Tesco plc Annual Report and Financial Statements 2012

OVERVIEW
Financial risks review
STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS
Board of Directors Principal risks and uncertainties General information Corporate governance
Directors’ remuneration report
The main financial risks faced by the Group relate to the availability
of funds to meet business needs, fluctuations in interest and foreign
exchange rates and credit risks relating to the risk of default by
counterparties to financial transactions. The management of these
risks is set out below. Details of the main financial risks relating to
Tesco Bank and the management of those risks can be found in the
principal risks and uncertainties table above and in Note 22 to the
financial statements on page 126.
Funding and liquidity The Group finances its operations by a
combination of retained profits, disposals of property assets, longand
medium-term debt capital market issues, short-term 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. Tesco Group has a long-term
rating of A- (stable) from Fitch, Baa1 (stable) from Moody’s and A-
(stable) from Standard & Poor’s. New funding of £2.5 billion was
arranged during the year, including a net £1.1 billion from property
disposals and £1.4 billion from long-term debt. At the year end, net
debt was £6.8 billion (2011: £6.8 billion).
Interest rate risk management Our objective is to limit our profit
and loss downside from rising interest rates. Forward rate agreements,
interest rate swaps, caps and floors are used to achieve the desired
mix of fixed and floating rate debt.
Our policy is to fix interest rates for the year on a minimum of 40% of
actual and projected debt interest costs of the Group excluding Tesco
Bank. At the year end the percentage of interest bearing debt at fixed
rates was 90% (2011: 71%). 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 4.8%
(2011: 5.4%).
Foreign currency risk management Our principal objective is
to reduce the effect of exchange rate volatility on operating margins.
Transactional currency exposures that could significantly impact
the Group Income Statement are managed, typically using forward
purchases or sales of foreign currencies and purchased currency
options. At the year end, forward foreign currency transactions,
designated as cash flow hedges, equivalent to £1,944 million were
outstanding (2011: £1,615 million) as detailed in Note 21. We translate
overseas profits at average foreign exchange rates which we do not
currently further manage.
We only hedge a proportion of the investment in our international
subsidiaries as well as ensuring that each subsidiary is appropriately
hedged in respect of its non-functional currency assets. During the
year, currency movements decreased the net value, after the effects
of hedging, of the Group’s overseas assets by £22 million (last year
decrease of £344 million).
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.
Insurance We purchased assets, earnings and combined liability
protection from the open insurance market for higher value losses
only. The risk not transferred to the insurance market is retained within
the business with some cover being provided by our captive insurance
companies, ELH Insurance Limited in Guernsey and Valiant Insurance
Company Limited in the Republic of Ireland. ELH Insurance Limited
covers Assets, Earnings and Combined Liability, while Valiant Insurance
Company Limited covers Combined Liability only.
Statement of compliance
The Business Review contained within this document has been
prepared in accordance with the requirements for a business review
under the Companies Act 2006. The intent is to provide information
to shareholders and this document should not be relied on by any
other party or for any other purpose.
Cautionary statement regarding forward-looking
information
Where this document 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 ‘Principal risks and uncertainties’ on pages 40 to 47 of this
Annual Report.
Tesco PLC Annual Report and Financial Statements 2012 47