Guinness Peat Group plc

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GUINNESS PEAT GROUP PLC • ANNUAL REPORT 5338. Derivatives and Other Financial Instruments - continuedEquity swaps and equity options are purchased from time to time as part of the Group’s investment portfolio. These derivativesdo not form a significant proportion of the portfolio, and are subject to the same rigorous research procedures as other equityinvestments.FOREIGN CURRENCY RISKThe income and capital value of the Group’s financial instruments can be affected by exchange rate movements as a significantportion of its financial assets (principally cash and investments) and financial liabilities are denominated in currencies other thanSterling, which is the Group’s reporting currency. The accounting impact of these exposures will vary according to whether ornot the Group company holding such financial assets and liabilities reports in the currency in which they are denominated.The Board recognises that the Group’s Sterling balance sheet will be affected by short term movements in exchange rates,particularly the value of the Australian, New Zealand and United States dollars. The Board takes the view that the majorcurrencies in which the Group is invested move within a relatively stable range and that currency fluctuations should even outover the long term. The Group’s policy is to hold over time a broad balance of cash and investments in Sterling and Australiandollars, being the two currencies in which it mainly invests.At certain times, the Board will make limited use of forward foreign currency contracts and swaps to maintain the Group’srelative exposure to the Australian dollar. These contracts tend to have a maturity of less than three months. Otherwise, thedistribution of the Group’s net assets between the principal currencies in which it does business is driven largely by theavailability of suitable investment opportunities within each country.Coats, Staveley Inc and Turners & Growers Ltd use forward foreign currency contracts to eliminate the currency exposure thatarises on business transacted in currencies other than their own reporting currencies. These companies only enter into suchforeign currency contracts when there is a firm commitment to the transaction. The contracts used to hedge futuretransactions typically have a maturity of between 6 months and 2 years.The borrowings drawn by the Group as at 31 December 2004 were mainly denominated in the reporting currency of therelevant company of which they were liabilities.INTEREST RATE RISKIn 2004, the Group financed its operations through shareholders’ funds, bank borrowings, commercial bills, the CLNs and theCapital Notes. The CLNs and the Capital Notes carry fixed interest rates. The Group’s trading subsidiaries use a mixture of fixedand floating rate debt. The Group also has access to bank facilities amounting to some £512.0 million, of which £313.9 millionhad been drawn down at year-end. This includes facilities negotiated by certain trading subsidiaries to meet their local needs.The Group’s interest income does not vary significantly from the returns it would generate through investing surplus cash atfloating rates of interest since the interest rates are re-set on a regular basis.In adopting the requirements of FRS13,Derivatives and other Financial Instruments,the Group has taken advantage of the exemptionthat short term debtors and creditors can be excluded from the following disclosures (other than the currency disclosures):INTEREST RATE AND CURRENCY PROFILE OF FINANCIAL LIABILITIESThe interest rate and currency profile of the Group’s financial liabilities,after taking account of the cross-currency interest rate swap,interest rate swaps and forward foreign currency contracts used to manage the interest and currency profile,was as follows:Year ended 31 December 2004 2003Floating Fixed Interest Floating Fixed Interestrate rate free Total rate rate free TotalCurrency £m £m £m £m £m £m £m £mSterling 24.4 6.0 8.1 38.5 3.9 11.9 0.3 16.1Australian dollars 12.3 – – 12.3 7.9 – – 7.9New Zealand dollars 19.3 172.0 – 191.3 16.3 166.5 – 182.8United States dollars 32.9 143.2 0.1 176.2 – – – –Euros 63.1 – – 63.1 2.3 – – 2.3Other 26.6 0.2 0.1 26.9 – – – –178.6 321.4 8.3 508.3 30.4 178.4 0.3 209.1The financial liabilities included above comprise the Group’s borrowings, onerous lease commitments, contractual employeeentitlements and certain derivatives.
54 GUINNESS PEAT GROUP PLC • ANNUAL REPORTNotes to Financial Statements – continued38. Derivatives and Other Financial Instruments - continuedDetails of fixed and non interest-bearing liabilities are provided below:Year ended 31 December 2004 2003FinancialFinancialFixed rate liabilities on Fixed rate liabilities onfinancial which no financial which noliabilities interest is paid liabilities interest is paidWeighted Weighted average Weighted Weighted Weighted average Weightedaverage period for which average period average period for which average periodinterest rate rate is fixed until maturity interest rate rate is fixed until maturityCurrency % (months) (months) % (months) (months)Sterling 8.00% 6 45 8.00% 12 –New Zealand dollars 8.86% 34 – 8.86% 46 –United States dollars 3.80% 48 6 – – –Other 6.40% 21 8 – – –6.61% 40 43 8.80% 44 –The benchmark for determining floating rate liabilities in the UK is LIBOR for both sterling and United States dollar loans. InNew Zealand, floating rates are determined by reference to the New Zealand 90 Day Bank Bill rate.INTEREST RATE AND CURRENCY PROFILE OF FINANCIAL ASSETSThe interest rate and currency profile of the Group’s financial assets, after taking account of forward foreign currency contracts,was as follows:Year ended 31 December 2004 2003Investments Cash at bank Investments Cash at bankand other assets and in hand Total and other assets and in hand TotalCurrency £m £m £m £m £m £mSterling 82.7 64.2 146.9 79.7 28.6 108.3Australian dollars 55.6 85.7 141.3 59.0 126.6 185.6New Zealand dollars 52.1 43.1 95.2 47.7 102.0 149.7United States dollars 0.9 40.7 41.6 0.8 30.5 31.3Other currencies 2.3 50.0 52.3 0.9 1.8 2.7193.6 283.7 477.3 188.1 289.5 477.6Fixed rate 4.9 – 4.9 – – –Floating rate – 245.4 245.4 12.9 282.8 295.7No rate – 38.3 38.3 – 6.7 6.74.9 283.7 288.6 12.9 289.5 302.4The investments included above comprise listed and unlisted investments in shares (excluding associates and joint ventures),equity options and equity swaps. Other assets comprise amounts recoverable on contracts after more than one year, loans toassociates and certain derivatives.Deposits of £245.4 million (2003: £282.8 million) which have been placed on deposit with banks for a variety of fixed periods,not exceeding six months, earn available market rates based on LIBID equivalents and are for these purposes classified asfloating rate cash balances. The Group’s investment portfolio principally comprises equity shares and derivatives. All suchinvestments have been excluded from the interest rate analysis because the investments do not generate a fixed entitlementto interest. The interest-bearing investments comprise secured convertible loan stock in an associated undertaking. Interestbearing loans of £Nil (2003: £3.4 million) and £Nil (2003: £7.3 million) were provided to an associated undertaking and a jointventure respectively. A non-interest bearing loan of £0.8 million was owed by an associated undertaking in 2003 (2004: £Nil)which had no fixed repayment date. Non-interest bearing deposits are payable on demand.
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