Notes to the accounts
Table of contents
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21 Financial instruments
Treasury policy
The group enters into derivative transactions such as interest rate swaps and forward foreign exchange contracts in order to help manage the financial risks arising from the group’s activities. The main risks arising from the group’s financing structure are interest rate risk, liquidity risk and market price risk, the latter in respect of both interest rates and foreign exchange. The policies for managing each of these risks and the principal effects of these policies on the results for the year are summarised below.
Interest rate risk
Group debt carries both fixed and floating interest rates. Bank loans and CMBS notes are typically at floating rates linked to LIBOR for the relevant currency. Bond debt and other capital markets debt is generally at fixed rates. The group’s policy is to eliminate substantially all exposure to interest rate fluctuations in order to establish certainty over long-term cash flows. Short-term debtors and creditors and investments are not directly exposed to interest rate risk.
Liquidity risk
The group’s policy is to seek to optimise its exposure to liquidity risk by balancing its exposure to interest risk and to refinancing risk. In effect the group seeks to borrow for as long as possible at the lowest acceptable cost. At 31 December 2007, the maturity profile of group debt showed a weighted average maturity of seven years (2006 – eight years). The group regularly reviews the maturity profile of its financial liabilities and seeks to avoid bunching of maturities through the regular replacement of facilities and using a selection of maturity dates. Re-financing risk may be reduced by re-borrowing prior to the contracted maturity date, effectively switching liquidity risk for market risk. The group will often pre-fund capital expenditure by arranging facilities or raising debt in the capital markets and then placing surplus funds on deposit until required for the project. Efficient treasury management and strict credit control minimise the costs and risks associated with this policy which ensures that funds are available to meet commitments as they fall due.
The tables below set out the maturity analysis of the group’s financial liabilities based on the undiscounted contractual obligations to make payments of interest and to repay principal (including notional principal in the case of gross settled foreign exchange contracts). Where interest payment obligations are based on a floating rate the rates used are those implied by the par yield curve for the relevant currency. Where payment obligations are in foreign currencies the spot exchange rate ruling at the balance sheet date is used.
Group
| 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
|
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Secured borrowings- non-recourse |
(190.9) | (31.9) | (155.9) | (39.6) | (424.1) | (731.3) | (310.5) | (2,137.4) | (1,081.4) | (2,940.2) |
| Other secured borrowings | (49.4) | (114.3) | (45.1) | (10.2) | (117.9) | (276.0) | (356.9) | (307.8) | (569.3) | (708.3) |
| Unsecured borrowings | (8.1) | – | (7.1) | (31.6) | (9.9) | (111.3) | (0.9) | (26.6) | (26.0) | (169.5) |
| Finance lease obligations | – | (6.1) | – | (6.1) | – | (18.3) | – | (110.1) | – | (140.6) |
| Tax and other payables | – | (5.7) | – | (30.9) | – | (56.1) | – | – | – | (92.7) |
| Interest rate derivatives payable | (2.5) | – | (17.6) | – | (35.1) | – | (164.3) | – | (219.6) | – |
| Other derivatives payable | (10.3) | (30.1) | (13.6) | (10.0) | (8.2) | (125.6) | – | – | (32.1) | (165.7) |
| (261.2) | (188.1) | (239.3) | (128.4) | (595.3) | (1,318.6) | (832.6) | (2,581.9) | (1,928.3) | (4,217.0) | |
| 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
|
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Interest rate derivatives receivable |
21.0 | – | 1.3 | – | 6.0 | – | 49.7 | – | 78.0 | – |
| Other derivatives receivable | 7.4 | 34.5 | 7.6 | 10.1 | 20.1 | 125.6 | – | – | 35.1 | 170.2 |
| 28.4 | 34.5 | 8.9 | 10.1 | 26.1 | 125.6 | 49.7 | – | 113.2 | 170.2 | |
| 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
|
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Interest rate derivatives net |
18.5 | – | (16.3) | – | (29.1) | – | (114.6) | – | (141.5) | – |
| Other derivatives net | (2.9) | 4.4 | (6.0) | 0.1 | 11.9 | – | – | – | 3.0 | 4.5 |
| 15.6 | 4.4 | (22.3) | 0.1 | (17.2) | – | (114.6) | – | (138.5) | 4.5 | |
| 2007 | Deduct: | ||||
|---|---|---|---|---|---|
| Reconciliation to Gross Debt |
Total principal |
Finance leases |
Non-cash amortisation |
Gross debt | |
| Maturing in 1 year | (247.7) | 6.1 | 2.7 | (238.9) | |
| Maturing in 1-2 years | (87.5) | 6.1 | 2.6 | (78.8) | |
| Maturing in 2-5 years | (1,136.9) | 18.3 | 6.4 | (1,112.2) | |
| Maturing in more than 5 years | (2,579.2) | 110.1 | 7.3 | (2,461.9) | |
| Trade (tax) and other payables | – | – | – | 92.7 | |
| (4,051.3) | 140.6 | 19.0 | (3,799.1) | ||
Group
| 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
| £m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Secured borrowings -non-recourse |
(160.5) | (31.6) | (163.2) | (31.9) | (78.1) | (731.1) | (343.7) | (1,983.2) | (745.5) | (2,777.8) |
| Other secured borrowings | (31.9) | (5.5) | (31.7) | (8.4) | (91.9) | (61.7) | (384.5) | (323.2) | (540.0) | (398.8) |
| Unsecured borrowings | (8.6) | – | (8.6) | – | (15.5) | (152.9) | (2.8) | (26.6) | (35.5) | (179.5) |
| Finance lease obligations | – | (6.4) | – | (6.1) | – | (19.9) | – | (122.4) | – | (154.8) |
| Tax and other payables | – | (2.1) | – | (38.0) | – | (94.2) | – | – | – | (134.3) |
| Interest rate derivatives payable | (4.6) | – | (4.1) | – | (20.1) | – | (275.3) | – | (304.1) | – |
| Other derivatives payable | (6.6) | (92.0) | (1.3) | (30.7) | (0.8) | (10.2) | – | – | (8.7) | (132.9) |
| (212.2) | (137.6) | (208.9) | (115.1) | (206.4) | (1,070.0) | (1,006.3) | (2,455.4) | (1,633.8) | (3,778.1) | |
| 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
| £m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Interest rate derivatives receivable |
6.9 | – | 11.1 | – | 19.1 | – | 12.0 | – | 49.1 | – |
| Other derivatives receivable | 7.5 | 106.3 | 1.6 | 34.5 | 1.3 | 10.2 | – | – | 10.4 | 151.0 |
| 14.4 | 106.3 | 12.7 | 34.5 | 20.4 | 10.2 | 12.0 | – | 59.5 | 151.0 | |
| 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
| £m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Interest rate derivatives net |
2.3 | – | 7.0 | – | (1.0) | – | (263.3) | – | (255.0) | – |
| Other derivatives net | 0.9 | 14.3 | 0.3 | 3.8 | 0.5 | – | – | – | 1.7 | 18.1 |
| 3.2 | 14.3 | 7.3 | 3.8 | (0.5) | – | (263.3) | – | (253.3) | 18.1 | |
| 2006 | Deduct: | |||
|---|---|---|---|---|
| Reconciliation to Gross Debt | Total principal |
finance leases |
Non-cash amortisation |
Gross Debt |
| Maturing in 1 year | (177.8) | 6.4 | 5.4 | (166.0) |
| Maturing in 1-2 years | (46.5) | 6.1 | 2.8 | (37.6) |
| Maturing in 2-5 years | (965.5) | 19.9 | 7.7 | (937.9) |
| Maturing in more than 5 years | (2,455.5) | 122.4 | 8.1 | (2,325.0) |
| Tax‚ and other payables | – | – | – | 134.3 |
| (3,645.3) | 154.8 | 24.0 | (3,332.2) | |
Company
| 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Within 1 year |
1-2 years | 2-5 years | over 5 years | Totals | ||||||
|
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Secured borrowings -non-recourse |
– | – | – | – | – | – | – | – | – | – |
| Other secured borrowings | – | – | – | – | – | – | – | – | – | – |
| Unsecured borrowings | (4.4) | – | (4.4) | – | (4.4) | (111.3) | – | – | (13.2) | (111.3) |
| Finance lease obligations | – | – | – | – | – | – | – | – | – | – |
| Tax and other payables | – | (1.8) | – | – | – | – | – | – | – | (1.8) |
| Interest rate derivatives payable | – | – | – | – | – | – | – | – | – | – |
| Other derivatives payable | – | – | – | – | – | – | – | – | – | – |
| (4.4) | (1.8) | (4.4) | – | (4.4) | (111.3) | – | – | (13.2) | (113.1) | |
Company
| 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Within 1 year | 1-2 years | 2-5 years | over 5 years | Totals | ||||||
| £m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
£m Interest |
£m Principal |
|
| Secured borrowings -non-recourse |
– | – | – | – | – | – | – | – | – | – |
| Other secured borrowings | – | – | – | – | – | – | – | – | – | – |
| Unsecured borrowings | (4.4) | – | (4.4) | – | (8.8) | (111.3) | – | – | (17.6) | (111.3) |
| Finance lease obligations | – | – | – | – | – | – | – | – | – | – |
| Tax and other payables | – | (1.7) | – | – | – | – | – | – | – | (1.7) |
| Interest rate derivatives payable | – | – | – | – | – | – | – | – | – | – |
| Other derivatives payable | – | – | – | – | – | – | – | – | – | – |
| (4.4) | (1.7) | (4.4) | – | (8.8) | (111.3) | – | – | (17.6) | (113.0) | |
Market price risk
The group is exposed to market price risk through interest rate and currency fluctuations.
Interest rates
The group’s policy is to substantially eliminate risk in respect of changes in interest rates such that over the longer term changes in interest rates will have little or no impact on group cash flows. As a consequence, the group is exposed to market price risk in respect of the fair value of its fixed rate derivative financial instruments.
The approximate impact of a 50 basis point shift upwards in the level of interest rates would be a positive movement of £186.9 million in the fair value of derivatives. The approximate impact of a 50 basis point shift downwards in the level of interest rates would be a negative movement of £204.9 million in the fair value of derivatives. Movements in the fair value of derivatives are dealt with in the income statement. In practice, a parallel shift in the yield curve is highly unlikely. However, the above sensitivity analysis is a reasonable illustration of the possible effect from the changes in slope and shifts in the yield curve that may actually occur. Because the fixed rate derivative financial instruments are matched by short-term floating rate debt, the overall effect on group cash flow of such a movement would be very small.
Foreign exchange
The group held investments in the US during the year. The group seeks to minimise market price risk in respect of foreign exchange movements. The group’s policy is, as far as practical, to hedge the net investment in non-sterling assets. This is done by borrowing in foreign currencies and through entering into cross-currency interest rate swaps and forward foreign exchange contracts. The approximate impact of a 10 per cent appreciation in foreign currency exchange rates would be an increase of £8.8 million in group reserves. The approximate impact of a 10 per cent depreciation in foreign currency exchange rates would be a decrease of £7.2 million in group reserves.
Capital structure
The group seeks to enhance shareholder value both by investing in the business so as to improve the return on investment and by managing the capital structure. The group uses a mix of equity, debt and hybrid financial instruments and aims to access both debt and equity capital markets with maximum efficiency and flexibility. The key ratios used to monitor the capital structure are the debt to assets ratio and the interest coverage ratio. The group aims not to exceed an underlying debt to assets ratio of 50 per cent and to maintain interest cover above 160 per cent.
During 2007 the underlying debt to assets ratio rose from 36 per cent to its maximum for the period of 40 per cent at 31 December 2007. Over the same period the interest coverage ratio reduced from 170 per cent to 165 per cent at the year end having reached a maximum during the period of 176 per cent.
Financial assets
Financial assets are disclosed in notes 14, 15, 16 and below.
The group has no significant concentration of credit risk as exposure is spread over a large number of counterparties and customers.
Exposure to credit risk is limited by investing liquid funds and entering into derivative financial instruments with counterparties who have a high percentage tier one capital and strong credit ratings assigned by international credit rating agencies.
The group is exposed to credit risk in respect of its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. As at 31 December 2007, trade receivables of £27.3 million (2006 – £26.1 million) were past due but not impaired. These relate to customers for whom there is no recent history of default.
The ageing analysis of these trade receivables is as follows:
|
Group 2007 £m |
Group 2006 £m |
|
|---|---|---|
| Up to three months | 20.6 | 20.5 |
| Three to six months | 6.7 | 5.6 |
Periodically the group enters into equity-linked derivative “contracts for difference”. The market value of the equities underlying such contracts at 31 December 2007 was £1.4 million (2006 – £nil). The market value of these contracts is £0.3 million (2006 – £nil) and the differences are cash settled monthly.
Total financial assets and liabilities
The table below sets out the group’s accounting classification of each class of financial assets and liabilities, and their fair values at 31 December 2007 and 31 December 2006.
|
Other derivatives at fair value £m |
Available for sale £m |
Amortised cost £m |
Total carrying value £m |
Fair value £m |
|
|---|---|---|---|---|---|
| 2007 | |||||
| Cash and cash equivalents | – | 188.4 | – | 188.4 | 188.4 |
| Borrowings due within one year | – | – | (152.3) | (152.3) | (152.3) |
| Borrowings due after one year | – | – | (3,704.0) | (3,704.0) | (3,860.6) |
| Derivative assets | 25.4 | – | – | 25.4 | 25.4 |
| Derivative liabilities | (97.8) | – | – | (97.8) | (97.8) |
| Other assets | – | 51.0 | 98.0 | 149.0 | 149.0 |
| Other liabilities | – | – | (259.3) | (259.3) | (259.3) |
| 2006 | |||||
| Cash and cash equivalents | – | 321.8 | – | 321.8 | 321.8 |
| Borrowings due within one year | – | – | (43.5) | (43.5) | (43.5) |
| Borrowings due after one year | – | – | (3,341.3) | (3,341.3) | (3,555.7) |
| Derivative assets | 21.0 | – | – | 21.0 | 21.0 |
| Derivative liabilities | (133.5) | – | – | (133.5) | (133.5) |
| Other assets | – | – | 69.9 | 69.9 | 69.9 |
| Other liabilities | – | – | (312.5) | (312.5) | (312.5) |
The fair values of quoted borrowings are based on the asking price. The fair values of borrowings, derivatives, financial instruments and other financial assets and liabilities are estimated using appropriate yield curves at 31 December each year by discounting the future contractual cash flows to the net present values.
Fair values of financial instruments
Financial assets and liabilities comprise long-term borrowings and other payables, derivative instruments, cash, receivables and investments. The fair values of financial assets and liabilities have been established using the market value, where available. For those instruments without a market value, a discounted cash flow approach has been used. Where no amount is disclosed in the table below, there is no material difference between the balance sheet value and the fair value.
| Group | ||||
|---|---|---|---|---|
| 2007 | 2006 | |||
|
Balance sheet value £m |
Fair value £m |
Balance sheet value £m |
Fair value £m |
|
| Debentures and other fixed rate loans | ||||
| Sterling | ||||
| C&C 5.562% debenture 2027 | 226.1 | 342.0 | 225.8 | 348.8 |
| CSC 6.875% unsecured bonds 2013 | 26.6 | 26.2 | 26.5 | 25.4 |
| CSC 5.75% unsecured bonds 2009 | 31.4 | 31.5 | 41.3 | 42.0 |
| US dollars | ||||
| Fixed rate loans* | 161.0 | 160.6 | 164.0 | 169.1 |
| 445.1 | 560.3 | 457.6 | 585.3 | |
| Convertible bonds – fixed rate (note 19) | 111.3 | 152.7 | 108.7 | 195.4 |
* Local currency balance sheet value US$320.4 million, weighted average interest rate 5.64 per cent (2006 – US$321.0 million, 5.68 per cent).
The adjustment in respect of the above, after credit for tax relief, to the diluted net assets per share (which does not require adjustment for the fair value of convertible bonds) would amount to 21p per share (2006 – 24p).
| Derivative financial instruments | Group | |
|---|---|---|
|
2007 £m |
2006 £m |
|
| Non-current assets (note 14) | 5.0 | 14.0 |
| Current assets (note 14) | 20.4 | 7.0 |
| Current liabilities | (3.8) | (4.6) |
| Non-current liabilities | (94.0) | (128.9) |
| (72.4) | (112.5) | |
Interest rate swaps
The notional principal amount of the outstanding swap agreements at 31 December 2007 is £5,428 million (2006 – £4,724 million). The table below summarises the interest rate swaps in effect on or after 31 December 2007:
| Notional principal £m |
Average contracted rate % |
||
|---|---|---|---|
| Sterling – pay fixed and receive floating | |||
| Effective on or after: | |||
| 1 year | 3,319 | 5.27 | |
| 5 years | 3,220 | 5.16 | |
| 10 years | 2,543 | 4.72 | |
| 15 years | 2,100 | 4.58 | |
| 20 years | 2,100 | 4.58 | |
| 25 years | 1,625 | 4.40 | |
The net interest payable or receivable on interest rate swaps is settled quarterly or semi-annually. Currency and interest rate swap agreements are held by the group to hedge the net investment in the US. Under these contracts which expire in 2008 and 2012 the group pays fixed rate US interest at 4.83 per cent (weighted average) and receives fixed rate sterling interest at 5.31 per cent (weighted average).
The fair value of the net investment hedge at 31 December 2007 is an asset of £4.7 million (2006 – asset of £21.5 million).
At 31 December 2007, the net exposure to foreign currencies was US$76.2 million (2006 – US$80.9 million).