Notes to the Group financial statements

for the year ended 31 March 2008

3. Financial risk management

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s financial risk management focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group seeks to reduce its exposure to financial risks and uses derivative financial instruments to hedge certain risk exposures. The Group also ensures surplus funds are managed and controlled in a prudent manner which will protect capital sums invested and ensure adequate short-term liquidity, whilst maximising returns.

Prior to the demerger in October 2006, the Group transacted primarily in Sterling. The hedging and risk management strategies pursued for the years then ended reflected this. Policies adopted since demerger reflect the increased significance of the Group’s US Dollar operations.

Market risk

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk from future commercial transactions, recognised assets and liabilities and investments in, and loans between, entities with different functional currencies. The Group manages such risk, primarily within entities whose functional currencies are Sterling, by borrowing in the relevant foreign currencies and using forward foreign exchange contracts. The principal transaction exposures are to the US Dollar and the Euro.

The Group has investments in entities with other functional currencies, whose net assets are exposed to foreign exchange translation risk. In order to reduce the impact of currency fluctuations on the value of such entities, the Group has a policy of borrowing in US Dollars and Euros, as well as in Sterling and of entering into forward foreign exchange contracts in the relevant currencies.

At 31 March 2008, if the US Dollar had strengthened/weakened by 6% (2007: 8%) against Sterling, with all other variables held constant, profit for the financial year would have been US$1m (2007: n/a) higher/lower, and other components of equity would have been unchanged.

At 31 March 2008, if the Euro had strengthened/weakened by 3% (2007: 2%) against Sterling, with all other variables held constant, profit for the financial year would have been unchanged (2007: US$1m higher/lower), and other components of equity would have been unchanged.

Interest rate risk

The Group’s interest rate risk arises principally from its net debt and the portions thereof at variable rates which expose the Group to such risk.

The Group has a policy of normally maintaining between 30% and 70% of net debt at rates that are fixed for more than one year. The Group’s interest rate exposure is managed by the use of fixed and floating rate borrowings and by the use of interest rate swaps to adjust the balance of fixed and floating rate liabilities. The Group also mixes the duration of its borrowings to smooth the impact of interest rate fluctuations.

At 31 March 2008, if interest rates on US Dollar denominated net debt had been 1.4% (2007: 1.4%) higher/lower with all other variables held constant, profit for the financial year would have been US$8m (2007: US$12m) lower/higher, mainly as a result of higher/lower interest on deposits and floating rate borrowings.

At 31 March 2008, if interest rates on Sterling denominated net debt had been 0.4% (2007: 0.4%) higher/lower with all other variables held constant, profit for the financial year would have been US$8m (2007: US$8m) lower/higher, mainly as a result of higher/lower interest on deposits and floating rate borrowings.

At 31 March 2008, if interest rates on Brazilian Real denominated net debt had been 2.4% (2007: 1.2%) higher/lower, with all other variables held constant, profit for the financial year would have been US$1m (2007: n/a) lower/higher, mainly as a result of higher/lower interest on deposits and floating rate borrowings.

At 31 March 2008, if interest rates on Euro denominated net debt had been 0.7% (2007: 0.4%) higher/lower with all other variables held constant, profit for the financial year would have been US$3m (2007: US$1m) lower/higher, mainly as a result of higher/lower interest on deposits and floating rate borrowings.

Price risk

The Group is exposed to price risk in connection with investments classified on the balance sheet as available for sale financial assets. Such investments are primarily held to provide security in connection with unfunded pension obligations and are managed by independent fund managers who seek to mitigate such risk by diversification of the portfolio.

At 31 March 2008, if the relevant stock market and other indices had been 10% higher/lower with all other variables held constant, no further gains/losses would have been recognised in the Group statement of recognised income and expense.

Credit risk

In the case of derivative financial instruments, deposits and trade receivables, the Group is exposed to credit risk, which results from the non-performance of contractual agreements on the part of the contract party.

This credit risk is minimised by a policy under which the Group only enters into such contracts with banks and financial institutions with strong credit ratings, within limits set for each organisation. Dealing activity is closely controlled and counterparty positions are monitored regularly. The general credit risk on derivative financial instruments utilised by the Group is therefore not considered to be significant. No credit limits were exceeded during the year and the Group does not anticipate that any losses will arise from non-performance by these counterparties.

At the balance sheet date trade receivables with financial institutions accounted for some 41% (2007: 40%) of total trade receivables in the UK and some 38% (2007: 39%) of total trade receivables in the US. The remaining balances are distributed across multiple industries and geographies. The Group has implemented policies that require appropriate credit checks on potential customers before granting credit. The maximum credit risk of such financial assets is represented by the carrying value of the asset net of any applicable provision for impairment.

Liquidity risk

The Group maintains long-term committed facilities that are managed to ensure it has sufficient available funds for operations and planned expansions. The Group monitors rolling forecasts of the Group’s net debt including projected cash flows and the level of committed facilities necessary to meet these.

Details of the facilities available to the Group and their utilisation at the balance sheet date are given in note 24. Maturity analyses for financial liabilities are given in note 30.