Tesco 2010 Annual Report Download - page 46

44 Tesco PLC Annual Report and Financial Statements 2010
Risks and uncertainties continued
Interest rate risk management Our objective is to limit our exposure to
increases in interest rates while retaining the opportunity to benefit from
interest rate reductions. Forward rate agreements, interest rate swaps,
caps and collars are used to achieve the desired mix of fixed and floating
rate debt.
Our policy is to fix or cap a minimum of 40% of actual and projected debt
interest costs of the Group excluding Tesco Bank. At the year end, £5.6bn
of debt was in fixed rate form (2009 – £6.3bn) with a further £0.1bn of
debt capped or collared, therefore 72% (2009 – 72%) of net debt is fixed,
capped or collared. 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 5.4% (2009 – 5.2%).
Foreign currency risk management Our principal objective is to reduce
the effect of exchange rate volatility on short-term profits. Transactional
currency exposures that could significantly impact the Group Income
Statement are hedged, typically using forward purchases or sales of
foreign currencies and currency options. At the year end, forward foreign
currency transactions, designated as cash flow hedges, equivalent to
£1.083bn were outstanding (2009 – £2.11bn) as detailed in note 22. We
hedge the majority of our investments in our international subsidiaries via
foreign exchange transactions in matching currencies. Our objective is to
maintain a low cost of borrowing and hedge against material movements
in our Group Balance Sheet value. During the year, currency movements
increased the net value of the Group’s overseas assets by £477m (last year
increase of £480m). We translate overseas profits at average foreign
exchange rates which we do not currently seek to hedge.
Credit risk The objective is to reduce the risk of loss arising from
default by parties to financial transactions across an approved list
of counterparties of good credit quality. The Group’s positions with
these counterparties and their credit ratings are routinely monitored.
Credit risk arising from Tesco Bank’s unsecured lending is managed using
all the normal credit assessment and collections and recoveries systems.
In terms of liquidity risk Tesco Bank has implemented a conservative
approach to the minimum amount of liquid assets its holds and to its
Net Stable Funding Ratio.
Insurance We purchased Assets, Earnings and Combined Liability
protection from the open insurance market at ‘catastrophe’ level only.
The risk not transferred to the insurance market is retained within the
business by using our captive insurance companies, Tesco Insurance
Limited in Guernsey and Valiant Insurance Company Limited in the
Republic of Ireland. Tesco Insurance Limited covers Assets and Earnings,
while Valiant Insurance Company Limited covers Combined Liability.
Statement of compliance
This Business Review has been prepared in accordance with the requirements
for a business review under the Companies Act 2006. The Business Review’s
intent is to provide information to shareholders and should not be relied
on by any other party or for any other purpose.
Cautionary statement regarding forward-looking information
Where this review contains forward-looking statements, these are made
by the Directors in good faith based on the information available to them
at the time of their approval of this report. These statements should be
treated with caution due to the inherent risks and uncertainties underlying
any such forward-looking information.
The Group cautions investors that a number of important factors, including
those in this document, could cause actual results to differ materially from
those contained in any forward-looking statement. Such factors include,
but are not limited to, those discussed under ‘Risks and uncertainties’ on
pages 41 to 44 of this document.