payments by Emirates have been made in accordance with the
terms of the lease.
As a result of the COVID-19 pandemic the global aviation
industry has faced widely reported and extreme pressures, which
could have an impact and tenor that may exceed that of 9/11. The
International Air Transport Association ("IATA") expect passenger
revenues to be USD 314 billion below 2019 (-55%), having revised
their initial estimate further to reflect a deeper decline. The
liquidity and creditworthiness of airlines, both large and small,
has come sharply into focus while a significant part of the global
aircraft fleet remains grounded. In the face of such pressures it
is very disappointing, but ultimately unsurprising, to note the
significant fall in the Company's share price over the Period. At
the start of 2020 the share price was trading at around 71 pence
but had fallen to 35 pence by the Company's financial year end on
31 March. At the time of writing the share price is 34.00 pence,
representing a market capitalisation of GBP 74.80 million based on
the 220,000,000 shares in issue.
Emirates, the sole lessee of the Company, reported cash assets
of USD 5.5 billion as at 31 March 2020. Further, Dubai's Crown
Prince Sheikh Hamdan bin Mohammed highlighted that the Government
is "fully committed to supporting Emirates in the current critical
period" and "as a shareholder of Emirates, the Government will
inject equity considering its strategic importance to the Dubai and
UAE economy and the airline's key role in positioning Dubai as a
major international aviation hub". Whilst Emirates do not have a
formal credit rating they have previously issued unsecured USD
bonds with maturities in 2023, 2025 and 2028, at the time of
writing these instruments are trading at approximately 96 cents, 96
cents and 92 cents respectively, equivalent to USD running yields
in the range of roughly 4.1% to 4.9%. Yields of this level are
typically not representative of an entity that is not expected to
service its obligations or is at significant risk of default.
Whilst some airlines have scaled back (Lufthansa) or even phased
out (Air France) the A380 from their future fleet plans the Board
takes comfort that Emirates continues to demonstrate support for
the model which has formed a key part of the airlines strategy for
over a decade. Emirates President, Sir Tim Clark, recently noted
that he will not "bottle out on the big bird" because "the A380 has
defined us. As demand returns, and given the slot availability at
prime hubs, there will be a place for it. I'm hoping by April 2022,
all our A380s will be flying again." Further, Emirates Chief
Operating Officer, Adel Al Redha commented in July that he expects
"60% to 70% of the current A380 fleet to be back in the air by
December 2020" while "the airline plans to keep all 115 of the
double-decker jets", limited to a potential change in fleet size
due to COVID-19. Further details on Emirates and the A380 can be
found in the Asset Manager's report by Amedeo Management Limited
("Amedeo") .
Following a thorough assessment with our Asset Manager and in
light of both COVID-19 and the continued lack of secondary market
development for the Airbus A380 aircraft, your Board has elected to
change the valuation basis for the Company's Assets from the
assumption that there would be a balanced market at lease expiry,
where supply and demand for the A380 are in equilibrium (so called
'future base values') to one characterised by less favourable
market conditions for the seller, including but not limited to an
imbalance of supply and demand in the aircraft type. These values
are called 'future soft values'. As a result of this change, and a
general weakening in widebody value forecasts, which have been more
pronounced with respect to the A380, the value of the Company's
Assets, on a future soft value (uninflated) basis, has declined by
GBP 146.8 million (approximately 45%) to GBP 178.5 million (from
GBP 325.3 million last year) at the expiry of the lease. On a USD
basis the decline is approximately 48.8%. This valuation would
represent a potential capital return in excess of the current share
price if realised and subject to the prevailing GBP/USD exchange
rate. As part of this year's impairment review an impairment charge
of approximately GBP 56.17 million has been recognised (further
details on residual value and the impairment test can be found in
notes 2-m, 3 and 10 of the accounts).
I am pleased to highlight that a comprehensive Environmental,
Social and Governance ("ESG") Policy is now included within this
report. This provides Shareholders with further detail on the
Company's business model and matters such as the environmental and
social considerations of the aviation industry and the importance
of high standards of Corporate Governance. Your Board recognises
the increasing importance of ESG matters in relation to
shareholders' investment considerations and has sought to address
the topic in a pragmatic fashion.
The operational risks as a result of the COVID-19 pandemic have
been considered by the Board and updates on operational resilience
were received from the Asset Manager and other key service
providers. Your Board continued to operate effectively during the
lock-down period utilising both telephone and video conferencing to
maintain contact with our advisors and auditors. The Board were
satisfied that the key service providers have the ability to
continue to operate. Amedeo continues to monitor the lease and is
in frequent contact with the lessee, and reports regularly to the
Board. Nimrod Capital LLP ("Nimrod" or the "Corporate and
Shareholder Adviser") continues to liaise between the Board and
Shareholders.
Shareholders should note that while the underlying cash flows
received during the Period have been as anticipated, the financial
statements do not, in the Board's view, properly convey this
economic reality due to the accounting treatments for foreign
exchange, rental income and finance costs, as required by
International Financial Reporting Standards ("IFRS").
For instance the entirety of the rental income that is
receivable under a 12 year lease is credited evenly over each of
the 144 months of the lease. However rental income is not received
in this uniform pattern, although it does closely match the
similarly uneven pattern of debt servicing and other payments. The
mismatch in timing between the receipt and recognition of rental
income results in large deferred income or accrued income balances
in the balance sheet.
Similarly, the relevant accounting standards require that
transactions denominated in currencies other than the presentation
currency (including, most importantly, the cost of the Aircraft)
are translated into the presentation currency at the exchange rate
ruling at the date of the transaction whilst monetary items
(including also very significantly, the outstanding borrowings) are
translated at the rate prevailing on the reporting date. The result
is that the figures sometimes show large mismatches which are
reported as unrealised foreign exchange differences - although the
distortive effect becomes less pronounced over time as debt is paid
down and as a result of the impairment adjustment.
On an on-going basis and assuming the lease rental is received
and the loan payments are made as anticipated, such exchange
differences do not reflect the commercial substance of the
situation in the sense that the key transactions denominated in US
dollars are in fact closely matched. Rental income received in US
dollars is used to make loan repayments due which are likewise
denominated in US dollars. Furthermore, the US dollar lease rentals
and loan repayments are fixed at the inception of the lease and are
very similar in amount and timing.
The notice of the next Annual General Meeting of the
Shareholders of the Company will be published in due course.
The Board encourages Shareholders to read the Company's
quarterly fact sheets which we believe provide a great deal of
interesting information and we hope these regular reports, in
addition to the communication you receive from Nimrod, are useful
and informative. We welcome Shareholder engagement and feedback and
encourage you to contact Nimrod to request a meeting or to relay
any feedback.
Finally, on behalf of the Board, I would like to thank our
service providers for all their help and, most importantly, all
Shareholders for their continuing support of the Company during
these turbulent times. I look forward to keeping all Shareholders
up to date with further progress.
Charles Wilkinson
Chair
30 July 2020
ASSET MANAGER'S REPORT
At the request of the Directors of the Company, this commentary
has been provided by the Asset Manager of the Company.
COVID-19
The coronavirus COVID-19 pandemic continues to impact private
and economic life worldwide. The consequences of COVID-19 are far
reaching and changing at a significant pace. The impact of this
pandemic on the aviation sector has been significant with a large
part of the global passenger aircraft fleet grounded. This Asset
Manager's R eport is exclusively based on known facts at the time
of writing and does not seek to draw on any speculation about any
possible future, long-term impacts of the pandemic on the aviation
sector or the Company specifically and should be read in such
context.
1. The Assets
The Company acquired four Airbus A380 aircraft by the end of
November 2013. Since delivery, each of the four aircraft has been
leased to Emirates - the national carrier owned by the Investment
Corporation of Dubai, based in Dubai, United Arab Emirates - for a
term of 12 years with fixed lease rentals for the duration. In
order to complete the purchase of the aircraft, DNA Alpha, a wholly
owned subsidiary of the Company, issued two tranches of EETCs - a
form of debt security - in July 2013 in the aggregate face amount
of USD 630 million. The EETCs are admitted to the official list of
the Euronext Dublin and to trading on the Main Securities market
thereof. DNA Alpha used the proceeds from both the equity and the
EETCs to finance the acquisition of the four new Airbus A380
aircraft.
The four Airbus A380 aircraft bear manufacturer's serial numbers
(MSN) 132, 133, 134 and 136.
The four A380s owned by the Group have been parked at Dubai
International Airport ("DXB") and Dubai World Central (" DWC" )
since the end of March 2020, due to the ongoing COVID-19 crisis
.
Aircraft utilisation for the period from delivery of each Airbus
A380 until the end of May 2020 was as follows:
MSN Delivery Date Flight Hours Flight Cycles Average Flight
Duration
132 29/08/2013 31,009 3,619 8 h 35 min
-------------- ------------- -------------- ---------------
133 27/11/2013 31,351 3,298 9 h 30 min
-------------- ------------- -------------- ---------------
134 14/11/2013 29,762 3,157 9 h 25 min
-------------- ------------- -------------- ---------------
136 29/10/2013 31,567 3,331 9 h 30 min
-------------- ------------- -------------- ---------------
Maintenance Status
Emirates maintains its A380 aircraft fleet based on a
maintenance programme according to which minor maintenance checks
are performed every 1,500 flight hours, and more significant
maintenance checks ("C checks") at 36-month or 18,000-flight hour
intervals, whichever occurs first.
Due to the continuing COVID-19 pandemic, Emirates has stored the
aircraft owned by the Group in Dubai. The lessee has "a
comprehensive aircraft parking and reactivation programme in place,
that strictly follows manufacturer's guidelines and maintenance
manuals". In addition, Emirates has enhanced standards and
protocols of their own, to protect and preserve the Assets during
the downtime. This includes the watertight sealing of all apertures
and openings through which environmental factors - sand, water,
birds, and insects - can find their way inside an aircraft. During
parking, maintenance teams complete periodic checks at different
intervals. Depending on the reactivation date of a specific
aircraft, the lessee might defer due maintenance checks, which are
calendar-based, until that time. This would allow the lessee to
make use of the full maintenance interval once the operation of a
specific aircraft resumes.
Emirates bears all costs (including for maintenance, repairs and
insurance) relating to the aircraft during the lifetime of the
respective leases.
Inspections
The Asset Manager conducted physical inspections and records
audits of the aircraft as shown in the table below. The condition
of the aircraft and technical records were in compliance with the
provisions of the respective lease agreements.
MSN Last Inspection MSN Last Inspection
132 11/2019 134 01/2020
---------------- ---- ----------------
133 01/2020 136 01/2020
---------------- ---- ----------------
2. Market Overview
Air passenger traffic worldwide is currently being affected by
the COVID-19 virus. In response to the pandemic, governments have
been imposing severe border restrictions and airlines have
subsequently sharply reduced capacity due to the significant drop
in passenger demand. IATA reported that markets that comprise 98%
of all passenger revenue worldwide are subject to some form of
severe restrictions, including outright border closures, partial
travel bans, and mandatory quarantines for arriving passengers.
Aerospace data provider, Cirium estimates that the number of
aircraft parked due to the pandemic likely peaked at nearly 17,000
widebodies, narrowbodies and regional jets on 22 April 2020,
representing approximately 64% of the total global fleet.
Given the pattern of previous epidemics, IATA anticipates that
the impact on aviation will last a number of months (typically 6-7
months) with the greatest effects realised after 2-3 months.
However, IATA also notes that an economic recession could delay any
recovery past this six-month period seen in previous epidemics.
Fiscal stimulus from governments is expected to lessen recessionary
impacts. In April, IATA updated its initial assessment of the
COVID-19 impact and now anticipates 2020 global revenue losses for
the passenger business of USD 314 billion due to the broader
spreading of COVID-19. This represents a 55% fall in global airline
passenger revenues. IATA's latest impact assessment now points to
air passenger volumes contracting by 48% year-on-year in 2020.
IATA did report that Chinese passenger numbers have begun to
increase and that passenger yields have stabilized, with March
domestic yields thus far slightly exceeding those in the same month
during 2019. Further, it was encouraged by fiscal stimulus actions
and intentions declared by governments around the world. The
governments of many large economies with significant air travel
markets are expected to provide stimulus packages falling in the
range of 10-20% of GDP.
During the first quarter of 2020 revenue passenger kilometers
("RPKs") fell by 22.2% compared to the same period in the previous
year, while capacity in available seat kilometers ("ASKs"),
declined by 14.7%, resulting in a Passenger Load Factor ("PLF") of
73.7%, a decline of 7.1 percentage points. With a rapid advance of
COVID-19 in March, RPKs came in 52.9% lower than in March 2019
marking the largest decline since IATA started to collect data in
1990. The global load factor was only 60.6%. Once the travel
restrictions and lockdowns are lifted, IATA expects the willingness
of consumers to travel by air to remain limited initially, in
particular on international markets. According to IATA,
industry-wide passenger traffic, measured in RPKs, grew at a rate
of 4.2% in the calendar year 2019, compared to the year before. At
the same time, industry-wide capacity, measured in ASKs, increased
by 3.4% against the previous year. This resulted in a 0.6
percentage point increase in the worldwide PLF to 82.6%.
In 2019, passenger traffic in the Middle East has increased by
2.3% against the previous year. Capacity grew marginally by 0.1%,
resulting in a 1.7 percentage point increase in PLF to 76.2%.
During the first quarter of 2020 RPKs in this region fell by 13.2%
compared to the same period in the previous year, while capacity in
ASKs declined by 10.8%, resulting in a PLF of 71.6%, a decline of
1.9 percentage points.
Source: Cirium, IATA
(c) International Air Transport Association, 2019. Air Passenger
Market Analysis January 2020. Air Passenger Market Analysis March
2020. Airlines Financial Monitor February 2020. COVID-19 Updated
Impact Assessment 14
April 2020. All Rights Reserved. Available on the IATA Economics page .
3. Lessee - Emirates
Network
Due to COVID-19 and the resulting travel restrictions and entry
requirements imposed by governments all around the world, Emirates
temporarily suspended its passenger operations on 25 March. On the
same day Dubai's two airports, DXB and DWC, closed to the
travelling public, but continued to service emergency evacuation
and cargo flights.
As from 21 May Emirates resumed scheduled passenger services to
initially nine destinations and the carrier expects to bring its
network gradually to over 50 cities in July. Starting from
mid-July, the A380 will return to a scheduled service, initially to
London and Paris. Emirates is "looking forward to gradually
introduce our A380 into more destinations according to the travel
demand on specific destinations", said Adel Al Redha, the airline's
Chief Operating Officer in a company statement. Furthermore, new
protocols will allow Dubai to re-open for business and leisure
visitors from 7 July, allowing international travel for UAE
citizens, residents, and tourists.
Emirates' president Sir Tim Clark has forecast that demand will
recover over a period of time with Emirates' operating network
returning to pre-COVID-19 levels by 2024. Ultimately, however, he
believes the recovery to be dependent on the creation of a
vaccine.
Fleet
Emirates received six new aircraft during the 2019/20 financial
year, all Airbus A380s, while it phased out six older aircraft,
comprising four Boeing 777-300ERs, one Boeing 777-300 and one
Boeing 777 Freighter. This left Emirates' fleet count at 270
aircraft with an average fleet age of 6.8 years as of the end of
March 2020. Deliveries of Emirates' latest orders for 50 Airbus
A350 XWBs and 30 Boeing 787 Dreamliner aircraft are not expected to
begin until 2023. The first Boeing 777X is now scheduled to arrive
in 2022. Tim Clark hints that the airline will seek to renegotiate
the size or schedule of these commitments, but not until it better
understands the impact of COVID-19 on its business.
Emirates is the largest operator of the Airbus A380 and the
aircraft type remains popular among Emirates' customers, as
demonstrated by the previously high load factors on the aircraft
type before COVID-19 hit the industry. Emirates has 115 Airbus
A380s in its fleet, which served 53 destinations, or about 34% of
Emirates' network in the 2019/20 financial year. In total, A380s
carried 43% of Emirates' passengers and the lessee states in its
annual financial report that the A380 will remain the cornerstone
of its fleet mix and product offering well into the 2030s. Tim
Clark recently noted he remains "a great believer in the qualities
of the A380, and when fuel is at USD 30-40 a barrel, it a good cash
producer and good for the bottom line, providing we can fill it and
we don't have social distancing rules".
The table below details the passenger fleet activity as of 30
June 2020:
Aircraft Grounded Active
Type
A380 115 0
--------- -------
777 39 104
--------- -------
Total 154 104
--------- -------
% 60% 40%
--------- -------
Source: Cirium as of 30 June 2020
Tim Clark expects all Emirates A380s to return to the skies by
April of 2022. Contrary to previous suggestions that the airline
would decommission a large portion of its A380 fleet he noted:
"We're not getting rid of any of them apart from I think three that
are coming out ... this year." However, the lessee will reduce its
fleet over time and indicated last year, that 80 to 100 A380 could
remain in service, depending on the time horizon. Separately, Adel
Al Redha, the lessee's chief operating officer, commented in early
July, that he expects "60% to 70% of the current A380 fleet to be
back in air by December this year".
Notwithstanding the unprecedented drop in demand for flight
tickets due to COVID-19, the airline was quick in adapting its
resources to benefit from a strong surge in air cargo demand: By
the end of May 2020 the airline was able to build up substantial
cargo-only operations with more than 80 Boeing 777-300ER passenger
aircraft in the air, complemented by 11 Boeing 777 freighters. Tim
Clark was pleased with the cash flow these services are able to
generate in challenging times: "Cargo operations are never going to
produce the kind of income you'll get from passenger operations,
but they certainly kept the wolf from the door."
Key Financials
In the 2019/20 financial year, ended on 31 March 2020, Emirates
recorded its 32(nd) consecutive year of profit despite negative
impacts from the 45-day runway closure at DXB and the COVID-19
pandemic. Largely due to these external factors as well as a
negative currency impact of AED 572 million (USD 156 million),
total revenue declined by 6% to AED 92.0 billion (USD 25.1 billion)
for the financial year. However, in the face of these pressures,
Emirates recorded a profit of AED 1.1 billion (USD 288 million).
This was a 21% increase over the results of the previous financial
year. The profit margin amounted to 1.1%.
During the 2019/20 financial year, Emirates carried 56.2 million
passengers, down 4% compared to the previous financial year.
However, with a seat capacity reduction of 6%, the airline achieved
a passenger seat load factor of 78.5%, an improvement over the load
factor of 76.8% in the previous financial year.
Emirates' total operating costs decreased by 10% during the
2019/20 financial year. This was largely attributable to
developments in Emirates' fuel costs. The decline in the average
cost of fuel of 9% during the financial year, together with the
capacity reduction, resulted in a 15% decrease in the airline's
fuel bill to AED 26.3 billion (USD 7.2 billion). Fuel accounted for
31% of operating costs and remained the largest cost component for
the airline.
While Emirates maintains that it has a strong balance sheet with
a substantial cash position, the airline is taking additional
measures to protect its cash flow through cost savings measures,
reductions to discretionary capital expenditure, and engaging with
business partners to improve working capital. To this end, Emirates
also raised AED 4.4 billion (USD 1.2 billion) in additional
liquidity in the last quarter of 2019/20 through term loans,
revolving credit and short term trade facilities. As a result,
Emirates ended the financial year 2019/20 with AED 20.2 billion
(USD 5.5 billion) in cash assets. Emirates also stated that it
intends to continue to tap the banking market for further liquidity
in the first quarter of the 2020/21 financial year to provide a
cushion against the impact of COVID-19 on its cash flows in the
short term.
Emirates also reaffirmed that measures to support the airline
include "obtaining committed support from the government of Dubai
which has publicly confirmed that they will financially support
Emirates during this period through a variety of measures including
an additional equity injection if required."
Emirates noted that, as a result of COVID-19, its profits for
the month of March 2020 were more than AED 1.5 billion (USD 0.4
billion) worse than expected.
Emirates' total liabilities increased by 66% to AED 148.5
billion (USD 40.5 billion) primarily due to recognition of
additional lease liabilities following the adoption of IFRS 16.
This was offset to an extent by a reduction in forward sales
liabilities due to the ongoing COVID-19 pandemic. Total equity
decreased by 37.5% to AED 23.6 billion (USD 6.4 billion) primarily
due to the adoption of IFRS 16. This resulted in an equity ratio of
13.7%.
Regarding the ongoing effects of the COVID-19 pandemic, Sheikh
Ahmed bin Saeed Al Maktoum stated, that "The COVID-19 pandemic will
have a huge impact on our 2020-21 performance, with Emirates'
passenger operations temporarily suspended since 25 March .... We
continue to take aggressive cost management measures, and other
necessary steps to safeguard our business, while planning for
business resumption. We expect it will take 18 months at least,
before travel demand returns to a semblance of normality. In the
meantime, we are actively engaging with regulators and relevant
stakeholders, as they work to define standards to ensure the health
and safety of travelers and operators in a post-pandemic world.
Emirates ... stand(s) to reactivate our operations to serve our
customers, as soon as circumstances allow." The cost management
measures include the layoff of an unspecified number of employees,
which has already started. In the meantime, Emirates also adapted
operations to minimise the risk of contamination by introducing
cleaning regimes, protective clothing and masks as well as by using
the airline's fleet to operate as "a mini United Parcel
Service".
As at the end of June Emirates has outstanding US dollar debt
issuances with maturities in 2023, 2025, and 2028. These bonds were
trading at approximately 96 cents, 96 cents, and 92 cents,
respectively, representing running yields ranging from
approximately 4.1% to 4.9% in US dollars. This level of yields does
not appear to indicate any significant financial stress to the
issuer.
4. Aircraft - A380
The Emirates fleet consisted of 270 aircraft as of March 2020,
including 115 A380s. In addition to its current fleet, Emirates has
an order book with Airbus and Boeing.
Emirates expects to receive an additional eight units from their
current 115 today, resulting in 123 A380 deliveries in total . Its
senior management indicated that the A380 will remain a cornerstone
part of their fleet well into the 2030s though the total number in
fleet will decline over time. However, Emirates have not given any
formal indication of numbers. In November 2019 press articles
following interviews with Tim Clark and a podcast with the
president of Emirates, mentioned ranges from 80 to 100 A380s to
remain in service, depending on the time horizon. T his scenario,
if realised, may result in returns and possibly retirements of a
number of Emirates A380s over the next few years, potentially 20 to
40 of the total deliveries Emirates will have received by the end
of 2021. In addition, as a function of the number of A380 airframes
returned or retired over time, from Emirates or other existing
operators, there is limited visibility over the value of remaining
green time on the engines and spare parts. This will be assessed
over the coming years.
During February Etihad Airways PJSC ("Etihad") completed the
purchase of two A380-800 aircraft less than three years into their
fixed 12 year operating leases. Etihad also undertook to repay all
of the outstanding financing arrangements and other associated
costs with respect to both leases. It remains to be determined how
such transactional data will be incorporated into appraisers'
forecasts for the A380, particularly in the current very fluid
operating environment.
Following the COVID-19 epidemic operators like Air France and
Lufthansa (at least for six units) have publicized plans to phase
out the A380 in the near term: Lufthansa is permanently
decommissioning six A380s that were previously scheduled to depart
the fleet in 2022. Air France announced in May its intention to
retire its remaining nine A380s with immediate effect - ahead of
its initial 2022 target.
Airbus entered into a new A380 maintenance, repair and overhaul
facility joint venture with Singapore Airlines ("HMSS"), in
February to address the cabin reconfiguration costs on the A380.
Airbus plans to use HMSS to offer major upgrades on the A380 in a
competitive way in order to assist in remarketing the aircraft on
the second-hand market.
Emirates has signed a general terms agreement for Airbus A380
support with component maintenance provider Spairliners, a joint
venture between Air France Industries KLM Engineering &
Maintenance and Lufthansa Technik based in Hamburg, Germany .
Emirates vice-president procurement aircraft Ammar Al-Zabe expects
the deal to "strengthen the support, service and reliability for
our A380s" and result in "optimised" operations of the type.
In May 2020, German maintenance specialist LHT announced that it
is working on a conversion for an Airbus A380 as part of its effort
to offer temporary passenger-to-cargo modification services. LHT
did not identify the customer but stated that it has been awarded
the technical and engineering task to support the "operational
change". While the modification is intended to comply with
temporary passenger-to-freight regulatory exemptions drawn up to
meet demand during the COVID-19 crisis, LHT indicated that it will
offer the conversion as a permanent solution.
Source: Cirium
DIRECTORS
As at 31 March 2020 the Company had four directors all of whom
were independent and non-executive.
Charles Edmund Wilkinson - Chair of the Company and of the
Nomination Committee
Charles Wilkinson is a solicitor who retired from Lawrence
Graham LLP in March 2005. While at Lawrence Graham he specialised
in corporate finance and commercial law, latterly concentrating on
investment trust and fund work.
Charles is Chair of Doric Nimrod Air One Limited and a director
of Doric Nimrod Air Two Limited. Charles is also a director of
Landore Resources Ltd, a Guernsey based mining exploration company.
He is resident in Guernsey.
Geoffrey Alan Hall - Chair of the Audit Committee
Geoffrey Hall has extensive experience in asset management,
having previously been Chief Investment Officer of Allianz
Insurance plc, a major UK general insurance company and an
investment manager at HSBC Asset Management, County Investment
Management, and British Railways Pension Funds. Geoffrey is also a
director and Chair of the Audit Committee of Doric Nimrod Air One
Limited and Chair of Doric Nimrod Air Two Limited.
Geoffrey earned his masters degree in Geography at the
University of London and is an associate of the CFA Society of the
UK. He is resident in the United Kingdom.
Suzanne Elaine Procter (appointed 1 August 2019) - Senior
Independent Director ("SID")
Suzie Procter brings over 38 years' experience in financial
markets, with specific expertise in asset management. She was
previously a non-executive director of TR Property Investment Trust
plc, an investment company listed on the FTSE 250 index. Her
executive roles included Partner and member of the Executive
Management Committee at Cantillon Capital Management LLC, Managing
Director of Lazard Asset Management, Head of Institutional Sales at
INVESCO Asset Management, Director and Head of Fixed Income
Business at Pictet International Management Ltd and Head of Fixed
Income at Midland Montagu Asset Management.
Suzie is also the SID of Doric Nimrod Air One Limited and Doric
Nimrod Air Two Limited. She is resident in the United Kingdom.
Andreas Josef Tautscher (appointed 1 August 2019)
Andreas Tautscher brings over 31 years' financial services
experience. He serves as a non-executive director and member of the
Audit Committee of BH Global Limited, a Guernsey closed-ended
investment company whose shares are traded on the Main Market of
the London Stock Exchange. He is also a director and CEO of Altair
Group, an independent director services business in the Channel
Islands. From 1994 to 2018 Andreas held various roles at Deutsche
Bank and was most recently CEO of the Channel Islands and Head of
Financial Intermediaries for EMEA. He was previously a
non-executive director of the Virgin Group. Andreas qualified as a
Chartered Accountant in 1994.
Andreas is also a director of Doric Nimrod Air One Limited and a
director and Chair of the Audit Committee of Doric Nimrod Air Two
Limited. He is resident in Guernsey.
John Le Prevost (resigned 16 January 2020)
Mr Le Prevost resigned as a director of the Company with effect
from 16 January 2020.
SERVICE PROVIDERS
Management and the Delegation of Functions
The Directors, whose details are set out on page 13 are
responsible for reviewing the business affairs of the Group in
accordance with the Articles and have overall responsibility for
the Group's activities including all business decisions, review of
performance and authorisation of distributions. The Company has
delegated management of the Group's Aircraft to Amedeo, which is a
company incorporated in Ireland. Further details are outlined below
under the heading Asset Manager. The Directors delegate secretarial
and administrative functions to JTC Fund Solutions (Guernsey)
Limited ("JTC" or the "Secretary" or the "Administrator") which is
a company incorporated in Guernsey and licenced by the Guernsey
Financial Services Commission (the "GFSC") for the provision of
administration services. The registrar function is delegated to JTC
Registrars Limited (formerly Anson Registrars Limited) (the
"Registrar"), which is licensed and regulated by the GFSC.
Asset Manager and Lease and Debt Arranger
Amedeo has been appointed by the Company to provide asset
management services to the Group. Pursuant to the Asset Management
Agreement, Amedeo will: (i) monitor Emirates' and any subsequent
lessees' performance of its obligations under the respective
operating leases and any subsequent lease respectively (which shall
include the obligations relating to the maintenance of insurance
cover); (ii) provide the Group with information regarding
alternatives with respect to any potential sale or re-lease of the
Assets; (iii) carry out mid-lease inspections of the Assets; (iv)
provide the Group with asset monitoring reports describing the
state and any material changes to the state of the Assets; and (v)
liaise, as and when necessary, with lenders, on all matters
relating to the loans, as required. Amedeo has further undertaken
that it will dedicate sufficient time and resources as it
reasonably believes is required from time to time to fulfil any
contractual arrangements it enters into with the Company.
Amedeo has also been appointed by the Company, pursuant to the
Agency Agreement, to assist the Group, and act as the Group's
agent, in relation to the arrangement, negotiation, review,
approval, execution and management on behalf of the Group of the
acquisition of the Assets, the borrowings of the Group relating to
the acquisition of the Assets, and the operating leases. Amedeo is
a subsidiary of Amedeo Capital Limited, a Cayman company engaged in
the business of aircraft operating leasing and management.
Amedeo Services (UK) Limited has been appointed by the Group,
pursuant to the Liaison Services Agreement, to: (i) coordinate the
provision of services by Amedeo to the Group under the Asset
Management Agreement and the Agency Agreement, as relevant; and
(ii) facilitate communication between the Group and Amedeo. Amedeo
Services (UK) Limited is authorised by the Financial Conduct
Authority and is part of the Amedeo Group of companies.
Amedeo is a leading aircraft Asset Manager and principal
investor in leasing transactions to customer airlines globally. The
aircraft portfolio currently managed by the Amedeo Group, includes
thirty nine aircraft under management and an additional 8 aircraft
under oversight. The volume of assets under management is c. $7
billion, which include commercial airliners including A380, A350,
A330 and Boeing 777 and 747-F. Amedeo is a member of the
International Society of Transport Aircraft Trading ("ISTAT") , and
is a Strategic Partner of IATA.
Corporate and Shareholder Adviser
Nimrod, which is authorised by the Financial Conduct Authority,
has been appointed as the Corporate and Shareholder Adviser by the
Company.
Nimrod was founded in 2008 as an independent organisation which
specialises in generating and sourcing interesting investment
funds, themes and solutions managed by experts in their fields for
the professional investor marketplace. It has launched nine listed
investment companies since its formation and it also provides
investment, marketing, distribution and advisory services to
investment companies and their boards and managers.
Secretary & Administrator
JTC is an independent provider of institutional and private
client services to clients in numerous jurisdictions and is a
member of the JTC Group. For further information about the JTC
Group, please visit www.jtcgroup.com .
JTC is a Guernsey incorporated company and provides
administration and secretarial services to the Group pursuant to an
Administration and Secretarial Agreement. In such capacity, JTC is
responsible for the general secretarial functions required by the
Law and assists the Group in its compliance with its continuing
legal and regulatory obligations, as well as providing advice on
good corporate governance and best practice for a publicly traded
company.
JTC is also responsible for the Group's general administrative
functions and for the preparation of unaudited half-yearly and
audited annual financial reports, subject to the direction and
oversight of the Company's Board of directors ("Board").
Registrar
The Registrar, is the Company's CREST compliant registrar. The
Company's registrar is responsible for the maintenance of the
Company's share register and for the processing of dividend
payments and stock transfers. The Registrar is licensed and
regulated by the GFSC and further information about Registrar may
be found at www.jtcgroup.com .
Review
The Board keeps under review the performance of the Asset
Manager, Corporate and Shareholder Adviser, Secretary,
Administrator and the Registrar and the powers delegated to each
service provider. In the opinion of the Board, the continuing
appointments of the service providers on the terms agreed is in the
interest of the Company's Shareholders as a whole.
A full list of the Company's service providers is set out on
page 86.
MANAGEMENT REPORT
A description of important events which have occurred during the
financial year under review, their impact on the performance of the
Group as shown in the consolidated financial statements and a
description of the principal risks and uncertainties facing the
Group is given in the Chairman's Statement, Asset Manager's Report,
Statement of Principal Risks and the notes to the consolidated
financial statements contained on pages 58 to 85 and are
incorporated here by reference.
Principal Risks and Uncertainties
The Board has undertaken a robust assessment of the principal
risks facing the Group and have undertaken a detailed review of the
effectiveness of the risk management and internal control systems.
The Board is comfortable that the risks are being appropriately
monitored on a regular basis.
The risks set out below are those which are considered to be the
material risks relating to an investment in the Shares but are not
the only risks relating to the Shares or the Group. Additional
risks and uncertainties of which the Group is presently unaware or
that the Group currently believes are immaterial may also adversely
affect it business, financial condition, results of operations or
the value of the Shares.
The principal risks associated with the Group are:
-- Operational risk: The Board is ultimately responsible for all
operational facets of performance including cash management, asset
management, regulatory and listing obligations. The Group has no
employees and so enters into a series of contracts/legal agreements
with a series of service providers to ensure both operational
performance and the regulatory obligations are met. This risk has
been mitigated by the Group using well established, reputable and
experienced service providers and assessing service providers'
continued appointment on at least an annual basis.
-- Investment risk: There are a number of risks associated with
the Group's Assets in relation to the occurrence of technical
faults with the Assets or actions by third parties causing both
damage to the Assets and also damaging the demand for global air
travel. This risk has been mitigated by the lessee's contractual
responsibility to insure, repair and maintain the aircraft for the
duration of the leases between the Group and Emirates (the
"Leases").
-- Borrowings and financing risk: There is a risk that the Group
is exposed to fluctuations in market interest rates and foreign
exchange rates. This risk has been mitigated by ensuring that debt
repayments are made from lease rental revenues received in the
matching currency and by fixing the interest rates on debt and
lease rentals.
-- Credit risk: Emirates is the sole lessee of the Assets and is
headquartered in the Middle East. Should Emirates default on the
rental payments due to domestic events, events in the wider airline
industry or other reasons it is unlikely the Company will be able
to meet its targeted dividends or, in the case of ongoing default,
continue as a going concern. The risk of default is mitigated by
the ability of the Group to sell or re-lease the Assets in the
event of a single default.
-- Secondary market risk: There is a risk that the Group would
not be able to achieve the projected resale value of the Assets due
to changes in demand for second hand aircraft of the type owned by
the Group. The Board monitors and revises the residual value of the
Aircraft on an annual basis.
-- Regulatory risk: The Group is required to comply with the
Disclosure Guidance and Transparency Rules ("DGTRs") of the
Financial Conduct Authority and the requirements imposed by the Law
and the GFSC. Any failure to comply could lead to criminal or civil
proceedings. Although responsibility ultimately lies with the
Board, the Secretary also monitors compliance with regulatory
requirements.
-- Global Pandemic: The emergence of a global pandemic may have
a profound and negative impact on the operations and performance of
the Group and may directly or indirectly affect some of the other
risks mentioned in this table. The Board and its key service
providers would all act to the best of their abilities to protect
the welfare of the various teams involved in the affairs of the
Group to ensure operations are maintained to the extent possible
and to protect and support the Assets of the Group for as long as
is required . Please refer to the Chairman's Statement, the Asset
Managers Report and the going concern statement below for more
information on how the Group is being affected by COVID-19.
Data Protection
The Company has implemented measures designed to ensure its
compliance with the EU General Data Protection Regulation (EU)
2016/679 and associated legislation in Guernsey. The Company has
also issued a privacy notice explaining the data it holds, how the
data is processed and its procedures for processing this data. This
notice is available for review and download at the Company's
website.
Going Concern
The Group's principal activities are set out within the Company
Overview on pages 2 to 3. The financial position of the Group is
set out on page 55. In addition, note 20 to the consolidated
financial statements includes the Group's objectives, policies and
processes for managing its capital, its financial risk management
objectives and its exposures to credit risk and liquidity risk.
The Directors in consultation with the Asset Manager are
monitoring the effect of the COVID-19 pandemic generally on the
aviation industry and specifically on the Group's aircraft values
and the financial wellbeing of its lessee both now and in the
future. The Group's future performance could potentially be
impacted should this pandemic have a pervasive and prolonged impact
on the economy. There have prevailed widespread restrictions on the
ability of people to travel which has had a material negative
effect on the airline sector, and by extension the aircraft leasing
sector. This may lead to the inability of airlines to pay rent as
they fall due. These factors, together with wider economic
uncertainty and disruption, are likely to have an adverse impact on
the future value of the aircraft assets owned by the Group, as well
as on the sale, re-lease, refinancing or other disposition of the
relevant aircraft.
An increase in lessee counterparty credit risk means that there
is now more uncertainty over lease payments and depending on
further developments with the lessee, there could be requests for
lease rental deferrals. Reduced rents receivable under the leases
may not be sufficient to meet the fixed loan or Equipment Note
interest and regular capital repayments of debt scheduled during
the life of each loan and may not provide surplus income to pay for
the Group's expenses and permit the declaration of dividends.
The option to remarket the Aircraft following a potential event
of default by the lessee has not been taken into account. The
period of time necessary to successfully complete such a process is
beyond the twelve months forecasting horizon of the going concern
considerations. This applies in particular in times of COVID-19, as
various restrictions are still in place to contain the
pandemic.
The Directors consider that the going concern basis of
accounting remains appropriate. Based on current information the
Directors have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the
foreseeable future, although the risk to this is clearly
higher.
Whilst there is some uncertainty as to the airline industry in
general, and specifically Emirates' financial position and credit
risk profile, on the basis that (i) Emirates has shown no intention
of failing to meet its obligations (ii) Emirates has the financial
backing to continue paying these rentals, the Directors believe
that it is appropriate to prepare these financial statements under
the going concern basis of preparation.
The Directors have considered Emirates' ability to continue
paying the lease rentals over the next 12 months and are satisfied
that the Group can meet its liabilities as they fall due over this
period. Further detail regarding the assumptions adopted when
forming this conclusion can be found in the Viability Statement
below.
Viability Statement
In accordance with Provision 31 of The UK Corporate Governance
Code, the Directors of the Company have considered the prospects of
the Group over the period from present until the Liquidation
Resolution is put to Shareholders six months before the last lease
is due to terminate in 2025, a period of five years. In choosing
the period of viability for the Group the Board has considered the
prospect of Emirates performing their obligations until the end of
their leases.
The Board, in assessing the viability of the Group, has paid
particular attention to the principal risks faced by the Company as
disclosed in the Asset Manager's Report and the notes to the
consolidated financial statements, reviewing on an ongoing basis
the risks faced and ensuring that any mitigation measures in place
are functioning correctly.
In addition, the Board has considered a detailed cash flow
projection for the running costs of the Group and has assumed that
Emirates is a going concern. The Board believe that it is
reasonable to assume as of the date of the approval of the annual
financial report that Emirates will continue with the contracted
lease rental payments due to the following:
- Emirates is still a going concern as at the date of the
lessee's latest signed annual financial report
- Emirates maintains and is considered to have a strong balance
sheet with a substantial cash position
- The airline confirms that it could obtain committed support
from the Government of Dubai which has publicly confirmed that they
will financially support Emirates during this period
- As of the date of the annual financial report, the Board is
not aware of a formal request to the Group for a lease deferral or
any other efforts that would result in the restructuring of the
existing transactions
- Emirates is staying with their current A380 fleet and are
reinstating the Airbus to their route.
The Group retains sufficient cash to cover the forecast
operating costs of the Group until the termination date of the
Leases in 2025, assuming receipt of planned rental income.
The Directors believe that their assessment of the viability of
the Company over the period chosen was sufficiently robust and
encompassed the risks which would threaten the business model,
future performance, solvency or liquidity of the Company.
As a result of their review, the Directors of the Group have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due until the
leases are due to terminate in 2025.
Responsibility Statement
The Directors jointly and severally confirm that to the best of
their knowledge:
(a) the financial statements, prepared in accordance with IFRS
give a true and fair view of the assets, liabilities, financial
position and profits of the Group and performance of the Group;
(b) this Management Report includes or incorporates by reference
a fair review of the development and performance of the business
and the position of the Group, together with a description of the
principal risks and uncertainties that it faces; and
(c) the annual report taken as a whole is fair, balanced and
understandable and provides the information necessary for
Shareholders to assess the Group's position, performance, business
model and strategy.
Charles Wilkinson Geoffrey Hall
Chair Director
30 July 2020
DIRECTORS' REPORT
The Directors present their annual report and audited financial
statements of the Group for the financial year ended 31 March
2020.
Principal Activities and Business Review
The principal activity of the Group is to acquire, lease and
then sell aircraft. The Directors do not envisage any change in
these activities for the foreseeable future. A description of the
activities of the Group in the year under review is given in the
Chairman's Statement and the Asset Manager's Report respectively on
pages 4 to 6 and 7 to 12.
Status
The Company is a Guernsey domiciled company the Shares of which
are admitted to trading on the SFS. Its registered number is 54908.
The Company operates in accordance with the Law.
Results and Dividends
The results of the Group for the financial year are set out on
page 54.
The Company declared dividends during the financial year under
review as follows:
Quarter End Announcement Date Payment Date Dividend per
Share (pence)
31 March 2019 11 April 2019 30 April 2019 2.0625
------------------- ----------------- ---------------
30 June 2019 11 July 2019 31 July 2019 2.0625
------------------- ----------------- ---------------
30 September 2019 10 October 2019 31 October 2019 2.0625
------------------- ----------------- ---------------
31 December 2019 16 January 2020 31 January 2020 2.0625
------------------- ----------------- ---------------
The Company declared the following dividends after the financial
year end:
Announcement Date Payment Date Dividend per Share
(pence)
16 April 2020 30 April 2020 2.0625
------------------------ -------------------
31 July 2020 (expected
16 July 2020 payment date) 2.0625
------------------------ -------------------
The Company aims to continue to pay quarterly dividends of
2.0625 pence per Share, in line with the Distribution Policy. There
is no guarantee that any future dividends will be paid.
Directors
The Directors in office are shown on page 13 and all Directors
remain in office as at the date of signing of these financial
statements. Further details of the Directors' responsibilities are
given on page 19.
No Director has a contract of service with the Company, nor are
any such contracts proposed.
The following interests in Shares of the Company are held by
persons discharging directorial responsibility and their persons
closely associated:
Number of Shares held Number of Shares held
as at 31 March 2020 as at 24 July 2020
Charles Wilkinson 150,000 150,000
Geoffrey Hall 90,000 90,000
Suzie Procter - 35,756
Andreas Tautscher - 16,279
John Le Prevost, who resigned as a director of the Company on 16
January 2020, was a director and controlling shareholder of Anson
Registrars Limited until 28 February 2020, when that company was
acquired by JTC Group Limited, the holding company of the Company's
Administrator and Secretary.
Other than the above shareholdings, and Mr Le Prevost's prior
interest in the Registrar, none of the Directors nor any persons
connected with them had a material interest in any of the Company's
transactions, arrangements or agreements during the year and none
of the Directors has or has had any interest in any transaction
which is or was unusual in its nature or conditions or significant
to the business of the Company, and which was effected by the
Company during the reporting year.
At the financial year end and as at the date of this report,
there are no outstanding loans or guarantees between the Company
and any Director.
There were no material related party transactions which took
place in the financial period, other than those disclosed in the
Directors' Report and at note 23 to the financial statements.
Substantial Controllers of Voting Rights
The Company has identified the following substantial controlling
interests in voting rights attached to the Company's issued share
capital in accordance with Chapter 5 of the DGTRs. These are based
on notifications made to the Company since inception and may differ
substantially from positions recorded on the Company's share
register.
There have been no material changes in the below list of
substantial controlling interests between the end of the year under
review and 24 July 2020, being the latest practicable date prior to
the date of approval of this report.
Name % of Total Voting Rights Number of Shares
State Street Nominees Limited 9.11% 20,040.008
Seneca IM Limited 5.58% 12,279,500
Quilter Cheviot Limited 5.09% 11,207,020
FIL Limited 5.01% 11,026,443
Legal & General Group PLC 5.00% 11,000,000
Corporate Governance
Statement of Compliance with The UK Corporate Governance Code,
as published in July 2018 (the "Code")
As a Guernsey incorporated company and under the DGTRs, the
Company was not, for the year under review, required to comply with
the Code. The Company has, however, voluntarily committed to comply
with the Code or explain any departure. A copy of the Code is
available for download from the UK Financial Reporting Council's
web-site (www.frc.org.uk).
Having reviewed the Code, the Board considers that it has
maintained procedures during the year to ensure that it has
complied with the Code, other than the following exceptions:
(i) Provisions 2: The board should assess and monitor culture.
Provision 5: The board should understand the views of the
company's other key stakeholders and describe in the annual report
how their interests and the matters set out in section 172 of the
Companies Act 2006 have been considered in board discussions and
decision-making. The board should keep engagement mechanisms under
review so that they remain effective.
For engagement with the workforce, one or a combination of the
following methods should be used:
-- a director appointed from the workforce;
-- a formal workforce advisory panel;
-- a designated non-executive director.
Provision 6: There should be a means for the workforce to raise
concerns in confidence and - if they wish - anonymously.
Company Response: the Company does not assess and monitor
culture as it has no employees and as such engagement with the
workforce is not applicable;
(ii) Provision 10: The board should identify in the annual
report each non-executive director it considers to be independent.
Circumstances which are likely to impair, or could appear to
impair, a non-executive director's independence include, but are
not limited to, whether a director:
-- has, or has had within the last three years, a material
business relationship with the company, either directly or as a
partner, shareholder, director or senior employee of a body that
has such a relationship with the company;
-- holds cross-directorships or has significant links with other
directors through involvement in other companies or bodies;
-- has served on the board for more than nine years from the date of their first appointment.
Where any of these or other relevant circumstances apply, and
the board nonetheless considers that the non-executive director is
independent, a clear explanation should be provided.
Provision 19: The chair should not remain in post beyond nine
years from the date of their first appointment to the board. To
facilitate effective succession planning and the development of a
diverse board, this period can be extended for a limited time,
particularly in those cases where the chair was an existing
non-executive director on appointment. A clear explanation should
be provided.
Company Response: on appointment, the Chairman was Chair of
Doric Nimrod Air One Limited and a director of Doric Nimrod Air Two
Limited. The Board considers the Directors to be independent. The
Directors of the Company are also directors of other DNA Companies
and therefore the Board has implemented measures to manage any
conflicts which might arise as a result of these appointments. The
Chair and one other Director have been on the Board since
incorporation of the Company in March 2012. The Group's assets each
have a fixed lease term of 12 years ending at different times and
as such the Board remain of the opinion that continuity is
paramount in the final years of the Company's life;
(iii) Provision 9: The chair should be independent on
appointment when assessed against the circumstances set out in
Provision 10. The roles of chair and chief executive should not be
exercised by the same individual.
Company Response: there is no chief executive;
(iv) Provision 18: All directors should be subject to annual
re-election. The board should set out in the papers accompanying
the resolutions to elect each director the specific reasons why
their contribution is, and continues to be, important to the
company's long-term sustainable success.
Company Response: the Articles provide that directors shall
retire by rotation at AGMs and be eligible for re-election at the
same meeting. The Board considers that, for continuity purposes,
retirement by rotation is best practice. After nine years directors
come up for re-election every year;
(v) Provision 20: Open advertising and / or an external search
consultancy should generally be used for the appointment of the
chair and non-executive directors. If an external search
consultancy is engaged it should be identified in the annual report
alongside a statement about any other connection it has with the
company or individual directors.
Company Response: due to the specific nature of the Company, it
has thus far used a combination of industry contacts to identify a
list of suitable candidates and undertakes a rigorous interview
process;
(vi) Provision 13: Non-executive directors have a prime role in
appointing and removing executive directors. Non-executive
directors should scrutinise and hold to account the performance of
management and individual executive directors against agreed
performance objectives. The chair should hold meetings with the
non-executive directors without the executive directors
present.
Provision 32: The board should establish a remuneration
committee of independent non-executive directors, with a minimum
membership of three, or in the case of smaller companies [i.e. not
in the FTSE 350], two.
Provision 33: The remuneration committee should have delegated
responsibility for determining the policy for executive director
remuneration and setting remuneration for the chair, executive
directors and senior management.
Provision 35: Where a remuneration consultant is appointed, this
should be the responsibility of the remuneration committee.
Provision 41: There should be a description of the work of the
remuneration committee in the annual report.
Company Response: the Company has no executive directors, senior
management or employees. It does not have a remuneration committee
given the small size of the exclusively non-executive and
independent board. Remuneration provision is set out in this
Directors' Report.
Board Evaluation
In May 2019, the Board engaged the services of an external
facilitator, Platinum Compliance (Guernsey) Limited, for the
performance evaluation required by Provision 21 of the Code. At the
conclusion of its evaluation, the external facilitator provided the
Directors with a report on Board effectiveness and made minor
suggestions for improvements thereon, which were considered further
by the Board. The Board agreed that additional members should be
appointed to bring diversity and new perspectives to the Board and
as such Miss Procter and Mr Tautscher were appointed to the Board
on 19 August 2019.
The Board is committed to ensuring that on an annual basis the
strengths of the Board are recognised and any weaknesses are
addressed. On 21 November 2019 the Board established a Nomination
Committee whose functions include the performance of an annual
performance evaluation. The Chair of the Nomination Committee will
also consider an external facilitation of the performance
evaluation on an annual basis.
Each director has undertaken to engage with the evaluation
process and take appropriate action when development needs have
been identified.
Board Responsibilities
The Board comprises four Directors, and their biographies appear
on page 13 demonstrating the wide range of skills and experience
they each bring to the Board. All the Directors are non-executive
and independent, with Charles Wilkinson acting as Chair and Suzie
Procter acting as SID.
The Board regularly reviews the balance, knowledge and
effectiveness of the Board, to identify if any additional
experience or skills are needed and to ensure that the current
Directors have sufficient available time to undertake the tasks
required and remain independent. The Directors are able and
encouraged to provide statements to the Board of their concerns and
ensure that any items of concern are recorded in the Board minutes.
When undertaking a search for a new director the Board would be
mindful of diversity and meritocracy.
The other significant commitments of the current Chair are
detailed in his biography on page 13. The Board was satisfied
during the year and remains satisfied that the Chair's other
commitments do not interfere with his day-to-day performance of his
duties to the Company and that he has the commitment and time to
make himself available at short notice should the need arise.
In accordance with the Articles the Directors shall determine
the Directors' fees payable provided that the aggregate amount of
such fees paid in respect of services rendered to the Company shall
not exceed GBP150,000 per annum. All Directors receive an annual
fee and there are no share options or other performance related
benefits available to them. All Directors are currently paid a fee
of GBP23,000 per annum. The Chair is paid an additional fee of
GBP6,000 per annum and the chair of the Audit Committee is entitled
to be paid an additional GBP4,000 per annum. The terms and
conditions of appointment of non-executive directors are available
for inspection at the Company's registered office by prior
arrangement with the Company's Secretary.
T he Board usually meets in Guernsey at least four times per
year to consider the business and affairs of the Company, at which
meetings the Directors review the Group's assets and all other
important issues to ensure control is maintained. Due to travel
restrictions imposed as a result of COVID-19 the UK resident
Directors have been unable to travel to Guernsey. However, the
Board continues to operate effectively utilising both telephone and
video conferencing to maintain contact with each other and with
their advisors and auditors. The Directors hold either a Dividend
Committee meeting in Guernsey each quarter to consider and if
thought suitable, approve the payment of a dividend in accordance
with the Company's Distribution Policy.
Between these regular meetings the Board keeps in contact by
email and telephone as well as meeting to consider specific matters
of a transactional nature. Additionally the Directors may hold
strategy meetings with its relevant advisors as appropriate.
The Directors are kept fully informed by the Asset Manager and
Secretary of all matters that are relevant to the business of the
Group and should be brought to the attention of the Directors
and/or the Company's Shareholders. All Directors have direct access
to the Secretary who is responsible for ensuring that Board
procedures are followed and that there are effective information
flows both within the Board and between the Committees and the
Board.
The Directors also have access to the advice and services of the
Asset Manager and Corporate and Shareholder Adviser and may also,
in the furtherance of their duties, take independent professional
advice at the Company's expense.
During the year the number of full Board meetings and committee
meetings attended by the Directors was as follows:
Director Board Meetings Audit Committee Nomination Dividend Committee
Meetings Committee Meetings***
Meetings
Geoffrey Hall 4 of 4 3 of 3 1 of 1 1 of 4
--------------- ---------------- ----------- -------------------
Charles Wilkinson 4 of 4 3 of 3 1 of 1 1 of 4
--------------- ---------------- ----------- -------------------
Suzie Procter* 2 of 4 2 of 3 1 of 1 1 of 4
--------------- ---------------- ----------- -------------------
Andreas Tautscher* 2 of 4 2 of 3 1 of 1 1 of 4
--------------- ---------------- ----------- -------------------
John Le Prevost** 3 of 4 3 of 3 0 of 1 3 of 4
--------------- ---------------- ----------- -------------------
* appointed August 2019
**resigned January 2020
*** refer to page 26 for the composition and function of the
Dividend Committee.
Audit Committee
Mr Hall, Mr Tautscher and Miss Procter are all members of the
Audit Committee, with Mr Hall acting as Chair. The Audit Committee
has regard to the Guidance on Audit Committees published by the
Financial Reporting Council in September 2012 and as updated in
April 2016. The Audit Committee examines the effectiveness of the
Group's and its service providers' internal control systems as
appropriate, the annual and half-yearly reports and financial
statements, the auditor's remuneration and engagement, as well as
the auditor's independence and any non-audit services provided by
them.
The FRC published updated Ethical and Auditing Standards in
December 2019, which further restrict the provision of non-audit
services by audit firms to their clients. The previous list of
prohibited non-audit services list has been replaced with a short
list of permitted services. Auditors of "Public Interest Entities"
("PIES") can now only provide non-audit services which are closely
linked to the audit itself or are required by law or regulation.
Also, whereas PIES were previously limited to those entities
incorporated in the EU, the FRC now defines PIES as all issuers
whose transferable securities have been admitted to trading on a UK
regulated market, which includes the London Stock Exchange but not
AIM . The Crown Dependency rules were also changed so that Market
Traded Companies incorporated in the Crown Dependencies are also
included in this requirement.
The Audit Committee considers the nature, scope and results of
the auditor's work and reviews annually prior to providing a
recommendation to the Board on the re-appointment or removal of the
auditor. When evaluating the external auditor the Audit Committee
has regard to a variety of criteria including industry experience,
independence, reasonableness of audit plan, ability to deliver
constructive criticism, effectiveness of communication with Board
and the Group's service providers, quality control procedures,
effectiveness of audit process and added value beyond assurance in
audit opinion.
Auditor independence is maintained through limiting non-audit
services to specific audit-related work that falls within defined
categories; for example, the provision of advice on the application
of IFRS or formal reports for any stock exchange purposes. All
engagements with the auditor are subject to pre-approval from the
Audit Committee and fully disclosed within the annual financial
report for the relevant period. A new lead audit partner is
appointed every five years and the Audit Committee ensures the
auditor has appropriate internal mechanisms in place to ensure its
independence.
The Audit Committee has recommended to the Board that the
re-appointment of Deloitte LLP ("Deloitte") as the Group's external
auditor be proposed to Shareholders at the 2020 annual general
meeting. The Audit Committee will consider arranging for the
external audit to be tendered in 2023 (being ten years from the
initial appointment) with the aim of ensuring a high quality and
effective audit.
The Audit Committee usually meets in Guernsey at least twice per
year, shortly before the Board meets to consider the Group's
half-yearly and annual financial reports, and reports to the Board
with its deliberations and recommendations and also holds annual
planning and final meetings with the auditor. In addition the Board
also meets during the audit process with the auditors to discuss
issues relating to the residual values of the Assets. The Audit
Committee operates within clearly defined terms of reference based
on the Institute of Chartered Secretaries and Administrators
recommended terms and provides a forum through which the Group's
external auditor report to the Board.
The Audit Committee can request information from the Group's
service providers with the majority of information being directly
sourced from the Asset Manager, the Secretary, the Administrator
and the external auditor. The terms of reference of the Audit
Committee are available on the Company's website and on request
from the Secretary.
Each year the Board examines the Audit Committee's performance
and effectiveness, and ensures that its tasks and processes remain
appropriate. Key areas covered included the clarity of the
committee's role and responsibilities, the balance of skills among
its members and the effectiveness of reporting its work to the
Board. The Board is satisfied that all members of the Audit
Committee have relevant financial experience and knowledge and
ensure that such knowledge remains up to date. Overall the Board
considers that the Audit Committee has the right composition in
terms of expertise and has effectively undertaken its activities
and reported them to the Board during the year under review.
During the financial year the Audit Committee met to consider
the annual financial report for the year ended 31 March 2019 and
the half-yearly financial report for the period ended 30 September
2019. The Audit Committee also met in January 2020, with the
external auditor in attendance, to approve the 2020 audit plan.
Dividend Committee
The Dividend Committee consists of any one or more Director, who
has been given full power and authority to consider and, if thought
suitable, declare and approve the payment of a dividend in
accordance with the Company's Distribution Policy, provided all
Directors had been provided with prior notice of the proposal to
declare each dividend and no Director had raised any objection to
the declaration of each dividend.
Nomination Committee
The Nomination Committee was established on 21 November 2019 and
consists of all directors of the Company, with Mr Wilkinson acting
as Chair of the committee, except when the Nomination Committee
considers any matter in relation to the chairmanship of the
Company, in which case an alternative chair would be appointed.
The functions of the Nomination Committee include to regularly
review the structure, size and composition (including the skills,
knowledge, experience, diversity and how effectively members work
together to achieve objectives) of the Board and make
recommendations to the Board with regard to any changes, and to
perform a formal and rigorous performance evaluation of the Board,
its committees, the chair and individual directors, including the
consideration of having a regular externally facilitated Board
evaluation .
Internal Control and Financial Reporting
The Board is responsible for the Group's system of internal
control and for reviewing its effectiveness. The Board confirms
that there is an on-going process for identifying, evaluating and
monitoring the significant risks faced by the Group.
The internal control systems are designed to meet the Group's
particular needs and the risks to which it is exposed. Accordingly,
the internal control systems are designed to manage rather than
eliminate the risk of failure to achieve business objectives and by
their nature can only provide reasonable and not absolute assurance
against misstatement and loss.
The Board on an annual basis conducts a full review of the
Group's risk management systems including consideration of a risk
matrix which covers various areas of risk including corporate
strategy, accuracy of published information, compliance with laws
and regulations, relationships with service providers and business
activities.
Asset Management services are provided to the Company by Amedeo.
Corporate and shareholder advisory services are provided to the
Company by Nimrod. Administration and secretarial duties for the
Group are performed by JTC.
The Directors of the Group clearly define the duties and
responsibilities of their agents and advisors. The appointment of
agents and advisers is conducted by the Board after consideration
of the quality of the parties involved and the Board monitors their
on-going performance and contractual arrangements. The Board also
specifies which matters are reserved for a decision by the Board
and which matters may be delegated to its agents and advisers.
Management of Conflicts of Interest
The Company has adopted a formal conflict of interest policy and
is committed to ensuring that all directors and service providers
facilitate the Company conducting its business in a manner that is
consistent with its reputation, conducive to maintaining high
standard of integrity in all its business dealings, in the best
interests of the Company's Shareholders.
The Board considers the directors conflicts of interest at each
Board meeting by reviewing a schedule of each directors other
directorships and other interests held. Each Director is required
to notify the Secretary of any potential, or actual, conflict
situations that would need to be considered by the Board.
No Director has a service contract with the Company, although
Directors are issued with letters of appointment upon appointment,
and, other than John Le Prevost who had an interest in Anson
Registrars Limited as disclosed on page 21, nor did any Director
have any interest in contracts with the Company during the
financial year under review, or subsequently.
Anti Bribery Policy
The Directors have undertaken to operate the business in an
honest and ethical manner and accordingly take a zero-tolerance
approach to bribery and corruption. The key components of this
approach are implemented as follows:
-- The Board is committed to acting professionally, fairly and
with integrity in all its business dealings and relationships.
-- The Group has implemented and enforces effective procedures to counter bribery.
-- The Group requires all its service providers and advisors to
adopt equivalent or similar principles.
Dialogue with Shareholders
All holders of Shares in the Company have the right to receive
notice of, and attend, the general meetings of the Company, during
which members of the Board will be available to discuss issues
affecting the Group.
The primary responsibility for Shareholder relations lies with
the Company's Corporate and Shareholder Adviser. The Corporate and
Shareholder Adviser regularly meets with Shareholders to discuss
the Company and seek feedback. The views of Shareholders are
discussed by the Board at every Board meeting, and action would be
taken to address any shareholder concerns. The Company provides
regular updates to Shareholders through the annual and half-yearly
financial reports and quarterly factsheets.
In addition the Directors are available to enter into dialogue
with Shareholders and the Chair is willing to meet Shareholders as
the Company believes such communication to be important. The
Company's Directors can be contacted at the Company's registered
office or via the Secretary.
Stakeholders and Section 172
The Code requires that the Company should understand the views
of the Company's key stakeholders and describe in the annual report
how their interests and the matters set out in section 172 of the
UK's Companies Act 2006 have been considered in Board discussions
and decision-making. Section 172 is not strictly applicable as this
is a Guernsey Company. However its application is being done as
part of the UK Corporate Governance requirements
The Company has no employees and all of the directors are
non-executive, so the Board considers that its key stakeholders are
its Shareholders, its service providers, society, the government
and regulators.
The Board's engagement with Shareholders is described in the
"dialogue with shareholders" section above . All Shareholders are
treated equally and no shareholder receives preferential treatment.
When making decisions of relevance to Shareholders, the Board
considers first and foremost the likely consequences of their
decisions in light of their duty to act in the best interests of
the Company. The Board also considers what is likely to be in the
best interests of Shareholders as a whole, but does not consider
individual Shareholders' specific circumstances or desires when
making its decisions.
In addition to the regular reporting provided by key service
providers, the Board undertakes a review of the performance of
these key service providers on an annual basis. The services
provided by the key third party service providers are critical to
the ongoing operational performance of the Company. The Board
believes that fostering constructive and collaborative
relationships with the Company's service providers will assist in
their promotion of the success of the Company for the benefit of
all Shareholders.
As described in detail in the Company's viability statement, the
Board considers the prospects of the Company for at least the next
five years whenever it considers the Company's long-term
sustainability. All strategic decisions are therefore taken with
the success of the Company in mind and the Board would take
external advice whenever it considered that such would be
beneficial to its decision making process, primarily from its
retained service providers (including legal counsel), but also from
other external consultants.
The Board recognises that responsible investment and the
associated ESG considerations can have a significant impact on
investment activity in terms of raising funds, identifying
investment opportunities and long-term value creation for
Shareholders. Please see more information regarding ESG in the
report on pages 31 to 34.
The Board ascribes to the highest standards of business conduct
and has policies in place to ensure compliance with all applicable
laws and regulations. In addition to the monitoring of the
Company's compliance with its own obligations, the Board also
monitors compliance by its service providers with their own
obligations. The Board encourages openness and transparency and
promotes proactive compliance with new regulation .
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable Guernsey
law and regulations.Under the Law the Directors are required to
prepare financial statements for each financial year. The Directors
have chosen to prepare the Group financial statements in accordance
with IFRS.
Under the Law the Directors must not approve the accounts unless
they are satisfied that they give a true and fair view of the state
of affairs of the Group and of the profit or loss of the Group for
that period.
In preparing these financial statements, International
Accounting Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Group's ability to continue as a going concern.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Group's
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that the
financial statements comply with the Law. They are also responsible
for safeguarding the assets of the Group and for taking reasonable
steps for the prevention and detection of 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 in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Disclosure of Information to the Auditor
The Directors who held office at the date of approval of this
Directors' Report confirm in accordance with the provisions of
Section 249 of the Law that, so far as they are each aware, there
is no relevant audit information of which the Group's auditor is
unaware; and each Director has taken all the steps that he ought to
have taken as a Director to make himself aware of any relevant
audit information and to establish that the Group's auditor is
aware of that information.
Auditor
Deloitte have expressed their willingness to continue in office
as auditor and the Audit Committee has recommended their
reappointment. A resolution proposing their reappointment will be
submitted at the forthcoming annual general meeting to be held
pursuant to section 199 of the Law.
Charles Wilkinson Geoffrey Hall
Chair of the Board Director
Signed on behalf of the Board
on 30 July 2020
ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT
The Board recognises that Responsible Investment and the
associated ESG considerations can have a significant impact on
investment activity in terms of raising funds, identifying
investment opportunities and long-term value creation for
Shareholders. This report sets out our policy and approach to
ensuring that the level of engagement on ESG matters is
commensurate to the size, nature and complexity of the
business.
This policy seeks to address ESG matters on two levels; firstly,
with regard to the Company itself and secondly, in relation to the
Assets which the Group owns. The direct and practical management of
the Company seeks to uphold ESG standards where possible and
applicable. This is greatly influenced by the nature of the Group's
activities and the legal structure of the associated leases.
The Company
The Company is a self-managed Guernsey company incorporated on
29 March 2012. Its shares were admitted to trading on the SFS of
the London Stock Exchange's Main Market on 2 July 2013.
The Company is under the control of its Board of Directors on
behalf of Shareholders. All Directors are independent and
non-executive. The Board are responsible for reviewing the business
affairs of the Company in accordance with the Articles and have
overall responsibility for the Company's activities including all
business decisions, review of performance and authorisation of
distributions.
The Company has delegated the following activities to its
appointed service providers;
-- Asset Management - Amedeo
-- Liaison Agents - Amedeo Services (UK) Limited
-- Corporate and Shareholder Adviser - Nimrod
-- Secretary and Administrator - JTC
-- Registrar - JTC Registrars Limited (formerly Anson Registrars Limited)
The Company has no executive directors or employees and no
physical office premises. The Company's business is carried out in
a series of meetings held in the offices of its administrator JTC,
in Guernsey, the Company's place of incorporation.
Subject to any travel restrictions imposed, the Directors are
required to travel in the fulfilment of their duties. Where
circumstances allow, travel is kept to a minimum. The Directors are
required to travel to Guernsey on at least a quarterly basis for
Board and other committee meetings, and to the UK to visit
Shareholders and service providers as and when required. Regular
dialogue with the Asset Lessee is maintained via the Asset
Manager.
The Company consequently has a limited physical footprint and
therefore its environmental impact is considered to be low.
The Modern Slavery Act
Due to the nature of the Company's business, being a company
that does not offer goods or services to customers, the Board
considers there are no relevant disclosures with regard to modern
slavery in relation to the Company's own operations. The Board
considers the Company's supply chains, dealing predominantly with
professional advisers and service providers in the financial
services industry, to be low risk in this regard.
The Assets
The principal activity of the Company is to acquire, lease and
then sell aircraft. The Company has a wholly-owned subsidiary, DNA
Alpha (together the "Group"). The Group owns four Airbus A380
aircraft which are leased for twelve years to Emirates (the
"Lessee"), the national carrier owned by The Investment Corporation
of Dubai based in Dubai, United Arab Emirates.
The Group's own operational influence in the fields of climate
change, air quality, and resource efficiency is minimal. The nature
of the lease with the Lessee means that control over the usage of
the Asset rests with the Lessee. The Group has leased the Assets
for a term of twelve years, with fixed lease rentals for the
duration, to the Lessee. The Lessee bears all costs (including for
maintenance, repairs and insurance) relating to the aircraft during
the lifetime of the lease. This would include any modifications or
modernisations related to ESG requirements as mandated by
regulatory agencies. However, in all other respects, the influence
of the Group over the Lessee with regard to voluntary ESG concerns
is limited due to existing quiet enjoyment arrangements between the
Group and the Lessee.
The Airbus A380 is the world's largest commercial passenger
aircraft. It is the first and only aircraft with two full-length
passenger decks, giving it a maximum capacity of up to 853
passengers. In a typical three-class configuration (First, Business
and Economy Class), the Airbus A380 has capacity for approximately
525 passengers. Additionally, developments with respect to the
aircraft's aerodynamics, control elements and flight systems,
coupled with the use of advanced, lightweight composite materials
make the A380 an attractive and efficient aircraft. In comparison
with other modern long-range passenger aircraft of the same
category (the so-called Very Large Aircraft segment), the Airbus
A380 consumes less fuel per passenger, using approx. three litres
of kerosene per 100 passenger kilometers, when equipped with Engine
Alliance engines. Furthermore, the A380 offers an efficient way to
capture traffic at the most concentrated airports and times by
giving airlines the ability to consolidate routes, thereby
increasing seat capacity while creating economies of scale.
The most critical environmental issue related to aircraft
operations is greenhouse gas ("GHG") emissions generated from
fossil energy consumption. Air transportation is one of the most
energy and carbon dioxide intensive modes of transport, whether
measured per passenger kilometer or per hour in transit. According
to the United Nations' Intergovernmental Panel on Climate Change
("IPCC"), the aviation industry currently produces approx. 2 - 2.5
per cent of all carbon dioxide emissions and is forecast to
increase its share of global man-made carbon dioxide emissions to
approx. 3 per cent by 2050 given the rapid growth of aviation in
recent years.
The Aviation Industry
Despite aviation's important role in local and global economic
development, the aviation industry faces the challenge of meeting
long term strong growth in passenger demand while simultaneously
reducing its environmental impacts. In addition to GHG emissions,
these environmental impacts could also include noise and nuisance,
as well as water pollution (due to aircraft de-icing, cleaning, and
other chemical-heavy aircraft operations).
To address these growing environmental concerns, IATA has
defined environmental goals, namely:
1. to improve fuel efficiency by 1.5 per cent per annum by 2020;
2. to cap emissions from aviation at the 2020 levels through carbon dioxide-neutral growth; and
3. to reduce net carbon dioxide emissions from aviation by 50
per cent by 2050, relative to 2005 figures.
In pursuit of these goals, IATA has defined a strategy based on
a four-pillar approach:
1. improved technology, including sustainable low-carbon dioxide fuels;
2. more efficient aircraft operations;
3. infrastructure improvements, including air traffic management systems; and
4. a single global market-based measure, to fill the remaining emissions gap.
Further information can be found on the IATA website:
https://www.iata.org/en/policy/environment/ .
There are a number of technological developments in the aviation
industry aimed at both increasing aircraft efficiency and reducing
carbon dioxide emissions. Some developments, such as drop-in power
fuels like biofuels that can be used in today's aircraft and
engines without modification, are already commercially available
and are expected to increase in prominence once initial costs can
be reduced through scale. Evolutionary concepts, such as the
second-generation geared turbo fan engine could become widely
commercially available in the medium-term. Revolutionary concepts,
such as piston compressors, steam injection and electric
propulsion, represent the greatest potential improvements, but will
most likely not be commercially available until the 2050s, based on
current forecasts.
As these technological developments progress, the aviation
industry is taking additional measures to curb its environmental
impact while maintaining its commitment to local and global
economic development. Initiatives, such as the Carbon Offsetting
and Reduction Scheme for International Aviation ("CORSIA"), as
established by the International Civil Aviation Organization
("ICAO") in October 2016, aim to offset airline carbon dioxide
emissions and allow for carbon dioxide-neutral growth from 2020.
Additionally, the aviation industry is able to participate in other
carbon dioxide emissions trading markets, such as the European
Union Emission Trading Scheme ("EU ETS").
Furthermore, a number of states currently levy passenger taxes
on air tickets over and above infrastructure charges and there are
a number of proposals for additional environmental taxes to be
imposed on the aviation industry. However, as IATA notes, the
income generated from an environmental tax is usually seen as
general revenue by governments, thus it can be used to fund any
variety of public sector programs and initiatives. As such, IATA
takes the position that, while the overall goal of an environmental
tax is laudable, it has distortionary effects on jobs and the
economy, while at the same time not effectively incentivising the
development or use of newer and greener technology. The effects of
any newly introduced environmental taxes on the aviation industry
will have to be monitored. The aviation industry plays a critical
role in local and global economic development, contributing to
approx. 72 million jobs worldwide according to IATA estimates for
2020.
ICAO have used the United Nations' Sustainable Development Goals
("SDG") as a basis to identify the contributions the aviation
industry is making to sustainable development. For further
information and the full working paper on aviation's contributions
towards the United Nations' 2030 agenda for sustainable development
from ICAO's 40(th) session please refer to the ICAO website:
https://www.icao.int/Meetings/A40/Documents/WP/wp_189_en.pdf
Concerning the role of aircraft in sustainable development,
aircraft Assets are likely to contribute to at least five of the
SDG. Specifically, airlines are able to utilize aircraft in a
manner consistent with the achievement of the following
targets:
1. SDG 5: Aviation is working to achieve gender balance across
the sector. In Europe, aviation is the most gender-balanced of all
transport modes with 41 per cent female employees. More work is
still needed to encourage balance in technical and executive
roles;
2. SDG 8.1: Devise and implement policies to promote sustainable
tourism that creates jobs and promotes local culture and
products;
3. SDG 9.1: Develop quality, reliable, sustainable and resilient
infrastructure, including regional and trans-border infrastructure,
to support economic development and human wellbeing, with a focus
on affordable and equitable access for all;
4. SDG 12.2: Achieve sustainable management and efficient use of
natural resources productions; and
5. SDG 13: Invest in the transition to net-zero carbon dioxide
energy, energy efficiency and the reduction of GHG emissions from
transport operations.
Detailed information on the SDG can be found on the United
Nations website: https://sustainabledevelopment.un.org/ .
Emirates, the Lessee, is committed to efforts to reduce resource
consumption while also investing in wildlife conservation and
protection. This includes participation in CORSIA as well as
internal initiatives.
For further information on Emirates' environmental policy and
initiatives, please visit the Emirates website where annual
environmental reports are also available:
https://www.emirates.com/english/about-us/our-planet/
In the context of the Assets and the associated lease, the Board
are committed to responsible decision making throughout the
lifecycle of the Group. The Board is in continuous dialogue with
its service providers and regularly reviews processes to guarantee
transparency and accountability. The Board will continue to monitor
the sustainability efforts of the industry and the Lessee and keep
Shareholders abreast of developments.
AUDIT COMMITTEE REPORT
Membership
Geoffrey Hall - Chair of the Audit Committee
Andreas Tautscher - Non-executive Director
Suzie Procter - Senior Independent Director
Key Objective
The provision of effective governance over (i) the
appropriateness of the Group's financial reporting including the
adequacy of related disclosures, (ii) the performance of the
Company's external auditor, (iii) monitoring of the systems of
internal controls operated by the Company and (iv) the Company's
principal service providers and the management of the Company's
regulatory compliance activities.
Responsibilities
The key duties of the Audit Committee (the "Committee") are as
follows:
-- reviewing the Company's financial results announcements and
financial statements and monitoring compliance with relevant
statutory and listing requirements;
-- reporting to the Board on the appropriateness of the
Company's accounting policies and practices including critical
accounting policies and practices;
-- advising the Board on whether the annual report and accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for Shareholders to assess the Company's
position, performance, business model and strategy;
-- overseeing the relationship with the external auditor and
reviewing the effectiveness of the external audit process; and
-- Monitoring the systems of internal controls operated by the
Company and by the Company's principal service providers.
Committee Meetings
The Committee usually meet in Guernsey at least twice a year.
The Committee reports to the Board as part of a separate agenda
item, on its activities and on matters of particular relevance to
the Board in the conduct of its work. During the financial year
under review the Committee formally reported to the Board on two
occasions.
Main Activities of the Committee during the financial year
The Committee assisted the Board in carrying out its
responsibilities in relation to financial reporting requirements,
compliance and the assessment of internal controls. The Committee
also managed the Group's relationship with the external
auditor.
Fair, Balanced and Understandable
In order to comply with the Code, the Board requested that the
Committee advises them on whether it believes the annual report and
accounts, taken as a whole, is fair, balanced and understandable
and provides the information necessary for Shareholders to assess
the Group's performance, business model and strategy.
T he Committee engaged with the Group's auditor and the Group's
administrator in order to ensure that the financial statements were
fair, balanced and understandable.
Financial Reporting and Significant Issues
The Committee's primary role in relation to financial reporting
is to review, with its service providers and the external auditor,
the appropriateness of the half-year and annual financial
statements, the significant financial reporting issues and
accounting policies and disclosures in the financial statements.
The Committee has considered the key risks identified as being
significant to these accounts and the most appropriate treatment
and disclosure of any new significant issues identified during the
audit and half-year reviews as well as any recommendations or
observations made by the external auditor, Deloitte. To aid its
review the Committee considered reports prepared by external
service providers, including Amedeo and Nimrod, and reports from
Deloitte on the outcome of their annual audit. The significant
issues considered by the Committee in relation to the 2020 accounts
and how these were addressed are detailed below:
Significant issues for How the Committee addressed these significant
the year under review issues
Residual value of aircraft The Group has engaged three internationally
assets recognised expert appraisers to provide
the Group with third party consultancy
The non-current Assets valuation services. In the absence of
of the Group comprise sales data for similar used Assets,
of four Airbus A380 aircraft. appraisers are heavily reliant on databases
An annual review is required containing historical data points of
of the residual value aircraft sales relating to large commercial
of the Assets as per aircraft. Interpretation of historical
IAS 16 Property, Plant data is the basis for the current market
and Equipment, which value and provides, together with the
defines residual value expected developments in the future,
as "the estimated amount the foundation for their opinions on
that an entity would future values. Furthermore, the appraisers'
currently obtain from valuations take into account specific
disposal of the Asset, technical and economic developments
after deducting the estimated as well as general future trends in
costs of disposal, if the aviation industry and the macro-economic
the Asset were already outlook. The Group has historically
of an age and in the used the average Future Base Values
condition expected at of the three independent appraisers,
the end of its useful excluding inflation as a guide to determine
life." the residual value. One of the key assumptions
in this concept is a market in a theoretical
The Company's estimation constant equilibrium, characterized
technique is to make by a balance in supply and demand.
reference to the most
recently produced forecast In the aftermath of Airbus' February
soft value (excluding 2019 decision to discontinue the A380
inflation), not an estimate production in 2021, a number of A380
of the amount that would operators disclosed plans to withdraw
currently be achieved, at least parts of their A380 fleets
and so this is not a earlier than originally anticipated.
direct application of Furthermore, it became obvious that
the IAS 16 definition. A380s returned following the expiration
This approach has been of operating lease agreements could
taken because current not be placed with a new operator within
market values in today's a reasonable period of time and owners
prices for comparable were forced to explore alternative scenarios
twelve year old A380 for revenue generation like engine lease.
were not available at This also includes part-out activities
the reporting date. for the first few A380s returned from
HMSS.
The spread of COVID-19 and comprehensive
travel restrictions around the world
came along with an unprecedented drop
in air travel. In the second half of
April 2020 about two out of three commercial
airliners worldwide were temporarily
on the ground. At the time of writing
the majority of all A380s worldwide
are in (temporary) storage. The financial
difficulties most of the airlines currently
experience, result in various measures
to weather the consequences of the COVID-19
pandemic, as many expect the recovery
to pre-pandemic passenger flows take
much longer than in previous situations,
where demand was negatively affected,
like 9/11.
Due to the A380-specific developments
during the last financial year of the
Company and the generally dimmed market
sentiment in the aviation sector since
the COVID-19 outbreak, which is not
over yet, there is an increasing risk
that the underlying assumptions of the
Base Value concept might not be met
at the time of the lease expires. For
this reason the Asset Manager recommended
to make use of a more conservative approach
in deploying future Soft Values instead
of Base Values. Soft Values are more
conservative, also applicable under
"abnormal conditions" and do not necessarily
require a balanced market as the Base
Value concept does.
The Group now believes that the use
of Future Soft Values excluding inflation
best approximates residual value as
required per IAS 16 Property, Plant
and Equipment. A significant decrease
in USD terms in the residual value of
the aircraft from the prior year has
resulted in an adjustment made to depreciation
in the current year, details of which
have been disclosed in note 10.
As updated investment valuations of
all Assets as at the year end were commissioned
and received from third party professional
valuers and analysed by the Asset Manager
and the directors, the Committee believes
that those valuations are appropriate
for use in preparing the financial statements.
Therefore, the average residual values
excluding inflation used in the accounts
are based on these appraisals .
Upon review of the advice they have
received from Amedeo and the appraisers,
the Committee is of the opinion that,
the current estimate of the residual
soft values excluding inflation of the
Assets is a reasonable approximation
of the residual value of the aircraft
within the IAS 16 definition.
The estimation of residual values remains
inherent to estimation uncertainty.
This is disclosed in note 3 and has
been highlighted by the auditor in their
key observations section of the valuation
and ownership of aircraft key audit
matter.
-------------------------------------------------
Recording foreign exchange In assessing foreign exchange, the Committee
gains/losses has considered the issue at length and
is of the opinion that, on an on-going
IFRS require that certain basis and assuming the lease and loan
transactions denominated payments are made as anticipated, such
in currencies other than exchange differences do not reflect
the presentation currency the commercial substance of the situation
(including, most importantly, in the sense that the key transactions
the cost of the Assets) denominated in US dollars are in fact
be translated into presentation closely matched. Rental income received
currency at the exchange in US dollars is used to pay loan repayments
rate ruling at transaction due which are likewise denominated in
date, whilst monetary US dollars. US dollar lease rentals
balances (principally and loan repayments are furthermore
the outstanding borrowings) fixed at the outset of the Group's life
are translated at the and are very similar in amount and timing.
rate prevailing on the
reporting date. The resultant The Committee concluded that the matching
figures sometimes show of the lease rentals to settle loan
very large mismatches repayments therefore mitigates risks
which are reported as of foreign exchange fluctuations.
unrealised foreign exchange
differences. The Committee carefully considered the
disclosure in note 20 (b) to the Consolidated
During the year the Group Financial Statements to ensure that
recorded a significant the reality of the Group's foreign exchange
foreign exchange rate risk exposure is properly explained.
loss due to the depreciation
of Sterling against the
US dollar and the consequent
increase in the Sterling
value of the US dollar
denominated debt.
-------------------------------------------------
Going concern risk The Committee received quarterly reports
from Amedeo during the year which comment
Emirates are the sole on the performance of Emirates. Amedeo
lessee of the Assets. have advised that Emirates has continued
Should Emirates default to perform well in its 2019-20 financial
on the rental payments, year, which ended on 31 March 2020.
it will result in the The Lessee recorded its 32(nd) consecutive
Group failing to service year of profit, despite negative impacts
debt and it is unlikely form the 45-day runway closure at its
the Group will be able home base and the COVID-19 pandemic.
to meeting its targeted The net profit increased by 21% over
dividend or, in the case the results of the previous financial
of ongoing default, continue year. For the 2020-21 financial year,
as a going concern. the airline expects "a huge impact"
on its performance, according to Sheikh
Ahmed bin Saeed Al Maktoum, CEO and
chairman of the Emirates Group.
While Emirates maintains that it has
a strong balance sheet with a substantial
cash position, the airline is taking
additional measures to protect its cash
flow through cost savings measures,
reductions to discretionary capital
expenditure, and engaging with business
partners to improve working capital.
To this end, Emirates also raised AED
4.4 billion (USD 1.2 billion) in additional
liquidity in the Q1/2020 through term
loans, revolving credit and short term
trade facilities. As a result, Emirates
ended the financial year 2019/20 on
March 31, 2020 with AED 20.2 billion
(USD 5.5 billion) in cash assets. Emirates
also stated that it intends to continue
to tap the bank market for further liquidity
in Q2/2020 to provide a cushion against
the impact of COVID-19 on its cash flows
in the short term. Hence, Emirates is
mindful of its reputation and is continuously
working on measures to maintain is ability
to pay all of its obligations in full
and on time.
In line with IFRS 16 Emirates is recording
its future lease payment liabilities
(including its right-of-use asset) in
its latest annual financial statements.
Furthermore, the management of the airline
came to the conclusion that the company
is a going concern. The auditors did
not raise a material uncertainty on
going concern in its independent auditor's
report, which is dated May 7, 2020 -
and hence should take COVID-19 and the
potentially negative effects on the
lessee's (future) financial position
into consideration.
The airline confirms in its annual report
that it could obtain "committed support
from the Government of Dubai which has
publicly confirmed that they will financially
support Emirates during this period
through a variety of measures including
an additional equity injection, if required".
In an official statement on Twitter
Sheikh Hamdan bin Mohammed al-Maktoum,
the Crown Prince of Dubai, confirmed
that "The Government of Dubai is committed
to fully supporting @Emirates at this
critical time and will inject equity
into the company". He added: "@Emirates,
our national carrier, positioned Dubai
as a global travel hub and has great
strategic value as one of the main pillars
of Dubai's economy, as well as the wider
economy of the UAE (United Arab Emirates)".
By the end of May 2020 the airline was
able to build up substantial cargo-only
operations with more than 80 Boeing
777-300ER passenger aircraft in the
air, complemented by 11 Boeing 777 freighters,
in order to generate cash flow with
the majority of its fleet still sitting
on the ground. According to Tim Clark,
the airline's president: "[Cargo operations]
are never going to produce the kind
of income you'll get from passenger
operations, but they certainly kept
the wolf from the door."
The Asset Manager is not aware of a
formal request addressed to the Company
for a lease deferral or any other efforts
that would result in the restructuring
of the existing transaction and could
potentially have an impact on the committed
future lease rental receipts. There
is indication that if the lessee would
approach the lessor community for some
sort of support (such as temporary deferral
of lease rate components) while Emirates
is working through this pandemic, transactions
with a relatively short remaining lease
tenor could be less affected.
Emirates is owned by the Investment
Corporation of Dubai, a state-owned
holding company that can be characterized
as a sovereign wealth fund owned by
the Government of Dubai. It is neither
listed nor carry its bond issuances
an issuer rating. However, Emirates'
senior unsecured USD bonds with maturities
in 2023, 2025 and 2028 are trading and
the markets' pricing for such instruments
provide proxies for the credit risk
of the lessee. As the operating lease
agreements between Emirates and the
Company include a hell or high water
clause, the lease rental stream and
any other contractual payment primarily
depends to Emirates' ability to meet
its financial obligations whenever they
fall due. In mid-July 2020, Emirates'
bonds are trading at around 96 cents
(maturities in 2023 and 2025) and 92
cents (2028 maturity), representing
USD running yields from approximately
4.1% to 4.9%. This level of yields certainly
does not appear to indicate any significant
financial stress to the issuer. Another
readily available indicator for the
lessee's financial health are Credit
Default Swaps on Emirates bonds. The
quote informs about the annual cost
in basis points of insuring against
an Emirates credit event for a five
year period. In mid-July 2020 the annual
insurance premium on one USD face value
in Emirates bonds is 343bps, which is
elevated versus the longer term average
of around 150bps. However, taking into
consideration that aviation is one of
the hardest hit sectors by COVID-19,
the Credit Default Swap still indicates
that the market perceives Emirates as
a trustworthy company, which is very
likely able to meet its obligations
in the next five years.
The Committee concluded that it would
continue to receive regular updates
from Amedeo on the performance of Emirates
and would continue to monitor Emirates'
overall performance .
The Committee carefully considered the
disclosure in note 20(c) to the financial
statements to ensure that this concentration
of credit risk is properly reflected.
-------------------------------------------------
Consideration of any The Committee has considered the issue
triggers for impairment at length and accordingly an impairment
review has been undertaken as at 31
IAS 36 Impairment of March 2020. Refer to note 3 for further
Assets requires that detail on the factors triggering the
a review for impairment review and the sensitivity analysis
be carried out by the performed on the discount rates and
Group when there is an residual value inputs. A s a result
indication of impairment of current year review, an impairment
of an asset and if events loss of GBP56,167,300 was booked in
or changes in circumstances the accounts as disclosed in note 2(m).
indicate that the carrying
amount of an asset may Contributing factors, which triggered
not be recoverable. The the Committee's decision to perform
review will compare the an impairment review, included the COVID-19
carrying amount of the pandemic and the global travel restrictions
Asset with its recoverable leading to a temporary halt of A380
amount, which is the operations worldwide. It was also necessary
higher of its value if as the Group decided to adhere to the
sold (if known) and its concept of Future Soft Values for measuring
value in use. the residual value of the aircraft.
In the previous years the Group relied
on Base Values.
-------------------------------------------------
Global Pandemic Risk COVID-19 has spread globally and resulted
in widespread restrictions on people
The emergence of a global socialising and travelling, which is
pandemic may have a profound having a significant effect on many
and negative impact on industries and in particular the airline
the operations and performance industry.
of the Group and may
directly or indirectly Due to restriction on travel imposed
affect some of the other by many countries, the majority of passenger
risks mentioned in this aircraft remain grounded. The consequent
table. lack of income for airlines may cause
bankruptcy and, in a worse case, repossession
of aircraft which would need to be stored
pending remarketing when restrictions
are eased.
The Board and its key service providers
have all acted to the best of their
abilities to protect the welfare of
the various teams involved in the affairs
of the Group to ensure operations are
maintained to the extent possible and
to protect and support the Assets of
the Group for as long as is required.
More information of COVID-19 is set
out in the Chairman's Statement on pages
4 to 6 and the Asset Manager Report
on pages 7 to 12
-------------------------------------------------
We note that the auditor also considers the recognition of
rental income and the accounting for debt within their key audit
matters. These items have been considered by the Committee in the
current year, but, as there have been no changes in respect of
these risks they have not been a primary area of focus of the
Committee in the current year.
Going Concern
The Directors in consultation with the Asset Manager are
monitoring the effect of the COVID-19 pandemic generally on the
aviation industry and specifically on the Group's aircraft values
and financial wellbeing of its lessee both now and in the future.
The Group's future performance can potentially be impacted should
this pandemic have a pervasive and prolonged impact on the economy.
There has prevailed widespread restrictions on the ability of
people to travel this has had a material negative effect on the
airline sector, and by extension the aircraft leasing sector. This
may lead to the inability of airlines to pay rent as they fall due.
These factors, together with wider economic uncertainty and
disruption, are likely to have an adverse impact on the future
value of the aircraft Assets owned by the Group, as well as on the
sale, re-lease, refinancing or other disposition of the relevant
aircraft.
An increase in lessee counterparty credit risk means that there
is now more uncertainty over lease payments and depending on
further developments with the lessee, there could be
requests for lease rental deferrals. Reduced rents receivable
under the leases may end up not being sufficient to meet the fixed
loan or Equipment Note interest and regular capital repayments of
debt scheduled during the life of each loan and may not provide
surplus income to pay for the Group's expenses and permit the
declaration of dividends.
The option to remarket the Aircraft following a potential event
of default by the lessee has not been taken into account. The
period of time necessary to successfully complete such a process is
beyond the twelve months forecasting horizon of the going concern
considerations. This applies in particular in times of COVID-19, as
various restrictions are still in place to contain the
pandemic.
The Directors consider that the going concern basis of
accounting remains appropriate. Based on current information the
Directors have reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable
future, although the risk to this is clearly higher.
Whilst there is some uncertainty as to the airline industry in
general, and specifically Emirates' financial position and credit
risk profile, on the basis that (i) Emirates has shown no intention
of failing to meet its obligations (ii) Emirates has the financial
backing to continue paying these rentals, the Directors believe
that it is appropriate to prepare these financial statements under
the going concern basis of preparation.
Internal Controls
The Committee has made due enquiry of the internal controls of
the Administrator. The Committee is satisfied with the controls
currently implemented by the Administrator. However it has
requested that the Administrator keeps the Committee informed of
any developments and improved internal control procedures.
The most recent report on the Internal control of JTC's
administration services, prepared in accordance with the
International Standard on Assurance Engagement 3402 ("ISAE 3402"),
for the period from 1 April 2019 to 31 March 2020, has been
provided to the Committee.
Internal Audit
The Group has no employees and operates no systems of its own,
relying instead on the employees and systems of its external
service providers. Following a recommendation from the Committee,
the Board has therefore taken the decision that it would be of
insufficient benefit for the Group to engage an internal
auditor.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle . The Committee receives from Deloitte a detailed audit plan
identifying their assessment of the key risks. For the financial
year under review, the primary risks identified were in respect of
valuation and ownership of the Group's Assets, the recording of
lease rental income and accounting for fixed rate debt using the
effective interest rate method.
Using its collective skills the Committee evaluates the
effectiveness of the audit process in addressing the matters raised
through the reporting it received from Deloitte at the conclusion
of the audit. In particular the Committee formally appraise
Deloitte against the following criteria:
-- Independence
-- Ethics and conflicts
-- Knowledge and experience
-- Challenge
-- Promptness
-- Cost
-- Overall quality of service
In addition the Committee also seek feedback from the
Administrator on the effectiveness of the audit process.
For the financial year under review, the Committee was satisfied
that there had been appropriate focus on the primary areas of audit
risk and assessed the quality of the audit process to be good. The
Committee discussed their findings with Deloitte and agreed how
future external audits could be improved.
The Committee holds meetings with the external auditor to
provide additional opportunity for open dialogue and feedback from
the auditor. Should it be necessary, Committee members meet with
the external auditor without the Administrator and Asset Manager
being present. Matters typically discussed include the auditor's
assessment of business risks and management activity thereon, the
transparency and openness of interactions with the Administrator,
confirmation that there has been no restriction in scope placed on
them by the Administrator on the independence of their audit and
how they have exercised professional scepticism.
Appointment and Independence
The Committee considers the reappointment of the external
auditor, including the rotation of the audit partner, each year and
also evaluates their independence on an on-going basis.
The external auditor is required to rotate the audit partner
responsible for the audit every five years. The current lead audit
partner has been in place since January 2020 with his first audit
reporting period being the year to 31 March 2020. This is his first
year of involvement .
Deloitte has been the Group's external auditor since June 2013,
with the first audit being carried out for the year ended 31 March
2014. The Committee has provided the Board with its recommendation
to the Company's Shareholders on the reappointment of Deloitte as
external auditor for the year ending 31 March 2021. Accordingly a
resolution proposing the reappointment of Deloitte as the Company's
auditor will be put to the Company's Shareholders at the 2020
annual general meeting.
There are no contractual obligations restricting the Committee's
choice of external auditor. The Committee continues to consider the
audit tendering provisions outlined in the revised Code, of which
it is very supportive. The Committee will consider arranging for
the external audit contract to be tendered in 2023 (being ten years
from the date of initial appointment of Deloitte) with the aim of
ensuring a high quality and effective audit.
Non-Audit Services
To further safeguard the objectivity and independence of the
external auditor from becoming compromised, the Committee has a
formal policy governing the engagement of the external auditor to
provide non-audit services. No changes have been made to this
policy during the year. This policy specifies that Deloitte should
only be engaged for non-audit services where there is considered to
be a very low threat to auditor independence. No non-audit services
have been provided by Deloitte during the year or to date.
Deloitte is prohibited from providing any other services without
the Committee's prior approval. In reaching such a determination
the Committee will take into consideration whether it is in the
best interests of the Group that such services should be supplied
by the Group's external auditor (rather than another service
provider) and, if so whether any safeguards regarding auditor
objectivity and independence in the conduct of the audit should be
put in place, whether these would be effective and how such
safeguards should be disclosed.
Committee Evaluation
The Committee's activities formed part of the review of Board
effectiveness performed in the year under review.
An internal evaluation of our effectiveness will be carried out
in 2020.
Geoffrey Hall
Chair of the Audit Committee
30 July 2020
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF DORIC NIMROD AIR
THREE LIMITED
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Doric Nimrod Air
Three Limited (the 'parent company') and its subsidiary (the
'Group):
-- give a true and fair view of the state of the Group's affairs
as at 31 March 2020 and of its loss for the year then ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union; and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
We have audited the financial statements which comprise:
-- the consolidated statement of comprehensive income;
-- the consolidated statement of financial position;
-- the consolidated statement of changes in equity;
-- the consolidated statement of cash flows; and
-- the related notes 1 to 24.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union.
2. Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council's
(the 'FRC's') Ethical Standard as applied to listed entities, and
we have fulfilled our other ethical responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters The key audit matters ("KAMs") that we identified
in the current year were:
* Valuation and ownership of aircraft;
* Recognition of lease rental income;
* Accounting for debt using the effective interest
method; and
* Impact of covid-19 on the going concern assumption.
Within this report, key audit matters are identified
as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
------------------- --------------------------------------------------------------
Materiality The materiality that we used in the current year
was GBP1,900,000 which was determined on the basis
of 2% of shareholders' equity. This is consistent
with the prior year.
------------------- --------------------------------------------------------------
Scoping The consolidated financial statements of the Group
incorporate its special purpose subsidiary through
which aircraft assets are held and through which
debt finance has been obtained. Whilst a statutory
audit of the financial statements of the subsidiary
is not required, it is included within the scope
of our audit of the consolidated financial statements.
Audit work to respond to the risks of material misstatement
was performed by the same audit engagement team.
------------------- --------------------------------------------------------------
Significant changes We have added a new KAM "Impact of covid-19 on the
in our approach going concern assumption". Covid-19 has had a significant
impact on the travel industry resulting in many of
the world's aircraft being grounded since the pandemic
took hold. The Group leases its aircraft to Emirates,
which currently, has grounded all its A380's including
the ones leased from the Group. This therefore raises
new going concern considerations on whether Emirates
will continue to meet its lease obligations.
------------------- --------------------------------------------------------------
4. Conclusions relating to going concern, principal risks and
viability statement
4.1. Going concern Going concern is the basis of preparation of the
We have reviewed the directors' statement in note financial statements that assumes an entity
2(k) to the financial statements about whether will remain in operation for a period of at least 12
they considered it appropriate to adopt the going months from the date of approval of the
concern basis of accounting in preparing financial statements.
them and their identification of any material
uncertainties to the Group's ability to continue We confirm that we have nothing material to report, add
to do so over a period of at least twelve months or draw attention to in respect of
from the date of approval of the financial these matters.
statements.
We considered as part of our risk assessment the
nature of the Group, its business model and
related risks including where relevant the impact of
the Covid-19 pandemic and Brexit, the
requirements of the applicable financial reporting
framework and the system of internal control.
We evaluated the directors' assessment of the
Group's ability to continue as a going concern,
including challenging the underlying data and key
assumptions used to make the assessment,
and evaluated the directors' plans for future
actions in relation to their going concern
assessment.
We state whether we have anything material to add or
draw attention to in relation to that
statement that would be required by Listing Rule
9.8.6R(3) if the company had a premium listing
and report if the statement is materially
inconsistent with our knowledge obtained in the
audit.
4.2. Principal risks and viability statement Viability means the ability of the Group to
Based solely on reading the directors' statements and continue over the time horizon considered
considering whether they were consistent appropriate
with the knowledge we obtained in the course of the audit, by the directors.
including the knowledge obtained We confirm that we have nothing material to
in the evaluation of the directors' assessment of the report, add or draw attention to in respect of
Group's ability to continue as a going these matters.
concern, we are required to state whether we have anything
material to add or draw attention
to in relation to:
* the disclosures on pages 16-17 that describe the
principal risks, procedures to identify emerging
risks, and an explanation of how these are being
managed or mitigated;
* the directors' confirmation on page 18 that they have
carried out a robust assessment of the principal and
emerging risks facing the Group, including those that
would threaten its business model, future performance
,
solvency or liquidity; or
* the directors' explanation on pages 17-18 as to how
they have assessed the prospects of the Group, over
what period they have done so and why they consider
that period to be appropriate, and their statement as
to whether they have a reasonable expectation that
the Group will be able to continue in operation and
meet its liabilities as they fall due over the period
of their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
We also report whether the directors' statement relating to
the prospects of the company that
would be required by Listing Rule 9.8.6R(3), if the company
had a premium listing, is materially
inconsistent with our knowledge obtained in the audit.
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1. Valuation and ownership of aircraft
Key audit matter Included on the Group's statement of financial position
description as at 31 March 2020 is aircraft assets amounting
to GBP386 million (2019: GBP490 million) as disclosed
in note 10 to the financial statements.
As explained in note 2(m), the Group's accounting
policy is to measure its aircraft assets at depreciated
historic cost less impairment. The assets are being
depreciated on a straight-line basis over the term
of the leases to estimated residual values at the
end of the lease periods. Notes 2(k) and 3, describe
the effects of the uncertainties created by the coronavirus
(COVID-19) pandemic on the residual values of the
Group's Assets. The outbreak has caused extensive
disruptions to businesses and economic activities
and, in particular, the airline industry and the
uncertainties created have increased the estimation
uncertainty over the residual values of the Assets
at the balance sheet date. As stated in Note 3, estimation
of aircraft residual value is a significant source
of uncertainty and is a key determinant in preparing
the financial statements. A number of factors, including
but not limited to, Airbus' decision to discontinue
the delivery of new A380s and the impact of Covid-19
has resulted in a change of estimation basis to use
soft values in the current year. Further, a significant
impairment of GBP56.2m has been recognised.
Refer to the considerations by the audit committee
on residual value and impairment as discussed on
pages 36 and 41.
The valuation and ownership of aircraft was deemed
to be a key audit matter as:
* the selected useful life or residual values used in
determining depreciation might not be appropriate, as
they may not be consistent with; available market
information, impact of Covid-19 on the Group and its
assets, forecast valuations obtained by the company
from expert aircraft valuers and the terms of the
aircraft lease agreements. The estimation of aircraft
useful life and residual values is a key judgement
area;
* an indicator of impairment of the assets might arise
in which case an impairment review should be
performed and the value of the assets written down to
recoverable amounts if less than carrying value.
Judgement is required in assessing whether an
indicator of impairment exists and estimation is
required on key inputs of the impairment review model
such as the terminal values, discount rate and
inflation rate used; and
* the economic substance of the original aircraft
acquisition transactions might not have been fully
considered, such that the assets might be recognised
in the financial statements when they do not belong
to the Group. In addition, the aircraft might be
recognised when the Group does not have proper legal
title.
----------------------- ------------------------------------------------------------------
How the scope Our procedures included:
of our audit responded * obtaining an understanding of the key business
to the key audit processes and controls associated with the valuation
matter of aircraft assets;
* reviewing and challenging management's considerations
of the impact of Covid-19 on the Group and its
assets;
(a) critically assessing the conclusions reached
by the Board of Directors ("Board") on the appropriateness
of the selected residual values and evaluating their
consistency with available market information, including
forecast valuations obtained by the Group from expert
aircraft valuers and the terms of the aircraft lease
agreements. We evaluated the competence, capability
and objectivity of the valuers engaged by management.
We also considered the adequacy of the disclosure
related to this estimation uncertainty set out in
Note 3;
(b) engaging with our internal aircraft valuation
specialists in reviewing the Board and asset manager's
conclusions on the assessments made on residual values
used at year end;
(c) engaging with our internal aircraft valuation
specialists in assessing the reasonableness of assumptions
and methodology used by a sample of expert appraisers,
in their estimation of forecast residual values and
current market value estimates;
* reviewing and challenging the reasonableness of key
inputs, assumptions and methodology used in the
assessment of impairment. This was achieved through
our inspection of supporting evidence and through our
consideration of internal and external factors which
affect the impairment review process on the aircraft;
and
* reviewing the original purchase agreement for
consistency with the assets owned and obtaining
certificate of registration directly from 'The
International Registry for International Interests in
Mobile Equipment' to confirm ownership. In addition,
we reassessed our evaluation of the economic
substance of the original purchase transactions in
order to evaluate if the assets were appropriately
recognised.
----------------------- ------------------------------------------------------------------
Key observations While we note the significantly increased estimation
uncertainty as a result of Covid-19 in relation to
the residual values of the Company's assets we consider
the assumptions used to be appropriate. In addition
we concluded that the inputs used in the impairment
review including these residual values, the resulting
impairment adjustment of GBP56.2m and the disclosures
of the resulting sensitivities in note 3 are appropriate.
Having considered both the economic substance of
the transactions and the legal form, we concluded
that the assets recorded in the financial statements
are owned by the Group.
----------------------- ------------------------------------------------------------------
5.2. Recognition of lease rental income
Key audit matter The Group's leases have been classified as operating
description leases and as such rental income which amounts to
GBP78.2 million (2019: GBP74.4 million) should be
recognised on a straight-line basis over the lease
term, which differs from the profile of actual rental
payments. As set out in Note 4 of the financial statements,
a significant portion of the lease rentals is receivable
in US Dollars and must be appropriately translated
into the Sterling functional and presentation currency.
The recognition of revenue also requires consideration
of all terms of the signed lease contracts. As stated
in Note 3, classification of leases as operating
leases is a key source of uncertainty in preparing
the financial statements.
The recognition of revenue was deemed to be a key
audit matter as:
* revenue might not be properly recorded in accordance
with requirements of the lease contracts and in
accordance with the straight-line basis;
* related deferred or accrued income might not be
recognised appropriately; and
* revenue transactions and related amortisation of
deferred income are significant to the Group's
financial performance, hence any material
misstatements in revenue will have a direct impact on
reported comprehensive income.
----------------------- -------------------------------------------------------------------
How the scope Our procedures included:
of our audit responded * obtaining an understanding of the key business
to the key audit processes and controls on recognition of lease
matter income;
* consideration on whether the classification of the
leases as operating is appropriate with reference to
the lease terms and the nature of the assets and the
requirements of IFRS 16: Leases;
* developing independent expectations of lease income
for the year based on total lease rentals receivable,
the lease term and the applicable foreign exchange
rates during the year. We also traced a sample of
rental income receipts to bank statements;
* recalculating deferred and accrued rental income
recognised in the Consolidated Statement of Financial
Position and testing accuracy of related translation
differences; and
* tracing all rental income receipts to bank
statements.
----------------------- -------------------------------------------------------------------
Key observations Having performed the procedures above, we concluded
that classification of the leases is appropriate
and that revenue recognition is in line with the
terms of the signed lease contracts and is in line
with IFRS 16: Leases.
We also concluded that deferred and accrued income
balances recorded were appropriate as they were not
materially different from results of our recalculations.
----------------------- -------------------------------------------------------------------
5.3. Accounting for debt using the effective interest method
Key audit matter In order to part-finance the acquisition of the aircraft
description asset, the Group obtained fixed rate debt. As at
31 March 2020 the value of total debt held by the
Group was GBP155.0 million (2019: GBP210.5 million)
as disclosed in Note 15 to the financial statements.
The debt is amortising over the lease term. As set
out in Note 2(n) to the financial statements, the
debt instruments are carried at amortised cost with
interest expense recognised at the effective interest
rate. The debt might not be properly accounted for
using the effective interest rate method or adequate
disclosures might not made in the financial statements.
----------------------- ------------------------------------------------------------------------
How the scope Our procedures included:
of our audit responded * obtaining an understanding of the key business
to the key audit processes and controls on accounting for and
matter recording of debt;
* reviewing the debt amortisation schedule prepared by
management to recalculate the effective interest rate
on the loan and checked whether it is consistent with
the repayment schedule;
* obtaining direct confirmation of the principal
balance outstanding and recalculating accrued
interest using the effective interest rate; and
* developing an expectation of the interest charge for
the period using the average outstanding principal
balance during the period and the effective interest
rate.
----------------------- ------------------------------------------------------------------------
Key observations Having carried out the procedures, we concluded that
the debt was appropriately valued in line with the
effective interest rate method and related interest
calculation was within our expectation.
----------------------- ------------------------------------------------------------------------
5.4. Impact of covid-19 on the going concern assumption
Key audit matter Covid-19 has had a significant impact on the travel
description industry resulting in many of the world's aircraft
being grounded since the pandemic took hold. The
Group leased its aircraft to Emirates Airlines ("Emirates")
and the financial wellbeing of this entity and its
ability to continue to meet lease rentals as they
fall due are a key factor is assessing whether the
Group is able to continue as a going concern.
Any default in the rentals receivable from Emirates
would result in a default on the loan obligations
of the Company which could ultimately result in the
sale of the aircraft to meet those obligations.
Note 2(k) of the financial statements provides further
disclosures on considerations on Going Concern.
----------------------- -----------------------------------------------------------------------
How the scope Our procedures included:
of our audit responded * Consideration of the ability of Emirates to meet the
to the key audit lease obligations as they fall due through the
matter consideration of publicly available financial
information and through our own independent
investigations;
* Discussions with the Directors and Investment Manager
as to whether any rental restructuring has been
requested by Emirates;
* Consideration of whether there have been any lease
payment defaults since the year end by comparing
scheduled lease payments against amounts received on
bank statements;
* Consideration of the credit rating of Emirates; and
* Consideration of the financial support available to
Emirates through its main investor and our
independent assessment on the main investor's ability
to provide support.
----------------------- -----------------------------------------------------------------------
Key observations Having carried out the procedures, we concluded that
the adoption of going concern basis of accounting
is appropriate.
----------------------- -----------------------------------------------------------------------
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Materiality GBP1,900,000 (2019: GBP3,242,000)
----------------------------------- ---------------------------------------------------------------------------------
Basis for determining materiality 2% (2019: 2%) of shareholders' equity.
----------------------------------- ---------------------------------------------------------------------------------
Rationale for the benchmark applied Our materiality is based on shareholders' equity of the Group. Comprehensive
income is significantly
influenced by fluctuations in exchange rates, hence it will not be a stable
benchmark to use
in our determination of materiality. We consider shareholders' equity to be the
most important
balance on which the shareholders would judge the performance of the Group.
----------------------------------- ---------------------------------------------------------------------------------
6.2. Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole. Performance materiality was set at 70% of
materiality for the 2020 audit (2019: 70%). In determining
performance materiality, we considered the following factors:
(a) the quality of the control environment, and we were able to
rely on controls on over a number of business processes, including;
Debt, Cash, Expenses and Revenue, and
(b) Our past experience of the audit, which has indicated a low
number of corrected and uncorrected misstatements.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP0.095m (2019:
GBP0.19m), as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds. We also report to
the Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the Group
and its environment, including internal control, and assessing the
risks of material misstatement. Audit work to respond to the risks
of material misstatement was performed directly by the audit
engagement team.
The Group is administered by a third party Guernsey regulated
service provider, as part of our audit we reviewed ISAE 3402 report
of the service organisations and the relevant controls for over a
number of business processes, including; Debt, Cash, Expenses and
Revenue.
The consolidated financial statements of the Group incorporate
its special purpose subsidiaries through which aircraft are held
and through which debt finance has been obtained. Whilst statutory
audits of the financial statements of each of these subsidiaries
are not required, they are included within the scope of our audit
of the consolidated financial statements conducted using the Group
materiality set out above. Audit work on each entity within the
Group was performed by the same audit team. The Group is treated as
a single entity for financial reporting purposes hence component
materiality was not used.
8. Other information
The Directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the financial statements and our auditor's
report thereon.
Our opinion on the financial statements does not cover the other
information and we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether there
is a material misstatement in the financial statements or a
material misstatement of the other information. If, based on the
work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact.
In this context, matters that we are specifically required to
report to you as uncorrected material misstatements of the other
information include where we conclude that:
-- Fair, balanced and understandable - the statement given by
the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group's position and performance, business model and strategy,
is materially inconsistent with our knowledge obtained in the
audit; or
-- Audit committee reporting - the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
-- Directors' statement of compliance with the UK Corporate
Governance Code - the parts of the directors' statement that would
be required, if the company had a premium listing, relating to the
Company's compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R (2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance
Code.
We have nothing to report in respect of these matters.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities . This description forms
part of our auditor's report.
Report on other legal and regulatory requirements
11. Matters on which we are required to report by exception
11.1. Adequacy of explanations received and accounting records
Under the Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- proper accounting records have not been kept by the parent company; or
-- the financial statements are not in agreement with the accounting records.
We have nothing to report in respect of these matters.
12. Use of our report
This report is made solely to the company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. 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.
David Becker ACA
For and on behalf of Deloitte LLP
Recognised Auditor
St Peter Port, Guernsey
30 July 2020
CONSOLIDA T ED S T A T E M ENT OF COM PREHENSIVE INCOME
For the year ended 31 March 2020
Year ended Year ended
Notes 31 Mar 2020 31 Mar 2019
GBP GBP
INCOME
A rent income 4 57,607,083 53,856,708
B rent income 4 20,528,473 20,430,241
Bank interest received 101,216 92,933
-------------- -------------
78,236,772 74,379,882
EXPENSES
Operating expenses 5 (1,555,971) (1,514,516)
Depreciation of Aircraft 10 (47,506,703) (25,020,998)
Impairment of Aircraft 10 (56,167,300) -
-------------- -------------
(105,229,974) (26,535,514)
Net (loss)/profit for the year before finance costs and foreign
exchange losses (26,993,202) 47,844,368
Finance costs 11 (10,549,991) (13,982,911)
Net (loss)/profit for the year after finance costs before foreign
exchange gains (37,543,193) 33,861,457
Unrealised foreign exchange loss 7 (15,994,153) (23,961,047)
-------------- -------------
(Loss)/profit for the year (53,537,346) 9,900,410
Other Comprehensive Income - -
-------------- -------------
Total Comprehensive (expense) /Income for the year (53,537,346) 9,900,410
-------------- -------------
Pence Pence
(Loss) / earnings per Share for the year - Basic and Diluted 9 (24.34) 4.50
In arr i v ing at the results for the f inancial year, all
amounts above relate to continuing operation s.
T he notes on pages 58 to 85 form an integral part of these con
sol idated f inancial statements.
CONSOLIDA T ED S T A T E M ENT OF FINANCIAL POSITION
A s at 31 March 2020
31 Mar 2020 31 Mar 2019
Notes GBP GBP
NON-CURRENT ASSETS
Aircraft 10 385,844,698 489,518,701
-------------- -------------
CURRENT ASSETS
Receivables 13 60,243 58,040
Cash and cash equivalents 18 13,719,497 13,113,249
-------------- -------------
13,779,740 13,171,289
TOTAL ASSETS 399,624,438 502,689,990
============== =============
CURRENT LIABILITIES
Borrowings 15 42,306,341 63,341,248
Deferred income 3,184,479 3,184,479
Rebates 16 381,116 367,220
Payables - due within one year 14 75,897 63,185
-------------- -------------
45,947,833 66,956,132
NON-CURRENT LIABILITIES
Borrowings 15 112,658,700 147,163,601
Deferred income 144,783,039 120,337,113
Rebates 16 938,717 1,249,649
-------------- -------------
258,380,456 268,750,363
-------------- -------------
TOTAL LIABILITIES 304,328,289 335,706,495
============== =============
TOTAL NET ASSETS 95,296,149 166,983,495
-------------- -------------
EQUITY
Share capital 17 208,953,833 208,953,833
Retained loss (113,657,684) (41,970,338)
-------------- -------------
95,296,149 166,983,495
-------------- -------------
Pence Pence
Net Asset Value per Share based
on 220,000,000 (31 March 2019:
220,000,000) shares in issue 43.32 75.90
The consolidated financial statements were approved by the Board
of Directors and authorised for issue on 30 July 2020 and are
signed on its behalf by:
Charles Wilkinson Geoffrey Hall
Director Director
T he notes on pages 58 to 85 form an integral part of these con
sol idated f inancial statements.
CONSOLIDA T ED S T A T E M ENT OF CA SH FLOWS
For the for the year ended 31 March 2020
Year ended Year ended
31 Mar 2020 31 Mar 2019
Notes GBP GBP
OPERA TING ACTIVITIES
(Loss)/p rof it for the year (53,537,346) 9,900,410
Mo vement in deferred income 17,188,328 19,469,610
Interest received (101,216) (92,933)
Deprec iation of Aircraft 10 47,506,703 25,020,998
Impairment of Aircraft 10 56,167,300 -
Loan interest payable 11 10,161,592 13,595,573
Increase / (decrea se) in payables 12,712 (2,594)
Increa se in receivables (2,203) (1,275)
Foreign exchange movement 7 15,994,153 23,961,047
A m orti sation of debt arrange ment costs 11 388,399 387,338
-------------------------- --------------------------
NET CA SH FROM OPERA TING ACTIVITIES 93,778,422 92,238,174
-------------------------- --------------------------
INVES TING ACTIVITIES
Interest received 101,216 92,933
-------------------------- --------------------------
NET CA SH FROM INVES TING ACTIVITIES 101,216 92,933
-------------------------- --------------------------
FINANCING ACTIVITIES
Di v idends paid 8 (18,150,000) (18,150,000)
Repa y ments of capital on borrow ings 21 (65,123,634) (60,179,618)
Rep ay ments of interest on borrow ings 21 (10,094,475) (13,464,345)
-------------------------- --------------------------
NET CA SH USED IN FINANCING ACTIVITIES (93,368,109) (91,793,963)
-------------------------- --------------------------
CA SH AND CA SH EQUIV ALENTS AT BEGINNING OF YEAR 13,113,249 12,408,778
Increa se in cash and cash equi valents 511,529 537,144
Effects of foreign exchange rates 94,719 167,327
-------------------------- --------------------------
CA SH AND CA SH EQUIV ALENTS AT OF YEAR 18 13,719,497 13,113,249
-------------------------- --------------------------
T he notes on pages 58 to 85 form an integral part of these con
sol idated f inancial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 March 2020
Notes Share Retained Total
Capital Loss
GBP GBP GBP
Balance as at 1 April
2019 208,953,833 (41,970,338) 166,983,495
Total Comprehensive
(Expense) for the year - (53,537,346) (53,537,346)
Dividends paid 8 - (18,150,000) (18,150,000)
------------ -------------- -------------
Balance as at 31 March
2020 208,953,833 (113,657,684) 95,296,149
------------ -------------- -------------
Share Retained Total
Capital Earnings
GBP GBP GBP
Balance as at 1 April
2018 208,953,833 (33,720,748) 175,233,085
Total Comprehensive
Income for the year - 9,900,410 9,900,410
Dividends paid 8 - (18,150,000) (18,150,000)
------------ -------------- -------------
Balance as at 31 March
2019 208,953,833 (41,970,338) 166,983,495
------------ -------------- -------------
T he notes on pages 58 to 85 form an integral part of these
financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 March 2020
1 GENERAL INFORMATION
The consolidated financial statements incorporate the results of
the Company and DNA Alpha (the "Subsidiary").
The Company was incorporated in Guernsey on 29 March 2012 with
registered number 54908. The address of the registered office is
given on page 86. Its share capital consists of one class of the
Shares and one class of Subordinated Administrative Shares
("Administrative Shares"). The Company's Shares have been admitted
to trading on the SFS of the London Stock Exchange's Main
Market.
The Company's investment objective is to obtain income returns
and a capital return for its Shareholders by acquiring, leasing and
then selling aircraft. The principal activities of the Company are
set out in the Chairman's Statement and Management Report on pages
4 to 6 and 16 to 19 respectively.
2 ACCOUNTING POLICIES
The significant accounting policies adopted by the Group are as
follows:
(a) Basis of Preparation
The consolidated financial statements have been prepared in
conformity with IFRS, as adopted by the EU, which comprise
standards and interpretations approved by the International
Accounting Standards Board ("IASB") and International Financial
Reporting Interpretations Committee ("IFRIC") as adopted by the EU
and applicable Guernsey law. The consolidated financial statements
have been prepared on a historical cost basis.
The accounting policies adopted are consistent with those of the
previous financial year, except for the adoption of the new and
amended standards set out below.
(b) Adoption of new and revised Standards
New and amended IFRS Standards that are effective for current
year
The following Standard and Interpretations have been adopted in
the current year. Their adoption has not had a material impact on
the amounts reported in these consolidated financial statements and
is not expected to have any impact on future financial periods
except where stated otherwise:
IFRS 16 Leases - specifies how an IFRS reporter will recognise,
measure, present and disclose leases.
The standard provides a single lessee accounting model,
requiring lessees to recognise Assets and liabilities for all
leases unless the lease term is 12 months or less or the underlying
Asset has a low value. Lessors continue to classify leases as
operating or finance, with IFRS 16's approach to lessor accounting
substantially unchanged from its predecessor, IAS 17. This standard
is effective for annual periods beginning on or after 1 January
2019 and is endorsed by the EU. The Directors have assessed the
leases as operating leases under IFRS 16 and there has been no
material adjustments as a result of the adoption of IFRS 16.
IFRIC 23 Uncertainty over Income Tax Treatments - clarifies the
accounting for uncertainties in income taxes. This standard is
effective for annual periods beginning on or after 1 January 2019
and is endorsed by the EU. Guernsey has a 0 per cent. tax rate.
Some annual improvements on existing standards became effective in
the current year.
Their adoption has not had a material impact on the amounts and
disclosures presented in these financial statements and is not
expected to impact amounts and disclosure for future periods.
New and Revised Standards in issue but not yet effective
There have been no Standards or Interpretations which are not
yet effective and expected to have a material impact on the Group's
financial statements, except for the presentation of additional
disclosures and changes to the presentation of components of the
financial statements. These items will be applied in the first
financial period for which they are required.
(c) Basis of Consolidation
The consolidated financial statements incorporate the results of
the Company and its Subsidiary.
The Company owns 100 per cent. of all the shares in the
Subsidiary, and has the power to govern the financial and operating
policies of the Subsidiary so as to obtain benefits from its
activities. Intra-group balances and transactions, and any
unrealised income and expenses arising from intra-group
transactions, are eliminated in preparing the consolidated
financial statements.
(d) Taxation
The Company and its Subsidiary have been assessed for tax at the
Guernsey standard rate of 0 per cent.
(e) Share Capital
Shares are classified as equity. Incremental costs directly
attributable to the issue of Shares are recognised as a deduction
from equity.
(f) Expenses
All expenses are accounted for on an accruals basis.
(g) Interest Income
Interest income is accounted for on an accruals basis.
(h) Foreign Currency Translation
The currency of the primary economic environment in which the
Group operates (the functional currency) is Pound Sterling ("GBP",
"GBP" or "Sterling"), which is also the presentation currency.
Transactions denominated in foreign currencies are translated
into Sterling at the rate of exchange ruling at the date of the
transaction.
Monetary assets and liabilities denominated in foreign
currencies at the reporting date are translated into the functional
currency at the foreign exchange rate ruling at that date. Foreign
exchange differences arising on translation are recognised in the
Consolidated Statement of Comprehensive Income.
(i) Cash and Cash Equivalents
Cash at bank and short term deposits which are held to maturity
are carried at cost. Cash and cash equivalents are defined as call
deposits, short term deposits with a term of no more than three
months from the start of the deposit and highly liquid investments
readily convertible to known amounts of cash and subject to
insignificant risk of changes in value.
(j) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a
single segment of business, being acquiring, leasing and selling
various Airbus A380-861 aircraft.
(k) Going Concern
The Directors have prepared these financial statements for the
year ended 31 March 2020 on the going concern basis.
The Directors in consultation with the Asset Manager are
monitoring the effect of the COVID-19 pandemic generally on the
aviation industry and specifically on the Group's aircraft values
and financial wellbeing of its lessees both now and in the future.
The Group's future performance can potentially be impacted should
this pandemic have a pervasive and prolonged impact on the economy.
There has prevailed widespread restrictions on the ability of
people to travel and this has had a material negative effect on the
airline sector, and by extension the aircraft leasing sector. This
may lead to the inability of the airlines to pay rent as they fall
due. These factors, together with wider economic uncertainty and
disruption, are likely to have an adverse impact on the future
value of the aircraft Assets owned by the Group, as well as on the
sale, re-lease, refinancing or other disposition of the relevant
aircraft.
An increase in lessee counterparty credit risk means that there
is now more uncertainty over lease payments and depending on
further developments with the lessee, there could be requests for
lease rental deferrals. Reduced rents receivable under the leases
may not be sufficient to meet the loan interest and regular capital
repayments of debt scheduled during the life of each loan and may
not provide surplus income to pay for the Group's expenses and
permit the declaration of dividends.
The option to remarket the Aircraft following a potential event
of default by the lessee has not been taken into account. The
period of time necessary to successfully complete such a process is
beyond the twelve months forecasting horizon of the going concern
considerations. This applies in particular in times of COVID-19, as
various restrictions are still in place to contain the
pandemic.
The Directors consider that the going concern basis of
accounting remains appropriate. Based on current information the
Directors have reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable
future, although the risk to this is clearly higher.
The Board will continue to actively monitor the financial impact
on the Company and its Group resultant from the evolving position
with its aircraft lessee and lenders whilst bearing in mind its
fiduciary obligations and the requirements of Guernsey law which
determine the ability of the Company to make dividends and other
distributions.
Note 15 ('Borrowings') describes the borrowings obtained by the
Group to part-finance the acquisition of its aircraft. The Group
has obligations under the loans to make scheduled repayments of
principal and interest, which are serviced by the receipt of lease
payments from Emirates. The loans have been largely fixed and the
fixed rental income under the operating leases means that the rents
should be sufficient to repay the debt and provide surplus income
to pay for the Group's expenses and permit payment of
dividends.
The Group's aircraft with carrying values of GBP385,844,698 are
pledged as security for the Group's borrowings (see note 15).
The Group is in a current net asset position and generates
strong positive operating cash flows.
The Directors, with the support of its Asset Manager, believe
that it is reasonable to assume as of date of approval of annual
financial statements that Emirates will continue with the
contracted lease rental payments due to the following:
- As stipulated by Emirates in its most recent audited annual
report, it maintains and is considered to have a strong balance
sheet with a substantial cash position, and the airline is taking
additional measures to protect its cash flow through cost savings
measures, reductions to discretionary capital expenditure, and
engaging with business partners to improve working capital.
- Emirates is recording its future lease payment liabilities in
its latest audited annual financial statements and the Company is
still a going concern as at the date of its signed audit report
being 7 May 2020, and hence would have taken COVID-19 and the
negative effects on its (future) financial position into
consideration.
- The airline confirms in its annual report that it has received
committed support via the various pronouncements.
- Emirates' listed debt and Credit Default Swaps ("CDS's") are
trading at investment grade or non-distressed levels
- All of the aircraft are funded by EETC's.
- In May 2020, the airline rebuilt its airfreight services with
a dedicated network and also reintroduced passenger flights between
its hub and a limited number of destinations.
- As of the end of July 2020, the Asset Manager was not aware of
a formal request addressed to the Group for a lease deferral or any
other efforts that would result in the restructuring of the
existing transactions and which could potentially have an impact on
the committed future lease rental receipts. Emirates is considered
to have substantial liquidity and has not requested deferral of
rent.
Whilst there is some uncertainty as to the airline industry in
general, and specifically Emirates' financial position and credit
risk profile, on the basis that (i) Emirates has shown no intention
of failing to meet its obligations (ii) Emirates has the financial
backing to continue paying these rentals, the Directors believe
that it is appropriate to prepare these financial statements under
the going concern basis of preparation.
The Directors have considered Emirates' ability to continue
paying the lease rentals over the next 12 months and are satisfied
that the Group can meet its liabilities as they fall due over this
period. Further detail regarding the assumptions adopted when
forming this conclusion can be found in the Viability Statement on
page 18.
(l) Leasing and Rental Income
The leases relating to the Assets have been classified as
operating leases as the terms of the leases do not transfer
substantially all the risks and rewards of ownership to the Lessee.
The Assets are shown as non-current assets in the Consolidated
Statement of Financial Position. Further details of the leases are
given in note 12.
Rental income and advance lease payments from operating leases
are recognised on a straight-line basis over the term of the
relevant lease. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of
the leased Asset and amortised on a straight-line basis over the
lease term.
(m) Property, Plant and Equipment - Aircraft
In line with IAS 16 Property Plant and Equipment, each Asset is
initially recorded at the fair value of the consideration paid. The
cost of the Asset is made up of the purchase price of the Asset
plus any costs directly attributable to bringing it into working
condition for its intended use. Costs incurred by the Lessee in
maintaining, repairing or enhancing the Aircraft are not recognised
as they do not form part of the cost to the Group. Accumulated
depreciation and any recognised impairment losses are deducted from
cost to calculate the carrying amount of the Asset.
Depreciation is recognised so as to write off the cost of each
Asset less the estimated residual value over the estimated useful
life of the Asset of 12 years, using the straight line method. As
at 31 March 2020, the estimated residual value of the four planes
ranges from GBP44.4 million to GBP45.1 million (31 March 2019:
GBP80.6 million to GBP81.7 million). Residual values have been
arrived at by taking the average amount of three independent
external valuers and after taking into account disposition fees
where applicable. In the prior year, the residual values of the
A380 Aircraft were determined using base values excluding
inflation.
However, following discussions between the Directors and the
Group's advisors for the year ended 31 March 2020, it was
determined that the use of soft values excluding inflation best
approximates residual value as required by IAS 16 Property, Plant
and Equipment.
Due to the A380-specific developments during the last financial
year of the Group and the generally dimmed market sentiment in the
aviation sector since the COVID-19 outbreak, which is not over yet,
there is an increasing risk that the underlying assumptions of the
Base Value concept might not be met at the time of the leases
expire. For this reason the Asset Manager recommended to make use
of a more conservative approach in deploying future Soft Values
instead of Base Values. Soft Values are more conservative, also
applicable under "abnormal conditions" and do not necessarily
require a balanced market as the Base Value concept does.
This has resulted in a significant reduction in the residual
value of the Aircraft since the prior financial year. Due to a
change in estimate of residual value for the Aircraft in the
current year, there has been a GBP22,417,154 increase which is the
combined depreciation and foreign exchange impact in the annual
depreciation for the current year as a result.
The depreciation method reflects the pattern of benefit
consumption. The residual value is reviewed annually and is an
estimate of the fair amount the entity would receive today if the
Asset were already of the age and condition expected at the end of
its useful life. Useful life is also reviewed annually and, for the
purposes of the financial statements represents the likely period
of the Group's ownership of these Assets. Depreciation starts when
the Asset is available for use. At each audited Consolidated
Statement of Financial Position date, the Group reviews the
carrying amounts of its Aircraft to determine whether there is any
indication that those Assets have suffered an impairment loss. If
any such indication exists, the recoverable amount of the Asset is
estimated to determine the extent of the impairment loss (if any).
Further details are given in note 3.
Recoverable amount is the higher of fair value less costs to
sell and the value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the Asset for
which the estimates of future cash flows have not been
adjusted.
If the recoverable amount of an Asset is estimated to be less
than its carrying amount, the carrying amount of the Asset is
reduced to its recoverable amount. An impairment loss is recognised
immediately in profit or loss. Where an impairment loss
subsequently reverses, the carrying amount of the Asset is
increased to the revised estimate of its recoverable amount, but so
that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been
recognised for the Asset in prior years. A reversal of an
impairment loss is recognised immediately in profit or loss.
(n) Financial instruments
A financial instrument is recognised when the Group becomes a
party to the contractual provisions of the instrument. Financial
liabilities are derecognised if the Group's obligations, specified
in the contract, expire or are discharged or cancelled.
Financial assets are derecognised if the Group's contractual
rights to the cash flows from the financial assets expire, are
extinguished, or if the Group transfers the financial assets to a
third party and transfers all the risks and rewards of ownership of
the asset, or if the Group does not retain control of the asset and
transfers substantially all the risk and rewards of ownership of
the asset.
Under IFRS 9, on initial recognition, a financial asset is
classified as measured at:
- Amortised cost;
- Fair value through other comprehensive income ("FVOCI"); or
- Fair value through profit or loss ("FVTPL").
The classification of financial assets under IFRS 9 is generally
based on the business model in which a financial asset is managed
and its contractual cash flow characteristics. The Group only has
financial assets that are classified as amortised cost.
i) Financial assets held at amortised cost
A financial asset is measured at amortised cost if it meets both
of the following conditions and is not designated as at FVTPL:
- it is held within a business model whose objective is to hold
assets to collect contractual cash flows; and
- its contractual terms give rise on specified dates to cash
flows that are solely payments of principal and interest on the
principal amount outstanding.
Assets that are held for collection of contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. These assets are
subsequently measured at amortised cost using the effective
interest method.
The effective interest method calculates the amortised cost of
financial instruments and allocates the interest over the period of
the instrument.
The Group's financial assets held at amortised cost include
trade and other receivables and cash and cash equivalents.
The Group assesses on a forward looking basis the expected
credit losses associated with its financial assets held at
amortised cost. The impairment methodology applied depends on
whether there has been a significant increase in credit risk.
ii) Financial liabilities held at amortised cost
Financial liabilities consist of payables and borrowings. The
classification of financial liabilities at initial recognition
depends on the purpose for which the financial liability was issued
and its characteristics. All financial liabilities are initially
measured at fair value, net of transaction costs. All financial
liabilities are recorded on the date on which the Group becomes
party to the contractual requirements of the financial liability.
Financial liabilities are subsequently measured at amortised cost
using the effective interest method, with interest expense
recognised on an effective yield basis.
The effective interest method is a method of calculating the
amortised cost of the financial liability and of allocating
interest expense over the relevant period. The effective interest
rate is the rate that exactly discounts estimated future cash
payments through the expected life of the financial liability, or,
where appropriate, a shorter period, to the net carrying amount on
initial recognition.
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or they
expire.
3 S IGNIFICANT JUDGE M ENTS AND ES TIM A T ES
In the application of the Group's accounting policies, which are
described in note 2, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period or in the period of the revision and future
periods if the revision affects both current and future
periods.
The following are the critical judgements and estimates that the
Directors have made in the process of applying the Group's
accounting policies and that have the most significant effect on
the amounts recognised in the consolidated financial
statements.
Estimates
Residual Value and Useful Life of Aircraft
As described in note 2 (m), the Group depreciates the Assets on
a straight line basis over the estimated useful life of the Assets
after taking into consideration the estimated residual value. IAS
16 Property, Plant and Equipment requires residual value to be
determined as an estimate of the amount that the Group would
currently obtain from the disposal of the Asset, after deducting
the estimated costs of disposal, if the Asset were of the age and
condition expected at the end of its useful life. However, there
are currently no Aircraft of a similar type of sufficient age for
the Directors to make a direct market comparison in making this
estimation. In the prior year, the residual values of the A380
Aircraft were determined using base values excluding inflation.
However, following discussions between the Directors and the
Company's advisors for the year ended 31 March 2020, it was
determined that the use of soft values excluding inflation best
approximates residual value as required by IAS 16 Property, Plant
and Equipment.
Due to the A380-specific developments during the last financial
year of the Group and the generally dimmed market sentiment in the
aviation sector since the COVID-19 outbreak, which is not over yet,
there is an increasing risk that the underlying assumptions of the
Base Value concept might not be met at the time of the leases
expire. For this reason the Asset Manager recommended to make use
of a more conservative approach in deploying future Soft Values
instead of Base Values. Soft Values are more conservative, also
applicable under "abnormal conditions" and do not necessarily
require a balanced market as the Base Value concept does. There is
additional uncertainty caused by COVID-19 (the directors have
described their response to this uncertainty in note 2(k), refer to
going concern section on page 60) which has resulted in the use of
soft market values in determining the residual value of the Asset.
This reflects as a change in the estimation basis in the current
year.
In estimating residual value for the year, the Directors refer
to future soft values (excluding inflationary effects) for the
Asset obtained from three independent expert aircraft valuers. This
has resulted in a significant reduction in the anticipated residual
value of the Aircrafts since the prior financial year details of
which have been disclosed in note 10.
The estimation of residual value remains subject to inherent
uncertainty. If the estimate of residual value had been decreased
by 20 per cent with effect from the beginning of this year, the net
profit for the year and closing Shareholders' equity would have
been decreased by approximately GBP5.5 million (31 March 2019:
GBP8.6 million). An increase in residual value by 20 per cent would
have had an equal but opposite effect. This reflects the range of
estimates of residual value that the Directors believe would be
reasonable at this time. The useful life of each Asset, for the
purpose of depreciation of the Asset under IAS 16, is estimated
based on the expected period for which the Group will own and lease
the Aircraft. The Board of Directors expects that the Aircraft will
have a working life in excess of this period.
Judgements
Operating Lease Commitments - Group as Lessor
The Group has entered into operating leases on four (31 March
2019: four) Assets. The Group has determined, based on an
evaluation of the terms and conditions of the arrangements, that it
retains all the significant risks and rewards of ownership of these
Assets and accounts for the contracts as operating leases.
The Group has determined that the operating leases on the Assets
are for 12 years based on an initial term of 10 years followed by
an extension term of 2 years. Should the Lessee
choose to exit a lease at the end of the initial term of 10
years a penalty equal to the present value of the remaining 2 years
would be due.
Functional Currency
The currency of the primary economic environment in which the
Group operates (the functional currency) is GBP, which is also the
presentation currency.
This judgement is made on the basis that this is representative
of the operations of the Group due to the following:
-- the Company's share capital was issued in GBP;
-- its investments were made in GBP; and
-- its dividends are paid to Shareholders in GBP, and that
certain of the Group's significant operating expenses as well as
portion of the Groups' rental income are incurred/earned in
GBP.
In addition, the set-up of the leasing structures was designed
to offer a GBP return to GBP investors.
Impairment
As described in note 2(m), an impairment loss exists when the
carrying value of an asset or cash generating unit exceeds its
recoverable amount, which is the higher of its fair value less
costs to sell and its value-in-use.
The Directors review the carrying amount of its Assets at each
audited Statement of Financial Position date and monitor the Assets
for any indications of impairment as required by IAS 16 Property,
Plant and Equipment and IAS 36 Impairment of Assets.
In assessing value-in-use, the estimated future cash flows
expected to be generated by the Assets (i.e. the income streams
associated with the lease and the expected future market value of
the Aircraft at the end of the lease) are discounted to their
present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks
specific to the Assets and the credit risk profile of the
lessee.
In determining fair value less costs of disposal, recent market
transactions are taken into account, if available. If no such
transactions can be identified, an appropriate valuation model is
used. Such valuation reflects the current use given the fact that
the Aircraft are held for use in a leasing business.
Factors that are considered important which could trigger an
impairment review include, but are not limited to, significant
decline in the market value beyond that which would be expected
from the passage of time or normal use, significant changes in the
technology and regulatory environments, evidence from internal
reporting which indicates that the economic performance of the
Assets are, or will be, worse than expected.
The Board together with the Asset Manager have conducted an
impairment review in the current year as the below items may result
in pricing changes for the Aircraft:
-- As further Airbus A380 aircraft reached the expiry of their
first lease agreements further market data will be available to
Amedeo and the appraiser community.
-- The announcement to discontinue the A380 program in 2021 may
impact prices in the secondary market.
-- The impact of COVID-19 on the business of airlines and
indirectly aircraft values, as well as on the credit risk profile
of the Company's lessee could indicate the need for impairment.
The assessment was performed by comparing the net book value of
the Aircraft to its value-in-use (being higher than its respective
fair value less costs to sell). Rental cash flows to the end of the
contracts have been used in the calculation of value-in-use as the
cash flows are contractual. Any assumptions with regards to issues
in counterparty credit risk would be reflected in the discount rate
used to calculate the net present value of future cash flows. In
determining the value-in-use, the gross value of future contractual
cash flows including a residual value assumption was discounted to
present value using the companies WACC (weighted average costs of
capital (6.5 per cent.)). The Gross value is higher than the
current value, therefore the discounted cash flows (or
Value-in-use, "VIU") is used as the Recoverable Amount for the
impairment test.
Residual values for the purpose of the test are determined to be
the soft values (at an inflation rate of 1.5 per cent. at the end
of the aircraft's useful life)), being considered the most
appropriate. A Soft Market is considered where the world's
principal traffic generating regions are in the middle of a
recession or a period of economic stagnation, which historically
have a negative impact on aircraft values. This is when airlines
experience low growth or even traffic reductions, make losses, cut
their fleets and staff or reduce fleet growth plans. The market
becomes imbalanced, with supply outstripping demand, resulting in
more parked aircraft and lower utilisation rates, which in turn,
increase aircraft availability.
Additionally, these values have been tested with regards its
sensitivity to the Discount Rates. Discount rates at a -0.5 per
cent. and +0.5 per cent. interval have been tested on either side
of the WACC (6.5 per cent.) initially, with -1 per cent. and +1 per
cent. intervals used for the analysis thereafter.
The Asset Manager considers that the inflated future soft value
is the most appropriate measures to use for the Residual Value for
the following reasons:
-- The Residual Value is discounted at the WACC which would
include a return for the time value of money (inflation). The
inflated values (1.5 per cent. p.a. inflation assumed) are
therefore used to avoid double counting when producing the
discounted future cash flow value.
-- The calculation of cash flow is an assumption on the Group's
best estimation of a) contracted cash flows and b) residual.
Pricing increases of 1.5 per cent. p.a. is considered to be the
best estimation as to what the Group would receive for residual
value in future years on a like for like basis, taking the current
economic climate into account.
Rental cash flows to the end of the contract has been used in
the calculation of the Future Cash Flow as the cash flows are
contractual. Any assumptions with regards issues in counterparty
credit risk would be reflected in the Discount Rate used to
calculate the net present value of future cash flows.
The Directors, with the support of its Asset Manager believe
that for the Group it is reasonable to assume as of date of
approval of annual financial statements that Emirates will continue
with the contracted lease rental payments and there is no evidence
at this time that either Emirates will default. The marketability
of the aircraft post lease will depend on how demand for air travel
will bounce back in a post COVID-19-crisis environment.
The Directors on the advice of the Asset Manager considers that
6.5 per cent. is the most appropriate WACC for the following
reasons:
-- the discount rate should be a rate commensurate with what a
normal market participant would consider to be the risk inherent in
the assets.
-- The risk profile of Emirates. Emirates unsecured USD bonds
indicate a running USD yield of 4.1 per cent. to 4.9 per cent.,
depending on the maturity .
-- By using soft values to approximate residual values (and 1.5
per cent. p.a. inflation), the discount rate is considered
appropriate to avoid double counting of risk.
Based on the impairment review performed, an impairment loss of
GBP56,167,300 was recognized the current year (31 March 2019:
GBPnil), with the impairment test resulting in an updated carrying
value of the Aircraft in total to GBP 385,844,698 at year end, as
reflected in note 10 .
If the discount rates had been decreased by 0.5 per cent with
effect from the beginning of this year, the net profit for the year
and closing Shareholders' equity would have been increased by
approximately GBP6 million. An increase in the discount rates by
0.5 per cent would have had an equal but opposite effect.
If the latest residual value estimates had been decreased by
20%, the net profit for the year and closing shareholders equity
would have decreased by GBP27.1 million as a result of the
additional impairment that would arise. An increase in residual
value estimates would have an equal and opposite effect.
4 RENT AL INCOME
1 Year ended Year ended
31 Mar 2020 31 Mar 2019
GBP GBP
A rent income 74,851,499 73,284,184
Revenue received but not yet earned (47,506,653) (48,080,218)
Revenue earned but not received or due 27,368,093 25,764,467
A m orti sation of ad van ce rental
income 3,193,203 3,177,923
Dedu ction of rebate monies (299,059) (289,648)
--------------------------- ---------------------------
57,607,083 53,856,708
--------------------------- ---------------------------
B rent income 20,472,385 20,472,385
Revenue received but not yet earned (28,044) (98,079)
Revenue earned but not yet received 84,132 55,935
--------------------------- ---------------------------
20,528,473 20,430,241
--------------------------- ---------------------------
T otal rental income 78,135,556 74,286,949
--------------------------- ---------------------------
Rental income is derived from the leasing of the Assets. Rent is
split into A rent, which is received in US dollars ("$") and B
rent, which is received in Sterling. Rental income received in US
dollars is translated into the functional currency (Sterling) at
the date of the transaction.
An adjustment has been made to spread the actual total income
receivable over the term of the lease on an annual basis. In
addition, advance rentals received have also been spread over the
full term of the leases.
5 OPERATING EXPENSES
Year ended Year ended
31 Mar 2020 31 Mar 2019
GBP GBP
Corporate shareholder and advisor fee
(note 23) 466,775 455,392
A ss et management fee (note 23) 630,152 614,780
Liaison agent fee (note 23) 70,017 68,309
A dm ini stration fees 121,136 118,782
B ank interest and charges 10,007 22,118
A cc ountancy fees 23,253 22,775
Regi strar fees (note 23) 19,787 16,005
A udit fee 33,900 34,500
Directors' remuneration (note 6) 104,169 75,000
Directors' and off i cers' insurance 27,583 26,450
Legal and profess ional expenses 20,569 26,562
A nnual fees 10,659 10,548
T ravel expenses - 2,864
Other operating expenses 17,964 20,431
------------------ ------------------
1,555,971 1,514,516
------------------ ------------------
6 DIRECTORS' REMUNERATION
Under their terms of appointment, each Director is paid a fee of
GBP23,000 per annum by the Group, except for the Chair, who
receives GBP29,000 per annum and the Chair of Audit, who receives
GBP27,000 per annum.
7 UNREALISED FOREIGN EXCHANGE LOSSES
Year ended Year ended
31 Mar 2020 31 Mar 2019
G BP G BP
Cash at bank 94,719 167,311
Deferred income (7,257,596) (5,467,205)
Borrowings (8,761,701) (18,676,497)
Rebates (69,575) 15,344
---------------- ----------------
(15,994,153) (23,961,047)
---------------- ----------------
8 DIVIDS IN RESPECT OF EQUITY SHARES
Year ended
31 Mar 2020
Pence
GBP per
Share
First interim dividend 4,537,500 2.0625
Second interim dividend 4,537,500 2.0625
Third interim dividend 4,537,500 2.0625
Fourth interim dividend 4,537,500 2.0625
------------ ---------------
18,150,000 8.25
------------ ---------------
Year ended
31 Mar 2019
Pence
GBP per
Share
First interim dividend 4,537,500 2.0625
Second interim dividend 4,537,500 2.0625
Third interim dividend 4,537,500 2.0625
Fourth interim dividend 4,537,500 2.0625
---------------- -------------------
18,150,000 8.25
---------------- -------------------
Refer to the Subsequent Events in note 24 in relation to dividends
declared and paid in April and July 2020.
9 LOSS / EARNINGS PER SHARE
Loss / earnings per Share ("EPS") is based on the net loss for
the year attributable to holders of Shares in the Company of
GBP53,537,346 (31 March 2019: net profit for the year of
GBP9,900,410) and 220,000,000 (31 March 2019: 220,000,000) Shares
being the weighted average number of Shares in issue during the
year.
There are no dilutive instruments and therefore basic and
diluted EPS are identical.
10 PROPERTY, PLANT AND EQUIPMENT - AIRCRAFT
Aircraft
GBP
COST
As at 1 Apr 2019 618,050,915
------------
As at 31 Mar 2020 618,050,915
------------
ACCUMULATED DEPRECIATION AND IMPAIRMENT
As at 1 Apr 2019 128,532,214
Depreciation charge based on previous residual
values 25,089,549
Adjustment due to change in US dollar residual
values 24,329,485
Adjustment due to FX movements on residual values (1,912,331)
------------
Net depreciation charge for the year 47,506,703
------------
Adjustment due to impairment 56,167,300
As at 31 Mar 2020 232,206,217
------------
CARRYING AMOUNT
As at 31 Mar 2020 385,844,698
------------
As at 31 Mar 2019 489,518,701
------------
The Group believes that the use of forecast soft values
excluding inflation best approximates residual value as required
per IAS 16 Property, Plant and Equipment (refer to note 3). The
residual values used is a change from the prior year due to current
market conditions arising mainly as a result of COVID-19 and is
further discussed in note 3. The combined effect of translating
residual values at the Sterling / US Dollar exchange rate
prevailing at 31 March 2020 of 1.2420 (31 March 2019: 1.3035) and a
48.8 per cent. decrease in average appraised residual values in US
Dollar terms, resulted in a GBP22,417,154 increase which is the
combined depreciation and foreign exchange impact in the annual
depreciation charge for the current year.
The Group can sell the Assets during the term of the leases
(with the lease attached and in accordance with the terms of the
transfer provisions contained therein).
Under IFRS 16 the direct costs attributed in negotiating and
arranging the operating leases have been added to the carrying
amount of the leased Asset and therefore are being recognised as an
expense over the lease term. The costs have been allocated to each
Aircraft based on the proportional cost of the Asset.
Refer to note 3 for details on the impairment review and
sensitivities conducted.
11 FINANCE COSTS
Year ended Year ended
31 Mar 2020 31 Mar 2019
GBP GBP
Amortisation of debt arrangements
costs 388,399 387,338
Interest payable 10,161,592 13,595,573
------------- -------------
10,549,991 13,982,911
------------- -------------
12 OPERATING LEASES
The amounts of minimum future lease receipts at the reporting
date under non cancellable operating leases are detailed below:
31 Mar 2020 Next 12
months 1 to 5 years After 5 years Total
GBP GBP GBP GBP
Aircraft- A rental
receipts 49,626,580 122,314,602 - 171,941,182
Aircraft- B rental
receipts 20,472,384 81,889,536 10,245,576 112,607,496
----------- ------------- -------------- ------------
70,098,964 204,204,138 10,245,576 284,548,678
----------- ------------- -------------- ------------
31 Mar 2019 Next 12
months 1 to 5 years After 5 years Total
GBP GBP GBP GBP
Aircraft - A rental
receipts 73,207,831 163,828,882 - 237,036,713
Aircraft - B rental
receipts 20,472,384 81,889,536 30,717,960 133,079,880
----------- -------------- -------------- ----------------
93,680,215 245,718,418 30,717,960 370,116,593
----------- -------------- -------------- ----------------
The operating leases are for four Airbus A380-861 aircraft. The
terms of the leases are as follows:
MSN132 Limited - term of the lease is for 12 years ending August
2025. The initial lease is for 10 years ending August 2023, with an
extension period of two years ending August 2025, in which rental
payments reduce. The present value of the remaining rentals in the
extension period at the end of the initial 10 year lease must be
paid even if the option is not taken.
MSN133 Limited - term of the lease is for 12 years ending
November 2025. The initial lease is for 10 years ending November
2023, with an extension period of two years ending November 2025,
in which rental payments reduce. The present value of the remaining
rentals in the extension period at the end of the initial 10 year
lease term must be paid even if the option is not taken.
MSN134 Limited - term of the lease is for 12 years ending
November 2025. The initial lease is for 10 years ending November
2023, with an extension period of two years ending November 2025,
in which rental payments reduce. The present value of the remaining
rentals in the extension period at the end of the initial 10 year
lease term must be paid even if the option is not taken.
MSN136 Limited - term of the lease is for 12 years ending
October 2025. The initial lease is for 10 years ending October
2023, with an extension period of two years ending October 2025, in
which rental payments reduce. The present value of the remaining
rentals in the extension period at the end of the initial 10 year
lease term must be paid even if the option is not taken.
At the end of each lease the Lessee has the right to exercise an
option to purchase the Asset if the Group chooses to sell the
Asset. If a purchase option event occurs the Group and the Lessee
will be required to arrange for a current market value appraisal of
the Asset to be carried out by three independent appraisers. The
purchase price will be equal to the average valuation of those
three appraisals.
13 RECEIVABLES
31 Mar 2020 31 Mar 2019
GBP GBP
Prepayments 60,203 58,000
Sundry debtors 40 40
60,243 58,040
------------ ------------
The above carrying value of receivables is equivalent to fair
value.
14 PAYABLES (amounts falling due within one year)
31 Mar 2020 31 Mar 2019
GBP GBP
Accrued administration fees 12,032 11,785
Accrued audit fee 20,460 20,160
Accrued registrar fees (note 23) 3,881 1,390
Other accrued expenses 39,524 29,850
75,897 63,185
------------ ------------
The above carrying value of payables is equivalent to the fair
value.
15 BORROWINGS
31 Mar 2020 31 Mar 2019
GBP GBP
Equipment Notes 157,120,337 213,048,544
Associated costs (2,155,296) (2,543,695)
154,965,041 210,504,849
------------ ------------
Current portion 42,306,341 63,341,248
============ ============
Non-current portion 112,658,700 147,163,601
============ ============
Notwithstanding the fact that GBP65.1 million (31 March 2019:
GBP60.2 million) capital was repaid during the year, as per the
Consolidated Statement of Cash Flows, the value of the borrowings
has decreased by GBP55.5 million due to the 4.9 per cent decrease
in the Sterling / US dollar exchange rate for the year ended 31
March 2020. See note 21.
The amounts below detail the future contractual undiscounted
cash flows in respect of the loans, including both the principal
and interest payments, and will not agree directly to the amounts
recognised in the Consolidated Statement of Financial Position:
31 Mar 2020 31 Mar 2019
GBP GBP
A m ount due for settlement w ithin
12 months 49,616,510 73,198,230
=============== ==============
A m ount due for settlement a fter 12
months 122,284,388 163,790,499
=============== ==============
In order to finance the acquisition of the Assets, the
Subsidiary used the proceeds of the August 2013 offering of Pass
Through Certificates (the "Certificates"). The Certificates have an
aggregate face amount of approximately $630 million, made up of
"Class A" certificates and "Class B" certificates. The Class A
certificates in aggregate have a face amount of $462 million with
an interest rate of 5.250 per cent and a final expected
distribution date of 30 May 2023. The Class B certificates in
aggregate had a face amount of $168 million with an interest rate
of 6.125 per cent. and were repaid on 30 November 2019. There is a
separate trust for each class of Certificate. The trusts used the
funds from the Certificates to acquire Equipment Notes. The
Equipment Notes were issued to Wilmington Trust, National
Association as pass through trustee in exchange of the
consideration paid by the purchasers of the Certificates. The
Equipment Notes were issued by the Subsidiary and the proceeds from
the sale of the Equipment Notes financed a portion of the purchase
price of the four airbus A380-861 Aircraft, with the remaining
portion being financed through contribution from the Group of the
Share issue proceeds. The holders of the Equipment Notes issued for
each Aircraft have the benefit of a security interest in such
Aircraft. The remaining balance is being repaid by continuing to
amortise borrowings that pays both principal and interest through
periodic payments.
In the Directors' opinion, the carrying values of the Equipment
Notes are approximate to their fair value.
16 REBATES
Upon entering into the leases it was agreed that the Lessee
would pay to the Group such amount as estimated to be necessary to
fund the payment by the Group of certain costs, fees and expenses
associated with the transactions arising from the leases. Following
payment of the costs, fees and expenses, it was agreed that such
amount paid by the lessee exceeded the amount actually necessary.
It was agreed that the Group would return the excess to the Lessee
over the remaining life of the leases in May and November of each
year. Upon any termination of a lease prior to its end the Group
shall pay the entire remaining unpaid excess relating to such
Aircraft to such account as is directed by the Lessee, but without
any interest accrued thereon.
17 SHARE CAPITAL
The Share Capital of the Company is represented by an unlimited
number of shares issued or reclassified by the Company as Shares or
Administrative Shares (together the "Share Capital").
Issued Administrative
Shares Shares
Issued shares as at 31 Mar 2020 and
31 Mar 2019 2 220,000,000
--------------------- -------------
Issued Administrative
Shares Shares Total
GBP GBP GBP
Shares
Share Capital as at 31 Mar
2020 and 31 Mar 2019 - 208,953,833 208,953,833
----------------------- ------------- -------------
Members holding Shares are entitled to receive and participate
in any dividends out of income attributable to the Shares; other
distributions of the Group available for such purposes and resolved
to be distributed in respect of any accounting period; or other
income or right to participate therein.
Upon winding up, Shareholders are entitled to the surplus assets
attributable to the Share class remaining after payment of all the
creditors of the Group. Members have the right to receive notice of
and to attend, speak and vote at general meetings of the Group.
The holders of Administrative Shares are not entitled to
receive, and participate in, any dividends out of income; other
distributions of the Group available for such purposes and resolved
to be distributed in respect of any accounting period; or other
income or right to participate therein. On a winding up, holders
are entitled to a return of capital paid up on them after the
Shares have received a return of their capital paid up but ahead of
the return of all additional capital to the holders of Shares.
The holders of Administrative Shares shall not have the right to
receive notice of and no right to attend, speak and vote at general
meetings of the Group, except for the Liquidation Proposal Meeting
(general meeting convened six months before the end term of the
Lease where the Liquidation Resolution will be proposed) or if
there are no Shares in existence.
18 CASH AND CASH EQUIVALENTS
31 Mar 2020 31 Mar 2019
GBP GBP
Cash at bank 13,719,497 13,113,247
Cash deposits - 2
----------------- -----------------
13,719,497 13,113,249
----------------- -----------------
Cash and cash equivalents are highly liquid, readily convertible
and are subject to insignificant risk of changes in value.
19 FINANCIAL INSTRUMENTS
The Group's main financial instruments comprise:
Cash and cash equivalents that arise directly from the Group's
(a) operations; and
(b) Debt secured on non-current assets.
20 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group's objective is to obtain income and returns and a
capital return for its Shareholders by acquiring, leasing and then
selling Aircraft.
The following table details the categories of financial assets
and liabilities held by the Group at the reporting date:
31 Mar 2020 31 Mar 2019
GBP GBP
Financial assets
Cash and cash equivalents 13,719,497 13,113,249
Receivables (excluding prepayments) 40 40
------------ ------------
Financial assets measured at amortised
cost 13,719,537 13,113,289
------------ ------------
Financial liabilities
Payables 75,897 63,185
Borrowings 154,965,041 210,504,849
------------ ------------
Financial liabilities measured at amortised
cost 155,040,938 210,568,034
------------ ------------
The main risks arising from the Group's financial instruments
are capital management risk, foreign currency risk, credit risk,
liquidity risk and interest rate risk. The Board regularly review
and agrees policies for managing each of these risks and these are
summarised below:
(a) Capital Management
The Group manages its capital to ensure that the Group will be
able to continue as a going concern while maximising the return to
Shareholders through the optimisation of the debt and equity
balance.
The capital structure of the Group consists of debt, which
includes the borrowings disclosed in note 15, cash and cash
equivalents disclosed in note 18 and equity attributable to equity
holders, comprising issued capital and retained earnings.
The Group's Board reviews the capital structure on a bi-annual
basis.
Equity includes all capital and reserves of the Group that are
managed as capital.
No changes were made in the objectives, policies or processes
for managing capital during the years ended 31 March 2020 and
2019.
(b) Foreign Currency Risk
The Group's accounting policy under IFRS requires the use of a
Sterling historic cost of the Assets and the value of the US dollar
debt as translated at the spot exchange rate on every reporting
date. In addition US dollar operating lease receivables are not
immediately recognised in the statement of financial position and
are accrued over the period of the leases. The Directors consider
that this introduces an artificial variance due to the movement
over time of foreign exchange rates. In actuality, the US dollar
operating lease should offset the US dollar payables on amortising
debt. The foreign exchange exposure in relation to the Equipment
Notes is thus almost entirely hedged.
Lease rentals (as detailed in notes 4 and 12) are received in US
dollars and Sterling. Those lease rentals received in US dollars
are used to pay the equipment note repayments due, also in US
dollars (as detailed in note 16). Both US dollar lease rentals and
equipment note repayments are fixed and are for similar sums and
similar timings. The matching of lease rentals to settle equipment
note repayments therefore minimise risks caused by foreign exchange
fluctuations.
The carrying amounts of the Group's foreign currency denominated
monetary assets and liabilities at the reporting date are as
follows:
31 Mar 2020 31 Mar 2019
GBP GBP
Debt (US dollar) - Liabilities (157,120,337) (213,048,544)
Cash and cash equivalents (US dollar)
- Asset 1,893,324 2,080,256
-------------- --------------
The following table details the Group's sensitivity to a 25 per
cent. (31 March 2019: 25 per cent.) appreciation and depreciation
in Sterling against US dollar. 25 per cent. (31 March 2019: 25 per
cent.) represents the Directors' assessment of the reasonably
possible change in foreign exchange rates. The sensitivity analysis
includes only outstanding foreign currency denominated monetary
items and adjusts their translation at the period end for a 25 per
cent. (31 March 2019: 25 per cent.) change in foreign currency
rates. A positive number below indicates an increase in profit and
other equity where Sterling strengthens 25 per cent. (31 March
2019: 25 per cent.) against the US dollar. For a 25 per cent. (31
March 2019: 25 per cent.) weakening of Sterling against the US
dollar, there would be a comparable but opposite impact on the
profit and other equity:
31 Mar 2020 31 Mar 2019
US dollar US dollar
Impact Impact
GBP GBP
Profit or loss 31,045,402 42,193,658
Assets (378,665) (416,051)
Liabilities 31,424,067 42,609,709
------------ ------------
On the eventual sale of the Assets, the Group may be subject to
foreign currency risk if settled in a currency other than Sterling.
Transactions in similar assets are typically priced in US
dollars.
(c) Credit Risk
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to the
Group.
Refer to the going concern section page 17 where an assessment
of Emirates is made.
The credit risk on cash transactions are mitigated by
transacting with counterparties that are regulated entities subject
to prudential supervision, or with high credit ratings assigned by
international credit rating agencies.
The Group's financial assets exposed to credit risk are as
follows:
31 Mar 2020 31 Mar 2019
GBP GBP
Receivables (excluding prepayments) 40 40
Cash and cash equivalents 13,719,497 13,113,249
13,719,537 13,113,289
------------ ------------
Surplus cash in the Company is held with RBSI. Surplus cash in
the Subsidiary is held in accounts with RBSI and Wilmington Trust.
The banks have credit rating given by Moody's of Baa2 and A3
respectively. The banks are shown as having a stable rating.
There is a contractual credit risk arising from the possibility
that the Lessee may default on the lease payments. This risk is
mitigated, as under the terms of the lease agreements between the
Lessee and the Group, any non payment of the lease rentals
constitutes a "Special Termination Event", under which the lease
terminates and the Group may either choose to sell the Asset or
lease the Assets to another party.
At the inception of each lease, the Group selected a lessee with
a strong balance sheet and financial outlook. The financial
strength of Emirates is regularly reviewed by the Board and the
Asset Manager.
(d) Liquidity Risk
Liquidity risk is the risk that the Group will encounter
difficulty in realising assets or otherwise raising funds to meet
financial commitments. The Group's main financial commitments are
its ongoing operating expenses and payments on Equipment Notes.
Ultimate responsibility for liquidity risk management rests with
the Board, which established an appropriate liquidity management
framework at the incorporation of the Group, through the timings of
lease rentals and debt repayments. The Group manages liquidity risk
by maintaining adequate reserves, banking facilities and borrowing
facilities, by monitoring forecast and actual cash flows, and by
matching profiles of financial assets and liabilities.
The table below details the residual contractual maturities of
financial liabilities. The amounts below are contractual
undiscounted cash flows, including both the principal and interest
payments, and will not agree directly to the amounts recognised in
the statement of financial position:
Over 5
1-3 months 3-12 months 1-2 years 2-5 years years
31 Mar 2020 GBP GBP GBP GBP GBP
Financial
liabilities
Payables -
due
within one
year 75,897 - - - -
Equipment
Notes 24,856,303 24,760,207 49,223,671 73,060,717 -
----------------- ------------------- --------------------- ---------------------- ----------------------
24,932,200 24,760,207 49,223,671 73,060,717 -
----------------- ------------------- --------------------- ---------------------- ----------------------
Over 5
1-3 months 3-12 months 1-2 years 2-5 years years
31 Mar 2019 GBP GBP GBP GBP GBP
Financial
liabilities
Payables -
due
within one
year 63,185 - - - -
Equipment
Notes 36,667,361 36,530,869 47,275,570 116,514,929 -
------------------ ------------------- --------------------- ---------------------- ----------------------
36,730,546 36,530,869 47,275,570 116,514,929 -
------------------ ------------------- --------------------- ---------------------- ----------------------
(e) Interest Rate Risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows. It is the risk that
fluctuations in market interest rates will result in a reduction in
deposit interest earned on bank deposits held by the Group.
The Group mitigates interest rate risk by fixing the interest
rate on the Equipment Notes debt and the lease rentals.
The following table details the Group's exposure to interest
rate risks:
31 Mar 2020 Variable Fixed Non-interest Total
interest interest Bearing
GBP GBP GBP GBP
Financial Assets
Receivables (excluding
prepayments) - - 40 40
Cash and cash equivalents 13,719,497 - - 13,719,497
Total Financial Assets 13,719,497 - 40 13,719,537
----------------- ------------------- ------------- ------------
Financial Liabilities
Payables - - 75,897 75,897
Equipment Notes - 157,120,337 - 157,120,337
Total Financial Liabilities - 157,120,337 75,897 157,196,234
----------------- ------------------- ------------- ------------
Total interest sensitivity
gap 13,719,497 157,120,337
----------------- -------------------
31 Mar 2019 Variable Fixed Non-interest Total
interest interest Bearing
GBP GBP GBP GBP
Financial Assets
Receivables (excluding
prepayments) - - 40 40
Cash and cash equivalents 13,113,249 - - 13,113,249
Total Financial Assets 13,113,249 - 40 13,113,289
----------------- ------------------- ------------- -------------
Financial Liabilities
Payables - - 63,185 63,185
Equipment Notes - 213,048,544 - 213,048,544
Total Financial Liabilities - 213,048,544 63,185 213,111,729
----------------- ------------------- ------------- -------------
Total interest sensitivity
gap 13,113,249 213,048,544
----------------- -------------------
If interest rates had been 50 basis points higher throughout the
year and all other variables were held constant, the Group's net
assets attributable to Shareholders as at 31 March 2020 would have
been GBP68,597 (31 March 2019: GBP65,566) greater due to an
increase in the amount of interest receivable on the bank
balances.
If interest rates had been 50 basis points lower throughout the
year and all other variables were held constant, the Group's net
assets attributable to Shareholders as at 31 March 2020 would have
been GBP68,597 (31 March 2019: GBP65,566) lower due to a decrease
in the amount of interest receivable on the bank balances.
21 CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
The following table discloses the effects of the amendments to
IAS 7 Statement of Cash Flows which requires additional disclosures
that enable users of financial statements to evaluate changes in
liabilities arising from financing activities, including both
changes arising from cash flows and non-cash flows. This table
below excludes non-cash flows arising from the amortisation of
associated costs (see note 15).
31 Mar 2020 31 Mar 2019
GBP GBP
Opening Balance 213,048,544 254,060,656
Cash flows paid - capital (65,123,634) (60,179,618)
Cash flows paid - interest (10,094,475) (13,464,345)
Non-cash flows
- Interest accrued 10,161,592 13,595,573
- Rebates movement 297,036 220,726
- Effects of foreign exchange
- Rebates 69,574 139,055
- Effects of foreign exchange
- Loans 8,761,701 18,676,497
----------------- ---------------------
Closing Balance 157,120,338 213,048,544
----------------- -----------------
22 ULTIMATE CONTROLLING PARTY
In the opinion of the Directors, the Group has no ultimate
controlling party.
23 RELATED PARTY TRANSACTIONS AND MATERIAL CONTRACTS
A m edeo has been appointed as the Group's A sset Manager.
During the year, the Group incurred GBP700,744 (31 March 2019:
GBP685,169) of expenses with Amedeo of which GBP630,152 (31 March
2019: GBP614,780) related to asset management fees as shown in note
5, GBP70,017 (31 March 2019: GBP68,309) was liaison agent fees and
GBP575 (31 March 2019: GBP2,080) reimbursed expenses. As at 31
March 2020, GBP53,491 (31 March 2019: GBP52,187) was prepaid to
this related party.
Ni mrod is the Co mpany's Corporate and Shareholder Adv i sor.
During the year, the Group incurred GBP467,484 (31 March 2019:
GBP461,142) of expenses with Nimrod, of which GBP709 (31 March
2019: GBP5,750) was reimbursed expenses and GBP466,775 (31 March
2019: GBP455,392) related to corporate shareholder and advisor fees
as shown in note 5. As at 31 March 2020, GBPnil (31 March 2019:
GBPnil) was owing to this related party.
Anson Registrars Limited (and now called JTC Registrar Limited)
("JTC Registrars") was the Group's registrar, transfer agent and
paying agent during the prior year. During the year, the Group
incurred GBP19,787 (31 March 2019: GBP16,005) of expenses with JTC
Registrars as shown in note 5. As at 31 March 2020 GBP3,881 (31
March 2019: GBP1,390) was owing to this related party.
24 SUBSEQUENT EVENTS
On 16 April 2020, a further dividend of 2.0625 pence per Share
was declared and this was paid on 30 April 2020.
On 16 July 2020, a further dividend of 2.0625 pence per Share
was declared and this will be paid on 31 July 2020.
The COVID-19 pandemic has been discussed throughout the
financial statements including detail relating to post year end.
This information is set out in the Chairman's Statement on pages 4
to 6, the Asset Manager's Report on pages 7 to 12, Management
Report on pages 16 to 19 and the significant issues section in the
Audit Committee Report on pages 35 to 44.
KEY A D V I SE RS A ND C O N T A CT I N F O R M A T ION
K E Y I N F O R M A T ION
E x chan ge: Special ist Fund S e gme nt of t he London S t o ck
E xchan g e's M a in M ark et
T i c k e r: DNA3
Li st ing Da te: 2 July 2013
Financial Year End: 31 M arch
Ba se Curre ncy: Pound Sterling
I S I N: GG00B92LHN58
SED O L: B92LHN5
LEI: 213800BMYMCBKT5W8M49
Coun t ry of I ncorpora t ion:
Guernsey
Registration number: 54908
M A N A G E ME NT A ND A DMI
N I S T R A T ION
Reg i s tered Off i ce Sec retary a nd A dmi n i s trator
D o ric Nimrod A ir T hree L JTC Fund Solutions ( G uernse y)
imi t ed Limi t ed
G round Floor G round Floor
Do rey Court Do rey Court
Ad miral Pa rk Ad miral Pa rk
S t Pe t er P ort S t Pe t er P ort
G ue rnse y, G Y1 2 HT G ue rnse y, G Y1 2 HT
A s se t Manager L i a i so n A gent
A medeo M ana g eme nt Limi t A medeo Serv ices (UK) L imi t ed
ed
T h e O v al 29 -30 Cornhill
Shelbou rne Road London
Ba ll sbri d ge En g land, E C 3 V 3 NF
D ub li n 4, Ireland
Corporate and Shareholder Advisor Reg i s trar
Nimrod Capital LLP JTC Registrars Limited (formerly
New Derwent House Anson Registrars Limited)
69-73 Theobalds Road G round Floor
London Do rey Court
WC1X 8TA England Ad miral Pa rk
S t Pe t er P ort
G ue rnsey, G Y1 2 HT
A d voca tes to the Co m pa ny
Lease and Debt Arranger (as to G u ernsey L a w)
A medeo M ana g eme nt Limi t Ca rey O lsen
ed
The Oval Ca rey House
Shelbourne Road Le s Ba n q ues
Ballsbridge S t Pe t er P ort
D ub li n 4, Ireland G ue rnse y, G Y1 4BZ
A u d i tor So li c i tors to the Comp a ny
(as to Eng l i sh L a w)
Deloi tt e LLP He rbert Smi th Freehills LLP
Re g en cy Cou rt E x chan ge House
G la t e g n y Esplanade P rimrose S treet
S t Pe t er P ort Londo n
G ue rnse y, G Y1 3 HW England, E C 2 A 2 HS
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KKKBBPBKDKON
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