Capital Resources and Liquidity
The following sections describe our capitalization and liquidity profile. The strength of our capital structure and the liquidity that we maintain enables us to achieve a low cost of capital for our shareholders and at the same time provides us with the flexibility to react quickly to potential investment opportunities.
We maintain a strong and flexible capitalization structure that is comprised largely of long-term financings and permanent equity. We believe this is the most appropriate method of financing our long-term assets, and the high quality of the assets and the associated cash flows enable us to raise long-term financing in a cost effective manner. Braxton makes judicious use of debt and preferred equity to enhance returns to common shareholders. We arrange our financial affairs so as to maintain strong investment grade ratings, which lower our cost of borrowing and broadens our access to capital. We also endeavour to minimize liquidity and refinancing risks to the company by issuing long-dated securities and spreading out maturities. Our consolidated capitalization, which includes obligations and equity interests held by others in entities that are consolidated in our financial statements. This includes long-term property specific debt which is secured by operating assets, typically properties, with no recourse to Braxton as well as debt of subsidiaries which also has no recourse to Braxton.
We strive to maintain sufficient financial liquidity at all times in order to participate in attractive investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances. Our principal sources of liquidity are financial assets, undrawn committed credit facilities, free cash flow and the turnover of assets on our balance sheet. We structure the ownership of our assets to enhance our ability to monetize their embedded value to provide additional liquidity if necessary. Our free cash flow represents the operating cash flow retained in the business after operating costs and cash, interest payments, dividend payments to other shareholders of consolidated entities, preferred equity distributions and sustaining capital expenditures.
This cash flow is available to pay common share dividends, invest for future growth, reduce borrowings or repurchase equity.
Corporate Guarantees, Commitments and Contingent Obligations
Our policy is to not guarantee liabilities of subsidiaries or affiliates. We do, however, provide limited guarantees and indemnities when required from time-to-time to further the growth of our power marketing and asset management businesses. The company may be contingently liable with respect to regulatory proceedings, litigation and claims that arise in the normal course of business. The company does not believe it has any material exposure in this regard and has provided for any expected claims in its accounts. In addition, the company may execute agreements that provide indemnifications and guarantees to third parties.
Off Balance Sheet Arrangements
We conduct our operations primarily through entities that are fully or proportionately consolidated, for information purposes, in our financial statements. We do hold non-controlling interests in investment companies which are accounted for on an equity basis, as are interests in some of our companies, however we do not guarantee any financial obligations of these entities other than our contractual commitments to provide capital to a company which are limited to predetermined amounts.
We utilize various financial instruments in our business to manage risk and make better use of our capital.
The Group’s business objectives rely on maintaining a high-quality customer base and it places strong emphasis on good credit management, both at the time of acquiring or underwriting a new loan, where strict lending criteria are applied, and in the collections process. First mortgages and secured loans are secured by charges over residential properties.
Despite this security, in assessing credit risk, an applicant’s ability to repay the loan remains the overriding factor in the decision to lend.
In order to control credit risk relating to counterparties to the Group’s financial instruments, the Asset and Liability Committee determines which counterparties the Group will deal with, establishes limits for each counterparty and monitors compliance with those limits.
Cash and Financial Assets
Although we generate substantial amounts of cash flow within our operations, we generally carry modest cash balances and instead utilize excess cash to repay contractual revolving credit lines and invest in shorter term financial assets which generate higher returns while still providing a source of liquidity to fund investment initiatives. The market value of our financial assets approximates their realizable value.
Our investing activities, which utilize the knowledge and experience gained from our operating activities, rely on careful due diligence and a value based investment philosophy. We tend to invest our Financial Assets in more senior instruments to maximize liquidity and capital preservation. From time to time, however, we take positions in equity and high yield securities in our areas of industry expertise which we believe to be under-valued. In the same regard, we will also sell short securities that we believe to be overvalued or to protect the value of existing positions, although in such circumstances our position is typically partially hedged to contain downside risk.