36 Bus<strong>in</strong>ess Review F<strong>in</strong>anc<strong>in</strong>g and Risk This section describes the treasury, fund<strong>in</strong>g and liquidity management activities undertaken by <strong>GKN</strong>. It also summarises the f<strong>in</strong>ancial and non-f<strong>in</strong>ancial risks which <strong>GKN</strong> faces <strong>in</strong> its global operations. <strong>GKN</strong> plc <strong>Annual</strong> <strong>Report</strong> <strong>2008</strong>
F<strong>in</strong>anc<strong>in</strong>g The follow<strong>in</strong>g section describes the way <strong>in</strong> which the Group manages and controls its treasury function and ensures it is f<strong>in</strong>anced <strong>in</strong> an appropriate and cost-effective manner. Treasury management All treasury activities are co-ord<strong>in</strong>ated through a central function (Group Treasury), the purpose of which is to manage the f<strong>in</strong>ancial risks of the Group and to secure short and long term fund<strong>in</strong>g at the m<strong>in</strong>imum cost to the Group. It operates with<strong>in</strong> a framework of clearly def<strong>in</strong>ed Board-approved policies and procedures, <strong>in</strong>clud<strong>in</strong>g permissible fund<strong>in</strong>g and hedg<strong>in</strong>g <strong>in</strong>struments, exposure limits and a system of authorities for the approval and execution of transactions. It operates on a cost centre basis and is not permitted to make use of f<strong>in</strong>ancial <strong>in</strong>struments or other derivatives other than to hedge identified exposures of the Group. Speculative use of such <strong>in</strong>struments or derivatives is not permitted. Group Treasury prepares reports at least annually to the Board, and on a monthly basis to the F<strong>in</strong>ance Director and other senior executives of the Group. In addition, liquidity, <strong>in</strong>terest rate, currency and other f<strong>in</strong>ancial risk exposures are monitored weekly. The overall <strong>in</strong>debtedness of the Group is reported on a weekly basis to the Chief Executive and the F<strong>in</strong>ance Director. The Group Treasury function is subject to an annual <strong>in</strong>ternal and external review of controls. Fund<strong>in</strong>g and liquidity The Group funds its operations through a mixture of reta<strong>in</strong>ed earn<strong>in</strong>gs and borrow<strong>in</strong>g facilities, <strong>in</strong>clud<strong>in</strong>g bank and capital markets borrow<strong>in</strong>gs and leas<strong>in</strong>g. The relative proportions of equity and borrow<strong>in</strong>gs are governed by specific Board-approved parameters. These are designed to preserve prudent f<strong>in</strong>ancial ratios, <strong>in</strong>clud<strong>in</strong>g <strong>in</strong>terest, dividend and cash flow cover, whilst also m<strong>in</strong>imis<strong>in</strong>g the overall weighted average cost of capital to the Group. The Group’s borrow<strong>in</strong>g facilities are arranged by Group Treasury and the funds raised are then lent to operat<strong>in</strong>g subsidiaries on commercial arm’s length terms. In some cases, operat<strong>in</strong>g subsidiaries have external borrow<strong>in</strong>gs, but these are supervised and controlled centrally. The Group’s objective is to ma<strong>in</strong>ta<strong>in</strong> a balance between cont<strong>in</strong>uity of fund<strong>in</strong>g and flexibility through borrow<strong>in</strong>g at a range of maturities. Wherever practicable, pool<strong>in</strong>g, nett<strong>in</strong>g or concentration techniques are employed to m<strong>in</strong>imise gross debt of the Group. At 31 December <strong>2008</strong> the Group had committed revolv<strong>in</strong>g credit facilities of £445 million (utilis<strong>in</strong>g 12 different banks) of which £43 million was utilised. In addition, £45 million of uncommitted bank l<strong>in</strong>es and overdraft were available of which £20 million was drawn. On 5 January 2009 on completion of the acquisition of the Airbus UK w<strong>in</strong>g component and sub-assembly facility at Filton, £180 million of additional committed revolv<strong>in</strong>g credit facilities with a five year maturity became available. Capital market borrow<strong>in</strong>gs of £675 million <strong>in</strong>clude unsecured issues of £325 million 7% bonds matur<strong>in</strong>g <strong>in</strong> May 2012 and £350 million 6.75% bonds matur<strong>in</strong>g <strong>in</strong> October 2019. In total, the Group’s revolv<strong>in</strong>g credit facilities have maturities rang<strong>in</strong>g from 2010 to 2013. The weighted average maturity profile of the Group’s committed borrow<strong>in</strong>g facilities was 5 years. This leaves the Group well placed <strong>in</strong> the short term to withstand sudden changes <strong>in</strong> liquidity <strong>in</strong> the f<strong>in</strong>ancial markets, although the tighten<strong>in</strong>g of available credit means that it may be more difficult and more expensive to ref<strong>in</strong>ance the Group’s borrow<strong>in</strong>g facilities as they mature. All of the Group’s committed revolv<strong>in</strong>g credit facilities have a s<strong>in</strong>gle f<strong>in</strong>ancial covenant requir<strong>in</strong>g EBITDA of subsidiaries to be at least 3.5 times net <strong>in</strong>terest payable. EBITDA of subsidiaries is before restructur<strong>in</strong>g and impairment charges, amortisation of non-operat<strong>in</strong>g <strong>in</strong>tangible assets and other non-cash charges aris<strong>in</strong>g on bus<strong>in</strong>ess comb<strong>in</strong>ations, profit and losses on sale or closure of bus<strong>in</strong>esses and the change <strong>in</strong> the value of derivative and other f<strong>in</strong>ancial <strong>in</strong>struments. Net <strong>in</strong>terest payable excludes the f<strong>in</strong>ance element of postemployment costs. For the 12 months to 31 December <strong>2008</strong> this ratio stood at 8.0 times. F<strong>in</strong>ancial resources and go<strong>in</strong>g concern At 31 December <strong>2008</strong> the Group had net borrow<strong>in</strong>gs of £708 million. In addition, it had available, but undrawn, committed borrow<strong>in</strong>g facilities totall<strong>in</strong>g £402 million. As referred to above, new revolv<strong>in</strong>g credit facilities totall<strong>in</strong>g £180 million became available to the Group <strong>in</strong> January on completion of the Filton acquisition. Of the Group’s total committed borrow<strong>in</strong>g facilities, £350 million is due to expire <strong>in</strong> July 2010. The Directors have assessed the future fund<strong>in</strong>g requirements of the Group and the Company and compared them to the level of committed available borrow<strong>in</strong>g facilities. The assessment <strong>in</strong>cluded a review of both divisional and Group f<strong>in</strong>ancial forecasts, f<strong>in</strong>ancial <strong>in</strong>struments and hedg<strong>in</strong>g arrangements for the 15 months from the balance sheet date. Recognis<strong>in</strong>g that a number of <strong>in</strong>dustries and especially the automotive sector cont<strong>in</strong>ue to be affected by the sharp global decl<strong>in</strong>e <strong>in</strong> demand, the Directors considered a range of potential scenarios with<strong>in</strong> the key markets the Group serves and how these might impact on the Group’s cash flow, facility headroom and bank<strong>in</strong>g covenants. The Directors also considered what mitigat<strong>in</strong>g actions the Group could take to limit any adverse consequences. Hav<strong>in</strong>g undertaken this work, the Directors are of the op<strong>in</strong>ion that the Group has adequate committed resources to fund its operations for the foreseeable future and so determ<strong>in</strong>e that it is appropriate for the f<strong>in</strong>ancial statements to be prepared on a go<strong>in</strong>g concern basis. Risks and uncerta<strong>in</strong>ties Set out below are those risks which could have a material impact on the Group’s future performance and cause f<strong>in</strong>ancial results to differ materially from expected and historical performance. Additional risks not currently known or which are currently regarded as immaterial could also adversely affect future performance. The current global economic recession has magnified exist<strong>in</strong>g risks and created new ones. The Group has an extensive risk management structure <strong>in</strong> place designed to identify and assess the likelihood and consequences of these risks and to manage the actions necessary to mitigate their impact. A detailed description of the Group’s procedures to manage risk is given <strong>in</strong> the corporate governance report on pages 57 and 58. F<strong>in</strong>ancial risk The Group is exposed to a variety of market related risks, <strong>in</strong>clud<strong>in</strong>g ref<strong>in</strong>anc<strong>in</strong>g risks and the effects of changes <strong>in</strong> foreign currency exchange rates and <strong>in</strong>terest rates. In the normal course of bus<strong>in</strong>ess, the Group also faces risks that are either non-f<strong>in</strong>ancial or non-quantifiable, <strong>in</strong>clud<strong>in</strong>g country and credit risk. Bus<strong>in</strong>ess Review F<strong>in</strong>anc<strong>in</strong>g and Risk www.gkn.com 37
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