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From Conventional Loans to Index-Linked Finance . Tim Jackson Resources Director, Golding Homes. What am I going to cover? . Index-linked financing – what is it? Impact on capacity Key risks Benefits Risk Management. Experience of sale and leaseback. 2 deals completed

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from conventional loans to index linked finance

From Conventional Loans to Index-Linked Finance

Tim Jackson

Resources Director, Golding Homes

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

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

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


  • 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

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
sale and leaseback capacity issues
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


  • 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
risk management supporting a separate lease vehicle
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)
risk management continued
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

Enhancing the

leaseback model

  • Proactive investor
  • CPI escalator
  • Security release
  • Shorter lease period and bullets repayment
  • Some fixed element
  • Range of tenure types


  • 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