Setting new standards - Friends Life

PARENT COMPANY ACCOUNTS
ABBREVIATIONS AND DEFINITIONS
Notes to the consolidated accounts continued
32. Interest-bearing loans and borrowings continued
Unless otherwise stated below, the fair values of interest-bearing loans and borrowings are the same as the carrying values.
(i) Issued on 18 November 1996 and guaranteed by Friends Provident Life Office (FPLO). Redemption is at the option of FP Finance PLC and
this was exercised on 27 November 2006. The bonds were guaranteed on a subordinated basis by FPLO after the claims of its senior
creditors, including all policyholder liabilities. On 9 July 2001, under the Demutualisation Scheme, FPLP replaced FPLO as the guarantor.
The fair value of the bonds at 31 December 2005 was £223m.
(ii) Subordinated loan notes issued in December 2006 and stated net of issue costs of £2m. The loan notes are redeemable in 2026.
For the period 20 December 2006 to 19 December 2016, interest accrues at a rate of 6.75% per annum, payable annually in arrears.
For the period 20 December 2016 to 20 December 2026, interest accrues at a rate of 2.69% above 3m LIBOR per annum, payable
quarterly in arrears.
(iii) On 16 December 2004 FPLP raised £380m of core regulatory capital in the form of floating rate secured notes through a securitisation of
the cash flows expected to emerge from a book of life insurance policies. The total cost of funds is approximately 5.5% per annum. The
repayment of principal on the notes started on the 15 April 2006 and every year thereafter, dependent on the surplus emerging from the
book of life insurance policies. For the purpose of securitisation, two special purpose vehicles were established, namely Box Hill Life
Finance plc and Box Hill Loan Finance Limited. Both companies have been treated as Group companies for the purposes of the
consolidated accounts. On 16 December 2004 Box Hill Life Finance plc issued the two classes of floating rate secured notes. The notes
benefit from a financial guarantee provided by Ambac Assurance UK. Interest is payable quarterly in arrears on 15 January, April, July and
October each year.
In 2006, £82m of the notes were repaid. Of the remaining £198m notes outstanding, £144m is expected to be repaid in April 2007.
(iv) Issued in February 2005. The carrying value is stated net of issue costs of £1m.
(v) Issued on 11 December 2002. Convertible at the option of the holder of ordinary shares at any time on or after 21 January 2003 and up to
5 December 2007. The number of ordinary shares to be issued on conversion will be determined by dividing the principal amount of the
relevant bonds by the conversion price in effect on the relevant conversion date. The conversion price is £1.71 per ordinary share. Unless
previously purchased and cancelled, redeemed or converted, the bonds will be redeemed on 11 December 2007 at their principal amount.
The Company may, at its option, redeem all (but not some) of the bonds outstanding at any time on or after 27 December 2005 and up to
the final maturity date of 11 December 2007 if certain conditions are met. Interest is payable in equal instalments semi-annually in arrears
on 11 June and December each year.
The convertible bonds are separated into a liability component, measured at amortised cost, and an embedded derivative being the option
to convert to equity. A deed poll election, effective May 2005, eliminated the Group’s ability to settle conversion consideration in cash.
The embedded derivative is classified as equity and held at its fair value at May 2005. The liability component is carried at £283m (2005:
£276m). The embedded derivative is valued at £51m and included in note 38.
Total interest-bearing loans and borrowings are repayable as follows:
2006 2005
£m £m
Within one year or on demand 311 238
Between one and two years - 276
Between two and three years - -
Between three and four years - -
Between four and five years 24 22
In more than five years 795 619
Total interest-bearing loans and borrowings 1,130 1,155
Total interest expenses for financial liabilities not measured at fair value through the income statement, which arises solely from interestbearing
loans and borrowings is £88m (2005: £89m).
Friends Provident Annual Report & Accounts 2006 153