Tesco 2015 Annual Report Download - page 27

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 120 of the Annual Report and Financial Statements 2015. An overview of the management of these risks is set out
below. Details of the main financial risks relating to Tesco Bank and the management of those risks can be found in Note 22 on page 123
of the Annual Report and Financial Statements 2015.
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 assets, debt capital
market issues, commercial paper, bank borrowings and leases
• New funding of £2.3 billion was raised during the year, including £2.1 billion from long term debt
and £0.2 billion from property disposals. At the year end, net debt was £8.5 billion (2014: £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 to maintain access to capital markets
so that maturing debt may be refinanced as it falls due
• Tesco has put in place £5 billion of committed facilities consisting of a revolving credit facility and bilateral
lines as alternate sources of liquidity
• At the year end, the Group had a long-term credit rating of BBB- (negative) from Fitch, Ba1 (stable)
from Moody’s and BB+ (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 79% (2014: 84%). 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 4.09%
(2014: 4.5%)
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
£2.2 billion were outstanding (2014: £2.9 billion) as detailed in Note 21 on page 116 of the Annual Report
and Financial Statements 2015. 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 increased the net value, after the effects of hedging, of the Group’s overseas assets
by £5 million (last year decrease of £1,102 million)
Counterparty risk
The risk of loss arising from default by parties
to financial transactions
• The Group holds positions with an approved list of highly rated counterparties
• Tesco monitors the exposure, credit rating, outlook and credit default swap levels of these counterparties
on a regular basis
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.
Paul Moore
Company Secretary
5 May 2015
25Tesco PLC Annual Report and Financial Statements 2015
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