Land Securities, the UK's largest real estate company, announced a one-off £700m hit to its profits yesterday as it announced plans to restructure almost £1.8bn of its debt in an attempt to improve its credit rating and slash its borrowing costs.
The move will see the group exchange four existing unsecured bonds and three mortgage debentures worth £1.8bn, for one new securitised bond issue of almost £2.4bn.
The net effect of the refinancing, if successful, will be to reduce Land Securities' average cost of borrowing from 7.6 per cent to 5.6 per cent, and to increase its credit rating from A- to AA. However, the move will also reduce the company's profits for the current year to 31 March 2005 with an accounting charge of up to £700m, which primarily reflects the increase the face value of the group's debt.
Standard & Poor's, the credit rating agency, said it had put the company's rating on "watch negative" until the transaction has been completed.
The move will see a shift away from Land Securities' traditional financing model, which has focused on the use of unsecured debt. The new bonds will be secured against a pool of assets worth about £6.2bn, which accounts for about two-thirds of the company's total assets.
The company also announced plans to refinance its unsecured bank debt, replacing its existing facility with a £1.5bn five-year secured loan, with Barclays, Citigroup and Lloyds TSB.
The group said a special committee of the Association of British Insurers, which represents the holders of about 37 per cent of the existing bonds, has already considered the proposals and leant its support to the plan. The proposals will be voted on by bondholders next month.
Commenting on the refinancing, Francis Salway, the chief executive, said: "These proposals are designed to improve the way in which we finance our business. Through this structure... we will refinance our historical higher coupon debt in an efficient manner, lower our future borrowing costs and provide improved flexibility in our financing.... This will be achieved while simultaneously providing debt investors with higher-rated secured paper."
Shares in the company fell 1.4 per cent to 1,183p yesterday, giving the company a market value of more than £5.5bn.
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