A special report – by John Miller
Last week in a little known announcement, Moody’s, the agency that stripped the UK of its AAA credit rating, cut the ratings of three property companies that lease buildings to the BBC in London and Glasgow.
The three companies which were downgraded were Juturna PLC, Pacific Quay Finance and White City Property Finance, which all went down from Aa3 to A1. The companies finance buildings for which the BBC is the sole occupier and Moody’s believes there is now doubt over whether the BBC can meet future financial obligations.
The news prompted Newsnet Scotland to look into who owns the property occupied by BBC Scotland at Pacific Quay. The result of our research is that quite frankly we don’t know. Information to hand indicates that it is not the BBC, but this will not stop the licence payers paying dearly for it over a period of thirty years.
The report by Moody’s Investor Services on February 27th said that they had downgraded the credit ratings of notes issued by three commercial mortgage-backed security (CMBS) transactions. The transactions relate to three BBC properties including Pacific Quay in Glasgow.
Our investigation took us into that nether world of PFI and complex financial instruments similar to those that brought the global financial system crashing down about our ears in 2008. It would take a book to explain everything in detail but given the constraints of an online article we will simply give you an overview.
Moody’s has cited several reasons for the downgrade:
- The downgrade of the UK’s sovereign debt rating and the impact on a number of structured finance transactions given their financial linkages.
- A degree of strategic uncertainty for the BBC following rapid management changes in the wake of the Jimmy Savile affair.
- The BBC’s ongoing challenge to balance its obligation to provide high quality programming while achieving the cost savings necessary to manage its financials within the envelope provided by the 2010 funding settlement.
- A stubbornly high pension deficit. According to reports, the BBC’s pension scheme deficit has increased from £1.4 billion to £2.6 billion over the past year.
For some of the background to the structured finance vehicles used by the BBC we can turn to the National Audit Office report dated November 30th, 2009 entitled “the BBC’s management of three major estate projects”.
The report is highly critical of the BBC’s management of the projects and concludes, amongst other things, that “The BBC is not well placed to demonstrate value for money from the £2,000 million it has committed to spending on the three projects over their life”. That £2 billion commitment has to be looked at in the context of the fact that the BBC has a borrowing limit of £200 million set by the Secretary of State for Culture, Media and Sport.
Here we have the magic of Private Finance Initiative (PFI) in action.
PFI was the Brown/Darling conjuring trick that swept vast amounts of public sector debt under the carpet where it could be hidden until it eventually emerged to grab us by the throat. The same PFI debt that extracts hundreds of millions of pounds annually out of Scotland’s health and education budgets, before a single nurse or teacher has been paid.
If we look now at what the report has to say about Pacific Quay. The project was originally conceived in 2002 at a cost of £126 million. The scope was revised in 2005 and the eventual cost was £188 million. This was made up of £100.1 million for the actual construction, £9.9 million for the cost of the bond to finance the project, £19.3 million for the cost of moving staff and £58.8 million for technology.
The report gives an indication of the structuring of arrangements for Broadcasting House, the London HQ of the BBC, which appears to be a lease-hold rather than a freehold property. It simply states that the Pacific Quay arrangements are similar.
From this we learn that it raised a bond of £110 million secured on the building and pays an annual rent (£7.4 million 2008-9) over 30 years to the investment vehicle that owns the building.
Fitch’s, one of the rating agencies, indicated in one of its rating reports, that the lease is a “fully repairing and insuring lease” i.e. the BBC is responsible for meeting all of the costs of the building in addition to paying the rent.
The BBC financed the £59 million in technology through a mix of its own capital funds and leasing. If the arrangements for Pacific Quay are similar to Broadcasting House then we can deduce that at the end of thirty years the BBC would have the options of, extending the lease, sharing in the sale of the property or buying the remaining term on the lease.
The financing arrangements are not in fact as straightforward as the summary in the Fitch report would suggest. For more information on this we have to turn to the annual report and financial statements for Pacific Quay Finance PLC for the fiscal year ended April 30th, 2012 filed at Companies House. From the report we learn that.
• The company was established as a special purpose company to raise funding by the issue of mortgage backed fixed rate notes due in 2034 and to apply the proceeds of such issue to advance a mortgage loan. On 14 July 2004 the company advanced the loan to Pacific Quay Trustees No 1 Ltd to purchase a head lease and finance the construction of a property within the Pacific Quay development.
So it would appear that the BBC Scotland HQ is owned by Pacific Quay Trustees No 1 Ltd.
So who are they?
They are a non-trading company wholly owned by Capita Trust Company Ltd, which is in the business of being corporate trustees and the provision of trust and administration services. This is where we hit a dead end in our search for the owner of BBC Pacific Quay.
• The company’s notes are listed on the Global Exchange Market (GEM) on the Irish Stock Exchange. GEM is aimed at investors who are particularly knowledgeable in investment matters. Regulatory requirements are therefore less onerous than EU regulated market requirements. Importantly, securities listed on GEM are considered to be listed on a recognised stock exchange.
So who has invested in Pacific Quay? We certainly don’t know from GEM since the information is simply not available. So we don’t know who owns the property and we don’t know who has invested in the notes used to fund the purchase and construction.
• The company uses an indexation rate swap contract to minimise its exposure to indexation risk between its index linked assets and its fixed rate liabilities.
Read behind that little bit of financial mumbo jumbo and you will find that the BBC isn’t simply paying rent for Pacific Quay. The payment may increase, or more unlikely, decrease, in accordance with movement in the Retail Price Index with a minimum of 0% and a maximum of 5%. What this means is that the principal and consequently the interest on the loan is, to use their phrase “uplifted” in accordance with the capped RPI. Can you imagine the amount of the mortgage on your house increasing in line with the RPI?
• The company’s financials show that it has a shareholders’ deficit of £15.8 million, that is, it owes £15.8 million more than it has in assets. Would you invest in a company that had more liabilities than assets? Perhaps you are, through your pension fund investing on GEM on the Irish Stock Exchange.
• Now the interesting part.
The company’s estimate of the gross contractual cash flows, adjusted for indexation, on its financial assets is £275.8 million pounds. Put another way, this is what they expect the BBC to pay them over 30 years for the use of Pacific Quay.
When Barclays Capital announced the details of the CMBS transaction in 2004 the Treasurer of the BBC, Stephen Wheatcroft said; “This is another fantastic deal for the BBC as it enables us to provide a great new building for the BBC Scotland HQ at Pacific Quay”.
I leave it to you to decide if you agree with him.
• Finally Pacific Quay Finance PLC is owned by Pacific Quay Holdings which peters out in the hands of yet another management company; Another dead end trail.
It is ironic that BBC Pacific Quay was formally opened by Gordon Brown on 20 September 2007, the architect of the PFI scandal. Currently there is a dispute and threats of repeated strike action hanging over BBC Scotland as a result of job losses due to funding cuts.
Two weeks ago the BBC Trust announced that it has has commissioned a review to examine whether the way the BBC distributes its content provides good value for money for licence fee payers. It could do worse than look at the financing of the Pacific Quay building in Glasgow and other properties leased by the corporation.
Every BBC employee who enters Pacific Quay should pause and reflect that their jobs are in jeopardy today due in no small measure to an ever more costly PFI contract, much beloved of Gordon Brown and his Chancellor Alistair Darling.
- Annual Accounts – 30 Apr 12, Pacific Quay Finance Plc from Duedil.pdf
- Annual Accounts – 30 Apr 12, Pacific Quay Holdings Limited from Duedil.pdf
- Annual Accounts – 30 Jun 12, Pacific Quay Trustees No. 1 Limited from Duedil.pdf
- TEXT-Fitch affirms Pacific Quay Plc notes ‘AAsf’ _ Reuters.pdf