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Tiered covenants help Land Securities debt exchange

Property company mixes secured and unsecured debt technology to preserve operational flexibility after its refinancing.

Liability management through debt exchanges and buybacks has been one of the big themes of 2004. Last month saw UK commercial property firm Land Securities announce a novel refinancing that makes its debt both cheaper and less of an encumbrance on its day-to-day business.

Historically, Land Securities has followed an unsecured funding strategy and aimed for a single A credit rating. But as last year progressed, a number of Land Securities' unsecured bonds and debentures had high coupons. Although their face value was approximately £1.8 billion, their market value was close to £2.4 billion.

Debentures can be especially annoying for property companies, which need operational flexibility to buy and sell property assets quickly. If those assets are mortgaged to debentures, Land Securities has to ask the debenture trustee to release the properties from charge and accept substitute properties.

“As we got into last year, the advantages of unsecured debt that we had seen particularly post-Enron were less clear,” says Andrew Macfarlane, Land Securities' group finance director. Property companies often set up joint ventures, and it wasn't clear that debt raised by these JVs was non-recourse.

Before Christmas, Land Securities sat down with long-term relationship bank Citigroup to work out how to tackle the problem.

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