Introduction

We are pleased to announce the interim consolidated financial results for Livermore Investments Group Limited ("the Company" or "Livermore") and its subsidiaries (together "the Group") for the six months ended 30 June 2014. 

During the first half of 2014, the Group generated net income of USD 10.86m (30 Jun 2013: USD 7.3m), which represents earnings per share of USD 0.06 (30 Jun 2013: USD 0.04). The Group paid an interim dividend of USD 5m in H1 2014 (USD 0.0256 per share). The NAV of the Group as of 30 June 2014 was USD 0.86 per share after payment of the interim dividend. During the reporting period, management continued to actively manage the financial portfolio and optimized exposure to US credit markets, which provided attractive risk adjusted returns, albeit at a lower rate than prior years.

Wyler Park, our investment property in Bern, Switzerland performed well, generating over CHF 2.7m in rent during the period. The property is fully rented. Market valuation of Wyler Park has remained stable.

There were no significant developments in the private equity portfolio during the period.

Financial Review

 The NAV of the Group as at 30 June 2014 was approximately USD 168.2m (30 Jun 2013: 174.2m). The profit after tax for the first half of 2014 was USD 10.86m, which represents earnings per share of USD 0.06. The performance relates largely to gains on the credit portfolio and the disposal of our investment in Montana Tech Components offset by write downs on certain investments.

 Livermore's Strategy

The financial portfolio is focused on fixed income instruments which generate regular cash flows and include exposure to senior secured and usually broadly syndicated US loans as well as emerging market debt through investments into Collateralized Loan Obligations ("CLOs"). This part of the portfolio is geographically focused on the US with some exposure to Europe and emerging markets. The remaining portfolio is focused on Switzerland and Asia with investments primarily in real estate and legacy private equity funds. 

Strong emphasis is given to maintaining sufficient liquidity and low leverage at the overall portfolio level and to re-invest in existing and new investments along the economic cycle. 

Repurchase of shares

Between 31 December 2013 and 30 June 2014, the Company repurchased no additional shares. On 30 June 2014, the Company held 108,830,818 shares in treasury. No additional shares were purchased between 30 June 2014 and before the beginning of the interim close period.

Dividends

In January 2014, the Company announced an interim dividend of USD 5m (USD 0.0256 per ordinary share).

The Board of Directors will decide on the Company's dividend policy for 2014 based on profitability, liquidity requirements, portfolio performance, market conditions, and the share price of the Group relative to its NAV.

30 September 2014

Review of Activities

Economic & Investment Environment

Global economic recovery remained hesitant in the first half of 2014. In the US, GDP declined in the first quarter, which was largely attributed to an exceptionally cold winter. Second quarter growth, however, has been strong suggesting a reversal of the temporary drag in the first quarter. In the euro area, growth was weak and varied greatly from one country to another. While economic activity picked up in Germany in the first quarter, renewed stagnation in France and Italy was disappointing. The Euro area faces significant challenges including consolidation of public finances and reforms which promote growth. Growth dynamics in emerging economies were also below expectations. In the US, overall conditions in the labour market continued to improve during the first half of 2014 with the unemployment rate falling to 6.1% in June. Nonetheless, labour force participation rates and the number of people working part time for economic reasons continued to suggest that significant slack remains in the labour market. Inflation inched up in the US from the unusually low levels in 2013 but remains somewhat below the longer run goal of 2%.

Global financial and market conditions remained supportive of economic growth in the first half of 2014 as developed market central banks continued to add stimulus to grow their respective economies. The US Federal Reserve continued to purchase US Treasury and Mortgage Backed Securities, albeit at a reducing pace. The European Central Bank reduced its main interest rate by 0.10% in June 2014 and lowered its marginal lending facility rate by 0.35% to 0.40%. It also introduced negative interest rates on the deposit facility for the first time to encourage lending and promote growth. The S&P 500 Index was up 6.5% in the first half of the year and the EuroStoxx 50 Index gained 4.1%. The 10 year US treasury bonds yielded 2.53% as at end of June versus 3.03% as at the beginning of the year.

Flows into high yield funds were erratic while loan funds have experienced outflows since the beginning of the second quarter after 95 consecutive weeks of inflows. At the same time, record issuance of CLOs has kept the demand steady for loans. Excluding the bankruptcy of Energy Future Holdings, the US leveraged loan trailing 12 month default rate ended June at a modest 1.3% according to Fitch Ratings. The S&P/LSTA Leverage Loan Index generated a total return of 2.6% for the first half of the year.

Sources: Swiss National Bank (SNB), European Central Bank (ECB), US Federal Reserve, Bloomberg

Review of Significant Investments

* Net of related loan.

Wyler Park - Switzerland

Wyler Park is a top quality mixed-use property located in Bern, Switzerland. It has over 16,800 square meters of commercial area, 4,100 square meters of residential area, and another 7,100 square meters available for additional commercial development. The commercial part is leased entirely to SBB (AAA rated), the Swiss national transport authority wholly owned by the Swiss Confederation, and serves as the headquarters of their Passenger Traffic division. The commercial lease is 100% linked to inflation and ends in 2019 with two 5 year extension periods thereafter. The annual rental income from the commercial area of the project is CHF 4.36m.

Following the successful development of 39 residential apartments, the entire property is now fully rented. The annual rental income expected from the residential area is CHF 1.04m.

The property generated rent of CHF 2.7m during the first half of 2014.

Livermore is the sole owner of Wyler Park through its wholly owned Swiss subsidiary, Livermore Investments AG. The loan outstanding on the project is CHF 78.03m, which is a non-recourse loan to Livermore Investments AG backed only by this property. The loan maturity has been extended until October 2014.

Management continues to evaluate the potential development of the additional commercial development rights of 7,100 square meters attached to the property.

SRS Charminar - India

Livermore invested USD 20m in 2008 in a leading Indian Real Estate company, in association with SRS Private and other investors as part of a total investment of USD 132.1m. The investment in the investee company was in the form of compulsorily convertible debt and included a put option, which can be exercised if the investee company does not have an IPO within 3 years or if certain terms in the agreement are not met.  As reported previously, the Manager for this investment served a put option exercise notice to the promoters in 2009 and entered into an arbitration process to resolve disputes.  The arbitrator ruled in favour of investors and awarded investors the investment plus interest amounting to 30% IRR until 14 August 2009 and 18% IRR thereafter.  Further, investors filed and won an interim order for injunction against the promoters and the company to prohibit sales, transfer or encumbering of the assets of the company.  Thereafter, the promoters filed against the arbitral award and the injunction order.  As at 30 June 2014, there was no change in the status of this case. On January 13, 2011 the Company Law Board ("CLB") passed an order and allowed Infrastructure Leasing & Financial Services Limited ("IL&FS") to become 80% shareholder and control the management of the company.

In 2013, SRS agreed to a settlement with IL&FS and the investee company. As per the terms of the settlement, INR 8.5bn will be paid to the investors in four tranches over a five year period. The settlement is subject to certain court and regulatory approvals.

Due to the legal complexity and the receipt of the regulatory and court approvals required for the implementation of the proposed settlement as well as the various counterparties involved, the outcome remains uncertain.

The carrying amount of the investment is based on discounted expected cash flows and valued at USD 8.9m (2013: USD 8.9m). 

Montana Tech Components AG ("Montana") - Europe

Montana, based in Austria, is a leading components manufacturer in the fields of Aerospace Components, Metal Tech, Energy Storage, and Industrial Components.

In the first half of 2014, MTC bought back its shares from Livermore for a total consideration of EUR 6.9m.

Private Equity Funds

The other private equity investments held by the Group are in the form of Managed Funds (mostly closed end funds) mainly in the emerging economies of India and China. The investments of these funds into their portfolio companies were mostly done in 2008 and 2009. Overall, during the first half of 2014, the investment environment relating to most funds was challenging and the Group expects that material exits of portfolio companies should materialize between 2015 and 2017. 

SRS Private: SRS Private is a private equity fund focused on real estate in India. The fund has invested in residential and commercial projects as well as directly in certain real estate companies. The assets are primarily located in and around major cities of India such as Mumbai and Hyderabad. In September 2014, the Fund has announced the first distribution of USD 25m from a partial exit of its investment in Supreme Housing in Mumbai. Livermore is expected to receive USD 0.67m from this distribution in September 2014.

Evolution Venture: Evolution is an Israel focused Venture Capital fund. It invests in early stage technology companies. Its investments include a carrier-class Mobile Broadband Wireless Wi-Fi solutions company, a language enhancement products company, a software company operating in the digital radio market, a software testing tool, and a virtualization technology company.

India Blue Mountains: India Blue Mountains is a leading hotel and hospitality development fund that is developing 4 star and 5 star hotels in India. The fund has acquired land and is in the process of developing three hotels in prime areas of Mumbai, Pune and Goa. All hotels will be managed by the Accor Group (Novotel brands). Accor has also invested equity and holds a 26% stake in all of the hotels.

In the first half of the year, the Fund aimed to raise USD 2m to support operations at the Pune Hotel and continue development of the Mumbai project. However, it was only successful in raising USD 1m.

Da Vinci:  The fund is primarily focused on Russia and CIS countries and is primarily invested in the Moscow Exchange and a Ukrainian coal company. The Group's investment in the fund was valued at USD 0.6m as of 30 June 2014.

Elephant Capital: India-focused private equity fund, which is AIM quoted (formerly called Promethean India Plc).  (Ticker: ECAP).  Its portfolio investments include a leading tiles manufacturer in India, an established automotive components manufacturer, a media business with an exclusive content library, and an online venture to distribute cricket related content. 

As of February 2014, the NAV of the fund was 34 pence per share. In the first half of 2014, the Fund realized its investment in Mahindra CIE and returned capital to shareholders via share buy-backs. Additional information about the fund and its portfolio is available at www.elephantcapital.com

Blue Ridge: Blue Ridge is a China focused private equity fund. The fund has made investments in six portfolio companies. Portfolio companies include a distressed real estate turnaround company, a plastic and chemicals manufacturer, a higher education company, an innovative bio-pesticide company, a software company specializing in Oil & Gas applications and a refinery.

Panda Capital: Panda Capital is a China-based private equity fund focused on early-stage industrial operations in China and Taiwan. The fund's main investment is in a bamboo flooring company in China, which provides an innovative low cost alternative to hardwood flooring in shipping containers.  The manager is in the process of building up operational capacity for product manufacturing.  As the fund is close to its end of life, the fund manager has proposed a restructuring in Q1 2014 whereby consenting limited partners will remain in the fund and non-consenting limited partners will be bought out by the fund at the prevailing net asset value. Livermore has decided to stay in the fund.

Financial Investments and Corporate Bond Trading

The Group manages a financial portfolio valued at USD 94m (net of leverage) as at 30 June 2014, which is invested mainly in US credit and special situation equity opportunities.

Senior Secured Loans and CLOs:

The US senior secured loan market continued to offer good risk adjusted returns as an inflation linked asset class with a senior secured claim on the borrower and with overall low volatility and low correlation to equity market. The CLO structure proved itself through the financial crisis and thereafter as a robust means of investing into the loan asset class.

During the first half of 2014 the Group reduced exposure to pre-crisis and emerging market CLOs and opportunistically added equity tranches from new issue CLO transactions. CLOs are managed portfolios invested into diversified pools of senior secured loans and financed with long term financing pre-fixed at the time of issuance.

The fundamentals of the US corporate credit market continued to show resilience during the first half of 2014. Excluding the bankruptcy of Energy Future Holdings, the US leveraged loan trailing 12 month default rate ended June at a modest 1.3% according to Fitch Ratings and is below the historical average. New issue loan volumes stayed high driven by opportunistic re-financings by existing issuers as well as increased merger and acquisition activity. The S&P/LTSA index of issuers generated a total return of 2.6% for the first half of 2014.

The US CLO portfolio continued to perform well on account of low current default rates and a benign default outlook and stable credit fundamentals. At the end of the reporting period all of our CLO investments were passing their coverage tests (thereby making dividend distributions). The Emerging Market CLO portfolio, however, was negatively affected due to certain defaults in Latin America as well as the geopolitical situation in Ukraine. During the first half of 2014, the CLO portfolio generated USD 12.4m in cash distributions. CLO payments remained strong but reduced as loan spreads narrowed on account of aggressive re-pricings and re-financings in the latter part of 2013 and early part of 2014.  Loan spread levels seem to have widened somewhat in the summer and prepayment rates seem to have settled down as well. As discussed in earlier reports, cash distributions from pre-crisis CLOs are on the decline as most pre-crisis CLOs have ended their reinvestment periods and are amortizing the cheapest liabilities or face other reinvestment constraints, divert cash-flow to pay manager incentive fees, and loan re-pricing activity reduces excess spread. While new issue CLOs also faced lower excess spread, they have longer reinvestment periods which should enable them to weather a downturn, and benefit from wider spreads or any volatility in loan prices in the future.  As of 30 June 2014, over 80% of the Group CLO portfolio is invested in post-crisis CLOs.

Secondary market prices for equity tranches of post-crisis CLOs were steady to higher in the first half of 2014. Secondary market prices for CLO equities seem to have declined somewhat in the third quarter as investors look to lock in gains made from investing in new issue deals and reinvest the proceeds into future new issue transactions.

As US interest rates are expected to remain low until 2015 and very few loans mature in the near term, corporate defaults are expected to remain low in the near-medium term. Management believes that the environment should remain attractive for investments in CLO income notes.  In the first half of 2014, Livermore launched a new issue cash-flow CLO as an anchor investor and participated in select US new issue CLOs of leading managers.

While management maintains a positive view, mid-long term performance may be negatively impacted by a pull back into a substantial double dip recession in US and/or Europe involving a spike in defaults.  Despite positive developments in the overall health of the US economy, we acknowledge the high unemployment, continued EU sovereign debt crisis as well as the headwinds the economy may face relating to the austerity measures and the US debt ceiling discussions and geopolitical risks.

Public Equities:

Babylon is an International Internet Company based in Israel and listed on the Tel-Aviv Stock Exchange (TASE: BBYL).  It is a leading translation and language tools provider. The company generates revenues through Search and Advertising, Online Sales, and Corporate Sales with the largest share of revenues coming from Search in partnership with Google and other search providers. In Q4 2013, Google terminated its agreement with Babylon which led to a sharp drop in the share price and a further decline in revenues is expected.

In the first quarter of 2014, Livermore sold approximately half of its shareholding in Babylon at an average price of USD 1.98 and now holds approximately 4% of Babylon's issued share capital. In August 2014, Babylon distributed a dividend of ILS 2.45 per share (USD 0.67 per share).

Noam Lanir, the majority shareholder of the Group, is also a major shareholder in Babylon (note 28).

The following is a table summarizing the financial portfolio as at 30 June 2014 

The following table reconciles the review of activities to the Group's financial assets and investment property as at 30 June 2014.  

Events after the reporting date

There were no significant events after the reporting date. 

Litigation

Information is provided in note 30 to the interim condensed consolidated financial statements.

Livermore Investments Group Limited

Condensed Consolidated Statement of Financial Position

as at 30 June 2014

Livermore Investment Group Limited

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2014

The total comprehensive income for the period is wholly attributable to the owners of the parent company.

Livermore Investments Group Limited

Condensed Consolidated Statement of Changes in Equity

for the period ended 30 June 2014

Livermore Investments Group Limited

Condensed Consolidated Statement of Cash Flows

for the period ended 30 June 2014