3i warns of write-downs; may have brighter future

The pre-closing trading update of 3i Group warned the markets of stark write-downs ahead. While the news may stoke the fire of critics calling the end of play for many listed vehicles, it may (and perhaps should) be seen as a pre-meditated approach to manage investor relations: it could represent an effort to make aggressive value reductions now to crystallise bad news, rather than more gently and across the entire year, so that growth may resume later in 2009.

At the time of going to press, the group had yet to announce its final results for 2008, but in January 2009 an estimated drop in value of 21% against the top 50 assets was reported. The slide could in fact be more severe, as the firm has also stated its intention to move all assets from a cost-base valuation for the full year reports - at 30 September 2008 25% of the portfolio was held at cost.

3i confirmed realisations for the 11-month period to 28 February 2009 totalling £1.1bn. This is down from £1.6bn in the corresponding period of 2008, though considering the sharp drop in asset values, this decline does not accurately reflect the scale of the ongoing de-leveraging exercise. In terms of investments, 3i's retrenchment is confirmed by the huge drop off in activity. The group invested a combined total of £898m over the same period and just £57m in the opening two months of this year - down from £2.2bn and £841m respectively in 2008. The group will continue this consolidation strategy going forward as it continues with its objective of reducing its debt-pile, which stood at more than £2bn in January.

In contrast, 3i Infrastructure announced that it had invested a total of £157m in the period 1 April 2008 to 26 March 2009, the majority of which is accounted for by the £114.7m purchase of a portfolio of junior debt instruments. Indeed, 3i Group funded drawdowns for the infrastructure division totalling £47m for the 11-month period to 28 February 2009 (with £25m of this being called in the first two months of 2009 alone), representing only a modest drop from £54m in the corresponding period of 2007/8.

In terms of realisations, an impressive £177.6m was generated over the period to 26 March, representing an uplift of £25.9m over the asset valuations at the start of the financial year. The largest proportion of this was generated by the sale of the group's 31.17% interest in Infrastructure Investors LP for a total consideration of £163.7m, which represented an uplift of £44.8m over cost and an increase of £16.2m on the valuation at 30 September 2008.

These realisation proceeds have contributed to an increase in 3i Infrastructure's cash balance from the £253.7m reported in March 2008 to £392.6m. The portfolio was also said to be performing steadily with strong income generation, though there was a warning of a decline in net asset value in the final year accounts as a result of volatility in the mark-to-market valuation of the junior debt portfolio and equity instruments.

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