16 FINANCIAL ASSETS AND FINANCIAL LIABILITIES
a) Financial assets
| Non-current | 2007 £’000 |
2006 £’000 |
| Available-for-sale financial assets | 7,718 | 5,000 |
| Interest rate cap and swap derivative contracts | 142 | 126 |
| Loan notes at amortised cost | 8,680 | 755 |
| 16,540 | 5,881 |
| Available-for-sale financial assets comprise: | 2007 £’000 |
2006 £’000 |
| Development participation | 6,662 | 5,000 |
| Development loans to joint venture partners | 1,056 | – |
| 7,718 | 5,000 |
The development participation represents the Group’s share of two development projects stated at fair value, which is assessed by reference to the stage of completion of the projects and progress on construction and lettings. One project is in an advanced state of completion and the Group’s participation has been valued at £6,420,000, incorporating an uplift from cost of £1,420,000 in respect of the Group’s share of profits (calculated by reference to the expected internal rate of return). The second project has not yet commenced on site and is therefore held at cost of £242,000 which is considered to represent its fair value. If the projects were not profitable the fair value of these participations could reduce to nil.
The fair value of interest rate cap and swap derivative contracts is calculated by discounting future cash flows (refer note 16(c)).
Loan notes with a carrying value of £255,000 (2006: £755,000) are held in Continental Estates Corporation BV, an associate (refer note 12(a)). Interest is earned at a fixed rate of 6.0 per cent. A provision of £500,000 has been made against the loan stock at 31st December 2007. Loan notes with a carrying value of £8,425,000 were issued in November 2007 by CTP Securities Limited, with a term of five years and a fixed coupon rate of 4.25 per cent.
| Current | 2007 £’000 |
2006 £’000 |
| Available-for-sale financial assets | 10,472 | – |
| Loans and receivables | 2,262 | – |
| 12,734 | – |
| Available-for-sale financial assets comprise: | 2007 £’000 |
2006 £’000 |
| Development participation | 10,472 | – |
During the year, the Group entered into a five-year funding agreement with Fiducia Group Limited, providing finance by way of development participation for the development of neighbourhood retail facilities. The Group participates in profit share arrangements which vary with each development project. At 31st December 2007, £10,065,000 (2006: £nil) funds had been advanced and £407,000 recognised as a fair value adjustment in respect of one project where a profitable outcome is anticipated in the short term. The fair value of the development equity in the remaining projects is not reliably measureable and is therefore held at cost.
The Group has provided finance of £2,145,000 (2006: £nil) to the Wessex Property Fund to refinance its existing liabilities by way of convertible loan notes, which are convertible into units until 29th June 2009. The convertible loan notes earn interest at a rate of 6.0 per cent until the conversion rights are exercised. The Group also provided £117,000 to a third party by way of development funding. This is carried at cost.
b) Financial liabilities
| Current | 2007 £’000 |
2007 £’000 |
2006 £’000 |
2006 £’000 |
| Bank overdrafts | 662 | 5,929 | ||
| Current instalments due on bank loans | 543 | 9,785 | ||
| Unamortised transaction costs | (352) | (199) | ||
| 191 | 9,586 | |||
| 853 | 15,515 |
| Non-current | 2007 £'000 |
2006 £'000 |
| First mortgage debenture 11% due 2016 | 20,000 | 20,000 |
| Bank loans and loan notes | 125,604 | 67,692 |
| Unamortised transaction costs | (1,808) | (273) |
| 143,796 | 87,419 |
Bank loans and the debenture are secured by way of mortgages and legal charges on certain properties and cash deposits held by the Group.
| Bank loans and loan notes comprise: | 2007 £’000 |
2006 £’000 |
| £20,000,000 first mortgage debenture 2016 | 20,000 | 20,000 |
| £35,000,000 fixed rate loan 2018 | 34,542 | 35,000 |
| £18,250,000 variable rate loan 2008 | – | 18,250 |
| £25,000,000 variable rate loan 2010 | – | 14,900 |
| £25,000,000 variable rate loan 2007 | – | 9,310 |
| £10,000,000 variable rate loan 2014 | 10,000 | – |
| £34,535,000 variable rate loan 2010 | 3,398 | – |
| £45,233,000 variable rate loan 2012 | 45,233 | – |
| €47,000,000 variable rate loan notes 2027 | 32,957 | – |
| £16,500 variable rate loan notes 1999 | 17 | 17 |
| 146,147 | 97,477 | |
| Less: current instalments due on bank loans | (543) | (9,785) |
| 145,604 | 87,692 |
£20,000,000 first mortgage fixed rate debenture
This secured debenture is repayable on 6th January 2016.
£35,000,000 fixed rate loan
This secured loan is repayable by instalments, with final repayment due on 23rd December 2018. In January 2008, the Directors made the decision to repay this loan early, which took place on 1st February 2008, incurring an early repayment fee of £5,891,000.
£18,250,000 variable rate loan
This secured loan was repaid on 29th November 2007.
£25,000,000 variable rate loan
This secured revolver loan was repaid in 2007, and can be redrawn at any time. Final repayment in one instalment is due on 30th September 2010.
£25,000,000 variable rate loan
This secured loan was repaid on 2nd July 2007.
£10,000,000 variable rate loan
This secured loan is repayable in one instalment on 17th October 2014.
£34,535,000 variable rate loan
This secured loan is repayable in one instalment on 23rd January 2010.
£45,233,000 variable rate loan
The loan is repayable in one instalment on 30th April 2012.
€47,000,000 variable rate loan notes
These unsecured loan notes were issued on 20th September 2007 and are denominated in Euros. They are repayable on 20th September 2027.
£16,500 loan notes
These unsecured loan notes were repayable in 1999. The balance of £16,500 represents the residual amount of unredeemed loan notes.
c) Financial instruments
The Group is exposed to a number of different market risks in the normal course of business including credit, foreign currency, interest rate and liquidity risks. The Group seeks to pre-fund, pre-let and pre-sell appropriate projects in line with its risk-averse development strategy. The Group’s own development project finance is arranged by way of internally generated cash resources and medium-term, revolving credit and fixed rate facilities which provide the necessary flexibility to draw down funds when required. An explanation of the Group’s financial instrument risk management objectives is set out below:
Interest rate maturity profile of financial assets and liabilities
The following table sets out the carrying amount by maturity of the Group’s financial instruments that are exposed to interest rate risk:
| 2007 Maturity | |||||||
| Fixed Rate | Within one year £’000 |
One to two years £’000 |
Two to three years £’000 |
Three to four years £’000 |
Four to five years £’000 |
More than five years £’000 |
Total £’000 |
| Loans and receivables | 2,262 | – | – | – | – | – | 2,262 |
| £8,425,000 loan notes | – | – | – | – | – | 8,425 | 8,425 |
| £255,000 loan notes | – | – | – | 255 | – | – | 255 |
| £20,000,000 first mortgage debenture | – | – | – | – | – | (20,000) | (20,000) |
| £35,000,000 fixed rate loan | (526) | (570) | (616) | (667) | (721) | (31,442) | (34,542) |
| Variable Rate | Within one year £’000 |
One to two years £’000 |
Two to three years £’000 |
Three to four years £’000 |
Four to five years £’000 |
More than five years £’000 |
Total £’000 |
| Cash and short-term deposits | 73,135 | – | – | – | – | – | 73,135 |
| Bank overdrafts | (662) | – | – | – | – | – | (662) |
| Development participation | 10,472 | 6,420 | 242 | – | – | – | 17,134 |
| Development loans to joint venture partners | – | – | 1,056 | – | – | – | 1,056 |
| Interest rate cap contracts | – | – | – | – | – | 142 | 142 |
| £34,535,000 variable rate loan | – | – | (3,398) | – | – | – | (3,398) |
| £45,233,000 variable rate loan | – | – | – | – | (45,233) | – | (45,233) |
| €47,000,000 variable rate loan notes | – | – | – | – | – | (32,957) | (32,957) |
| £10,000,000 variable rate loan | – | – | – | – | – | (10,000) | (10,000) |
| £16,500 variable rate loan notes | (17) | – | – | – | – | – | (17) |
| 2006 Maturity | |||||||
| Fixed Rate | Within one year £’000 |
One to two years £’000 |
Two to three years £’000 |
Three to four years £’000 |
Four to five years £’000 |
More than five years £’000 |
Total £’000 |
| £755,000 loan notes | – | 755 | – | – | – | – | 755 |
| £20,000,000 first mortgage debenture | – | – | – | – | – | (20,000) | (20,000) |
| £35,000,000 fixed rate loan | (458) | (527) | (570) | (616) | (667) | (32,162) | (35,000) |
| Variable Rate | Within one year £’000 |
One to two years £’000 |
Two to three years £’000 |
Three to four years £’000 |
Four to five years £’000 |
More than five years £’000 |
Total £’000 |
| Cash and short-term deposits | 88,536 | – | – | – | – | – | 88,536 |
| Bank overdrafts | (5,929) | – | – | – | – | – | (5,929) |
| Development participation | – | – | 5,000 | – | – | – | 5,000 |
| Interest rate cap and swap derivative contract | – | – | – | – | – | 126 | 126 |
| £18,250,000 variable rate loan | – | (18,250) | – | – | – | – | (18,250) |
| £25,000,000 variable rate loan | (9,310) | – | – | – | – | – | (9,310) |
| £25,000,000 variable rate loan | – | (14,900) | – | – | – | – | (14,900) |
| £16,500 variable rate loan notes | (17) | – | – | – | – | – | (17) |
Financial Instruments
Interest on financial instruments classified as floating rate is re-priced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial assets and financial liabilities of the Group that are not included above are non-interest bearing and are therefore not subject to interest rate risk.
Interest rate risk
Where appropriate, interest rate caps and swaps have been used to commercially hedge the Group’s exposure to short-term fluctuations in interest rates on floating rate debt, in addition to the cross-currency swap set out below. The Group holds interest rate caps with a nominal value of £63,250,000 (2006: £27,500,000). The Group states its interest rate caps at fair value, with changes to fair value included in the income statement. The fair value of such swaps at 31st December 2007 was £142,000 (2006: £126,000).
Credit risk
The Group’s principal financial assets are cash and short-term deposits, trade and other receivables, development participations and loan notes. Provisions are made where there is an identified event which provides evidence of a reduction in the recoverability of debts. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks and financial institutions with high credit-ratings. The Group has no significant concentration of credit risk arising from rental income receipts, with exposure spread over a large number of tenants and counterparties. The maximum credit risk exposure relating to financial assets is represented by their carrying value at 31st December 2007.
In November 2007, the Group entered into an agreement to sell a trading property asset for proceeds of £68,000,000. The sale was not recognised in the 2007 results because £52,000,000 of proceeds were outstanding at 31st December 2007 and the sale did not satisfy the revenue recognition criteria of IAS 18 ‘Revenue’. The Group remains exposed to possible default on the outstanding proceeds, which are secured by a first charge against the trading property asset.
Foreign currency risk
The Group does not undertake significant trade overseas, but does hold certain assets, amounting to £808,000 (2006: £1,394,000) denominated in foreign currencies. The currency exposure arising from these investments is not considered to materially affect the Group’s operations and is not subject to hedging arrangements.
The Group is exposed to foreign currency risk from €47,000,000 (2006: £nil) loan notes issued during 2007 that are denominated in Euros. The Group has entered into a cross-currency interest rate swap with a banking institution to minimise any potential risks. The cross-currency interest rate swap is cash collateralised and qualifies to be accounted for as a cash flow hedge as detailed below. The fair value of this cross-currency interest rate swap at 31st December 2007 was a deficit of £114,000 (2006: £nil).
The Group maintains a security deposit of £2,500,000 (2006: £nil) throughout the loan note term. The security deposit is required to cash collateralise the foreign exchange risk of the cross-currency interest rate swap for the swap counter-party if Sterling appreciates against the Euro. The Group is further required to increase this security if £/e appreciation is greater than 5 per cent. Since the issue of the loan notes in September 2007, the Euro has appreciated against Sterling.
The following table demonstrates the possible effect of changes in Sterling and Euro exchange rates with all other variables held constant:
| Increase/ decrease in Euro rate |
Effect on cash collateral £’000 |
|
| 2007 | +8% | 500 |
| Euro | –8% | – |
| 2006 | ||
| No Euro exchange rate exposure | – | – |
The Group does not undertake significant foreign exchange trading activity; consequently a detailed foreign exchange sensitivity analysis is not presented.
Interest rate sensitivity
The following table demonstrates the sensitivity in respect of variable rate debt obligations to a change in interest rates, with other variables held constant, of the Group’s profit before tax.
The sensitivity analysis excludes all non-derivative fixed-rate financial instruments carried at amortised cost as well as floating rate financial instruments with associated effective fixed-rate hedging instruments or currency hedging instruments.
Fair value interest rate hedging instruments that are part of a hedging relationship have been excluded. Floating rate non-derivative financial instruments where the associated interest has been capitalised have also been excluded.
| Increase/ decrease in basis points |
Effect on profit before tax £’000 |
|
| 2007 | ||
| Sterling | +50 | 341 |
| –50 | (341) | |
| 2006 | ||
| Sterling | +50 | 239 |
| –50 | (239) |
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group has at its disposal, to further reduce liquidity risk, undrawn, committed revolving credit facilities of £55,000,000, of which £7,500,000 is collateralised at 31st December 2007 (2006: £42,790,000 of which £5,370,000 is collaterised).
The table below summarises the maturity profile of the Group’s financial liabilities at 31st December 2007 and 2006 on contractual undiscounted payments:
| Maturity profile of financial liabilities | On demand £’000 |
Less than three months £’000 |
Three to twelve months £’000 |
One to five years £’000 |
More than five years £’000 |
2007 Total £’000 |
| Interest bearing loans and borrowings | 679 | 3,670 | 8,784 | 97,460 | 155,482 | 266,075 |
| Trade and other payables | – | 10,814 | 52,111 | – | – | 62,925 |
| 679 | 14,484 | 60,895 | 97,460 | 155,482 | 329,000 |
| Maturity profile of financial liabilities | On demand £’000 |
Less than three months £’000 |
Three to twelve months £’000 |
One to five years £’000 |
More than five years £’000 |
2006 Total £’000 |
| Interest bearing loans and borrowings | 5,946 | 2,464 | 14,803 | 56,476 | 78,561 | 158,250 |
| Trade and other payables | – | 12,363 | 4,384 | – | – | 16,747 |
| 5,946 | 14,827 | 19,187 | 56,476 | 78,561 | 174,997 |
Market risk
A review of market risk and its effect on the Group is set out in the Review of operations.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in this note and cash and cash equivalents and equity comprising issued capital, reserves and retained earnings as disclosed in notes 18 and 19 respectively. The Group balances its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt. The Group’s overall strategy remains unchanged from 2006.
Fair values of financial assets and financial liabilities
Except as detailed below in respect of fixed rate debenture and loan facilities the Directors consider the carrying amount to be either fair value or a reasonable approximation of fair value apart from equity instruments classified as available-for-sale assets under IAS 39, where fair value cannot be reliably measured.
Fixed rate debt
A valuation was carried out as at 31st December 2007 by J C Rathbone Associates Limited, to calculate the market value of the Group’s fixed rate debt on a replacement basis, taking into account the difference between fixed interest rates for the Group’s borrowings and the market value and prevailing interest rate of appropriate debt instruments as a fair value adjustment. Whilst the replacement basis provides a consistent method for valuation of fixed rate debt, such financing facilities are in place to provide continuing funding for the Group’s activities. The valuation is therefore only an indication of a notional effect on the net asset value of the Group as at 31st December 2007 and may be subject to daily fluctuations in line with money market movements.
The fair value compared to the carrying amounts of the Group’s fixed rate financial liabilities as at 31st December 2007 is analysed below:
| Book value 31st December 2007 £’000 |
Fair value 31st December 2007 £’000 |
Fair value 29th February 2008 £’000 |
|
| Fixed rate loan facilities | 34,542 | 40,654 | – |
| First Mortgage debenture 11% due 2016 | 20,000 | 25,486 | 25,456 |
| Total fixed rate financial liabilities | 54,542 | 66,140 | 25,456 |
| Book value 31st December 2006 £’000 |
Fair value 31st December 2006 £’000 |
Fair value 28th February 2007 £’000 |
|
| Fixed rate loan facilities | 34,700 | 40,800 | 40,500 |
| First Mortgage debenture 11% due 2016 | 20,000 | 25,800 | 25,600 |
| Total fixed rate financial liabilities | 54,700 | 66,600 | 66,100 |
The fair value difference of £11,598,000 at 31st December 2007 (2006: £11,900,000) represents approximately 21.3 per cent of gross, fixed rate borrowings (2006: 21.8 per cent). The effect on net assets per share after tax of this adjustment would be a decrease of 20.0 pence after tax (2006: 20.5 pence). The £34,542,000 fixed rate loan was repaid on 1st February 2008, and a fair value is therefore not presented as at 29th February 2008.
Hedging
| 2007 £’000 |
2006 £’000 |
|
| Cash flow hedges: cross-currency interest rate swap | (114) | – |
At 31st December 2007, the Group held one cross-currency interest rate swap designated as a hedge of expected future cash flows arising from €47,000,000 floating rate loan notes issued in September 2007. The cross-currency swap is used to hedge the EURIBOR interest rate exposure and Euro currency exposure from the loan notes. The terms of the derivative have been negotiated to match the terms of the loan notes.
The cash flow hedge of the expected future loan note cash flows was assessed to be highly effective and an unrealised loss of £114,000 is included in equity.
Other hedges
At 31st December 2007, the Group held two interest rate caps designated as economic hedges and not qualifying as an effective hedge under IAS 39. The derivatives are used to cap the Group’s interest rate exposure to variable rate loans of £63,250,000. The fair value of the derivatives is recorded as a financial asset at 31st December 2007.
