The Issuer and the Guarantor believe that the following factors may affect their ability to fulfil their respective obligations under the Bonds. Most of these factors are contingencies which may or may not occur and neither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any such contingency occurring.
In addition, factors which each of the Issuer and the Guarantor believes may be material for the purpose of assessing the market risks associated with the Bonds are described below.
Each of the Issuer and the Guarantor believes that the factors described below represent the principal risks inherent in investing in the Bonds, but the inability of the Issuer or the Guarantor to pay interest, principal or other amounts on or in connection with the Bonds may occur for other reasons and, none of the Issuer or the Guarantor represents that the statements below regarding the risks of holding the Bonds are exhaustive. Prospective investors should also read the detailed information set out elsewhere in this Prospectus and reach their own views prior to making any investment decision.
Risks relating to the Guarantor Group Ability to raise future debt financing
The ability of the Guarantor Group to raise funds to roll-over or refinance on similar terms to the Guarantor Group’s existing debt financing, or at all, its existing debt facilities, which are currently set to mature on dates ranging from 31 December 2013 to 2022, will be dependent on a number of factors including general economic, political, debt and equity capital market conditions, funding availability and, importantly, the appetite of financial institutions to lend to the property sector.
An inability to raise funds to roll-over or to refinance the ten year medium term loan facility (‘‘MTL Facility’’) by 31 December 2013 or to repay certain of the commercial mortgage backed securitisation notes issue (‘‘CMBS’’) Notes in January 2014 or to refinance other facilities or borrowings when they become due may mean that the Guarantor Group will not have funds available to pay other debts (including under the Bonds) or to invest in or develop properties, which could result in the Guarantor Group being forced to sell assets. Sales in such circumstances may not deliver the level of proceeds that may otherwise be expected, in order to comply with the Guarantor Group’s obligations.
In addition, if the Guarantor Group is unable to renegotiate or refinance existing debt facilities, there is a risk that the Guarantor Group would face insolvency or be placed into administration by the lenders. This would have an adverse effect on the Guarantor Group’s business, results of operations, financial condition and/or prospects and on the Guarantor’s ability to fulfil its commitments to Bondholders to make payment of interest and principal under the Bonds.
The Guarantor Group recognises this risk and has undertaken a strategy to mitigate the risk posed by concurrent maturity of its debt and provide certainty over the future financing of the Guarantor Group. As part of the Guarantor Group’s on-going refinancing plans, the Guarantor Group has recently repaid £123,050,000 of the CMBS Notes, which was funded by a new 10 year loan facility (‘‘Legal & General Facility’’). The Guarantor Group is at an advanced stage of negotiations in respect of entry into a new £240 million five year MTL Facility, repayable in 2018. The increased amount of the new MTL Facility would be used to pay down part of the BE Loan and consequently to fund repayment of part of the CMBS Notes which are to be repaid in January 2014 as described above.
The Guarantor Group also intends to diversify its sources of debt financing, including through the issue of the Bonds. There is however no guarantee that this strategy will be implemented or will be able to mitigate all of the Guarantor Group’s refinancing risks.
Guarantor Group’s debt level
The investment property sector tends to employ financial leverage with the aim of improving returns to shareholders. Whilst the use of borrowings should enhance the performance of the Guarantor Group when the value of the Guarantor Group’s underlying assets is rising, it may have the opposite effect where the underlying asset value is falling.
It is the Guarantor Group’s current policy to hedge a proportion of its floating interest rate exposure to maintain the appropriate risk and interest profile. However, an increase in interest rates might materially adversely affect the results of the Guarantor Group’s operations by increasing the financing cost of any unhedged portion of debt.
As at 30 September 2012, the Guarantor Group has a net gearing level of 62.77 per cent. loan to value (‘‘LTV’’), which is below the average when compared with net gearing of the United Kingdom property sector as a whole, and a 187 per cent. interest cover. As at 30 September 2012, 87 per cent.
of the Guarantor Group’s debt is hedged. The Guarantor Group will covenant to ensure all secured and unsecured borrowings (‘‘Net Debt’’) as a percentage of Tangible Fixed Assets does not exceed 75 per cent. This will be tested on an semi-annual consolidated basis and will be based on external valuation. The Guarantor Group will further covenant that the ratio of Gross profit to Net Financing Costs for each semi-annual financial period will be at least 150 per cent. on a consolidated basis.
‘‘Net Financing Costs’’ as used herein, is the Interest payable and similar charges figure taken from the Accounts, excluding exceptional costs and also excluding Interest receivable.
Guarantor Group’s debt facilities
The Guarantor Group is financed through a combination of the CMBS Notes, the MTL Facility and the Legal & General Facility and an overdraft facility (‘‘Overdraft Facility’’), all incurred by subsidiaries of the Guarantor. As at the date of the Prospectus the total amount borrowed and outstanding under the CMBS Notes was £309,500,000. The CMBS Notes were refinanced in January 2013. £80,350,000 of the CMBS Notes are repayable in January 2014 and the balance of £229,150,000 repayable in January 2016. The Guarantor Group owns £22,294,000 of the CMBS Notes which will be subordinated to the other outstanding CMBS Notes. This will reduce the net amount payable in January 2014 to £74,562,000 and the balance repayable in January 2016 to £212,644,000. These amounts repayable will be further reduced as the Guarantor Group will use a majority of the proceeds of the issue of the Bonds to repay them further. See ‘‘Description of the Business of the Bruntwood Group – CMBS Notes’’ for more details relating to refinancing.
As at the date of the Prospectus, the amount borrowed and outstanding under the MTL Facility was
£165,000,000 and is repayable on 31 December 2013. The Guarantor Group is currently negotiating a replacement of this facility (See ‘‘Ability to raise future debt financing’’ below). As at the date of the Prospectus, the total amount borrowed and outstanding under the Legal & General Facility was
£119,000,000 and is repayable on 21 December 2022. As at the date of the Prospectus, there is no amount borrowed and outstanding under the Overdraft Facility.
Set out below is a table illustrating the Guarantor Group’s outstanding facility amounts and debt maturity profile, each as at the date of this Prospectus (all terms as described in ‘‘Description of the Bruntwood Group’’). The re-profiling of debt maturities from time to time, as with generally all businesses, is part of an on-going process.
Amounts Due £’000
Facility 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
MTL Facility (exp. 31 Dec 13) 165,000 CMBS Notes (exp. 15 Jan 14) 80,350 Self-held CMBS Notes redeemed
in Jan 14 with the CMBS Notes (5,788) B2000 Loan under the CMBS
Notes (exp. 15 Jan 16) 226,150
Self-held CMBS Notes to be redeemed in Jan 16 with the B2000
Loan (16,506)
L&G Facility (exp. 20 Dec 22) 118,915
Net Expiry of Current Facilities 165,000 74,562 0 212,644 0 0 0 0 0 118,915
(Note: that these amounts will be reduced following the issue of the Bonds because the proceeds from the Bonds will serve to reduce currently outstanding debt facility amounts.)
In order to obtain this financing, the Guarantor Group has provided security for the total amount borrowed through these facilities against all of the commercial and property assets which form the Guarantor Group’s property portfolio which as at May 2013, amounted to a total portfolio value of
£891,080,000. The Guarantor Group proposes to use the proceeds raised by the issue of the Bonds to repay a proportion of the Guarantor Group’s existing financing, at which point the commercial and property assets which will comprise the initial Specifically Mortgaged Properties in relation to the
Bonds will be released as security of the existing financing and will be provided as security to the Bonds in the form of the Specifically Mortgaged Properties.
The nature and extent of the security package associated with each financing does vary. See
‘‘Description of the Guarantor and the Guarantor Group – Borrowings and capital funding’’ below for a further description of each of those security arrangements. If any such member defaults under its debt facilities, the relevant lender will take ownership of mortgaged properties and other assets, undertakings and rights of the affected member. This may as a consequence, preclude the Guarantor Group from using surplus cash flows from the member of the Guarantor Group to meet payment obligations under the Guarantee. In the event that the entire Guarantor Group defaults, holders of Bonds will have direct recourse to the Specifically Mortgaged Properties and not to other properties within the Guarantor Group’s property portfolio.
The Guarantor Group’s debt facilities impose certain restrictions on the Guarantor Group. These restrictions may affect, limit or prohibit the Guarantor Group’s ability to create or permit to subsist any charges, liens or other encumbrances in the nature of a security interest; incur additional indebtedness by way of borrowing, leasing commitments, factoring of debts or granting of guarantees;
make any material changes in the nature of its business as presently conducted; sell, transfer, lease or otherwise dispose of all or a substantial part of its assets; amend, vary or waive the terms of certain acquisition documents or give any consent or exercise any discretion thereunder; acquire any businesses; or make any co-investments or investments over the longer term. If the Guarantor Group were to seek to vary or waive any of these restrictions and the relevant lenders did not agree to such variation or amendment, the restrictions may delay the implementation of certain of the Guarantor Group’s development projects and may over the longer term limit the Guarantor Group’s ability to plan for or react to market conditions, meet capital needs, or otherwise restrict the Guarantor Group’s activities or business plans and adversely affect the Guarantor Group’s ability to finance strategic acquisitions, investments and development projects.
Management risks
The Guarantor Group’s future success is substantially dependent on the continued services and performance of its directors, senior managers and other key employees, and its ability to continue to attract and retain highly skilled and qualified personnel. Although measures are in place to reward and retain key individuals and to protect the Guarantor Group from the impact of excessive staff turnover, the Guarantor cannot give assurances that the directors, senior managers and other key employees will continue to remain with the Guarantor Group. Furthermore, in the event of the death or disability of any of the directors, senior managers or other key employees, no ‘‘key-man’’
insurance is in place to protect the Guarantor Group from this loss. The loss of the services of the directors, the senior managers and other key employees could materially adversely affect the Guarantor Group’s business, financial condition or results of operations.
Deterioration of the Guarantor Group’s reputation could have a negative effect on the Guarantor Group’s operating results, financial condition and prospects
It is important that the Guarantor Group has the ability to maintain and increase the image and reputation of its existing brand, properties and property management style. The image and reputation of the Guarantor Group’s brand, properties and property management styles may be impacted for various reasons including real or perceived quality issues, complaints from customers or regulatory authorities or litigation resulting from quality failure. If any of the foregoing were to occur, or if the Guarantor Group were to be involved in protracted litigation, found liable in respect of any complaint or litigation or subject to a costly settlement, the Guarantor Group’s lettings could decline and restoring the image and reputation of the Guarantor Group’s operations could be costly and time consuming. Any harm caused to the Guarantor Group’s reputation could have an adverse impact on the Guarantor Group’s operating results, financial condition and prospects.
Counterparty credit risk
The Guarantor Group is potentially exposed to counterparty credit risk on cash deposits and in respect of interest rate hedging agreements used to hedge interest rates if interest rates increase. There is a risk of a loss being sustained by the Guarantor Group as a result of payment default by the counterparty with whom the Guarantor Group has deposited cash or entered into hedging transactions. The extent of the Guarantor Group’s loss could be the full amount of the deposit or the cost of replacing those hedging transactions. Under the Guarantor Group’s treasury risk management policy, the Guarantor Group only deals with counterparties with certain minimum credit ratings and
has set its maximum exposure to each of them with regard to credit ratings. There can be no assurance, however, that the Guarantor Group will successfully manage this risk or that such payment defaults by counterparties will not materially adversely affect the Guarantor Group’s business, financial condition or results of operations.
Factors that may affect the Issuer’s ability to fulfil its obligations under the Bonds The Issuer acts as a special purpose company to raise capital by the issue of the Bonds
The sole function of the Issuer is to act as a special purpose company to raise money by the issue of the Bonds. The net proceeds received by the Issuer from the issue of the Bonds will be lent by the Issuer to Bruntwood RB Limited (the ‘‘Charging Company’’), a wholly-owned subsidiary of the Guarantor which has been newly established for the purpose of holding the properties (the
‘‘Specifically Mortgaged Properties’’) and any other assets that will provide security for the Bonds.
The Charging Company will, in turn, use the amounts lent to it by the Issuer to purchase the Specifically Mortgaged Properties from other members of the Bruntwood Group. The Issuer’s only material assets will therefore be the obligation of the Charging Company to pay interest on and to repay such lent funds to it. As the funds to pay interest on the lent funds and repay the on-lent funds will originate from cash-flow generated from the wider business of the consolidated Guarantor Group (which includes cash-flow generated from the Specifically Mortgaged Properties held in the Charging Company), the ability of the Charging Company to pay interest on such loan to the Issuer and to repay the loan and accordingly of the Issuer to pay interest on and repay the Bonds will be subject to all the risks to which the Guarantor Group is subject. See ‘‘Factors that may affect the Guarantor’s ability to fulfil its obligations under the Guarantee’’ below for a further description of certain of these risks.
Factors that may affect the Guarantor’s ability to fulfil its obligations under the Guarantee The Guarantor is a holding company within the Guarantor Group
If the Issuer or the Guarantor defaults on its obligations to make payments on or to repay the Bonds or to make payments under the Guarantee and if as a consequence the Trustee enforces the security provided over the charged assets, the Trustee will be entitled to apply the net proceeds of sale or other amounts received by it in respect of the charged assets (after deduction of certain expenses or prior claims, see Condition 2(c) (Application of Moneys)) in payment of outstanding amounts under the Bonds. If following such enforcement the net proceeds of sale of the charged assets (after deduction of certain expenses or prior claims) are insufficient to repay all amounts outstanding under the Bonds, Bondholders will have unsecured claims for any outstanding amount against the Guarantor under the Guarantee. Bondholders will not have any direct claim for such outstanding amount against any subsidiary of the Guarantor. See ‘‘The Issuer acts as a special purpose company to raise capital by the issue of the Bonds’’ above for a description of the risk in relation to the Issuer.
The Guarantor’s principal business is that of holding shares in its subsidiaries. In turn, all of its share capital is held by Bruntwood Group Limited, the ultimate holding company of the Group. As a holding company, the Guarantor conducts all of its operations through its subsidiaries and is dependent on the financial performance of its subsidiaries and payments of dividends and inter-company payments (both advances and repayments) from these subsidiaries to meet its debt obligations including its ability to fulfil its obligations under the Guarantee.
Generally, creditors of a subsidiary, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by the subsidiary and preferred shareholders (if any) of the subsidiary, will be entitled to the assets of that subsidiary before any of those assets can be distributed to its direct or indirect shareholders (including the Guarantor) upon its liquidation or winding up. The Guarantor’s subsidiaries may have other liabilities, including secured liabilities and contingent liabilities, which could be substantial. See ‘‘Risks relating to the Guarantor Group, Guarantor Group’s debt facilities and Guarantor Group’s debt level’’ below. Notes 16 to 18 of the Guarantor’s consolidated financial statements for the year ended 30 September 2012 provided an indication of the Guarantor’s liabilities as at 30 September 2012. Since Bondholders are not creditors to these subsidiaries, their claims to the assets of the subsidiaries that generate the Guarantor’s income (and consequently, their right to receive payments under the terms and conditions (the
‘‘Conditions’’) of the Bonds) are structurally subordinated to the creditors of these subsidiaries. In the event that members of the Guarantor Group are unable to remit funds to the Guarantor, the Guarantor’s ability to fulfil its commitments to Bondholders to make payments under the Guarantee may be adversely affected.
Risks relating to the taking of Specifically Mortgaged Properties as security Reliance on Valuation Reports
The valuation reports (the ‘‘Valuation Reports’’) which are reproduced in the section headed
‘‘Valuation Reports’’ below are addressed to, among others, the Guarantor, the Issuer, the Trustee and the Manager but may only be relied on by each of them on the terms as more fully set out therein.
Knight Frank LLP (the ‘‘Valuer’’) has valued the proposed initial Specifically Mortgaged Properties at
£70,470,000 as at 24 May 2013. However, the market value of an initial Specifically Mortgaged Property may not continue to be equal to such valuation. Therefore, if any of the Specifically
£70,470,000 as at 24 May 2013. However, the market value of an initial Specifically Mortgaged Property may not continue to be equal to such valuation. Therefore, if any of the Specifically