Notes to the Group financial statements

for the year ended 31 March 2009

3. Financial risk management

Financial risk factors

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.

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, undertakings with different functional currencies. The Group manages such risk, primarily within undertakings 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.

In view of the profile of foreign exchange transaction exposures and an assessment of reasonable possible changes in the principal exposures, the Group’s sensitivity to foreign exchange risk can be quantified as follows:

At 31 March 2009, if the US dollar had strengthened/weakened by 9% (2008: 6%) against sterling, with all other variables held constant, profit for the financial year would have been unchanged (2008: US$1m higher/lower), and other components of equity would have been unchanged.
At 31 March 2009, if the euro had strengthened/weakened by 8% (2008: 3%) against sterling, with all other variables held constant, profit for the financial year would have been US$2m (2008: US$1m) higher/lower, and other components of equity would have been unchanged.

The Group has investments in undertakings 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. The above sensitivity analysis excludes the impact of foreign exchange risk on the translation of the net assets of such undertakings.

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.

In view of the profile of net debt and an assessment of reasonable possible changes in the principal interest rates, the Group’s sensitivity to interest rate risk as at 31 March 2009 can be quantified as follows:

If interest rates on US dollar denominated net debt had been 1.6% (2008: 1.4%) higher with all other variables held constant, profit for the financial year would have been US$4m (2008: US$1m) higher, mainly as a result of higher interest income on interest rate swaps, offset by higher expense on floating rate borrowings.
If interest rates on sterling denominated net debt had been 1.0% (2008: 0.4%) higher with all other variables held constant, profit for the financial year would have been US$4m higher (2008: US$8m lower), mainly as a result of higher interest income on interest rate swaps.
If interest rates on Brazilian real denominated net debt had been 2.9% (2008: 2.4%) higher with all other variables held constant, profit for the financial year would have been US$1m (2008: US$1m) higher mainly as a result of higher interest income on deposits.
If interest rates on euro denominated net debt had been 1.0% (2008: 0.7%) higher with all other variables held constant, profit for the financial year would have been US$2m (2008: US$3m) higher, mainly as a result of higher interest income on interest rate swaps.

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 2009, 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 37% (2008: 41%) of total trade receivables in the UK and some 33% (2008: 38%) of total trade receivables in the USA. 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 in respect of such financial assets is the carrying value of the assets.

Liquidity risk

The Group maintains long-term committed facilities to ensure it has sufficient available funds for operations and planned expansions. The Group monitors rolling forecasts of projected cash flows to ensure that it will have adequate undrawn committed facilities available.

Details of the facilities available to the Group and their utilisation at the balance sheet date are given in note 22. Maturity analyses for financial liabilities are given in note 26(d).

Capital risk management

The Group’s objectives in managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure and cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce net debt. As part of its internal reporting processes the Group monitors capital employed by geographical segment. For this purpose, capital employed excludes net debt and tax balances and at 31 March 2009 the Group’s capital employed was US$4,205m (2008: US$5,054m). The Group manages its working capital in order to meet its target for the conversion of EBIT into operating cash flow and the conversion percentage for the year ended 31 March 2009 was 99% (2008: 95%).