Marks and Spencer 2007 Annual Report Download - page 84

Notes to the financial statements continued
23 FINANCIAL INSTRUMENTS continued
(a) Liquidity/funding risk
The Group’s funding strategy is to ensure a mix of funding sources offering flexibility and cost effectiveness to match the
requirements of the Group. Operating subsidiaries are financed by a combination of retained profits, bank borrowings, medium-term
notes, securitised loan notes and committed syndicated bank facilities. In addition to the existing borrowings, the Group has a Euro
Medium Term Note programme of £3bn, of which £1.2bn (last year £1.7bn) was in issuance as at the balance sheet date. Short-
term borrowings are backed by a £1.2bn five-year committed syndicated bank facility, of which £296.9m (last year £nil) was drawn
down at the balance sheet date.
(b) Interest rate risk
The Group is exposed to interest rate risk in relation to the sterling, euro and Hong Kong dollar variable rate financial assets and
liabilities. The Group’s policy is to use derivative contracts where necessary to maintain a mix of fixed and floating rate borrowings to
manage this risk. The structure and maturity of these derivatives correspond to the underlying borrowings and are accounted for as
fair value or cash flow hedges as appropriate.
At the balance sheet date fixed rate borrowings amounted to £1,374.5m (last year £1,137.7m) representing three public bond issues
and finance leases. Based on the financial liabilities and assets as at the balance sheet date a one percentage point movement in
average interest rates will have a £3.0m (last year £6.2m) impact on the Group’s net interest charge.
(c) Foreign currency risk
Transactional foreign currency exposures arise from both the export of goods from the UK to overseas subsidiaries, and from the
import of materials and goods directly sourced from overseas suppliers. Group Treasury hedge these exposures principally using
forward foreign exchange contracts progressively covering up to 100% out to 18 months.
As at the balance sheet date the gross notional value in sterling terms of forward foreign exchange sell or buy contracts amounted to
£456m (last year £270m) with a weighted average maturity date of six months (last year six months).
The Group does not use derivatives to hedge balance sheet and profit and loss translation exposures. However, the translation
exposures arising on the overseas net assets are hedged with foreign currency debt. As at the balance sheet date, €234m (last year
€nil) and HK$113m (last year HK$nil) currency debt was hedging overseas net assets.
The Group also hedges foreign currency intercompany loans where these exist. As at the balance sheet date, the gross notional
value of intercompany loan hedges was £128m (last year £109m).
(d) Counterparty risk
Counterparty risk exists where the Group can suffer financial loss through default or non-performance by financial institutions.
Exposures are managed through Group Treasury policy which limits the value that can be placed with each approved counterparty to
minimise the risk of loss. The counterparties are limited to the approved institutions with secure credit ratings. Limits are reviewed
regularly by senior management.
The maximum exposure to credit risk at the balance sheet date was as follows: trade receivables £68m (last year £42m), other
receivables £53m (last year £33m), cash and cash equivalents £180m (last year £363m) and derivatives £2m (last year £76m).
The Group does not have any material exposures to concentrations of credit risk with any one counterparty.
Derivative financial instruments 2007 2006
Assets Liabilities Assets Liabilities
£m £m £m £m
Current
Interest rate swaps – fair value hedges ––1.6 –
Cross currency – fair value hedges ––71.9 (5.3)
Forward foreign exchange contracts – cash flow hedges 1.4 (8.3) 1.2 (2.7)
Forward foreign exchange contracts – held for trading 1.0 – 1.7 –
2.4 (8.3) 76.4 (8.0)
Non-current
Interest rate swaps – cash flow hedges ––– (9.5)
Forward foreign exchange contracts – cash flow hedges – (0.2) ––
– (0.2) – (9.5)
During the year, the Group held a number of interest rate and currency swaps to redesignate both fixed and floating rate debt to the
Group’s desired interest rate profile. The attributes of these derivatives matched the characteristics of the underlying debt hedged.
Derivatives moving floating debt to fixed were designated as cash flow hedges, and derivatives moving fixed debt to floating were
designated as fair value hedges.
8822MARKS AND SPENCER GROUP PLC wwwwww..mmaarrkkssaannddssppeenncceerr..ccoomm//aannnnuuaallrreeppoorrtt22000077