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Debt Information
Financial risk factors
The group operates a central treasury function which manages cash and borrows on behalf of the group and provides finance to group companies in their home currencies.
The main financial risks faced by the Group relate to the availability of funds to meet business needs, fluctuations in interest and foreign exchange rates and credit risks relating to the risk of default by counterparties to financial transactions. The management of these risks is set out below.
Capital risk
The group is committed to maintaining a debt/equity structure which allows continued access to a broad range of financing sources and sufficient flexibility to pursue commercial opportunities in a timely manner as they present themselves, without onerous financing terms and conditions.
The group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Capital consists of ordinary shares, retained earnings and non-controlling interests of the group. Management monitor the return on capital as well as the level of dividends to ordinary shareholders.
Debt credit rating
The group’s debt is rated by Standard & Poor’s and the group targets a rating of BBB or above for debt issuance over the medium term. A rating of BBB- or above is an “investment grade” rating. Financial markets which have been closed to new debt issues from certain borrowers at times since 2008 have been receptive to debt issuance for investment grade borrowers throughout this period. Currently the group is rated BBB– with a stable outlook.
The group’s new €500 million 3.375% bond maturing 24 September 2019 contains a “coupon step-up” increasing the coupon from 3.375% to 4.625% in the event that the group is downgraded to BB+ or below (sub-investment grade).
Financial Covenants
The group has in issue bonds issued under its Medium Term Note Programme and Revolving Credit Facilities (see note 20 for details). The group’s Revolving Credit Facilities contain covenants requiring that EBITDA : Interest should be at least 4.0 : 1.0 and that Net Debt : Adjusted EBITDA should be no greater than 3.5 : 1.0 at each semi-annual reporting date. The group remains compliant.
Change of Control
The group’s Medium Term Notes may be recalled by its investors in the event of a change of control of the group and within 120 days if:
(a) the group’s debt is down-graded below investment grade or the rating is withdrawn; and
(b) the rating agency confirms in writing, either publicly or in writing to the issuer or the Trustee that the rating action occurred either wholly or in part due to the change of control.
Liquidity risk
The group is committed to ensuring it has sufficient liquidity to meet its payables as they fall due. To achieve this, and in accordance with the liquidity ratio requirements of the credit rating agency Standard & Poor’s significant maturities are financed at least 12 months in advance, either through existing cash balances, forecast cash flows or new debt issuance. Management models financing requirements at least 12 months ahead and aims to maintain average headroom of at least £150 million and minimum headroom of at least £100 million. At 31 December 2012 the group had a £50 million maturity in 2013 and approximately £400 million of bonds maturing in March 2014. The group had available funds of £203 million at 31 December 2012 and £510 million of undrawn available committed headroom under its Revolving Credit Facilities (2011: £180 million headroom).
Market risk
Interest rate risk
While we currently have market risk sensitive instruments related to interest rates, we have no significant exposure to changing interest rates on our long-term debt because the interest rates are fixed on all of our long-term bond debt.
Within net debt, the group holds cash balances net of floating rate borrowings amounting to approximately £160 million, while all of the group’s bond debt is at fixed rates of interest. Assuming no change in these balances throughout the year, the impact on the profit and loss of a 1% shift in interest rates would be an increase/decrease of £1.6 million (2011: £0.2 million).
The group had outstanding debt at 31 December with a fair value of £1,175.3 million. Market risk for fixed-rate, long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 100bps increase in interest rates and amounts to £38 million at 31 December 2012. The income statement impact is nil as changes in interest rates do not change the expected cash flows on the bonds. However in the event it is decided to redeem bonds early, it will be necessary to pay the fair value.
The group’s £50 million bond was issued at a floating rate and swapped to a fixed rate. Changes in the valuation of the fixed rate instrument are recorded in equity. The impact on equity of a 1% shift in interest rates would be a maximum increase/decrease of £0.3 million (2011: £1.3 million).
Foreign exchange risk
The group’s primary exposure is to the Sterling Euro exchange rate which impacts earnings, Euro denominated debt and intra-group borrowings.
At 31 December 2012, the group’s net debt was approximately 50% Euro. The retranslation of the interest element of this Euro debt provides a partial income statement offset to the retranslation of earnings.
The group calculates the impact on the income statement and equity of a 10% shift in foreign exchange rates. The group’s principal foreign currency exposure is to Euro, and a 10% shift in GBP/EUR would result in a £18.2 million (2011: £17.2 million) increase/decrease in adjusted operating profit, offset by a £2.9 million (2011: £1.9 million) decrease/increase in interest payable.
Where possible, currency cash flows are used to settle liabilities in the same currency in preference to selling currency in the market through netting cash flows in currency and using short dated currency borrowings. At 31 December 2012, approximately €100 million of euro debt was due within 15 months.
Foreign currency balances, including cash, debt and intra-group balances are hedged on a net basis. To the extent that balances naturally offset, retranslation gains and losses are recognised in the income statement. At 31 December 2012, a 10% shift in the GBP/EUR rate would result in a net impact of nil, made up of a gain of £205.4 million offset by an equal loss (2011: nil net impact, made up of a £184.4 million gain offset by an equal loss).
Foreign currency debt is designated by the group for hedge accounting as a hedge of its currency net assets, so reducing its net currency assets. Retranslation gains and losses are recognised in reserves, rather than in the income statement. At 31 December 2012, a 10% shift in foreign exchange rates would decrease/increase equity reserves by £14.8 million (2011: £7.4 million).
Credit risk
The group has no significant concentration of credit risk. Sales are typically low value, high volume, spreading the risk across a number of customers. Policies are in place to ensure that sales are only made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high-credit-quality financial institution and there is no significant concentration of exposure to any single counterparty. The group monitors the creditworthiness of its derivative counterparties using a combination of credit ratings and other market indicators. All of the group’s banking and derivative counterparties were graded A- or above by Standard & Poor’s or equivalent at 31 December 2012. The group operates in some territories where there is increased exposure to trade credit risks and in those cases the group puts in place appropriate additional measures where possible to manage its credit exposure.
The group’s funding trade of £591.2 million (2011: £546.5 million) is invested with Barclays Bank plc, rated A by Standard & Poor’s, and collaterised by gilts. Barclays are entitled to post cash and gilts as collateral. Corporate bonds rated A or above and asset backed securities rated AAA may be provided as collateral but more than 100% of the value of the trade must be provided as collateral. The board continue to monitor this exposure.
Treasury risk
The company utilises financial instruments to manage known financial exposures in line with policies agreed by the board and outlined above.
The company does not enter into any speculative derivative contracts.
OUTSTANDING CAPITAL MARKETS ISSUANCE AS AT 31st DECEMBER 2012
Currency/Amount | Interest Coupon | Maturity Date |
€500m bond | Fixed rate – 4.625% pa | 27-03-14 |
€500m bond | Fixed rate – 3.375% pa | 24-09-19 |
£300m bond | Fixed rate – 5.75% pa | 31-03-16 |
£50m bond | Floating rate – 3 month LIBOR + 3.25% | 20-09-13 |
£1.3m debentures | Fixed rate – 5.00% pa | n/a |
£0.3m debentures | Fixed rate – 4.50% pa | n/a |