DDE Develica

TIDMDDE

RNS Number : 1407C

Develica Deutschland Ltd

01 March 2011

Develica Deutschland Limited

Recommended proposals for the orderly run off of the Group, cash distribution to Shareholders, changes to the Management and Administration agreements and cancellation of admission to trading on AIM

The following announcement incorporates extracts from the Shareholder circular posted to the Company's Shareholders today to convene an EGM of the Company to seek Shareholder's approval for the Recommended Proposals for the changes to the way the Manager and the Delegate would be paid and the cancellation of admission to trading on AIM.

Introduction

On 7 February 2011, the Company announced that it had received notice from the agent to the lenders of the Company's second largest property portfolio by gross assets (referred to as "Bluestar") that it had issued notice of a breach of the loan to value covenant. As a result of the breach of covenant and as required under the loan agreement, the Group was asked to rectify the breach by way of equity cure which it was unable to do due to insufficient funds. This, combined with the expiry at the end of March 2011 of the waiver from the Group's largest lender, Citibank International Plc ("Citibank"), is expected to have a significant negative impact on the Group's current cash reserves. As a consequence, the Board has been in urgent discussions with its Manager to decide how to preserve the remaining shareholder value in the Group. The Board has given particular consideration to try to ensure as much value can be returned to shareholders, while satisfying the Company's current liabilities. It has also given consideration to the appropriateness for the Company to remain quoted on AIM.

Having considered the options available to the Company, your Board has today announced that the Company will convene a meeting of Shareholders in order to consider your Board's recommended proposals for the changes to the way the Manager and the Delegate would be paid and the cancellation of admission to trading on AIM (the "Recommended Proposals"). This announcement explains why your Board is seeking your approval for the Recommended Proposals which are conditional on the approval of Shareholders at the EGM.

If Shareholders approve the Recommended Proposals, it is the intention of the Board to declare a cash dividend of 1.5 euro cents per Share (the "Dividend"), the admission of the Shares to AIM will be cancelled, and the Company's obligation to pay the Manager and the Delegate will be amended as further set out in this announcement. If Shareholders do not approve the Recommended Proposals, the Directors will either lay proposals before Shareholders to seek their approval to place the Company into an immediate members' voluntary liquidation or in the event that they believe the position of the Company is such, have resolved to review at that time whether they should apply to the Royal Court of Guernsey for the Company to be placed into compulsory liquidation.

It is anticipated that, conditional upon Shareholder approval of the ordinary resolution to be proposed at the EGM, the Dividend will be declared shortly after the EGM. Based on the current information available, the Board intends to declare a dividend of 1.5 euro cents per Share. However, the Board will need to certify the Company's solvency under Guernsey law on the date the Dividend is declared, taking into account payment of the Dividend (the "Solvency Test"). The Board, therefore, cannot guarantee that it will declare the Dividend as it will need to assess the financial position of the Company as at the date of the Solvency Test.

It should be noted that if Shareholders do not approve the Recommended Proposals and the Board pursues either a members' voluntary liquidation with Shareholders' consent or the Royal Court places the Company into compulsory liquidation that based on the position of the Company today the Board and the Manager believe that there is unlikely to be any significant value to be returned to Shareholders from the Company. The Recommended Proposals enable the Board to declare the Dividend and provide a platform to offer the potential for further value to be distributed to Shareholders. The Board believes that any short term enforced liquidation or an immediate members' voluntary liquidation is not likely to provide as much value to Shareholders as the Recommended Proposals.

The Company is authorised as an authorised closed-ended investment scheme by the Commission under Section 8 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and the Authorised Closed-Ended Investment Scheme Rules 2008 made thereunder (the "Rules"). Notification of the Recommended Proposals has been given to the Commission pursuant to the Rules.

Background and Reasons for the Proposals

Develica Deutschland is a closed-ended investment company with an unlimited life, incorporated in Guernsey and which is managed by Develica Deutschland Management Limited (the "Manager"). The Company was incorporated on 18 May 2006 and was admitted to trading on AIM on 31 May 2006 having raised by way of a placing EUR250,000,000 through the issue of 250,000,000 Shares at EUR1.00 each. The Company was established to take advantage of potential opportunities in the German commercial property market. The Company's objective was to provide Shareholders with an attractive level of income together with the prospect of long term capital growth. Since the Company was established it has invested in a diverse commercial real estate portfolio using third party leverage to purchase a portfolio valued at acquisition in excess of EUR1 billion. As a consequence of the recessionary impact and tightening of global credit, property values in the Company's portfolio have reduced significantly. This economic climate has forced the Board and Manager to adopt a survival strategy to deal with the lack of availability of financing generally, and particularly the problem of sustaining the cash flow necessary to maintain the Group's operations and to meet its continuing financial obligations. The Board and the Manager therefore sought to renegotiate, where possible, waivers with lenders and reduce the cash expenses of the Group.

On 4 June 2009 the Company announced its most significant action, namely the renegotiation of its largest facility held with Citibank (the related property portfolio representing approximately 50 per cent. of the Company's overall portfolio in value terms) by means of a waiver. On 7 February 2011, the lender in respect of the Company's second largest property portfolio, Bluestar, issued a notice of a breach of covenant and as a result the Group was asked to rectify the breach by way of equity cure which it was unable to do due to insufficient funds. This, combined with the expiry at the end of March 2011 of the waiver from the Group's largest lender, Citibank, is expected to have a significant negative impact on the Group's current cash reserves. In addition, the deteriorating cash position as a result of the operating costs and liabilities as well as the restrictions on the access to cash implemented by the lenders within the SPVs due to breaches on the loan to value covenants has required the Board to take immediate steps to protect Shareholder value. As a consequence, the Board has, with its Manager, undertaken a comprehensive review of the options available to the Company.

In looking at the options the Board has considered the current equity position of the property portfolio, the ability of the Company to refinance its loans across the portfolio, available cash resources to the Company and current and future liabilities in the event that the Company continues to operate in its current structure.

The Board has considered the options currently available to the Company which include an immediate liquidation of the Company or the orderly run off of the activities of the Group. Based on the current loan to value ratios of the property portfolio, the breach and potential breach of covenants across the portfolio and the inherent ongoing operating costs and liabilities of the Company, the Board believes that there are unlikely to be any credible and viable alternatives to the Recommended Proposals which would deliver the same level of returns to Shareholders. The Group operates ring fenced special purpose vehicles (the "SPVs") which hold the Company's property assets. These SPVs have historically generated excess cash flow after the payment of all third party financial and property expenses, including amortisation payments. This cash flow has resulted in the Company accumulating cash balances. As at 28 February 2011 this cash balance was estimated to be approximately EUR6.4 million before any creditor payments.

Based on the latest available information and taking account of costs of disposal, it is not anticipated that the near-term realisation of the property portfolio would generate significantly more than EUR2 million in surplus cash. Based on preliminary assessments, making reference to market based analysis on distressed sale discounts, of value within the SPVs in a forced sale situation or where the buyer recognises the short term nature of the sellers funding constraints, the Board considers there to be no meaningful value in the SPVs at this date or in the near future. Until such time as property yields improve for the Group's portfolio, which the Board can have no guarantee that they will in the short term, and until such time that the Company can provide a more stable operating platform, then it is unlikely that the Company could extract any meaningful value. As at today's date and consistent with the previous disclosures made by the Company, the Board believes the equity position in the various SPVs remains at a distressed level. Consistent with the strategy outlined in this announcement the Board believes the best opportunity for Shareholders is to have the possibility to wait for any potential uplift in property values, and therefore recovery of equity, is to restructure

the Company.

In light of the financial position of the Company and having assessed possible ways of eliminating unnecessary costs to enable the survival of the Company, it is the Board's assessment that the Company is no longer appropriate to remain quoted on AIM. Further details regarding the cancellation of admission to trading have been provided later in this announcement.

However as the pressure on the covenants of the SPVs has tightened, less cash flow is being generated. As a consequence, the cash available to the Company is forecast by the Manager to reduce substantially and in the absence of the ability to cut costs to compensate for the anticipated reduction in revenues, the Board believes that the ring fenced cash in the Company will be reduced significantly from current levels and it is unlikely to be able to meet all actual and potential future liabilities of the Company. In addition, the Company expects to incur normal operating costs, excluding property management expenses, of approximately EUR870,000 per quarter. If those liabilities are not renegotiated the Board does not believe that any initial dividend could be paid to Shareholders and the Board would likely be required to implement some liquidation proposal. The Board has therefore negotiated a fee arrangement with the Manager and the Delegate (the "Amendment Agreement") details of which are set out below.

The Board believes that an immediate liquidation of the Group would not provide the best outcome for Shareholders and could result in less cash being returned to Shareholders compared to the Dividend and any surpluses that may arise from an orderly run-off. On an accelerated basis, whether through a forced disposal programme or liquidation process, the Board believes based on the assessment that there is unlikely to be any equity value remaining in the SPVs. Any sale of the SPVs will require the consent of the lenders and there can be no certainty of the outcome of any discussions. In addition, without achieving significant cost reductions the Board believes that it will be unable to continue to operate the Company in the short term, provide a going concern basis for the Group as a whole and could therefore lose the ability to extract any significant remaining value from the Company and its SPVs or the lenders to the SPVs. The Company's ability to survive on a streamlined basis is therefore a preferred way to extract remaining value for Shareholders, however reduced, from the SPVs.

The Independent Directors have therefore agreed to a conditional restructuring of the Management Agreement and Delegation Agreement whereby the current obligations for the payment of property management fees and administration fees to the Manager and Delegate respectively are terminated, by a reduction of Company operating expenses including reduced director costs, the elimination of costs associated to trading and reporting on AIM, and the cancellation of the admission of the Company to trading on AIM. It is intended that these actions will allow the Board to declare an interim cash distribution of 1.5 euro cents per Share representing a majority of the available distributable cash held by the Company after the Manager has waived its rights to receive fees under the Management Agreement.

The Company, the Manager and the Delegate have entered into an Amendment Agreement dated 1 March 2011 which is conditional on shareholder approval by ordinary resolution. If Shareholders do not give such approval the existing Management Agreement and Delegation Agreement will continue in full force and effect. Under the Management Agreement the Manager is entitled to a fixed fee payable by the Company of 0.395 per cent. per annum of the Company's net asset value plus borrowings of the Group.

The Manager is not entitled to other fees under the Management Agreement. Under the Delegation Agreement the Delegate is entitled to receive payment for its administration services which in the last financial year cost EUR1,160,000. The Company agrees these fees periodically and the Board believes that they are reasonable for the services provided.

The Management Agreement is terminable by the Company in certain circumstances including on 12 months' notice such notice not to expire before 31 May 2013. The Management Agreement is not expressed to be terminable by the Company upon its own liquidation and therefore if the Company went into liquidation it would still be obliged to pay the Manager its entitlement under the Management Agreement.

The Delegation Agreement is terminable on 3 months' notice but it would not automatically terminate upon the Company's own liquidation.

In negotiating the Amendment Agreement the Board has therefore taken into account the ongoing and future liability to the Manager and the Delegate, the cost of obtaining the third party administrative services offered by the Delegate, the likely impact of those liabilities taking into account the likely cash flows from the SPVs to the Company and the merit of proposing a liquidation now as against continuing to trade with revised fee arrangements with the Manager and the Delegate. The Board has also taken into account what it imagines is a remote possibility of the SPVs returning significant equity value as well as determining with certainty the quantum of the Manager's and Delegate's entitlements under their respective agreements, were they to be terminated summarily.

The Amendment Agreement provides that in consideration for the Manager and the Delegate continuing to perform their obligations under the Management Agreement and Delegation Agreement until 31 May 2013 respectively and agreeing to waive all their entitlements to payments from the Company under those agreements the following fee arrangements will apply for the future:

(i) the Company may pay the Dividend (subject to any legal requirements) and keep an additional cash reserve of EUR2.1 million earmarked for creditors of the Company (other than the Manager and the Delegate) (the "Reserved Liabilities");

(ii) subject to maintaining an additional working cash balance of EUR500,000 in excess of current liabilities for the next twelve months (other than the Reserved Liabilities), the Company shall pay to the Delegate the next available EUR1.85 million (representing an estimated cost to the Company for the provision of the delegated administrative services currently performed by the Delegate up to 31 May 2013) only to the extent that such funds can be recovered by the Company or the Manager acting on the Company's behalf;

(iii) subject to the payment in (ii) above and subject to maintaining the additional working cash balance of EUR500,000 (in excess of current liabilities for the next twelve months other than the Reserved Liabilities), the Company shall pay to the Manager the next available EUR4.15 million only to the extent that such funds can be recovered by the Company or the Manager acting on the Company's behalf; and

(iv) after the payments of (ii) and (iii) above, the Company and the Manager shall share any remaining cash recovered on an equal basis save that the aggregate payments that may be made to the Manager and the Delegate in respect of the above payments will be capped at EUR10.55 million.

The payment in (iii) above represents the discounted fee basis the Manager has agreed with the Board so that the restructuring of the Company can take place and in order to allow sufficient cash resources to be available for the payment of the Dividend.

Under the Amendment Agreement, it has been agreed that payments made by any of the SPVs, whilst they are still members of the Group, to the Manager and/or Delegate shall be deemed to be payments to the Company so that the Manager and/or the Delegate shall not be entitled to be paid twice. The Manager and the Delegate shall, in any event, pay any such monies so received by it to the Company.

In addition the Company has agreed to grant the Manager the opportunity to offer to acquire any SPVs which are offered to a third party by the Company.

The Independent Directors believe that the Recommended Proposals including the amendment of the Management Agreement and the Delegation Agreement are in the best interests of the Company for the following reasons:

1) It reduces the diminution in value of the Company's only current asset being cash on the balance sheet;

2) It provides the Company with sufficient working capital needs to fund the ongoing financial and property related costs to maintain the SPVs where arrangements with the SPV lenders permit and avoids the prospect of an immediate enforced liquidation of the Company;

3) It gives the Company the ability to manage and protect where possible its remaining assets and offers the possibility to realise value that may not have otherwise have been possible under the current position; and

4) It provides Shareholders with the possibility to receive an interim dividend payment in the near-term from Company cash balances that in the absence of these arrangements would not have otherwise been possible.

The ability of the Company to pay the Dividend is dependent on the Board reducing the Company's operating costs from existing cash resources and removing certain obligations of the Group. In the event that the Recommended Proposals are not approved by Shareholders, the Board believes that the Company may well become insolvent, and insolvency proceedings such as administration or liquidation, may need to be commenced. Should the Company be placed into liquidation, the total amount distributable to Shareholders may be less than the Dividend and less than the Board believes could be paid out if the Recommended Proposals are approved. However, whilst the Board and the Manager believe that any turnaround in the value to the Company of the underlying properties is remote, should there be any such turnaround, Shareholders would, under the Recommended Proposals, only share any increase in value with the Manager on an equal basis up to the cap referred to above.

The Amendment Agreement is a related party transaction for the purposes of Rule 13 of the AIM Rules. The Independent Directors, having consulted with Grant Thornton Corporate Finance, the Company's nominated adviser, consider the terms of the Amendment Agreement to be fair and reasonable insofar as the Company's Shareholders are concerned.

Cancellation of the Company's admission to trading on AIM

In connection with the Recommended Proposals, the Company proposes to seek the cancellation of admission of its shares to trading on AIM. The Directors believe that significant cost savings could be achieved by virtue of cancelling the listing and that this represents a better outcome for Shareholders notwithstanding the fact that Shareholders will lose the benefit of their Shares being traded on AIM as well as the protections for Shareholders available under the AIM Rules for Companies.

Conditional on Shareholders approving the Resolutions, Peter Le Cheminant will resign as a director of the Company.

In the event that the Recommended Proposals are approved by Shareholders, the Company's admission of Shares to trading on AIM will be cancelled with effect from 7.00 a.m. on 4 April 2011.

Shareholders should be aware that in such circumstances, there will be no market on which to trade their Shares and, accordingly, it will be extremely difficult for them to find any purchasers of their Shares. In addition, the Company will no longer be required to appoint a Nominated Adviser nor to comply with the AIM Rules for Companies in the conduct of its business. These are significant protections and Shareholders are advised to take advice from an independent adviser if they are uncertain of the impact of the cancellation of admission to AIM of the Company's Shares.

Dividend

Subject to the Directors being able to do so in accordance with applicable law and regulation (including, without limitation, the Companies Law), it is the intention of the Directors to declare the Dividend conditional on the approval by Shareholders of the ordinary resolution. It is expected that the Dividend will be paid to Shareholders on or around 27 April 2011.

Recommendation

The Independent Directors consider the terms of the Recommended Proposals to be fair and reasonable so far as the Shareholders are concerned. Accordingly, the Independent Directors unanimously recommend that all Shareholders vote in favour of all the Resolutions as they intend to do in respect of their combined holdings of 2,480,000 Shares representing 0.992 per cent. of the Company's issued share capital.

For further information please contact:

Contact:

Derek Butler, Chairman, Develica.

Tel: 020 7016 1860

Philip Secrett, Grant Thornton Corporate Finance.

Tel: 020 7383 5100

Expected timetable of principal events

All references to time shown in this announcement are to London time unless otherwise stated.

Latest time and date for receipt of Forms of Proxy -10.00 a.m on 23 March 2011

Extraordinary General Meeting 12 noon on - 25 March 2011

Conditional Interim Dividend declared* on or around - 25 March 2011

Conditional Interim Dividend Record Date - close of business on 30 March 2011

Cancellation of admission of the Shares to trading on AIM - 7.00 a.m. on 4 April 2011

Interim Dividend paid to Shareholders on or around - 27 April 2011

If any of the above times and/or dates change, the revised time(s) and/or dates(s) will be notified to Shareholders by announcement through a Regulatory Information Service.

* It is intended to declare and pay an interim dividend but this cannot be guaranteed.

Definitions

The following definitions apply throughout this announcement, unless the context otherwise requires:

"AIM" the AIM market of the London Stock Exchange

"Articles" the articles of incorporation of Develica Deutschland Limited

"Business Day" any day on which the London Stock Exchange and banks in London and Guernsey are open for business

"Certificated" or in "certificated form" where a share or other security is not in uncertificated form

"Citibank" Citibank International Plc

"Commission" the Guernsey Financial Services Commission

"Company" or "Develica Deutschland" Develica Deutschland Limited, a closed-ended investment company incorporated with limited liability under the laws of the Island of Guernsey with registered number 44810

"CREST" the relevant system (as defined in the UK Uncertificated Securities Regulations 2001) in respect of which Euroclear UK & Ireland is the operator (as defined in the UK Uncertificated Securities Regulations 2001)

"Delegate" MacNiven and Cameron Management Limited

"Delegation Agreement" the delegation agreement dated 22 July 2010 between Elysium Fund Management Limited, the Company and the Delegate as amended

"Directors" or "Board" the directors of the Company

"Dividend" the proposed cash dividend of 1.5 euro cents per Share

"Euroclear UK & Ireland" Euroclear UK & Ireland Limited, the operator of CREST

"Extraordinary General Meeting" the extraordinary general meeting of the Shareholders (and any adjournment thereof) convened for the purpose of approving the Resolution to be held at 10.00 a.m. on 25 March 2011

"Form of Proxy" the form of proxy in relation to the Extraordinary General Meeting

"Grant Thornton Corporate Finance" the corporate finance division of Grant Thornton UK LLP, of 30 Finsbury Square, London EC2P 2YU

"Group" the Company and its subsidiaries

"Independent Directors" the directors other than Grant Tromans

"Law" The Companies (Guernsey) Law, 2008 (as amended)

"London Stock Exchange" London Stock Exchange plc

"Management Agreement" the management agreement dated 25 May 2006 between the Company and the Manager as amended and as currently in force

"Manager" Develica Deutschland Management Limited, the investment manager of the Company

"Register" the register of Shareholders of the Company

"Resolutions" an ordinary resolution and a special resolution to be proposed at the EGM to cancel the admission of the Shares to trading on AIM and to approve the Amendment Agreement

"Shareholders" holders of Shares

"Shares" ordinary shares in the capital of the Company

recorded on the relevant register as being held in uncertificated form

This information is provided by RNS

The company news service from the London Stock Exchange

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