The principal objectives of British Land's financing policy and practice are to:
- Minimise the cost of capital through a mix of debt and equity finance
- Raise debt from a variety of sources and maintain a spread of maturities, including longer-term financing, supported by committed income under long leases
- Maintain significant committed undrawn loan facilities, to support current and future business requirements
- Actively manage financial risks, including interest rate, foreign exchange, liquidity and counterparty risks
Profit and loss account and balance sheet management
We monitor our current and projected financial position using several key internally generated reports: cash flow, borrowing, debt maturity and interest rate exposure. We also undertake sensitivity analysis to assess the impact of proposed transactions, movements in interest rates and changes in property values on the key balance sheet, liquidity and profitability ratios.
Debt finance gearing is used to enhance our returns. The Loan to Value (LTV) ratio on a proportionally consolidated basis (including our share of Joint Ventures and Funds) is the primary measure of gearing monitored by the Board. The level of gearing is adjusted over time to reflect judgements about the position of the property market and our portfolio in the cycle, the relative vulnerability to market corrections of our assets, particularly regarding the level of speculative development, and relevant general economic indicators. Across the property cycle the Board considers the Loan to Value ratio should not exceed a maximum of 55%. At 31 December 2011, the proportionally consolidated Loan to Value was 46%.
Liability management is not a profit centre – no speculative transactions are undertaken. The Group’s debt and derivative positions are continually reviewed to meet current and expected debt requirements.
We maintain a balance between longer-term and shorter-term financings. Short-term financing is principally raised through bilateral and syndicated revolving bank facilities. Medium to longer-term financing comprises public and private bond issues, including private placements and securitisations. Financing risk is spread by using a variety of types of debt. The maturity profile is managed by spreading the repayment dates and extending facilities.
Interest rate management
The Board sets an appropriate maximum level of sensitivity of underlying earnings and cash flows to movements in market rates of interest over a rolling three to five-year period.
The proportion of fixed rate debt required to remain within the target sensitivity varies with the levels of gearing and interest cover. With financing raised at both fixed and variable rates, derivatives (primarily interest rate swaps) are used to achieve the desired interest rate profile across proportionally consolidated net debt. Currently 71% of projected debt is at fixed rate over the policy time period. The use of derivatives is managed by the Derivatives Committee. The Group’s exposure to derivative counterparties is monitored on a regular basis, as are their external credit ratings.
Liquidity and cash management
We maintain undrawn committed revolving bank facilities to provide financial liquidity. These can be drawn/repaid at short notice, reducing the need to hold liquid resources in cash and deposits. This minimises costs arising from the difference between borrowing and deposit rates, while reducing credit exposure. Deposits are placed as necessary to optimise the rate of return, subject to the credit standing of the counterparty.
In January 2010, the Group purchased £200 million of medium-term notes. These tradable notes have a fixed interest rate of 4.4% per annum and a maturity date of January 2015.
Foreign currency management
Our 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.
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.
