Annual Report 2008 in PDF - GKN

Financing
The following section describes the way in which the Group
manages and controls its treasury function and ensures it
is financed in an appropriate and cost-effective manner.
Treasury management
All treasury activities are co-ordinated through a central
function (Group Treasury), the purpose of which is to
manage the financial risks of the Group and to secure
short and long term funding at the minimum cost to the
Group. It operates within a framework of clearly defined
Board-approved policies and procedures, including
permissible funding and hedging instruments, 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 financial
instruments or other derivatives other than to hedge
identified exposures of the Group. Speculative use of
such instruments or derivatives is not permitted.
Group Treasury prepares reports at least annually to the
Board, and on a monthly basis to the Finance Director and
other senior executives of the Group. In addition, liquidity,
interest rate, currency and other financial risk exposures are
monitored weekly. The overall indebtedness of the Group is
reported on a weekly basis to the Chief Executive and the
Finance Director. The Group Treasury function is subject to
an annual internal and external review of controls.
Funding and liquidity
The Group funds its operations through a mixture of
retained earnings and borrowing facilities, including bank
and capital markets borrowings and leasing. The relative
proportions of equity and borrowings are governed by
specific Board-approved parameters. These are designed
to preserve prudent financial ratios, including interest,
dividend and cash flow cover, whilst also minimising the
overall weighted average cost of capital to the Group.
The Group’s borrowing facilities are arranged by Group
Treasury and the funds raised are then lent to operating
subsidiaries on commercial arm’s length terms. In some
cases, operating subsidiaries have external borrowings,
but these are supervised and controlled centrally. The
Group’s objective is to maintain a balance between
continuity of funding and flexibility through borrowing
at a range of maturities. Wherever practicable, pooling,
netting or concentration techniques are employed to
minimise gross debt of the Group.
At 31 December 2008 the Group had committed revolving
credit facilities of £445 million (utilising 12 different
banks) of which £43 million was utilised. In addition, £45
million of uncommitted bank lines and overdraft were
available of which £20 million was drawn. On 5 January
2009 on completion of the acquisition of the Airbus UK
wing component and sub-assembly facility at Filton, £180
million of additional committed revolving credit facilities
with a five year maturity became available.
Capital market borrowings of £675 million include
unsecured issues of £325 million 7% bonds maturing
in May 2012 and £350 million 6.75% bonds maturing in
October 2019.
In total, the Group’s revolving credit facilities have
maturities ranging from 2010 to 2013. The weighted
average maturity profile of the Group’s committed
borrowing facilities was 5 years. This leaves the Group well
placed in the short term to withstand sudden changes in
liquidity in the financial markets, although the tightening
of available credit means that it may be more difficult
and more expensive to refinance the Group’s borrowing
facilities as they mature.
All of the Group’s committed revolving credit facilities
have a single financial covenant requiring EBITDA of
subsidiaries to be at least 3.5 times net interest payable.
EBITDA of subsidiaries is before restructuring and
impairment charges, amortisation of non-operating
intangible assets and other non-cash charges arising
on business combinations, profit and losses on sale
or closure of businesses and the change in the value
of derivative and other financial instruments. Net
interest payable excludes the finance element of postemployment
costs. For the 12 months to 31 December
2008 this ratio stood at 8.0 times.
Financial resources and going concern
At 31 December 2008 the Group had net borrowings of
£708 million. In addition, it had available, but undrawn,
committed borrowing facilities totalling £402 million. As
referred to above, new revolving credit facilities totalling
£180 million became available to the Group in January on
completion of the Filton acquisition. Of the Group’s total
committed borrowing facilities, £350 million is due to
expire in July 2010.
The Directors have assessed the future funding
requirements of the Group and the Company and
compared them to the level of committed available
borrowing facilities. The assessment included a review
of both divisional and Group financial forecasts, financial
instruments and hedging arrangements for the 15
months from the balance sheet date. Recognising that
a number of industries and especially the automotive
sector continue to be affected by the sharp global decline
in demand, the Directors considered a range of potential
scenarios within the key markets the Group serves and
how these might impact on the Group’s cash flow, facility
headroom and banking covenants. The Directors also
considered what mitigating actions the Group could take
to limit any adverse consequences.
Having undertaken this work, the Directors are of
the opinion that the Group has adequate committed
resources to fund its operations for the foreseeable future
and so determine that it is appropriate for the financial
statements to be prepared on a going concern basis.
Risks and uncertainties
Set out below are those risks which could have a material
impact on the Group’s future performance and cause
financial 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
existing risks and created new ones. The Group has an
extensive risk management structure in 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 in the
corporate governance report on pages 57 and 58.
Financial risk
The Group is exposed to a variety of market related risks,
including refinancing risks and the effects of changes in
foreign currency exchange rates and interest rates. In the
normal course of business, the Group also faces risks that
are either non-financial or non-quantifiable, including
country and credit risk.
Business Review
Financing and Risk
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