Construction loans

The Group has retained, through North American Loan Services (“NALS”), the portfolio of construction loan receivables formerly owned and managed by Stock Building Supply (“Stock”). These are loans made to builders to finance the construction of properties. At origination the term of the loan is a maximum of 12 months, with an option at NALS’s discretion to extend by six month increments, and with a registered charge over the property. The charge usually has priority over other charges over the asset and is often reinforced by liens under State law and personal guarantees. In general, the funding is made available as the expenditure is incurred, rather than in advance, which restricts the exposure, and the completed property cannot be sold by the builder unless the loan has been repaid and the charge released.

Charges for impairment of receivables and gains or losses on the disposal of foreclosed property, as well as the cost of labour and facilities, are included in the Group’s trading profit. Income from interest and fees is included in the Group’s finance revenue, and interest expense in the Group’s finance cost.

The Group intends to effect a phased reduction in the construction loans portfolio over the next two to three years. It expects to continue to undertake selective lending only, to allow for an orderly reduction in the scope of the business. The portfolio will also be reduced through a phased withdrawal from selected markets to position the business for a possible future sale.

Following its separation from Stock, NALS has ceased operations in five States, and now has 90 per cent of its portfolio in North Carolina, South Carolina, Texas and Virginia.

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Both new loan originations and the outstanding loans have been reduced over the past 12 months reflecting a more cautious approach to lending following the continuing decline in the US housing market. At 31 July 2009, construction lending receivables on Wolseley’s balance sheet, financed by an equivalent amount of construction loan borrowings, was $272 million (£163 million) compared to $470 million at the previous year end. The trading loss for the year of $37 million has decreased slightly from $38 million in the prior year and reflects bad debt charges and losses on property disposals of $29 million. The run rate of losses is expected to decline over the next 12 months.

Following the separation from Stock, NALS recorded an exceptional charge of $48 million to reflect an impairment of receivables that arose as a result of the separation and the withdrawal from certain markets at that time rather than from any further deterioration in its underlying markets.

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