Tesco 2014 Annual Report Download - page 28

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Financial risks review
The main financial risks faced by the Group relate to the availability of funds to meet business needs, fluctuations in interest and foreign
exchange rates and credit risks relating to the risk of default by parties to financial transactions. Further explanation of these risks is set out in
Note 22 on page 104 of the Annual Report and Financial Statements 2014. An overview of the management of these risks is set out below for
ease of reference and to support a further understanding of the principal treasury risks described in the table above. Details of the main financial
risks relating to Tesco Bank and the management of those risks can be found in Note 22 on page 107 of the Annual Report and Financial
Statements 2014.
Financial risks Key controls and mitigating factors
Funding and liquidity risk
The risk of being unable to continue to fund our
operations on an ongoing basis
• The Group finances its operations by a combination of retained profits,
disposals of property assets, debt capital market issues, commercial paper,
bank borrowings and leases
• New funding of £1.4 billion was raised during the year, including £0.8 billion
from long term debt and £0.6 billion from property disposals. At the year
end, net debt was £6.6 billion (2013: £6.6 billion)
• The policy is to smooth the debt maturity profile, to arrange funding
ahead of requirements and to maintain sufficient undrawn committed
bank facilities and a strong credit rating so that maturing debt may be
refinanced as it falls due. At the year end, the Group had a long-term
credit rating of BBB+ (negative) from Fitch, Baa1 (negative) from Moody’s
and BBB+ (stable) from Standard & Poor’s
Interest rate risk
The risk to our profit and loss account resulting from
rising interest rates
• Forward rate agreements, interest rate swaps, caps and floors may be used
to achieve the desired mix of fixed and floating rate debt
• Our policy is to fix interest rates for the year on a minimum of 40% of
actual and projected debt interest costs of the Group excluding Tesco
Bank. At the year end, the percentage of interest-bearing debt at fixed
rates was 84% (2013: 75%). The remaining balance of our debt is in
floating rate form. The average rate of interest paid on an historic cost basis
this year, excluding joint ventures and associates, was 4.5% (2013: 4.8%)
Foreign exchange risk
The risk that exchange rate volatility may have an
adverse impact on our balance sheet or profit and
loss account
• Transactional currency exposures that could significantly impact the Group
Income Statement are managed, typically using forward purchases or sales of
foreign currencies and purchased currency options. At the year end, forward
foreign currency transactions, designated as cash flow hedges, equivalent
to £2,862 million were outstanding (2013: £1,835 million) as detailed in
Note 21 on page 99 of the Annual Report and Financial Statements 2014.
We translate overseas profits at average foreign exchange rates
• We only hedge a proportion of the investment in our international
subsidiaries as well as ensuring that each subsidiary is appropriately hedged
in respect of its non-functional currency assets. During the year, currency
movements decreased the net value, after the effects of hedging, of the
Group’s overseas assets by £1,102 million (last year increase of £420 million)
Credit risk
The risk of loss arising from default by parties to
financial transactions
•The Group holds positions with an approved list of counter parties
of good credit quality and these counterparties and their credit
ratings are routinely monitored
Insurance risk
The risk of being inadequately protected from liabilities
arising from unforeseen events
• We purchased assets, earnings and combined liability protection from the
open insurance market for higher value losses only
•The risk not transferred to the insurance market is retained within the
business with some cover being provided by our captive insurance
companies, ELH Insurance Limited in Guernsey and Valiant Insurance
Company Limited in the Republic of Ireland. ELH Insurance Limited
covers Assets, Earnings and Combined Liability, while Valiant Insurance
Company Limited covers Combined Liability only
This Strategic report, which has been prepared in accordance with the requirements of the Companies Act 2006, has been approved and
signed on behalf of the Board
Jonathan Lloyd
Company Secretary
2 May 2014
Other information
Governance Financial statementsStrategic report
Tesco PLC Annual Report and Financial Statements 2014 25