Financial Statements

Notes to the Accounts

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18 Net debt

	Footnote	2008 £m	2007 £m
Secured on the assets of the Group
Class A1 4.986% Bonds 2037	1.1	602	602
Class A2 Floating Rate Bonds 2037	1.1	60	60
Class B 4.988% Bonds 2037	1.1	171	174
Class A4 4.821% Bonds 2036	1.2	396	396
Class C2 5.098% Bonds 2035	1.2	217	217
Class B 4.999% Bonds 2033	1.2	365	365
Class A3 4.851% Bonds 2033	1.2	174	174
Class A1 Floating Rate Bonds 2032	1.2	224	224
Class A2 4.949% Bonds 2031	1.2	295	302
Class A2 4.482% Bonds 2030	1.3		257
Class M1 Floating Rate Bonds 2030	1.3		82
Class B2 5.270% Bonds 2030	1.3		239
Class B3 5.578% Bonds 2030	1.3		49
Class C1 Floating Rate Bonds 2030	1.3		70
Class D1 Floating Rate Bonds 2030	1.3		43
Class D Floating Rate Bonds 2025	1.2	130	144
Class C1 Floating Rate Bonds 2022	1.2	235	234
5.264% First Mortgage Debenture Bonds 2035		327	327
5.0055% First Mortgage Amortising Debentures 2035		105	106
5.357% First Mortgage Debenture Bonds 2028		307	307
9.125% First Mortgage Debenture Stock 2020	1.4	40	40
6.75% First Mortgage Debenture Bonds 2020		204	205
6.125% First Mortgage Debenture Stock 2014	1.4	45	45
10.3125% First Mortgage Debenture Stock 2011	1.4	44	45
6.75% First Mortgage Debenture Bonds 2011		100	100
Floating Rate Secured Loan Notes 2035		256	256
Loan notes		5	5
		4,302	5,068
Unsecured
5.50% Senior Notes 2027		98	98
6.30% Senior US Dollar Notes 2015	3	77	78
10.25% Bonds 2012			2
Bank loans and overdrafts		785	1,425
		960	1,603
Gross debt	4	5,262	6,671
Interest rate derivatives: liabilities		31	19
Interest rate derivatives: assets		(17)	(88)
		5,276	6,602
Cash and short-term deposits	5	(244)	(198)
Net debt		5,032	6,404

Maturity analysis of net debt

	2008 £m	2007 £m
Repayable within one year and on demand	111	54
between: one and two years	51	122
two and five years	712	1,422
five and ten years	1,117	1,212
ten and fifteen years	613	797
fifteen and twenty years	943	906
twenty and twenty-five years	912	1,244
twenty-five and thirty years	803	914
	5,151	6,617
Gross debt	5,262	6,671
Interest rate derivatives	14	(69)
Cash and short-term deposits	(244)	(198)
Net debt	5,032	6,404

Total borrowings where any instalments are due after five years is £3,084m (2007: £3,260m).

1 These borrowings are obligations of ring-fenced, special purpose companies, with no recourse to other companies or assets in the Group:

	2008 £m	2007 £m
1.1 Meadowhall Finance PLC	833	836
1.2 Broadgate Financing PLC	2,036	2,056
1.3 BL Superstores Finance PLC (footnote 2)		740
1.4 BLD Property Holdings Ltd	129	130

2 On 26 March 2008 the BL Superstores Finance PLC securitisation group was transferred to BL Sainsbury Superstores Limited, a joint venture with J Sainsbury PLC.
3 Principal and interest on this borrowing was fully hedged into Sterling at the time of issue.
4 The principal amount of gross debt at 31 March 2008 was £5,275m (2007: £6,684m). Included in this, the principal amount of secured borrowings and other borrowings of non-recourse companies was £4,294m (2007: £5,061m).
5 Cash and deposits not subject to a security interest amount to £78m (2007: £27m).

Capital risk management

The Group’s objectives, policies and processes for managing capital are set out in the Financing Policy. The capital structure of the Group consists of net debt and equity attributable to the equity holders of The British Land Company PLC, comprising issued capital, reserves and retained earnings.

Loan to value ratio

A 45-55% loan to value ratio (LTV) is targeted, subject to the Board’s view of markets, the prospects of and risks within the portfolio and the recurring cash flows of the business. During the year ended 31 March 2008 the Board considered the markets fully valued and brought gearing down through sales such that, despite the mark downs in the valuation of the portfolio, LTV was 41% at year end (2007: 41%).

Categories of financial instruments

	2008 Book value £m	2007 Book value £m
Financial assets
Derivatives in designated hedge accounting relationships	17	88
Loans and receivables
Trade and other debtors	101	95
Cash and short-term deposits	244	198
Available for sale financial assets
Other investments	196	267
	558	648
Financial liabilities
Fair value through income statement
Held for trading - derivatives	(2)	(2)
Derivatives in designated hedge accounting relationships	(29)	(17)
Amortised cost
Gross debt	(5,262)	(6,671)
Finance lease payable	(35)	(30)
Trade creditors	(90)	(85)
Amounts owed to joint ventures	(29)	(32)
	(5,447)	(6,837)
Total	(4,889)	(6,189)

Gains and losses on financial instruments, as classed above, are disclosed in note 7 (net financing costs), note 14 (debtors) and the consolidated statement of recognised income and expense.

Interest rate risk management

The Group uses interest rate swaps to hedge exposure to the variability in cash flows on floating rate debt, such as revolving bank facilities and floating rate bonds, caused by movements in market rates of interest. At 31 March 2008 the market value of these derivatives, which have been designated as cash flow hedges under IAS 39, is a net asset of £3m (2007: £88m). The valuation movement reflects the reduction in Sterling interest rates since 31 March 2007.

The cross currency swap, which fully hedges the foreign exchange exposure on the US Private Placement, has been designated as a cash flow hedge. The market value of this is a liability of £15m (2007: £17m).

The ineffectiveness recognised in the income statement on cash flow hedges in the year ended 31 March 2008 was £nil (2007: £nil).

The cash flows occur and enter into the determination of profit and loss until the maturity of the hedged debt. The table below summarises foreign currency denominated and variable rate debt hedged at 31 March 2008.

Cash flow hedged debt

	2008 £m	2007 £m
Outstanding: after one year	2,189	2,712
after two years	2,751	3,265
after five years	2,439	2,737
after ten years	519	330

Interest rate profile – including effect of derivatives

	2008 £m	2007 £m
Fixed rate	5,248	6,061
Capped rate		100
Variable rate (net of cash)	(216)	243
Net debt	5,032	6,404

All the debt is effectively Sterling denominated except for £181m (2007: £111m) of Euro debt, of which £179m (2007: £102m) is fixed and the balance floating. At 31 March 2008 the weighted average interest rate of the Sterling fixed rate debt is 5.23% (2007: 5.20%). The weighted average period for which the rate is fixed is 16.0 years (2007: 15.1 years). The weighted average interest rate for the Euro fixed rate debt is 4.50% (2007: 4.50%) and the weighted average period for which the rate is fixed is 8.2 years (2007: 8.9 years). The floating rate debt is set for periods of the Company’s choosing at the relevant LIBOR (or similar) rate.

Property sales and the related repayment of floating rate debt increased the proportion of gross debt at fixed or capped rates of interest to nearly 100% at 31 March 2008 (2007: 92%). This proportion is expected to reduce as floating rate debt is redrawn to fund committed development expenditure. Based on the Group’s interest rate profile at the balance sheet date a 276 basis point increase in interest rates would increase annual profits by £6m (2007: £8m reduction). Similarly, a 276 basis point reduction would reduce profits by £6m (2007: £9m increase). The change in interest rates used for this sensitivity analysis is based on the largest annual change in three month Sterling LIBOR over the last 10 years.

Upward movements in medium and long-term interest rates, associated with higher interest rate expectations, increase the value of the Group’s interest rate swaps that provide protection against such moves. The converse is true for downward movements in the yield curve. The Group’s interest rate swaps qualify as effective hedges under IAS 39, therefore movements in their fair value are recognised directly in equity rather than the income statement. At 31 March 2008 a 195 basis point parallel upward shift in swap rates would increase the value of the Group’s interest rate swaps by £291m (2007: £319m). A 195 basis point downward shift in swap rates would reduce the value of the interest rate swap portfolio by £366m (2007: £378m). Because the interest rate swaps are matched by floating rate debt, the overall effect on Group cash flows of such movements is minimal. A 195 basis point shift represents the largest annual change in the seven year Sterling swap rate over the last 10 years.

Foreign currency risk management

Group policy is to have no material unhedged net assets or liabilities denominated in foreign currencies. The currency risk on overseas investments is hedged via foreign currency denominated borrowings and derivatives. The Group has adopted net investment hedging in accordance with IAS 39 and therefore the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. The ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the income statement.

The table below shows the carrying amounts of the Group’s foreign currency denominated assets and liabilities. Provided contingent tax on overseas investments is not expected to occur it will be ignored for hedging purposes, this explains the excess of Euro denominated liabilities over assets. Based on the 31 March 2008 position a 17% appreciation (largest annual change since 1999) in the Euro relative to Sterling would result in a £2m reduction (2007: £2m reduction) in reported profits.

	Assets		Liabilities
	2008 £m	2007 £m	2008 £m	2007 £m
Euro denominated	172	98	181	111

Credit risk management

The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained.

Cash and short-term deposits at 31 March 2008 amounted to £244m (2007: £198m). Deposits were placed with financial institutions with AA or better credit ratings.

At 31 March 2008 the fair value of all interest rate derivatives which had a positive value was £17m (2007: £88m). All of the counterparties have investment grade credit ratings.

At 31 March 2008, prior to taking into account any offset arrangements, the largest combined credit exposure to a single counterparty arising from money market deposits and interest rate swaps was £217m (2007: £150m). This represents less than 2% (2007: 1%) of gross assets.

The Group’s exposure to credit risk in respect of its trade receivables is analysed in note 14.

Liquidity risk management

The table below presents a maturity profile of the contracted undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal flows. Where the interest payable is not fixed, the amount disclosed has been determined by reference to the projected interest rates implied by yield curves at the reporting date. For derivative financial instruments that settle on a net basis (e.g. interest rate swaps) the undiscounted net cash flows are shown and for derivatives that require gross settlement (e.g. cross currency swaps) the undiscounted gross cash flows are presented. Where payment obligations are in foreign currencies, the spot exchange rate ruling at the balance sheet date is used. Trade creditors and amounts owed to joint ventures, which are repayable within one year, have been excluded from the analysis.

	2008
	Debt £m	Interest on debt £m	Derivative payments £m	Finance lease payments £m	Total payments £m	Derivative receipts £m	Net £m
Repayable: within one year	103	288	6	2	399	(19)	380
between: one and two years	49	263	18	2	332	(6)	326
two and five years	707	745	26	8	1,486	(21)	1,465
over five years	4,396	2,731	134	220	7,481	(103)	7,378
	5,255	4,027	184	232	9,698	(149)	9,549
Unamortised issue costs	(21)
Fair value adjustments arising on acquisitions	28
Gross debt	5,262

 

	2007
	Debt £m	Interest on debt £m	Derivative payments £m	Finance lease payments £m	Total payments £m	Derivative receipts £m	Net £m
Repayable: within one year	53	371	7	2	433	(24)	409
between: one and two years	120	364	6	2	492	(26)	466
two and five years	1,415	1,010	19	7	2,451	(63)	2,388
over five years	5,077	3,238	130	217	8,662	(116)	8,546
	6,665	4,983	162	228	12,038	(229)	11,809
Unamortised issue costs	(25)
Fair value adjustments arising on acquisitions	31
Gross debt	6,671

Upward only rent reviews, long leases and high occupancy rates generate a secure income profile. The Group expects to meet its financial liabilities from this secure income profile, undrawn committed borrowing facilities and in the longer-term debt refinancings or property sales. The Group’s approach to liquidity risk management is discussed on Financial Policy. The maturity profile of committed undrawn borrowing facilities is shown below.

Maturity of committed undrawn borrowing facilities

	2008 £m	2007 £m
Expiring: within one year	77	50
between: one and two years	80	40
two and three years	221	130
three and four years	709	707
four and five years	80	322
over five years	1,266	408
Total	2,433	1,657

The above facilities are those freely available to be drawn for Group purposes. There are additional undrawn 364 day revolving liquidity facilities of £185m and £75m which are only available for requirements of the Broadgate and Meadowhall securitisations, respectively.

Comparison of market values and book values

	2008			2007
	Market value £m	Book value £m	Difference £m	Market value £m	Book value £m	Difference £m
Securitisations	2,495	2,869	(374)	3,552	3,632	(80)
Debentures and unsecured bonds	1,213	1,347	(134)	1,366	1,353	13
Bank debt and other floating rate debt	1,046	1,046		1,686	1,686
Cash and short-term deposits	(244)	(244)		(198)	(198)
	4,510	5,018	(508)	6,406	6,473	(67)
Other financial (assets) liabilities
– interest rate derivative assets	(17)	(17)		(88)	(88)
– interest rate derivative liabilities	31	31		19	19
	14	14		(69)	(69)
Total	4,524	5,032	(508)	6,337	6,404	(67)

The carrying values of trade debtors, other investments, trade creditors, finance leases and amounts owed to joint ventures represent their fair values at the balance sheet date. These financial instruments are excluded from the above analysis.

The fair values of securitised debt and debentures have been established by obtaining quoted market prices from brokers. The bank debt and loan notes have been valued assuming they could be renegotiated at contracted margins. The derivatives have been valued by calculating the present value of future cash flows, using appropriate market discount rates, by an independent treasury advisor.

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