Annual Report 2010 in PDF - BBA Aviation

17. Derivative fnancial instruments – continued
The table below details the contractual amount and maturity of the cash balances that have been pledged as collateral for these
contingent liabilities:
2010 2009
US Dollar Sterling Total US Dollar Sterling Total
£m £m £m £m £m £m
BBA Aviation Insurances Limited 9.6 1.0 10.6 7.6 1.0 8.6
Total 9.6 1.0 10.6 7.6 1.0 8.6
Current
Less than 1 year 9.6 1.0 10.6 7.6 1.0 8.6
Total current 9.6 1.0 10.6 7.6 1.0 8.6
The standby letters of credit have been issued via bank facilities that BBA Aviation Insurances Limited has in place. The amount of these facilities
correspond to the amounts pledged as detailed in the table above. The amounts pledged are usually for less than one year and are secured by a
legal charge, to the bank providing the letters of credit, over the cash balances of BBA Aviation Insurances Limited corresponding to the amount
of the standby letters of credit.
Financial Risk Factors
Our activities expose us to a variety of fnancial risks: market risk (including currency risk and cash fow interest rate risk), credit risk and liquidity
risk. Overall, our risk management policies and procedures focus on the uncertainty of fnancial markets and seeks to manage and minimise
potential fnancial risks through the use of derivative fnancial instruments. The Group does not undertake speculative transactions for which
there is no underlying f nancial exposure.
Risk management is carried out by a central treasury department under policies approved by the Board of Directors of BBA Aviation plc.
This department identif es, evaluates and hedges f nancial risks in close co-operation with our subsidiaries. The treasury policies cover specif c
areas such as foreign exchange risk, interest rate risk, credit risk, use of derivative fnancial instruments and the investment of excess liquidity.
These policies are outlined further as described on page 65.
Capital Risk Management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to
shareholders through the optimisation of the debt to equity balance. The capital structure of the Group consists of debt, cash and cash
equivalents and equity attributable to equity holders of the parent comprising capital, reserves and retained earnings.
The Group’s policy is to borrow centrally to meet anticipated funding requirements. These borrowings, together with cash generated from
the operations, are on-lent or contributed as equity to subsidiaries at market-based interest rates and on commercial terms and conditions.
The Group is subject to two fnancial covenant requirements under its two main credit facilities: maximum net debt to underlying EBITDA
of 3.5 times and minimum net interest cover of 3.0 times. The Group complied with these covenants during the year. In the primary $900 million
facility the Group has the option of relaxing the fnancial covenants for a period of time if certain acquisition criteria are met. This acquisition spike
is not incorporated, and therefore not available, under the $175 million facility.
Market Risk
Market risk is the risk of adverse f nancial impact due to changes in fair values or future cash f ows of f nancial instruments from f uctuations in
foreign currency exchange rates and interest rates. The Group has well defned policies for the management of these risks and the management
of these risks includes the use of derivative f nancial instruments.
(i) Foreign Exchange Risk
The Group has signifcant overseas businesses whose revenues, cash fows, assets and liabilities are mainly denominated in the currency in which
the operations are located. The Group is, therefore, exposed to foreign currency translation risk from the translation of these overseas operations
fnancial statements into Sterling. The Group’s policy is not to hedge the income statement translation exposure since such hedges have only a
temporary efect. However, it is the Group’s policy to partially hedge the balance sheet in order to reduce the impact of foreign exchange rate
movements on the net debt to EBITDA ratio. Therefore, it is the Group’s policy to seek to denominate the currency of its borrowings in US Dollars
in order to match the currency of its cash fows, earnings and assets.
Consolidated Financial Statements — 109