GSK Annual Report 2002

Funding, maturity and counterparty risk
The Group invests centrally managed liquid assets primarily in
Government bonds and short-term corporate debt instruments
with a minimum short-term credit rating of A-1/P-1 from Standard
and Poor’s and Moody’s Investors’ Services respectively. The Group
manages its net borrowing requirement through a portfolio of
long and medium-term borrowings, including bonds, together
with short-term finance under the US dollar commercial paper
programme. In 2002, a £500 million, 4.875 per cent coupon bond
and two US dollar denominated, floating rate bonds totalling
$495 million were issued under the European Medium Term Note
programme. The Group also raised $500 million floating rate debt
through a private financing arrangement.
The Group’s medium-term borrowings mature at dates between
2004 and 2008, the private financing matures in 2032, and the
long-dated sterling bond matures in 2033. The private financing
may be redeemed by GlaxoSmithKline at any time and, in
particular, in the event of any accelerating event that would
increase the cost of funding for the Group. The Group also has
outstanding $500 million of Flexible Auction Market Preferred
Stock (Flex AMPS) and $400 million of Auction Rate Preference
Stock (ARPS), originally issued in 1996. $250 million of the Flex
AMPS may be redeemed by GlaxoSmithKline at any time after
July 2003. The remainder of the Flex AMPS and the ARPS may
be redeemed by GlaxoSmithKline at any time.
GlaxoSmithKline’s long-term debt rating is AA from Standard and
Poor’s and Aa2 from Moody’s Investors’ Services. The agencies’
short-term rating for paper issued under the Group’s commercial
paper programme is A-1+ and P-1 respectively.
Foreign exchange risk management
In GlaxoSmithKline, foreign currency transaction exposure arising
on normal trade flows both in respect of external and intra-Group
trade is not hedged. GlaxoSmithKline’s policy is to minimise the
exposure of overseas operating subsidiaries to transaction risk
by matching local currency income with local currency costs.
For this purpose, intra-Group trading transactions are matched
centrally and intra-Group payment terms are managed to reduce
risk. Exceptional foreign currency cash flows are hedged selectively
under the management of Corporate Treasury.
A significant proportion of Group borrowings, including the
commercial paper programme, is in US dollars, to benefit from
the liquidity of US dollar denominated capital markets. Certain of
these and other borrowings are swapped into other currencies as
required for Group purposes. The Group seeks to denominate
borrowings in the currencies of its principal overseas assets.
Borrowings denominated in, or swapped into, foreign currencies
which match investments in overseas Group assets are treated as a
hedge against the relevant net assets.
Based on the composition of net debt at 31st December 2002 a
10 per cent appreciation in sterling against major currencies would
result in a reduction in the Group’s net debt of approximately
£145 million. A 10 per cent weakening in sterling against major
currencies would result in an increase in the Group’s net debt of
approximately £177 million.
Interest rate risk management
GlaxoSmithKline’s policy on interest rate risk management requires
that the amount of net borrowings at fixed rates increases with
the ratio of forecast net interest payable to trading profit.
Operating and financial review and prospects GlaxoSmithKline 63
The Group uses a limited number of interest rate swaps to
redenominate external borrowings into the interest rate coupon
required for Group purposes. The duration of these swaps matches
the duration of the principal instruments. All interest rate derivative
instruments are accounted for as hedges of the relevant assets or
liabilities.
The Group manages centrally the short-term cash surpluses or
borrowing requirements of subsidiary companies and uses forward
contracts to hedge future repayments back into originating
currency.
Sensitivity analysis considers the sensitivity of the Group’s net debt
to hypothetical changes in market rates and assumes that all other
variables remain constant. Based on the composition of net debt at
31st December 2002 a one percentage point (100 basis points)
increase or decrease in average interest rates would result in a
negligible change in the Group’s annual interest expense.
Equity risk management
Equity investments classified as current assets are available for sale
and the Group manages disposals to meet overall business
requirements as they arise. The Group regularly monitors the value
of its equity investments and only enters into hedges selectively
with the approval of the Board.
Financial assets and liabilities
An analysis of net debt is given in Note 25 to the Financial
statements, ‘Net debt’. An analysis of financial assets and liabilities
at carrying value and fair value and a reconciliation to net debt are
given in Note 32 to the Financial statements, ‘Financial instruments
and related disclosures’, together with a discussion of derivative
financial instruments and quantitative disclosures about market risk in
accordance with the requirements of Financial Reporting Standard 13.
The Group continues to benefit from strong positive cash flow.
Group net debt would have decreased significantly in the year to
31st December 2002, except for the Group’s purchase of its own
shares in the market of £2,220 million.
The financial assets and liabilities at 31st December 2002 are
representative of the treasury policies and strategies of
GlaxoSmithKline, applied consistently during the year. There were
no significant changes in such policies throughout the year.
ESOT share purchases and shares purchased for cancellation
In 2002 the ESOTs did not make any market purchases of shares in
GlaxoSmithKline plc (2001 – £795 million). The shares are held by
the Trusts to satisfy future exercises of options and awards under
the Group share option and award schemes. A proportion of the
shares held by the Trusts are in respect of options where the rules
of the scheme require the company to satisfy exercises through
market purchases rather than the issue of new shares.
The shares held by the Trusts are matched to options granted and
diminish the dilutive effect of new share issues on shareholders'
capital and earnings.
At the 2002 Annual General Meeting, shareholders renewed
approval for GlaxoSmithKline to make market purchases of its own
shares. In September 2002, the £4 billion share repurchase
programme announced in October 2001 was completed. On
23rd October 2002, GlaxoSmithKline announced a further share
repurchase programme of £4 billion. The exact amount and timing
of future purchases will depend on market conditions and other
factors. In 2002, GlaxoSmithKline purchased 155.7 million shares
for cancellation, at a total cost of £2,220 million.