• by  • July 30, 2014 • Doric II

    Doric Nimrod Air Two Limited

    Annual Financial Report From 1 April 2013 to 31 March 2014

    Company Facts

    Listing Special Fund Market of the London Stock Exchange and Channel Islands Securities Exchange 
    Ticker DNA2 
    Share Price 226.00p (as at 31 March 2014)230.75p (as at 25 July 2014)


    Market Capitalisation GBP 390.5 million (as at 31 March 2014) 
    Aircraft Registration Numbers A6-EDP, A6-EDT, A6-EDX, A6-EDY, A6-EDZ, A6-EEB, A6-EEC 
    Current/Future Anticipated Dividend Current dividends are 4.5p per quarter per share (18p per annum) and it is anticipated that this will continue until the aircraft leases begin to terminate in 2023. 
    Dividend Payment Dates January, April, July and October 
    Currency Sterling 
    Launch Date/Price 14 July 2011 / 200p 
    Incorporation and Domicile Guernsey 
    Asset Manager Doric GmbH 
    Corp & Shareholder Advisor Nimrod Capital LLP 
    Administrator JTC Fund Managers (Guernsey) Limited 
    Auditor Deloitte LLP 
    Market Makers Shore Capital Ltd/Winterflood Securities Ltd/

    Jefferies International Ltd/

    Numis Securities Ltd


    SEDOL, ISIN B3Z6252, GG00B3Z62522 
    Year End 31 March
    Stocks & Shares ISA Eligible
    Website www.dnairtwo.com

    Doric Nimrod Air Two Limited

    Doric Nimrod Air Two Limited (LSE: DNA2) (“DNA2” or the “Company”) is a Guernsey company incorporated on 31 January 2011.

    Pursuant to the Company’s prospectus dated 30 June 2011, the Company on 14 July 2011 raised approximately £136 million by the issue of Ordinary Preference Shares at an issue price of £2 each.  The Company’s Ordinary Preference Shares were admitted to the Official List and to trading on the Channel Islands Stock Exchange (“CISX”) and the Specialist Fund Market of the London Stock Exchange (“SFM”) on 14 July 2011.  On 20 December 2013 the Royal Court of Guernsey approved the scheme of arrangement (“the scheme”) between CISX and The Channel Islands Securities Exchange (“CISE”).  In accordance with the scheme, the business of CISX has been acquired by CISE.  All securities that were listed on the Official List of CISX have been transferred and are now listed on the Official List of CISE.

    Subsequently the Company raised a further £188.5 million from a C share fundraising (the “C Shares”), which closed on 27 March 2012 with the admission of 100,250,000 Convertible Preference Shares to trading on the SFM and the CISE.

    On 6 March 2013, the Company’s C shares converted into an additional 100,250,000 Ordinary Preference Shares.  These additional Ordinary Preference Shares were admitted to trading on the SFM and to listing on the Official List of the CISE on 6 March 2013 and rank pari passu with the Ordinary Preference Shares already in issue. As at 25 July 2014, the last practicable date prior to the publication of this report, the Company’s total issued share capital consisted of 172,750,000 Ordinary Preference Shares (the “Shares”) and the Shares were trading at 230.75 pence per share.

    Investment Objectives and Policy

    The Company’s investment objective is to deliver an income return and a capital return for its shareholders by acquiring, leasing and then remarketing Airbus A380-800 aircraft (each an “Asset”).  The Company receives income from the lease rentals paid to it by Emirates Airlines (“Emirates”), the national carrier owned by the Investment Corporation of Dubai, based in Dubai, United Arab Emirates, pursuant to the leases.  It is anticipated that income distributions will be made quarterly.


    The Company has four wholly-owned subsidiaries; MSN077 Limited, MSN090 Limited, MSN105 Limited and Doric Nimrod Air Finance Alpha Limited (“DNAFA”) which collectively hold the Assets for the Company (together the Company and the subsidiaries are known as (the “Group”).

    The first Asset was acquired by MSN077 Limited on 14 October 2011 for a purchase price of US$234 million and has been leased to Emirates for an initial term of 12 years to October 2023, with fixed lease rentals for the duration.

    The second Asset was acquired by MSN090 Limited on 2 December 2011 for a purchase price of US$234 million and has been leased to Emirates for an initial term of 12 years to December 2023, with fixed lease rentals for the duration.

    The third Asset was acquired by MSN105 Limited on 1 October 2012 for a purchase price of US$234 million and has been leased to Emirates for an initial term of 12 years to October 2024.

    In order to complete the purchase of the relative Assets, MSN077 Limited, MSN090 and MSN105 Limited entered into separate loan agreements with a number of  banks (see Note 14), each of which will be fully amortised with quarterly repayments in arrears over 12 years (together the “Loans”).  A fixed rate of interest applies to the Loans.  MSN077 Limited drew down US$151,047,509 under the terms of the first loan agreement to complete the purchase of the first Asset, MSN090 Limited drew down US$146,865,575 in accordance with the second loan agreement to finance the acquisition of the second Asset and MSN105 Limited drew down US$145,751,153 in accordance with the third loan agreement to finance the acquisition of the third Asset. The first loan agreement, second loan agreement and the third loan agreement are on materially the same terms.

    The fourth, fifth, sixth and seventh Assets were acquired by DNAFA using the proceeds of the issue of the C Shares, together with the proceeds of Enhanced Equipment Trust Certificates (the “Equipment Notes”) issued by DNAFA. The Equipment Notes were acquired by two separate pass through trusts using the proceeds of their issue of enhanced equipment trust certificates (the “Certificates”). The Certificates, with an aggregate face amount of approximately $587.5 million were admitted to the Official List of the UK Listing Authority and to the London Stock Exchange on 12 July 2012.These four Assets were also leased to Emirates for an expected initial term of 12 years to July 2024, with fixed lease rentals for the duration.

    Distribution Policy

    The Company aims to provide its shareholders with an attractive total return comprising income from distributions through the period of the Company’s ownership of the Assets and capital upon the sale of the Assets.

    The Company receives income from the lease rentals paid by Emirates pursuant to the relevant leases.  The lease payments received by the Company from Emirates cover repayment of the debt as well as income to pay dividends to shareholders.  Emirates bears all costs (including maintenance, repair and insurance) relating to the aircraft during the lifetime of the lease.

    Future dividend payments are anticipated to continue to be declared and paid on a quarterly cycle on the basis specified above under Distribution Policy and subject to compliance with applicable laws and regulations.

    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 (the “Guernsey 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.

    In accordance with the Distribution Policy the Company declared four dividends of 4.50 pence per Ordinary Preference Share during the financial year to 31 March 2014 and two dividends of 4.50 pence per Ordinary Preference Share after the reporting period.  Further details of these dividend payments can be found on page 26.

    Return of Capital

    In respect of any Asset, following the sale of that Asset, the Directors may, as they deem appropriate at their absolute discretion, either (i) return to Shareholders the net capital proceeds, or (ii) re-invest such proceeds in accordance with the Company’s investment policy.

    Further, the Company intends to return to Shareholders 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 a solvency test contained therein).

    Liquidation Resolution

    Although the Company does not have a fixed life, the Articles require that the Directors convene a Liquidation Proposal Meeting in June 2025 where a Liquidation Resolution will be proposed that the Company proceed to an orderly wind-up. In the event that the Liquidation Resolution is not passed, the Directors will consider alternatives for the Company and shall propose such alternatives at a general meeting of the Shareholders, including re-leasing the Assets (to the extent the Assets have not already been disposed of in the market), or selling the Assets and applying the capital received from the sale of those Assets to: (i) if applicable, the repayment of outstanding debt; and (ii) reinvestment in other aircraft

    I am pleased to present shareholders with the Company’s second consolidated financial report covering the period from 1 April 2013 until 31 March 2014. (the “Period”)

    The Group owns seven planes, funded in part by two equity issues, a note issue and bank debt.

    I am glad to report that during the period the Company has performed well and been declaring quarterly dividends as expected.

    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 Company used the net proceeds of the initial placing and three separate loans, each of approximately US$150 million, to fund the purchase of three Airbus A380-800 aircraft.  The Company acquired the first, second and third aircraft, respectively through its wholly owned subsidiaries MSN077 Limited, MSN090 Limited and MSN105 Limited, on 14 October 2011, 2 December 2011 and 1 October 2012 respectively each for the sum of US$234 million.  Upon delivery the subsidiaries each also entered into an aircraft operating lease with Emirates , the national carrier owned by the Investments Corporation of Dubai, based in Dubai, United Arab Emirates. The aircraft have been leased to Emirates for an initial term of twelve years with fixed lease rentals for the duration.  The debt portion of the funding will be fully amortised over the twelve years of the lease, with the aim of leaving the aircraft unencumbered at the conclusion of the lease.  All payments thus far by Emirates have been made in accordance with the terms of the leases.

    The Company used the net proceeds of the C Share placing together with debt of approximately US$600 million, issued in the form of Equipment Notes to two Special Purpose Trusts, to fund the purchase of four additional Airbus A380-800 aircraft, and to lease them to Emirates  in the fourth quarter of 2012.

    Once all seven aircraft were acquired, the C Shares were converted into Ordinary Preference Shares at a conversion ratio of one Ordinary Preference Share for every one C – Share, and the Company has since been targeting a distribution of 4.5p per Share per quarter, equating to 9 per cent per annum on the issue price of the Shares.

    The Company’s Asset Manager, Doric GmbH, continues to monitor the lease performance and reports regularly to the Board. Nimrod Capital LLP, the Company’s Placing Agent as well as its Corporate and Shareholder Advisory Agent, continues to liaise between the Board and Shareholders, and to distribute  quarterly fact sheets and interim management statements.

    During the calendar year 2013 overall global air traffic passenger demand, measured in revenue passenger kilometres (RPKs), expanded by 5.2% compared to the year before.  This number represents exactly the average historical growth rate over the last 30 years, and was mainly driven by solid economic growth in the emerging regions.  Less mature air travel markets continued to expand significantly faster than the more mature ones. In general, increasing air travel was consistent with the pick-up in economic growth around the globe.

    Emirates has also continued to perform well flying more passengers than ever before carrying 44.5 million people to 142 destinations in 80 countries on six continents during the last financial year 2013/14.  Passenger load factors remain high and the airline has ordered more wide bodied planes (including a further 50 A380’s) to cope with its forecast increasing demand.

    At the end of April 2014 the A380 had 10 operators with 128 planes in service.  There were undelivered orders of some 195 A380s at that point in time.

    According to Airbus, as at March 2014 the worldwide A380 fleet had accumulated 1.3 million flight hours in close to 155,000 commercial flights.  The number of passengers who flew aboard an Airbus A380 was 55 million.  Currently the A380 operates between more than 35 airports and every five minutes an A380 takes off or lands at these destinations.

    The Board recognise Emirates are the sole lessee of the Assets, and in the event that Emirates default on the rental payments 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.  We do not believe this is a likelihood at this moment in time given the current and historical performance of Emirates and its current financial position.

    In economic reality, the Company has also performed well. Four interim dividends were declared in the year and future dividends are targeted to be declared and paid on a quarterly basis.  However, the financial statements do not in the Board’s view properly convey this economic reality due to the accounting treatment for foreign exchange, rental income and finance costs.

    International Financial Reporting Standards require that transactions denominated in US Dollars (including, most importantly, the cost of the aircraft) are translated into sterling at the exchange rate ruling at the date of the transaction whilst monetary items (principally the outstanding borrowings) are translated at the rate prevailing on the reporting date.  The resultant figures sometimes show very large mismatches which are reported as unrealised foreign exchange differences.

    On an on-going basis and assuming the lease and 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 Dollars is used to pay debt repayments due which are likewise denominated in Dollars. Dollar lease rentals and debt repayments are furthermore fixed at the outset of the Company’s life and are very similar in amount and timing.

    In addition to this, rental income receivable is credited evenly to the Statement of Comprehensive Income over the planned life of the Company.  Conversely, the methodology for accounting for interest cost means that the proportion of the debt repayments which is treated as interest and is debited to the Statement of Comprehensive Income, varies over the term of the debt with a higher proportion of interest expense recognised in earlier periods – so that the differential between rental income and interest cost (as reported in the Statement of Comprehensive Income) reduces over the course of 12 years. In reality however the amount of rental income is fixed so as to closely match the interest and principal components of each debt repayment instalment and allow for payments of operating costs and dividends.

    An annual review is required of the residual value of the Assets as per IAS 16 Property, Plant and Equipment which defines residual value as “the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of age and in the condition expected at the end of its useful life.”  The Company’s estimation technique is to make reference to the current forecast market value, not the amount that would currently be achieved, and so this value is not a direct application of the IAS 16 definition of residual value.  The Company has engaged three internationally recognised expert appraisers to provide the Company with third party consultancy valuation services.  The Company has also received reports from Doric, who have confirmed it has no reason to question the methodology used within the appraisal reports to determine the residual value and that they do not believe the appraisals show a fundamental movement in the anticipated residual values of the planes since they were acquired.  Thus Doric has advised the Committee they do not believe the estimate of residual value need be changed for the Period. Upon review of the professional advice they have received, the Board is of the opinion that, the current estimate of the residual value of the Assets is a reasonable approximation of the residual value within the IAS 16 definition of residual value given a comparable asset is not available.

    On behalf of the Board I would like to thank our service providers for all their help and assistance together with all Shareholders for their continued support of the Company.

    Norbert Bannon


    The complete report can be found in pdf format here on the companies website