Balance Sheet Capacity - Gearing and Leverage
Ratio 49. Total Debt
per Unit (£000's)
Total
of short and long-term debt dividend by total number of units.
Needs to be compared, implicitly at least, with the value per unit and
weekly rent and operating surplus per unit. In this sense it is a relative
measure which can be expected to vary by type of property and by region.
For example a rent of £60 per week might generate a surplus per
unit of £15 per week. Allowing for cover of 1.1 this would service
interest of £709 per annum. At 7% interest this implies debt of
£10,130 per unit. Debt would then be 3.25 times gross rental income
or 169 times weekly rent.
= 
Ratio 50. Gearing (Net
Debt % Net Worth plus SHG)
Total
of short and long-term debt less cash, as a percentage of total capital
and reserves plus grants. The traditional ratio of debt
to equity capital including grants.
One of the most popular balance sheet measures of borrowing capacity among
lenders, but unfortunately based on historical cost accounting 'values',
rather than existing use or alternative use market values.
For RSLs a ratio of 50 debt to 50 of capital, reserves and grants gives
a ratio of 100% which might be regarded as the normal upper limit. But
if surplus and cash flow are strong and asset values very old you might
see 150% based on debt of 60, reserves of 40 (a loan to "value"
of 60%)!
= 
Ratio 51. Leverage %
(Net Debt % Net Assets)
Net
debt as a percentage of the total assets net of grants.
Gearing and leverage are different ways of looking at the same issue -
the amount of borrowing. Leverage is used here instead of the traditional
gearing because it is similar to the "loan to value" concept
used by property lenders. Shows what proportion of the balance sheet value
of assets (net of grants) is funded by debt. It is important because it
has a direct effect on the cash cost of capital and hence interest cover
and debt repayment ability.
It can be argued that reducing the asset value by deducting capital grants
brings the measure more into line with the reduced income from the assets
that characterises social housing rents as compared to commercial property.
It therefore is arguably closer to a view of borrowing against existing
social housing use valuation. From a lending perspective this ratio can
probably be as high as 65%.
= 
Ratio 52. Adjusted Leverage
% (Net Debt % Gross Assets)
Net
debt expressed as a percentage of total assets but with capital grants
added back.
This ratio is calculated in addition to the net leverage (Ratio 51) ratio
since the asset value funded by SHG and written out of the balance sheet
is significant. This ratio measures debt against assets at full cost,
which arguably might be closer to an alternative use valuation. 50% is
probably a comfortable maximum for lenders considering the downside scenario
of having to realise the asset value. For traditional RSL housing this
ratio will probably be less than 35% but for non grant funded activities
65% might well be acceptable.
= 
Ratio 53. Net Debt %
EUV (SH) Asset Value
Net debt expressed as a percentage of an estimated EUV(SH) Asset Value
based on a multiple of total rents receivable. The multiple value is an
input based on the valuation experience of the particular association
in its different business streams.
Arguably a more relevant measure of Loan to Value than 'book' leverage
since the value is based on gross rents and therefore on the means of
servicing interest. It should be closer to the lender's viewpoint. Ideally
the value should be based on rents net of direct costs times a higher
multiple. A maximum of 70% for this ratio would seem appropriate.
= 
Ratio 54. Net Debt %
NPV (30 years constant)
Net
debt is expressed as a percentage of the net present value (NPV) of the
next thirty years' cash flows before interest but after capex. Cash flows
after the forecast period are assumed to grow in line with inflation and
then discounted at the average cost of borrowing.
A cash flow-based loan to value calculation, arguably superior to that
based on estimated EUV(SH) asset value because the cash flow incorporates
critical issues such as repairs and maintenance outflows to remedy stock
condition problems. If this ratio has a value of 100% all of the next
30 years' cash flows are need to service and repay existing loans.
Allowing for all the risk and uncertainty factors over the next 30 years
plus the low margin aspects of social housing, 100% is probably the absolute
maximum to plan for. A value of 150% means, approximately, that interest
could be serviced but no repayments made, in the absence of future addition
of value through developments.
This situation might arguably be sustainable and appropriate for maximising
development potential, ie that all maturing debt is refinanced, but ideally
the ratio should reduce towards 100% over time.
= 
= 
NB. For all multi-period discounted
ratios (54, 55, 57, 58 and 59) the following notation is used:
where
r = average cost of debt
t = time period
c = cash flow (CFS21 - CFS11)
g = inflation (growth) = RPI assumption
r and g must be expressed as decimals ie 0.3 not 3%
Ratio 55.
Net Debt % NPV (30 years plus TV)
Net debt is expressed as a percentage
of forecast cash flows before interest, extrapolated to infinity! Cash
flows, for the next thirty years plus a terminal value (a "growing
perpetuity"), are discounted at the average cost of debt.
This ratio compares existing debt to the maximum cash flow value of the
business, since it is based on cash flows extrapolated "to infinity."
The absolute maximum for this ratio must be 100% since this implies mortgaging
the future cash flows 100%, allowing no margin for risk and uncertainty
factors which can affect the cash flows forecast. It implies perpetual
debt, which is arguably acceptable if the assets and cash flows can also
be maintained indefinitely.
A prudent maximum might be 80%. A value-adding development programme could
reduce the ratio from 100% to 80% over time
=BS 13 + B 20 - BS 11
divided by NPV of (CFS21 - CFS 11) for years 1 to 30, discounted
at FP 25
plus NPV of
= 
Ratio 56.
Current Assets/Current Liabilities (Times)
The rate of current assets to current liabilities.
A simple and very approximate measure to compute the association's ability
to meet short-term liabilities from short-term assets. This is a very
"static" balance sheet ratio that ignores cash generated from
operations and undrawn bank facilities, but it is quite popular. A margin
for mis-matches and illiquidities suggests this should have a value greater
than 1.0 but an even higher value might be required by covenants. A decreasing
ratio might suggest that the company using cheap short-term funds, but
it could be the result of poor profitability or inadequate re-financing.
= 
| << Capacity (Debt Repayment) | Capacity (Multi-period Measures) >> |