Risk Management


Our view of risks

In addition to the general economic, security and regulatory risks faced by a wide range of companies, as part of the commercial environment, we consider there to be a number of specific risks that are faced by our Company.

How we manage risk

In managing the business, the identification and monitoring of risk is crucial. During the year, the Risk Committee was re-constituted. It now comprises the Executive Team and meets quarterly. The risk register has been divided into four areas and those responsible for the risks in each area are required to present to the Risk Committee at one of the quarterly meetings. The minutes of those meetings are distributed to the Audit Committee and more formally the Audit Committee is asked to review the risk register and consider the adequacy of controls at least once annually. Internal Audit also reviews the risk register and considers this in planning their audit programme. After the year end PwC was appointed as Internal Auditor replacing Grant Thornton. Set out below is management’s view of the current key specific business risks and action taken in mitigation.

Risks and mitigation

Description and implication of risk Mitigation
Property valuations  
Property valuations are inherently subjective and uncertain. This is more acute both in current markets where transaction volumes are lower than average and in relation to our major regeneration projects which are unique with comparables used varying materially more than for investment properties. We use external independent valuers that are well regarded in the industry. We keep in close contact to understand how valuations are moving. With respect to the urban regeneration properties, valuers support their stand back valuation with other metrics including value per acre, value per net developable square foot and discounted cashflow.
Banking covenants  
The two key financial covenants within the corporate bilateral facilities are gearing and interest cover. The gearing ratio of 60% compares with a covenant of 110%. Interest cover for the year was 1.9 times against a covenant of 1.25 times. Covenants are forecast and monitored on a regular basis. Internal guidelines which have been endorsed by the Board operate at tighter levels of control than the external covenants and incorporate the impact of positioning in the cycle to encourage significant headroom at the top of the cycle. In re-pricing the 2013 and 2014 swaps to market, the banks have agreed to exclude the net present value payment from interest cover which materially increases headroom against forecast for the next three years. The corporate debt remains fully hedged to assist in cost certainty and part of the proceeds of the 2009 rights issue was set aside to invest in income producing assets and build the fund management business to improve the income profile of the Group.
Liquidity  
Quintain’s corporate debt facilities expire between 2013 and 2016. Ensuring sufficient liquidity is in place to deliver the business plan. Having extended, either fully or through options, £295m of debt net of amortisation, the target this year is to increase that to £400m. We currently have sufficient undrawn facilities to meet commitments. Recycling of capital through sales and joint venture partners will be critical to the continued build-out of our major regeneration schemes.
Development  
The Group is exposed to risks associated with development projects. Delays could occur for regulatory or funding reasons. Counterparty risk remains high with a risk that contractors may become bankrupt or insolvent. This also applies to other counterparties such as development partners who may fail to meet their obligations. Control of timing and construction costs are vital to prevent overspend or delays once on site. Quintain’s in-house project management team transfers risk to contractors where possible and employs a culture of no changes once the design is agreed. The supply chain management initiative, SC2, is creating increasing visibility into opportunities for cost control and reduction, while standardisation across Quintain’s projects will increase predictability and provide economies of scale. Structuring of deals and retentions provide some support against counterparty risk.
Market  
The Group’s business is dependent on the general economic and property market conditions in the United Kingdom. Deterioration in residential and commercial property markets could lead to further declines in the value of the Group’s property portfolio, tenant default and a reduction in income from these properties. Land, which makes up 47.5% of the Group’s gross property assets, tends to experience greater volatility in valuations than income producing assets. There is significant diversification in the profile of assets, from nursing homes with RPI linked long leases and minimum rental uplifts, to direct lets of student accommodation, secondary regional property with a wide tenant base and regeneration projects with lower initial income profiles. While the Group has a considerable quantity of planning consents, we have few development obligations. The largest tenant comprising 5.0% of contracted annualised rent is Live Nation, operating Wembley Arena. This exposure is reduced by receipts equating to approximately half of the rent being received in Quintain controlled bank accounts before being passed on and also by Quintain’s ability to step into the business.
Reputation  
Quintain’s reputation with many stakeholders is important in the continued effective operations of the business. Support from the public sector is essential in continuing to achieve detailed planning consents. Relationships with joint venture partners and other professional organisations are critical in delivery of the business. Ongoing senior management engagement with stakeholders. All deals that may have a material impact on reputation must be reviewed by the Board. In order to increase our understanding and manage the risk, we recently commissioned a perceptions audit and are creating an action plan to address any concerns that arise.
Counterparty risk  
The ability of counterparties to meet their obligations is crucial. In particular, we are exposed to contractors on developments under construction, joint venture partners and end purchasers under forward funding agreements. We monitor counterparty risk and ensure that through step-in rights, retentions and deposits, we have protected our position as far as possible from financial loss.
Personnel  
The loss of key personnel could affect delivery of the business strategy. This risk is currently increased because share incentive packages have very little or no value. A new share incentive plan will be implemented subject to shareholder consent at the next AGM. In order to understand and address employees’ issues within the business there is an annual employee survey, the findings of which are openly disclosed and acted upon. There are regular formal staff meetings and monthly informal events at which staff can communicate with senior management, as well as weekly transmissions of news and successes allowing all employees to understand the activities around the Group and the impact of their contribution.

The detailed assessment of financial risk management covering credit, liquidity and market risk is set out in note 19 to the accounts in the 2010 Annual Report and Accounts.