TIDM31PE
RNS Number : 3926F
Canary Wharf Finance II PLC
21 April 2011
CANARY WHARF FINANCE II PLC
21 April 2011
PUBLICATION OF THE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31
DECEMBER 2010
Pursuant to sections 4.1 and 6.3.5 of the Disclosure and
Transparency Rules, the board of Canary Wharf Finance II plc is
pleased to announce the publication of its annual financial report
for the year ended 31 December 2010, which will shortly be
available from www.canarywharf.com/Investor Relations.
The information contained within this announcement, which was
approved by the board of directors on 21 April 2011, does not
comprise statutory accounts within the meaning of the Companies Act
2006 and is provided in accordance with section 6.3.5(2)(b) of the
Disclosure and Transparency Rules.
In accordance with Paragraph 9.6.1 of the Listing Rules, a copy
of the 31 December 2010 Annual Financial Report will be submitted
to the National Storage Mechanism and will shortly be available for
inspection at: www.Hemscott.com/nsm.do.
Dated: 21 April 2011
CONTACT FOR QUERIES
J R Garwood
Company Secretary
Canary Wharf Finance II plc
Telephone: 020 7418 2000
MANAGEMENT REPORT
BUSINESS REVIEW
The following business review aims to provide shareholders with
an overall summary of the business of the company as at 31 December
2010 and during the year then ended. The main factors likely to
affect the future development, performance and position of the
business of the company are set out in the principal risks and
uncertainties section of this Management Report.
This business review should be read in conjunction with the
remainder of the Management Report, the Directors' Report and the
financial statements.
At 31 December 2010, the company had GBP2,462,057,521 (2009:
GBP2,519,590,161) of notes listed on the London Stock Exchange and
had lent the proceeds to a fellow subsidiary undertaking, CW
Lending II Limited. The notes are secured on seven properties at
Canary Wharf, owned by fellow subsidiary undertakings, and the
rental income therefrom.
During the previous year a fellow subsidiary undertaking
acquired GBP119.7m of the notes comprising GBP26.1m of B3 notes,
GBP35.3m of C2 notes and GBP58.3m of D3 notes. These notes remain
in issue.
In November 2010 two of the seven properties on which the notes
are secured, 25 Bank Street and 50 Bank Street, were withdrawn from
the securitisation and substituted with 10 Cabot Square and 20
Cabot Square. In conjunction with this substitution GBP65.7m was
added to cash collateral held by CW Lending II Limited to cover any
shortfall in debt service.
Prior to withdrawing 25 Bank Street, the securitisation had the
benefit of a loan facility agreement with American International
Group, Inc. ('AIG') which provided for any shortfall in contracted
rents under the Lehman lease in the event of a default by Lehman
Brothers Limited, the tenant of 25 Bank Street. In November 2010,
terms were agreed with AIG for the termination of this
facility.
Separately, the securitisation continues to have the benefit of
an agreement with AIG which covers the rent in the event of a
default by the tenant of 33 Canada Square over the entire term of
its lease. AIG has posted GBP258.7 million as cash collateral in
respect of this obligation.
The company also has the benefit of a GBP300.0 million liquidity
facility provided by Lloyds Bank plc, under which drawings may be
made in the event of a cash flow shortage under the
securitisation.
As shown in the company's profit and loss account, the company's
loss after tax for the year was GBP16,861,190 (2009: profit of
GBP55,166,777). This included an unrealised fair value loss on
derivative financial instruments of GBP18,118,645 (2009: gain of
GBP53,852,000).
The balance sheet shows the company's financial position at the
year end and indicates that net liabilities were GBP122,749,050
(2009: GBP82,902,534).
The financial position of the company as indicated by its
balance sheet is impacted by the application of Financial Reporting
Standard 26 (Financial Instruments: Recognition and Measurement)
('FRS26') and its impact on other financial reporting standards.
Adjusting for the effects of FRS26 the net asset value of the
company at 31 December 2010 was as follows:
31 December 31 December
2010 2009
GBP GBP
Net liabilities per statutory balance sheet (122,749,050) (82,902,534)
Add back: Effects of FRS26 126,478,135 86,380,000
-------------- -------------
Adjusted net assets 3,729,085 3,477,466
============== =============
KEY PERFORMANCE INDICATORS
31 December 31 December
2010 2009
GBP GBP
Securitised debt 2,462,057,521 2,519,590,161
Financing cost (before adjustments
for FRS26) 150,011,694 153,304,806
Adjusted profit before tax and FRS26 251,619 269,755
Weighted average maturity of debt 16.5 years 17.1 years
Weighted average interest rate 6.2% 6.2%
The adjusted profit before tax comprises the loss on ordinary
activities before tax of GBP16,861,190 (2009: GBP55,166,777)
adjusted for the FRS 26 items listed in Note 4, totalling
GBP17,112,809 (2009: GBP54,897,022).
PRINCIPAL RISKS AND UNCERTAINTIES
The risks and uncertainties facing the business are monitored
through continuous assessment, regular formal quarterly reviews and
discussion at Canary Wharf Group plc audit committee and board
level. Such discussion focuses on the risks identified as part of
the system of internal control which highlights key risks faced by
the company and allocates specific day to day monitoring and
control responsibilities to management. As a member of Canary Wharf
Group, the current key risks of the company include the cyclical
nature of the property market, concentration risk and financing
risk.
Cyclical nature of the property market
The valuation of Canary Wharf Group's assets is subject to many
external economic and market factors. The turmoil in the financial
markets during 2008 and 2009 was reflected in the property market
by such factors as the oversupply of available space in the office
market, a significant decline in tenant demand for space in London
and a change in the market perception of property as an investment
resulting in a negative impact on property valuations in general.
In the latter half of 2009 and during the course of 2010 there have
been signs of a tightening of supply which has resulted in an
increase in valuation and compression of yields. Changes in
financial and property markets are kept under constant review so
that the company can react appropriately. The impact of the ongoing
uncertainty in the financial and property markets continues to be
closely monitored.
Concentration risk
The majority of Canary Wharf Group's real estate assets are
currently located on or adjacent to the Canary Wharf Estate with
tenants that are mainly linked to the financial services industry.
Wherever possible steps are taken to mitigate or avoid material
consequence arising from this concentration.
Financing risk
The broader economic cycle inevitably leads to movements in
inflation, interest rates and bond yields.
The company holds debenture finance, at both fixed and floating
rates and uses interest rate swaps or caps to modify exposure to
interest rate fluctuations. All of the company's borrowings are
fixed after taking account of interest rate hedges. All borrowings
are denominated in sterling and the company has no intention to
borrow amounts in currencies other than sterling.
The company enters into derivative financial instruments solely
for the purposes of hedging its financial liabilities. No
derivatives are entered into for speculative purposes.
The company is not subject to externally imposed capital
requirements.
The company's securitisation is subject to to a maximum loan
minus cash to value ('LMCTV') ratio covenant.
The maximum LMCTV ratio is 100.0%. Based on the 31 December 2010
valuations of the properties upon which the company's notes are
secured, the LMCTV ratio at the interest payment date in January
2011 would have been 73.7%. The securitisation is not subject to a
minimum interest coverage ratio.
A breach of covenant can be remedied by depositing eligible
investments (including cash).
Exposure Management
The mark-to-market positions of all the company's derivatives
are reported to the Group Treasurer on a monthly basis and to the
directors on a quarterly basis. The Group Treasurer monitors
hedging activity on an ongoing basis, in order to notify the
directors of any overhedging that may potentially occur and
proposals to deal with such events.
Hedging Instruments and Transaction Authorisation
Instruments that may be used for hedging interest rate exposure
include:
-- Interest rate swaps
-- Interest rate caps, collars and floors
-- Gilt locks
Instruments that may be used for managing foreign exchange
exposure include:
-- Cross currency swaps
-- Spot and forward foreign exchange contracts
No hedging activity is undertaken without explicit authority of
the board.
Transaction Accounting
Under FRS26, all derivatives are required to be measured on
balance sheet at fair value (mark-to-market).
Certain derivatives may be designated as part of a hedge
relationship, whereby the derivative and the underlying hedged item
(financial instrument) are accounted for in a manner in order to
reduce profit and loss account volatility ("hedge accounting").
In order to apply hedge accounting, the company must comply with
the following procedures:
-- All hedge relationships proposed must be in line with the
company's risk management policy stated above.
-- All hedge relationships must be documented in advance,
stating the purpose, including the nature of the risk being hedged,
the type of hedge being undertaken, the item being hedged and the
related hedging instrument and the methodology to be adopted to
assess and measure the hedge effectiveness.
-- Provide supporting documentation to include excerpts from
loan or debenture issuance documentation, detailing principal and
amortisation schedules and relevant excerpts from hedging
derivative documentation.
-- Both prospective and retrospective effectiveness testing are
undertaken and approved by the Group Financial Controller.
Credit Risk
The group's policies restrict the counterparties with which
derivative transactions can be contracted and cash balances
deposited. This ensures that exposure is spread across a number of
approved financial institutions with high credit ratings.
All other debtors are receivable from other group
undertakings.
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2010
31 December 31 December
2010 2009
Note GBP GBP
Administrative expenses (14,100) (13,950)
-------------- -------------
OPERATING LOSS (14,100) (13,950)
Interest receivable and
similar income 2 150,277,413 153,588,511
Interest payable and similar
charges 3 (167,124,503) (98,407,784)
-------------- -------------
(LOSS)/PROFIT ON ORDINARY
ACTIVITIES BEFORE TAXATION (16,861,190) 55,166,777
Tax on (loss)/profit on
ordinary activities 4 - -
-------------- -------------
(LOSS)/PROFIT ON ORDINARY
ACTIVITIES AFTER TAXATION
FOR THE YEAR 9 (16,861,190) 55,166,777
============== =============
Movements in reserves are shown in Note 9 of these financial
statements.
All amounts relate to continuing activities in the United
Kingdom.
The notes numbered 1 to 11 form an integral part of these
financial statements.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR
ENDED 31 DECEMBER 2010
Year Ended Year Ended
31 December 31 December
2010 2009
GBP GBP
(Loss)/profit for the financial year (16,861,190) 55,166,777
Fair value movement on effective hedging
instruments (38,123,761) 51,512,715
Interest paid/(received) on effective
hedging instruments 16,144,271 5,715,286
Hedge reserve recycling (1,005,836) (1,045,022)
------------- ------------
Total recognised (losses)/gains relating
to the year (39,846,516) 111,349,756
============= ============
The notes numbered 1 to 11 form an integral part of these
financial statements.
BALANCE SHEET AS AT 31 DECEMBER 2010
Year Ended Year Ended
31 December 31 December
2010 2009
Note GBP GBP
CURRENT ASSETS
Debtors 5
Amounts falling due after one year 2,476,097,668 2,534,909,653
Amounts falling due within one
year 88,243,855 88,744,717
Cash at bank 6 1,554,889 1,513,916
---------------- ----------------
2,565,896,412 2,625,168,286
CREDITORS: Amounts falling due
within one year 7 (86,069,657) (86,781,165)
---------------- ----------------
NET CURRENT ASSETS 2,479,826,755 2,538,387,121
---------------- ----------------
TOTAL ASSETS LESS CURRENT
LIABILITIES 2,479,826,755 2,538,387,121
CREDITORS: Amounts falling due
after more than one year 8 (2,602,575,805) (2,621,289,655)
---------------- ----------------
NET LIABILITIES (122,749,050) (82,902,534)
================ ================
CAPITAL AND RESERVES
Called-up share capital 50,000 50,000
Hedging reserve 9 (55,702,781) (32,717,455)
Profit and loss account 9 (67,096,269) (50,235,079)
---------------- ----------------
SHAREHOLDER'S DEFICIT 10 (122,749,050) (82,902,534)
================ ================
The notes numbered 1 to 11 form an integral part of these
financial statements.
NOTES TO THE FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER
2010
1. PRINCIPAL ACCOUNTING POLICIES
This announcement does not constitute the company's statutory
accounts for the year ended 31 December 2010 but is derived from
those accounts. The statutory accounts for the year ended 31
December 2010 will be delivered to the Registrar of Companies
following the company's annual general meeting. The auditors have
reported on those accounts and their report was unqualified, did
not contain a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying the report and did
not contain statements under sections 498(2) or (3) of the
Companies Act 2006.
This announcement has been prepared on the basis of the
accounting policies set out in the company's financial statements
for the year ended 31 December 2010 which are prepared in
accordance with UK generally accepted accounting principals. Such
accounting policies have been applied consistently in all material
respects throughout the current and previous years.
In accordance with the provisions of FRS 1 (Revised) the company
is exempt from the requirements to prepare cash flow statements, as
it is a wholly-owned subsidiary of Canary Wharf Group plc, which
has prepared a consolidated cash flow statement.
Going concern
The directors are required to prepare the financial statements
for each financial year on a going concern basis, unless to do so
would not be appropriate. Having made requisite enquiries, the
directors have a reasonable expectation that the company has
adequate resources to continue its operations for the foreseeable
future and hence the financial statements have been prepared on
that basis.
At 31 December 2010 the company had a deficit of GBP122,749,050
attributable solely to the adoption of FRS26. Under the
requirements of the standard the company recognises the fair value
of its derivative financial instruments in the balance sheet. In
the event that the company were to realise the fair value of the
derivative financial instruments, it would have the right to recoup
its losses as a repayment premium on its loans to CW Lending II
Limited. The standard does not permit this potential asset to be
accounted for in conjunction with the hedges
Notwithstanding the deficit in net assets resulting from the
treatment of derivative financial instruments required by FRS26,
the directors have prepared the financial statements on a going
concern basis on the grounds that the company will be able to meet
its obligations as they fall due for a period of not less than 12
months from the date of the financial statements.
The directors have also reached the view that the value of the
company's assets at the balance sheet date was not less than the
amount of its liabilities for the purposes of Section 123(2) of the
Insolvency Act 1986.
2. INTEREST RECEIVABLE AND SIMILAR INCOME
Year Ended Year Ended
31 31
December December
2010 2009
GBP GBP
Bank interest receivable 16,892 30,373
Interest receivable from group undertakings 150,260,521 153,558,138
------------ ------------
150,277,413 153,588,511
============ ============
3. INTEREST PAYABLE AND SIMILAR CHARGES
Year Ended Year Ended
31 December 31 December
2010 2009
GBP GBP
Interest payable on securitised debt (Note 8) 150,011,694 153,304,806
Fair value adjustments on derivative financial
instruments 18,118,645 (53,852,000)
Hedge reserve recycling (1,005,836) (1,045,022)
------------ -------------
167,124,503 98,407,784
============ =============
Included in the interest payable on securitised debt is
GBP1,571,467 (2009: GBP1,457,104) payable to a fellow subsidiary
undertaking in respect of notes acquired during the previous year
(Note 8).
4. TAXATION
Year Ended Year Ended
31 December 31 December
2010 2009
GBP GBP
Current tax:
UK Corporation tax (see below) - -
============= =============
Tax reconciliation:
(Loss)/profit on ordinary activities before tax (16,861,190) 55,166,777
============= =============
Tax on (loss)/profit on ordinary activities at
UK corporation tax rate of 28% (4,721,133) 15,446,698
Effects of:
Items not chargeable to tax 4,791,586 (15,371,166)
Tax losses and other timing differences (70,453) (75,532)
------------- -------------
Current tax charge for the year - -
============= =============
No provision for corporation tax has been made since the taxable
profit for the year will be covered by the group relief expected to
be made available to the company by other companies in the group.
No charge will be made by other group companies for the surrender
of group relief. There is no unprovided deferred taxation.
5. DEBTORS
31 December 31 December
2010 2009
GBP GBP
Due within one year:
Loan to fellow subsidiary undertaking 86,109,563 86,617,063
Amount owed by fellow subsidiary undertakings 2,132,406 2,126,381
Accrued interest receivable 1,886 1,273
-------------- --------------
88,243,855 88,744,717
============== ==============
Due in more than one year:
Loan to fellow subsidiary undertaking 2,476,097,668 2,534,909,653
============== ==============
The loans to a fellow subsidiary undertakings bear fixed rates
of interest between 5.31% and 6.81% and are repayable in
instalments between 2010 and 2035.
Amounts owed by group undertakings are non-interest bearing.
The amount of the loan due within one year comprises
GBP28,576,923 (2009: GBP29,084,423) of interest and GBP57,532,640
(2009: GBP57,532,640) of capital.
The carrying values of debtors due within one year also
represent their fair values. The fair value of the loans to group
undertakings at 31 December 2010 was GBP2,564,980,000 (2009:
GBP2,289,728,000), calculated by reference to the fair values of
the company's financial liabilities. The carrying value of
financial assets represents the company's maximum exposure to
credit risk.
6. FINANCIAL ASSETS
The company's financial assets comprise loans to fellow group
undertakings, cash at bank and derivative financial
instruments.
Cash at bank totalled GBP1,554,889 at 31 December 2010 (2009:
GBP1,513,916), comprising GBP1,545,701 in Sterling (2009:
GBP1,504,720), GBP2,094 (EUR2,432) in Euros (2009:
GBP1,474/EUR2,432) and GBP7,094 (US$11,012) in US Dollars (2009:
GBP7,722/$11,012), all of which was held as cash collateral for the
company's borrowings and has a term of one month or less.
Cash at bank earns interest at floating rates linked to bank
deposit rates.
7. CREDITORS: Amounts falling due within one year
31 December 31 December
2010 2009
GBP GBP
Securitised debt (Note 8) 86,062,607 86,774,115
Accruals and deferred income 7,050 7,050
------------ ------------
86,069,657 86,781,165
============ ============
The amount of the securitised debt due within one year comprises
GBP28,529,967 (2009: GBP29,241,475) of interest and GBP57,532,640
(2009: GBP57,532,640) of capital.
8. CREDITORS: Amounts falling due after more than one year
31 December 31 December
2010 2009
GBP GBP
Securitised debt 2,476,097,670 2,534,909,655
Derivative financial instruments 126,478,135 86,380,000
-------------- --------------
2,602,575,805 2,621,289,655
============== ==============
The securitised debt has a face value of GBP2,462.1m (2009:
GBP2,519.6) of which GBP1,736.1m (2009: GBP1,793.6m) carries fixed
rates of interest between 5.95% and 6.80%. The other GBP726.0m
(2009: GBP726.0m) carries floating rates of interest at LIBOR plus
a margin. The company uses interest rate swaps to hedge exposure to
the variability in cash flows on floating rate debt caused by
movements in market rates of interest. The hedged rates of the
floating rate notes, including margins, are between 5.11% and
5.80%.
The amounts at which borrowings are stated comprise:
31 December 31 December
2010 2009
GBP GBP
Brought forward 2,592,442,295 2,626,086,740
Repaid in year (57,532,640) (32,221,760)
Amortisation of issue premium (4,847,330) (4,990,672)
Accrued financing expenses 3,567,985 3,567,987
-------------- --------------
Carried forward 2,533,630,310 2,592,442,295
============== ==============
Payable within one year or on demand 57,532,640 57,532,640
Payable after more than one year 2,476,097,670 2,534,909,655
-------------- --------------
2,533,630,310 2,592,442,295
============== ==============
Certain of the A1, A3 and B notes were issued at a premium which
is being amortised to the profit and loss account on a
straight-line basis over the life of the relevant notes. At 31
December 2010 GBP58,405,478 (2009: GBP63,252,808) remained
unamortised.
During the previous year a fellow subsidiary undertaking
acquired GBP119,778,000 of notes comprising GBP26,101,000 of B3
notes, GBP35,338,000 of C2 notes and GBP58,339,000 of D2 notes.
These notes remain in issue and have not been cancelled.
The notes are secured on seven properties at Canary Wharf, owned
by fellow subsidiary undertakings, and the rental income stream
therefrom.
In November 2010 two of the seven properties on which the notes
are secured, 25 Bank Street and 50 Bank Street, were withdrawn from
the securitisation and substituted with 10 Cabot Square and 20
Cabot Square. In conjunction with this substitution GBP65.7m was
added to cash collateral held by CW Lending II Limited to cover any
shortfall in debt service.
Prior to withdrawing 25 Bank Street, the securitisation had the
benefit of a loan facility agreement with AIG which provided for
any shortfall in contracted rents under the Lehman lease in the
event of a default by Lehman, the tenant of 25 Bank Street. In
November 2010, terms were agreed with AIG for the termination of
this facility.
Separately, the securitisation continues to have the benefit of
an arrangement with AIG which covers the rent in the event of a
default by the tenant of 33 Canada Square, over the entire term of
its lease. AIG has posted GBP258.7m as cash collateral in respect
of this obligation.
The company also has the benefit of a GBP300.0m liquidity
facility provided by Lloyds, under which drawings may be made in
the event of a cash flow shortage under the securitisation. This
facility is renewable annually.
The annual fees payable in respect of the above arrangements
currently totals GBP3.7m.
The market value of the securitised debt at 31 December 2010 was
GBP2,441.7m (2009: GBP2,203.4m). The fair values of the sterling
denominated notes have been determined by reference to prices
available on the markets on which they are traded.
The weighted average maturity of the debentures at 31 December
2010 was 16.5 years (2009: 17.1 years).
After taking into account interest hedging arrangements, the
weighted average interest rate of the company at 31 December 2010
was 6.2% (2009: 6.2%).
At 31 December 2010 the fair value of interest rate derivatives
resulted in the recognition of a net liability of GBP126,478,135
(2009: GBP86,380,000). Of this net liability GBP66,480,490 (2009:
GBP44,501,000) was in respect of interest rate swaps which qualify
for hedge accounting and GBP59,997,645 (2009: GBP41,879,000) was in
respect of interest rate swaps and collars which do not qualify for
hedge accounting.
The fair values of the derivative financial instruments have
been determined by reference to market values provided by the
relevant counter party and have been classified as level 2, as
defined in accordance with FRS 29 Financial Instruments:
Disclosures.
The terms of the derivative financial instruments correlate with
the terms of the financial instruments to which they relate.
Consequently the cash flows and effect on profit or loss are
expected to arise over the term of the financial instrument.
9. RESERVES
Profit and loss
Hedging reserve account Total
GBP GBP GBP
At 1 January 2010 (32,717,455) (50,235,079) (82,952,534)
Loss for the year - (16,861,190) (16,861,190)
Fair value movement
on effective
hedging
instruments (38,123,761) - (38,123,761)
Interest paid on
effective hedging
instruments 16,144,271 - 16,144,271
Transferred to the
profit and loss
account:
Movements on
discontinued hedge
accounting (1,005,836) - (1,005,836)
---------------- --------------------- --------------
At 31 December 2010 (55,702,781) (67,096,269) (122,799,050)
================ ===================== ==============
Movements on discontinued hedge accounting relate to the B2 and
C1 interest rate swaps, for which the hedging instruments have been
novated but the forecast transactions to which they relate are
still expected to occur.
10. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' DEFICIT
31 December 31 December
2010 2009
GBP GBP
Opening shareholders' deficit (82,902,534) (194,252,290)
(Loss)/profit for the year (16,861,190) 55,166,777
Fair value movement on effective hedging
instruments (38,123.761) 51,512,715
Interest paid on effective hedging
instruments 16,144,271 5,715,286
Transferred to the profit and loss account:
Movements on discontinued hedge
accounting (1,005,836) (1,045,022)
-------------- --------------
Closing shareholders' deficit (122,749,050) (82,902,534)
============== ==============
11. CONTINGENT LIABILITIES AND FINANCIAL COMMITMENTS
As at 31 December 2010 and 31 December 2009 the company had
given a fixed charge over all its assets, including first fixed
charges over its bank accounts, to secure the notes referred to in
Note 8.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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