Punch Taverns plc 2007 Annual Report and Financial Statements

20 Financial liabilities continued
Obligations under finance leases
The minimum lease payments under finance leases fall due as follows:
Minimum lease
payments
£m
18 August 2007 19 August 2006
Present value
of future
obligations
£m
Minimum lease
payments
£m
Present value
of future
obligations
£m
Within one year 4.1 3.7 7.4 6.5
Within one to five years 7.4 6.0 10.0 8.1
Over five years 50.7 11.4 56.2 12.2
62.2 21.1 73.6 26.8
Convertible bonds
The Group issued £275.0m 5.0% convertible bonds at a nominal value of £275.0m on 14 December 2005. The bonds mature 5 years
from the issue date and can be redeemed at that date for 107.21% (£294.8m) of their principal amount or can be converted, at the
option of the holder, into shares at an initial conversion price of £11.782. The conversion price is subject to adjustment following
capital distributions (whether by cash dividend, dividend in specie, scrip dividend, capitalisation issue or otherwise). The share price
at the date of pricing of the convertible bonds in the market was £8.60.
The fair values of the liability component and equity component were determined at issuance of the bonds. The fair value of the
liability component was calculated using a market rate for an equivalent non-convertible bond. The residual amount, representing
the value of the equity conversion component, is included in shareholders’ equity as a separate reserve (note 27).
The value of convertible bonds recognised in the balance sheet is calculated as follows:
£m
Face value of convertible bonds issued on 14 December 2005 275.0
Deferred issue costs paid (9.3)
Net proceeds 265.7
Equity component (30.0)
Liability component at 14 December 2005 235.7
Finance cost (note 5) 15.0
Cash interest paid (9.3)
Amortisation of deferred issue costs 1.1
Liability component at 19 August 2006 242.5
Finance cost (note 5) 22.7
Cash interest paid (13.7)
Amortisation of deferred issue costs 1.6
Liability component at 18 August 2007 253.1
Finance cost on the bonds is calculated using the effective interest method by applying the effective interest rate of 9.23% (August 2006: 9.23%).
21 Financial instruments
All derivative financial instruments are held on the balance sheet at fair value; the effective portion of changes in the fair value of
derivative financial instruments that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating
to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the
income statement in the periods when the hedged item will affect profit or loss. Changes in fair value of any derivative financial
instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
The Group’s principal financial instruments, other than derivative financial instruments, comprise borrowings, cash and liquid
resources. The main purpose of these financial instruments is to provide finance for the Group’s operations. The Group has various
other financial instruments such as trade receivables and trade payables, which arise directly from its operations.
The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. There is no currency exposure as all
material transactions and financial instruments are in sterling. The Group has no material exposure to equity securities or commodity price
risk and it is the Group’s policy that no speculative trading in financial instruments shall be undertaken. There are no significant concentrations
of credit risk within the Group. The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the
balance sheet date. The Board reviews and agrees policies for each of these risks and they are summarised below:
Interest rate risk
As the Group has no significant interest-bearing assets, other than cash and cash equivalents, the Group’s income and operating
cash flows are substantially independent of changes in market interest rates. Income and cash flows from cash and cash equivalents
fluctuates with interest rates.
Punch Taverns plc Annual Report and Financial Statements 2007 773