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Financing Policy & Risk Management
Objectives
The aim of British Land's financing policy is to fund the Group to service
its evolving corporate strategy and needs, and provide the flexibility
to take advantage of opportunities as they arise.
The principal objectives are to ensure that:
- significant committed undrawn facilities are available to support
current and future business requirements;
- the Group is financed over the long term with debt levels supported
by recurring, committed income;
- the Group's cost of capital is minimised; and
- the Group maintains a prudent financial position by active management
of financial risks, including interest rate, liquidity and counter party
risks.
Financing policy
Through a mix of debt and equity finance, together with a wide variety
of debt sources, the Group aims to minimise its cost of capital, consistent
with its other strategy aims (as outlined above). Most joint ventures
have their own financing (see here), which is
entirely independent of the Group's financing, except for a total of £12.0 million of guarantees.
The Group's financing policy is to leverage equity returns through strategic
gearing, and at the same time maintain a defensive debt structure. The
mortgage ratio is maintained at or around 50% subject to the Board's view
of the property market, the future growth prospects of British Land's
portfolio and recurring cash flows.
Liability management
Liability management is not a profit centre and no speculative transactions
are undertaken. The Group's debt and derivative positions are continuously
reviewed to meet current and expected debt requirements.
The Group maintains a balance between longer-term and shorter- term financings.
The latter provide flexibility of repayment at no penalty. Acquisitions
are often funded initially by shorter-term credit facilities and then
refinanced with longer-term funding when market conditions are favourable.
Short-term financing is principally raised through bilateral and syndicated
revolving bank facilities, which can be repaid at will without penalty
and redrawn again when the need arises. All bank facilities are unsecured
and on standard terms to maintain oper- ational flexibility.
Medium to longer-term financing comprises public and private bond issues,
including convertibles and securitisations. British Land's property portfolio
is well placed to take advantage of new asset-specific and cash-flow
financing structures.
Financing risk is spread by using a range of banks and a variety of types
of finance. The maturity profile of debt is managed by spreading the repayment
dates and extending and expanding bank facilities.
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Interest rate management
The Group borrows principally in Sterling at both fixed and floating rates
of interest, then uses derivatives to generate the desired interest rate
profile and to control the Group's exposure to interest rate fluctuations.
The proportion of debt held at variable interest rates is varied as new
transactions (whether corporate, direct property or financing) emerge, to
rebalance the overall mix. Normally, the Group maintains around 85% of debt
(subject to a 5% tolerance either side) at fixed or capped rates to provide
long-term protection. The time horizon for this policy is a rolling 3-5
years.
The use of derivatives is managed and monitored by the Board of British
Land Financing Limited and its Derivative Sub-Committee, which includes
four executive directors, and also retains a specialist external firm of
consultants.
The Group's credit exposure to each derivative counterparty is monitored
on a regular basis, as are external credit ratings.
Foreign currency management
To manage the impact of foreign exchange movements, the Group borrows in
currencies other than Sterling, principally Euros, and uses cross-currency
swaps to match foreign currency assets with foreign currency liabilities.
When attractive terms are available to do so, the Group borrows in freely
available currencies other than Sterling. The Group fully hedges its foreign
currency risk on such borrowings through derivatives.
The Group's policy is to have no material unhedged net assets or liabilities
denominated in foreign currencies.
Liquidity and cash management
The Group maintains a high level of undrawn revolving bank facilities to
provide financial liquidity. The property portfolio is stringently reviewed
to identify appropriate properties for sale, with a view to converting non-cash
assets into cash if required.
Deposits are placed to optimise the rate of return, subject to the creditworthiness
of the counterparty.
Profit and loss account and
balance sheet management
The Group monitors the current and projected financial position using several
key internally generated reports: cash flow, borrowing, debt maturity and
derivatives schedules. The Group also undertakes sensitivity analysis to
assess the impact of proposed transactions and movement in interest rates
on the key balance sheet, liquidity and profitability ratios.
At the Group's option, the £150 million 6% Irredeemable Convertible
Bond can be converted into preference shares, augmenting equity. These preference
shares can subsequently be switched back to Bonds (see here).
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