Treasury risk – introduction
SIG's Finance and Treasury Policies set out the Group's approach to managing treasury risk. These policies are reviewed and approved by the Group Board on a regular basis. It is Group policy that no trading in financial instruments or speculative transactions be undertaken.
Funding of operations
SIG finances its operations through a mixture of retained profits, Shareholders' equity, bank funding, private placement notes and other borrowings. A small proportion of SIG's assets are funded using fixed rate finance lease contracts.
The Group's net debt is made up of the following categories:
|Obligations under finance lease contracts||10.5||9.8|
|Private placement notes||254.3||252.5|
|Derivative financial instruments (liabilities)||1.1||2.1|
|Derivative financial instruments (assets)||(33.9)||(29.7)|
|Gross debt (after derivative financial instrument assets)||239.6||239.9|
|Cash and cash equivalents||(110.3)||(118.7)|
|Other financial assets||(0.9)||–|
The Group's gross debt (after derivative financial instrument assets) can be further analysed as follows:
|Gross financial liabilities with a maturity profile of greater than five years||78.8||33%||84.3||35%|
|Gross financial liabilities held on an unsecured basis||227.5||95%||229.4||96%|
Details of derivative financial instruments are shown in Note 19 to the Accounts.
Management of treasury risks
Treasury risk management incorporates liquidity risk, interest rate risk, foreign currency risk, commodity risk, counterparty credit risk and the risk of breaching debt covenants. These specific risks, and the Group's management of them, are detailed below.
Liquidity risk and debt facilities
Liquidity risk is the risk that SIG is unable to meet its financial obligations as they fall due.
In order to mitigate the risk of not being able to meet its financial obligations, SIG seeks a balance between certainty of funding and a flexible, cost-effective borrowing structure, using a mixture of sources of funding in order to prevent over-reliance on any single provider. The key sources of finance are private placement note investors, being mainly US-based pension funds, and principal bank debt.
The maturity profile of the Group's debt facilities at 31 December 2014 is as follows:
|Date of expiry|
|Bank debt||250.0||–||250.0||October 2019|
|Private placement loan notes||130.6||130.6||–||November 2016|
|Private placement loan notes||20.0||20.0||–||November 2018|
|Private placement loan notes||23.4||23.4||–||October 2020|
|Private placement loan notes||15.6||15.6||–||October 2021|
|Private placement loan notes||38.9||38.9||–||October 2023|
During the year the Group's £250m committed Revolving Credit Facility ("RCF") was refinanced. The new five year facility, which matures in October 2019, has been put in place with five banks. This facility was undrawn at 31 December 2014 and ensures SIG has sufficient funding headroom to support its medium-term strategic plans.
Interest rate risk
The Group's interest costs in respect of its borrowings will increase in the event of rising interest rates. To reduce this risk the Group monitors its mix of fixed and floating rate debt and enters into derivative financial instruments to manage this mix where appropriate. SIG has a policy of aiming to fix between 50% and 75% of its average net debt over the medium-term.
In order to manage its interest exposure within this policy, £40.0m of floating-to-fixed interest rate swaps were cancelled in February 2014 at a cash cost of £2.0m. The percentage of average net debt at fixed rates of interest at 31 December 2014 is 72% (2013: 98%) and on a gross debt basis is 64% (2013: 82%), which is within the Group's targeted medium-term range.
Foreign currency risk
SIG has a number of overseas businesses whose revenues and costs are denominated in the currencies of the countries in which the operations are located. 51% of SIG's 2014 continuing revenues (2013: 55%) were in foreign currencies, being primarily Euros and Polish Zloty. The vast majority of SIG's sales and purchases are not cross-border. When cross-border transactions occur, it is SIG's policy to eliminate currency exposure at that time through forward currency contracts, if the exposure is considered to be material.
SIG faces a translation risk in respect of the local currencies of its primary foreign operations, principally being Euro and Polish Zloty sales and profits. SIG does not hedge the income statement translational risk arising from these income streams. Every 1 cent Euro movement in the average exchange rate will have a c.£0.5m impact on the reported underlying PBT of the Group.
SIG also faces a translation risk from the US Dollar in respect of interest on its private placement borrowings. This risk has been eliminated through the use of cross currency swaps, which swap the US Dollar private placement debt into Sterling.
The Consolidated Balance Sheet of the Group is inherently at risk from movements in the Sterling value of its net investments in foreign businesses and the Sterling value of its foreign currency net debt.
For currencies where the Group has significant balance sheet translational risk, SIG seeks to mitigate this risk by holding financial liabilities and derivatives in the same currency to partially hedge the net investment values. The Group's policy for currencies where a material balance sheet translational exposure exists is that the Group will hold financial liabilities in that particular currency in proportion to the overall Group ratio of net debt to capital employed.
SIG had the following net borrowings/(cash) denominated in foreign currencies, held partially to hedge the assets of overseas businesses:
|% of net debt||38%||56%|
Euro net debt at 31 December 2014 represented 48% of Group net debt (2013: 65%).
Impact of Foreign Currency Movements in 2014
The overall impact of foreign exchange rate movements on the Group's Consolidated Income Statement and Consolidated Balance Sheet is disclosed in the Financial Review section of this Strategic Report.
The nature of the Group's operations creates an ongoing demand for fuel and therefore the Group is exposed to movements in market fuel prices. The Group enters into commodity derivative instruments to hedge such exposure where it makes commercial and economic sense to do so. There were no commodity instruments outstanding at 31 December 2014 (2013: nil).
In the first quarter of 2015 the Group entered into three commodity derivative financial instruments to hedge a portion of the UK, Polish and French commercial vehicle fuel requirements for 2015 and a portion of the UK requirements for 2016.
Counterparty credit risk
SIG holds significant investment assets, being principally cash deposits and derivative assets. Strict policies are in place in order to minimise counterparty credit risk associated with these assets.
A list of approved counterparties is maintained. Counterparty credit limits, based on published credit ratings and CDS spreads, are in place. These limits, and the position against these limits, are reviewed and reported on a monthly basis.
Sovereign credit ratings are also monitored, and country limits for investment assets are in place. If necessary, funds are repatriated to the UK.
Debt covenants at 31 December 2014
The Group's debt facilities in place at 31 December 2014 contained a number of covenants to which the Group must adhere. The Group's debt covenants are tested at 30 June and 31 December each year, with the key financial covenants being interest cover and leverage ratios.
The ratio for each of the debt covenants is set out below:
|Interest cover ratio*||>3.0x||8.7x||9.7x|
*Covenant interest cover is the ratio of the previous twelve months' underlying operating profit (including the trading losses and profits associated with divested businesses) over net financing costs (excluding pension scheme finance income and finance costs).
^Covenant leverage is the ratio of closing net debt (at average exchange rates) over EBITDA (defined as the underlying operating profit before depreciation, adjusted if applicable for the impact of acquisitions and disposals during the previous twelve months).
As can be seen in the table above the Group is in compliance with its financial covenants, and is forecast to maintain a comfortable headroom in the foreseeable future.
Going concern basis
In determining whether the Group's 2014 Annual Report and Accounts can be prepared on a going concern basis, the Directors considered all factors likely to affect the Group's future development, performance and financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities. These are set out in the Chairman's Statement and the Strategic Report and in the Notes to the Accounts.
The key factors considered by the Directors were as follows:
- the implications of the weak economic environment in Mainland Europe on demand for the products the Group sells;
- projections of working capital requirements;
- the impact of the competitive environment in which the Group's businesses operate;
- the availability and market prices of the goods that the Group sells;
- the credit risk associated with the Group's trade receivable balances;
- the potential actions that could be taken in the event that revenues are worse than expected, to ensure that operating profit and cash flows are protected; and
- the committed finance facilities available to the Group.
Having considered all the factors above impacting the Group's businesses, including downside sensitivities, the Directors are satisfied that the Group will be able to operate within the terms and conditions of the Group's financing facilities, and has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Group's 2014 Annual Report and Accounts.
Certain statements included in this Annual Report and Accounts contain forward-looking information concerning the Group's strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries and markets in which the Group operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Group's control or can be predicted by the Group. Although the Group believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect the business, financial performance or results of operations, please see the Principal Risks and Uncertainties Section included in this Annual Report and Accounts. No part of this document constitutes, or shall be taken to constitute, an invitation or inducement to invest in the Group or any other entity, and must not be relied upon in any way in connection with any investment decision. The Group undertakes no obligation to update any forward-looking statements.
Approval of the Strategic Report
The Strategic Report (including the Chairman's Statement) was approved by a duly authorised Committee of the Board of Directors on 11 March 2015 and signed on its behalf by Stuart Mitchell and Doug Robertson.
11 March 2015
Group Finance Director
11 March 2015