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Investment Trusts: why Doric Nimrod is no flight of fancy

James Carthew takes a closer look at the Doric Nimrod investment company, which makes its money by leasing aircraft to the Emirates.

 
Investment Trusts: why Doric Nimrod is no flight of fancy

This week I'm going to have a closer look at some of the funds Mark Barnett has bought for his Perpetual Income & Growth trust. There are some equity fund managers who won’t use investment companies, but Barnett is not alone at Invesco in using them as portfolio diversifiers.

For instance, Neil Woodford’s Edinburgh Investment trust has stakes in Raven Russia, Burford and Eurovestech, which give him exposure to Russian warehouses, litigation finance and a successful mini conglomerate. The stocks I highlighted within Barnett’s portfolio were Doric Nimrod, Damille and the two Impax funds.

A specialist market for specialist funds

The two Doric Nimrod funds (and the two Damille funds) are Guernsey-based investment companies, and are among the handful of funds listed on the Specialist Fund Market (SFM). The SFM can accommodate investment companies with unusual structures or portfolios – the trade-off being that funds listed on the SFM are only targeted at sophisticated investors.

The first Doric Nimrod fund listed in December 2010. It needed to be on the SFM because it has just one asset – an A380, which is leased to Emirates. The second fund listed in July 2011 raised enough to finance three aircraft. It was topped up with a £200 million C-share issue this March and is looking to raise yet more money from the US. Again, this is leasing A380s to Emirates.

Doric Asset Finance, the investment manager, has been raising asset finance for some years and has finance in place for a number of other airlines apart from Emirates, including Singapore Airlines, Virgin Atlantic and Cathay Pacific. Airline finance is its principal business but it has also financed solar and biogas plants in Germany as well as some property and a cargo ship.

Initial doubts

I must admit that when I originally heard about Doric Nimrod, the first thing that came into my mind was Guinness Peat Aviation (GPA) – which probably says a lot about the way I think.

GPA, founded in the mid 1970s and managed by Tony Ryan (who later went on to found Ryanair), grew rapidly and profitably by borrowing money, investing in aircraft and then leasing them. It made a sizeable margin on the spread between borrowing costs and the lease income.

However, in the early 1990s, against a backdrop of a downturn in the airline industry, it overstretched itself by committing to a huge expansion of its fleet at a time when finance was getting harder to come by. It planned to shore up their balance sheet with an IPO but when this plan faltered, the company ran into trouble and was dismembered.

This high-profile failure is not representative of the industry, however. Many of the businesses founded or expanded on the back of GPA’s demise have gone on to do well.

How the fund works

The economics of these funds are best understood by looking at the first fund. Doric Nimrod raised £40 million in the first fund raising and used this and $122 million borrowed from Westpac (fixed at an effective rate of 5.495% per annum) to acquire its A380. It then leased the plane to Emirates for 12 years. The debt was structured to amortise over the life of this lease so that by November 2022 the fund will own the plane outright.

The third-party forecast valuation for the plane then was $110 million, so they reckoned investors would end up with around 161p per share if they sold the plane then and handed back the net proceeds.

In the meantime, they were targeting dividends of 2.25p per quarter (9p per annum) and, to date, this is what they have been distributing.
The company does not have a fixed life. The plane may still by flying 40 years from now, they are accounting for the plane still having a residual value of £6 million 30 years after it was built (in 2038). They have promised though that if the plane is sold, shareholders will be given the chance to liquidate the company.

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