Marks and Spencer 2009 Annual Report Download - page 106

Marks and Spencer Group plc Annual report and financial statements 2009 Financial statements
Notes to the financial statements
continued
102
21 Borrowings and other financial liabilities continued
Partnership liability to the Marks & Spencer UK Pension Scheme
Last year the partnership liability of £723.2m related to an amortising liability in respect of obligations of the Marks and Spencer Scottish
Limited Partnership to the Marks & Spencer UK Pension Scheme. During the year an interest charge of £38.0m was taken to the income
statement representing the unwinding of the discount included in this obligation at an implied average interest rate of 5.7% (last year 5.7%).
On 25 March 2009 the terms of the Scottish Limited Partnership agreement were amended to make the payment by the Scottish Limited
Partnership of annual distributions to the Pension Scheme discretionary at the instance of Marks and Spencer plc in relation to financial
years 2010/11 onwards. This discretion is exercisable if the Group does not pay a dividend or make any other form of return to its
shareholders. As a result, the distributions to the Pension Scheme in 2009 and 2010 remain as financial liabilities, while the remaining
financial instrument is now an equity instrument (see note 26).
The agreement includes a clause such that, following a default event (including the appointment of an administrator, liquidator, receiver or
similar officer in respect of Marks and Spencer plc or Marks and Spencer Group plc and the winding up or dissolution of Marks and Spencer
plc or Marks and Spencer Group plc) or on a relevant change of law, the net present value of the outstanding distributions becomes payable
to the Pension Scheme by the Scottish Limited Partnership at the option of the Pension Scheme. On the basis of the expected cash flows
associated with such an event, the related financial liability has been fair valued at nil.
22 Financial instruments
Treasury policy and financial risk management
The Group operates a centralised treasury function to manage the Group’s funding requirements and financial risks in line with the Board
approved treasury policies and procedures, and their delegated authorities.
The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as trade
debtors and trade creditors, that arise directly from its operations. The main purpose of these financial instruments is to finance the Group’s
operations.
Group treasury also enters into derivative transactions, principally interest rate and currency swaps and forward currency contracts.
The purpose of these transactions is to manage the interest rate and currency risks arising from the Group’s operations and financing.
It remains the Group’s policy not to hold or issue financial instruments for trading purposes, except where financial constraints
necessitate the need to liquidate any outstanding investments. The treasury function is managed as a cost centre and does not engage
in speculative trading.
The principal financial risks faced by the Group are liquidity/funding, interest rate, foreign currency and counterparty risks. The policies and
strategies for managing these risks are summarised as follows:
(a) Liquidity/funding risk
The risk that the Group could be unable to settle or meet its obligations as they fall due at a reasonable price.
– The Group’s funding strategy ensures 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 and committed syndicated
bank facilities.
At year end, the Group had a committed syndicated bank revolving credit facility of £1.2bn set to mature on 26 March 2013. This facility
contains only one financial covenant being the ratio of earnings before interest, tax, depreciation, amortisation and rents payable; to interest
plus rents payable. The covenant is measured semi-annually. In addition, the term out option under the £400m credit agreement which
expired on 13 February 2009 was converted into a committed facility for the same period, expiring on 11 February 2010. This facility has the
same financial covenant as the main £1.2bn facility. The Group also has a number of undrawn uncommitted facilities available to it. At year
end, these amounted to £105m (last year £155m), all of which are due to be reviewed within a year. At the balance sheet date a sterling
equivalent of £764m (last year £614m) was drawn under the committed facilities and £nil (last year a further £29m) was drawn under the
uncommitted facilities.
In addition to the existing borrowings, the Group has a euro medium-term note programme of £3bn, of which £1.4bn (last year £1.4bn) was
in issuance as at the balance sheet date.