Tesco 2014 Annual Report Download - page 107

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Note 22 Financial risk factors
The main financial risks faced by the Group relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial
transactions and the availability of funds to meet business needs. The management of these risks is set out below.
Risk management is carried out by a central treasury department under policies approved by the Board of Directors. The Board provides written principles for
risk management, as described in the Principal risks and uncertainties on pages 20 to 25.
Interest rate risk
Interest rate risk arises from long-term borrowings. Debt issued at variable rates as well as cash deposits and short-term investments exposes the Groupto cash
flow interest rate risk. Debt issued at fixed rates exposes the Group to fair value risk. The Group’s interest rate management policy is explained onpage 25.
The Group has Retail Price Index (‘RPI’) debt where the principal is indexed to increases in the RPI. RPI debt is treated as floating rate debt. The Group also
has Limited Price lnflation (‘LPI’) debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of0%. LPI debt is
treated as fixed rate debt.
For interest rate risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors on page 107.
During 2014 and 2013, net debt was managed using derivative instruments to hedge interest rate risk as follows:
2014 2013
Fixed
£m
Floating
£m
Total
£m
Fixed
£m
Floating
£m
Total
£m
Cash and cash equivalents –2,506 2,506 140 2,372 2, 512
Loans and advances to customers – Tesco Bank 3,440 3,475 6,915 2,739 2,820 5,559
Short-term investments –1,016 1,016 –522 522
Other investments 855 160 1,015 707 111 818
Joint venture and associate loan receivables (Note 28) 163 92 255 –459 459
Other receivables 1 – 1 –17 17
Finance leases (Note 34) (90) ( 31) (121) (104) (24) (128)
Bank and other borrowings (9,788) (1,304) (11,0 92) (9,569) (1,137) (10,706)
Customer deposits – Tesco Bank (2,707) (3,371) (6,078) (2,399) (3,601) (6,000)
Deposits by banks – Tesco Bank (780) –(780) (15) –(15)
Derivative effect:
Interest rate swaps (4,022) 4,022 –(1,156) 1,156 –
Cross currency swaps 2,418 (2,418) –2,436 (2,436) –
Index-linked swaps (553) 553 –(537) 537 –
Total (11,063) 4,700 (6,363) ( 7,758) 796 (6,962)
Credit risk
Credit risk arises from cash and cash equivalents, trade and other receivables, customer deposits, financial instruments and deposits with banks and
financial institutions. The Group policy on credit risk is described on page 25.
The net counterparty exposure under derivative contracts is £1.2bn (2013: £1.7bn). The Group considers its maximum credit risk to be £13.3bn
(2013: £11.9bn) being the Group’s total financial assets.
For credit risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors on page 107.
Liquidity risk
Liquidity risk is managed by short-term and long-term cash flow forecasts. In addition, the Group has committed facility agreements for £2.7bn (2013:
£2.8bn), which mature between 2015 and 2018.
The Group has a European Medium Term Note programme of £15.0bn, of which £7.0bn was in issue at 22 February 2014 (2013: £6.2bn), plus a Euro
Commercial Paper programme of £2.0bn, none of which was in issue at 22 February 2014 (2013: £0.1bn), and a US Commercial Paper programme of $4.0bn,
£nil of which was in issue at 22 February 2014 (2013: £0.1bn).
On 5 November 2013 the Group issued €1.0bn of long-term debt and on 27 January 2014 the Group repaid ¥31.5bn of long-term debt.
For liquidity risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors on page 107.
104 Tesco PLC Annual Report and Financial Statements 2014
Notes to the Group financial statements continued