From Conventional Loans to Index-Linked Finance

1. From Conventional Loans to Index-Linked Finance Tim Jackson Resources Director, Golding Homes

2. What am I going to cover? • Index-linked financing – what is it? • Impact on capacity • Key risks • Benefits • Risk Management

3. Experience of sale and leaseback • 2 deals completed • 1 was to raise additional finance for the Group • 1 was to fund stock acquisition – 190 properties

4. Sale and leaseback – what is it? • RP sells long lease to investor for a lump sum – probably around £100k a unit but the exact price will affect the ability to pay, after management and maintenance costs, the annual sublease payments in the next bullet point • Investor simultaneously sells a sublease for say 48 years in return for an annual lease payment which starts low (I can’t disclose the exact figure) • The annual lease payment goes up by rpi or cpi each year • At the end of the 48 years the leases collapse and the RP can buy the properties back for £1 • This means in effect the annual  lease payments include capital repayments • In accounting terms this is all on balance sheet and the lump sum at bullet point 1 is treated as a loan

6. Benefits • Relationship and documentation very different from a bank,e.g.. far fewer default clauses – this is a key benefit • Very security efficient – only interest is the legal interest in the lease – no other security required. Asset cover is effectively 75%-80% versus lenders who seek 110% upwards • ‘Security’ in place day one

7. Benefits (continued) • Very little else in treasury portfolio benefits the business if inflation is low • Will pricing rise as much as loan pricing if interest rates go up? • Cash flows match rents • Makes sale and leaseback great for stock acquisition – cash positive day one

8. Sale and leaseback – capacity issues • No financial covenants, so gearing of no concern to the investor • So if it can be done in a part of the group that does not impact on the group’s gearing it can enhance capacity • Very useful if gearing is constraining for non-financial reasons, e.g. lender re-pricing needed to change historic gearing covenants • Works well where a deal can ‘stand alone’, i.e. cash flow positive day 1 – e.g. stock acquisitions • Useful if security is a limiting factor

9. Risks/Issues • CPI/RPI increases • Very long agreement • Asset security cover inefficient in later years • Accounting is odd • ‘Jam today’ – brings forward future surplus Cash flows – so reduced strength in later years • It’s different! Regulatory interest

10. Risk Management – Supporting a separate lease vehicle • Key risk is not meeting lease payment • Deal must be solid in the first place, i.e. really strong cash flows, i.e. buffer between net income and lease payments • Raise extra cash, use to acquire stock to increase rental income with no lease payment attached • Other RP’s can give vehicle additional stock to increase income • Parent has resources to support vehicle (RP)

11. Risk Management (continued) • Transaction can be novated to other RP’s in the group • Limit the amount of index linked funding to the group • Inflation collar on lease uplift • Stress testing, etc. • Property substitution

12. Enhancing the leaseback model • Proactive investor • CPI escalator • Security release • Shorter lease period and bullets repayment • Some fixed element • Range of tenure types

13. Summary • Challenge is to stretch but protect finances • As new sources of finance emerge, how diversified should our funding sources be – managing multiple agreements and relationships is risky • Real need for treasury systems and processes • Link between development risk and treasury risk has never been greater