Development Securities PLC - Annual Report 2006


16. FINANCIAL LIABILITIES
a) Current
	2006 £’000	2006 £’000	2005 £’000	2005 £’000
Bank overdrafts		5,929		1,075
Current instalments due on bank loans	9,785		5,325
Unamortised arrangement costs	(199)		(196)
		9,586		5,129
		15,515		6,204

b) Non-current
			2005 £’000	2005 £’000
First mortgage debenture 11% due 2016			20,000	20,000
Bank loans			67,692	79,075
Deferred revenue expenditure			(273)	(443)
			87,419	98,632

All bank loans and overdrafts are denominated in Sterling. Bank loans and the Debenture are supported by way of mortgages and legal charges on certain properties and cash deposits held by the Group. Bank loans and overdrafts in the sum of £48,406,000 (2005: £56,602,000), included in notes 15 and 16, attract variable rates of interest based on LIBOR/base rate in the range +1.0625 per cent to +1.075 per cent and loans in the sum of £55,000,000 (2005: 48,873,000) attract fixed rates of interest of between 5.88 per cent and 11 per cent.


Maturity table
	2006 Maturity
	Effective interest rate %	Total £’000	Less than one year £’000	One to two years £’000	Two to five years £’000	More than five years £’000
Fixed rate debenture	11	20,000	–	–	–	20,000
Sterling bank loans
Fixed rate loans	8.3	35,000	458	527	1,852	32,163
Variable rate loans	6.2	42,477	9,327	33,150	–	–
Bank overdrafts	–	5,929	5,929	–	–	–
Deferred revenue expenditure	–	(472)	(199)	(133)	(130)	(10)
		102,934	15,515	33,544	1,722	52,153

	2005 Maturity
	Effective interest rate %	Total £’000	Less than one year £’000	One to two years £’000	Two to five years £’000	More than five years £’000
Fixed rate debenture	11	20,000	–	–	–	20,000
Sterling bank loans
Fixed rate loans	8.8	28,873	309	337	1,204	27,023
Variable rate loans	6.2	55,527	5,016	22,011	28,500	–
Bank overdrafts	–	1,075	1,075	–	–	–
Deferred revenue expenditure	–	(639)	(196)	(178)	(216)	(49)
		104,836	6,204	22,170	29,488	46,974

Cash in the amount of £6,948,000 (2005: £24,743,000) is held on deposit as security against the above borrowings and facilities. Borrowings due for repayment after five years include £6,738,000 (2005: £5,467,000) repayable by instalments.


FINANCE REVIEW The Group’s financial instruments, other than trade receivables and payables arising from its operations, comprise borrowings, cash resources and equity investments. Monetary assets and liabilities, other than certain equity investments, amounting to £1,394,000 (2005: £1,727,000), are denominated in pounds Sterling. The Group had net borrowings of £14,398,000 at 31st December 2006 (2005: £31,742,000). Cash balances were £88,536,000 (2005: £73,094,000), of which £6,948,000 (2005: £24,743,000) was pledged as security against borrowings. Undrawn, committed revolving credit facilities were £42,790,000 (2005: £24,738,000). The decrease in net financial liabilities largely reflects net cash inflows from investment and trading property disposals and proceeds from a share placing during the year. Financing and interest rate strategy The Group’s investment portfolio is mainly financed with fixed-rate debt facilities, matching debt service costs with cash flow from rental income. Where appropriate, interest rate swaps have been used to commercially hedge the Group’s exposure to short-term fluctuations in interest rates on floating rate debt. The Group holds £27,500,000 (2005: £27,500,000) of interest rate swaps. The Group does not hedge account its interest rate swaps and states them at fair value, with changes to fair value included in the income statement. The fair value of such swaps at 31st December 2006 was £126,000 (2005: £nil), (refer note 12(c)). The Group seeks to pre-fund and pre-let 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 facilities which provide the necessary flexibility to draw down funds when required. Fixed and floating rate liabilities and financial assets as at 31st December 2006 are analysed as:

	2006 £ million	Weighted average interest rate %	Weighted average debt maturity Years	2005 £ million	Weighted average interest rate %	Weighted average debt maturity Years
Fixed rate debt	54.7	9	10	48.5	9.7	11.1
Floating rate debt	48.2	6.2	1.1	56.3	5.9	2.0
Gross debt	102.9	7.9	6.3	104.8	7.7	6.3
Cash balances	(88.5)	(5.1)	–	(73.1)	(4.4)	–
Net debt	14.4	–	–	31.7	–	–

Undrawn facilities	42.8	6.3	1.4	24.7	5.9	2.7

Floating rate debt is generally re-priced quarterly based on prevailing LIBOR rates. Valuation of financial assets and liabilities A valuation was carried out as at 31st December 2006 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 2006 and may be subject to daily fluctuations in line with money market movements.


The debt valuation as at 31st December 2006 is analysed as:
	Book value 31 December 2006 £’million	Fair value 31 December 2006 £’million	Fair value adjustment December 2006 £’million	Fair value adjustment 28 February 2007 £’million
Fixed rate mortgage facilities	34.7	40.8	(6.1)	(5.8)
First Mortgage debenture 11% due 2016	20.0	25.8	(5.8)	(5.6)
Total fixed rate financial liabilities	54.7	66.6	(11.9)	(11.4)

The fair value adjustment of £11,900,000 at 31st December 2006 (2005: £15,100,000) represents approximately 21.8 per cent of gross, fixed rate borrowings (2005: 31.1 per cent). The effect on net assets per share after tax of this adjustment would be a decrease of 20.5 pence (2005: 28.8 pence). As at 28th February 2007, the fair value adjustment had decreased to £11,400,000 equivalent to a decrease of 19.6 pence per share after tax. The Directors consider that the fair value of other remaining financial assets and liabilities is not materially different to their book values as at 31st December 2006. Debt maturity The maturity profile of the Group’s borrowings is set out above in this note. Of the total of £42,800,000 of currently undrawn revolving credit facilities, £16,200,000 expire in 2007, with the remaining £26,600,000 in 2008. Gearing Gearing, measured as net debt to total shareholders’ funds, has decreased to 6.2 per cent (2005: 16.5 per cent) as at 31st December 2006. Currency risk The Group does not undertake significant trade overseas, but does hold certain assets, amounting to £1,394,000 (2004: £1,727,000) 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. Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments. The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts shown in the balance sheet are net of any provision for bad debts. Such 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, with exposure spread over a large number of tenants and counterparties. Price and liquidity risk Details of price and liquidity risk are set out in the Review of operations and the Property portfolio review.

Notes to the consolidated financial statements