Tesco plc Annual Report and Financial Statements 2008

Joint venture governance and partnerships As we continue to enter
into new partnerships and joint ventures as well as developing existing
arrangements, there remains an inherent risk in managing these
partnerships and joint ventures. It is more difficult to guarantee the
achievement of joint goals that affect our partners and we rely on partners
to help achieve such goals. We may also be impacted by reputational issues
which affect our partners. We choose partners with good reputations
and set out joint goals and clear contractual arrangements from the
outset. We monitor performance and governance of our joint ventures
and partnerships.
Financial review
The main financial risks faced by the Group relate to the availability of
funds to meet business needs, the risk of default by counterparties to
financial transactions, and fluctuations in interest and foreign exchange
rates. These risks are managed as described below. The Group Balance
Sheet position at 23 February 2008 is representative of the position
throughout the year.
Funding and liquidity The Group finances its operations by a combination
of retained profits, long and medium-term debt, capital market issues,
commercial paper, bank borrowings and leases. The objective is to ensure
continuity of funding. The policy is to smooth the debt maturity profile, to
arrange funding ahead of requirements and to maintain sufficient undrawn
committed bank facilities, and a strong credit rating so that maturing debt
may be refinanced as it falls due.
The Group’s long-term credit rating remained stable during the year. Tesco
Group is rated A1 by Moody’s and A+ by Standard and Poor’s. New funding
of £3.0bn was arranged during the year, including a net £0.9bn from
property transactions, £1.1bn from an issue of US denominated senior
notes and £1.0bn from medium-term notes (MTNs). At the year end, net
debt was £6.2bn (last year £4.9bn).
Interest rate risk management The 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.
The policy is to fix or cap a minimum of 40% of actual and projected
debt interest costs. At the year end, £2.5bn of debt was in fixed rate
form (last year £2.3bn) with a further £0.9bn of debt capped or collared,
therefore 55% (2007 – 67%) 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 a historic cost basis excluding joint ventures and associates
this year was 4.5% (last year 4.8%).
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 £1,198m were
outstanding (2007 – £764m) as detailed in note 20. 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 £284m (last year increase of £77m).
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 high credit quality. The Group’s positions with these counterparties and
their credit ratings are routinely monitored.
Tesco Personal Finance (TPF) TPF lending is predominantly to
individuals through its credit card and unsecured personal loan products.
TPF has also developed a significant insurance business, with motor
insurance a major component. TPF risk is managed by observing and
adopting industry best practices and drawing upon the expertise and
systems of the Royal Bank of Scotland Group, including its subsidiary
Direct Line.
All policies pertaining to risk within TPF are subject to the governance
procedures of the Royal Bank of Scotland Group and ratified by the TPF
Board, which has representation from both Tesco and the Royal Bank of
Scotland Group. This has delivered a portfolio of products with strong asset
quality. This asset quality is maintained through proactive risk management,
both at the time of acquisition and ongoing account maintenance.
The Tesco Group would support its 50% share of any further funding TPF
might require to sustain liquidity ratios. However, we believe that provisions
for bad debts and insurance losses (supported by re-insurance of significant
risks) are at prudent levels.
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 Acts 1985
and 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 14 to 17 of this document.
Other information
Additional financial and non-financial information, including press
releases and year end presentations, can be accessed on our website
www.tesco.com/annualreport08 and also in our Corporate Responsibility
Review 2008.
Tesco PLC Annual Report and
Financial Statements 2008 17