Tesco 2009 Annual Report Download - page 104

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102 FINANCIAL STATEMENTS
Tesco PLC Annual Report and Financial Statements 2009
Note 23 Financial risk factors
The main financial risks faced by the Group relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial
transactions, and the availability of funds to meet business needs. These risks are managed as described below. The Group Balance Sheet position at
28 February 2009 is representative of the position throughout the year, including the impact of acquisitions during the year.
Risk management is carried out by a central treasury department under policies approved by the Board of Directors. The Board provides written
principles for risk management, as described in the Business Review on pages 38 to 40.
Interest rate risk
Interest rate risk arises from long-term borrowings. Debt issued at variable rates exposes the Group to cash flow interest rate risk. Debt issued at fixed
rates exposes the Group to fair value risk. Our interest rate management policy is explained on page 40.
The Group has RPI debt where the principal is indexed to increases in the RPI index. RPI debt is treated as floating rate debt. The Group also has LPI
debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of 0%. LPI debt is treated as fixed rate debt.
For interest rate risk relating to Tesco Personal Finance Group Limited (TPF) please refer to the separate section on TPF financial risk factors.
During 2009 and 2008, net debt including TPF was managed using derivative instruments to hedge interest rate risk as follows:
2009 2008
Fixed Floating Total Fixed Floating Total
£m £m £m £m £m £m
Cash and cash equivalents – 3,509 3,509 – 1,788 1,788
Loans and advances to customers – TPF 3,388 – 3,388 – – –
Loans and advances to banks and other financial assets – TPF – 2,129 2,129 – – –
Short-term investments – 1,233 1,233 – 360 360
Other investments – TPF 259 – 259 – – –
Joint venture loan receivables – 262 262 – 173 173
Finance leases (84) (159) (243) (73) (188) (261)
Bank and other borrowings (11,540) (4,667) (16,207) (5,745) (2,045) (7,790)
Customer deposits – TPF – (4,538) (4,538) – – –
Deposits by banks – TPF – (24) (24) – – –
Future purchases of minority interests (200) – (200) (232) – (232)
Derivative effect:
Interest rate swaps (415) 415 – 752 (752) –
Cross currency swaps 4,524 (4,524) – 2,778 (2,778) –
Caps and collars 774 (774) – (876) 876 –
Total (3,294) (7,138) (10,432) (3,396) (2,566) (5,962)
Credit risk
Credit risk arises from cash and cash equivalents, trade and other receivables, customer deposits, financial instruments and deposits with banks and
financial institutions. The Group policy on credit risk is described on page 40.
The counterparty exposure under derivative contracts is £1,860m (2008 – £313m). The Group policy is to transact derivatives only with counterparties
rated at least A1 by Moody’s.
For credit risk relating to TPF please refer to the separate section on TPF financial risk factors.
Liquidity risk
Liquidity risk is managed by short-term and long-term cash flow forecasts. In addition, the Group has committed facility agreements for £2.7bn
(2008 – £1.6bn), which mature between 2010 and 2014.
The Group has a European Medium Term Note programme of £15bn, of which £11bn was in issue at 28 February 2009 (2008 – £4.9bn), plus a Euro
Commercial Paper programme of £2bn, of which £1.6bn was in issue at 28 February 2009 (2008 – £0.6bn), and a US Commercial Paper programme
of $4bn, none of which was in issue at 28 February 2009 (2008 – £nil).
For liquidity risk relating to TPF please refer to the separate section on TPF financial risk factors.
The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives.
The undiscounted cash flows will differ from both the carrying values and fair value. Floating rate interest is estimated using the prevailing rate at the
Balance Sheet date. Cash flows in foreign currencies are translated using spot rates at the Balance Sheet date. For index linked liabilities, inflation is
estimated at 3% for the life of the liability.
Notes to the Group financial statements continued