Annual Report 2010 in PDF - BBA Aviation

17. Derivative fnancial instruments – continued
During 2010 and 2009, net debt was managed using derivative instruments to hedge cash fow interest rate risk as follows:
Fixed
rate
£m
Floating
rate
£m
2010 2009
Cash and cash equivalents – 107.7 107.7 – 115.4 115.4
Bank overdrafts – (29.4) (29.4) – (31.7) (31.7)
Borrowings – (388.5) (388.5) – (470.8) (470.8)
Finance leases (2.4) (1.3) (3.7) (2.8) (1.7) (4.5)
Net Debt (2.4) (311.5) (313.9) (2.8) (388.8) (391.6)
Derivative effect – cross-currency swaps – (55.9) (55.9) – (47.7) (47.7)
Derivative effect – cash flow interest rate swaps* (222.9) 211.6 (11.3) (329.2) 323.9 (5.3)
Net debt post derivative effect (225.3) (155.8) (381.1) (332.0) (112.6) (444.6)
*Mark-to-market value has been included within the foating rate amount. This is not booked to net debt but is recorded as a net loss in reserves.
The fair value of interest rate swaps are designated and efective as cash fow hedges and the fair value loss of £11.3 million (2009: £5.3 million)
has been deferred in equity. A charge of £6.7 million (2009: charge £7.7 million) has been booked against hedged interest payments made in
the period.
Credit Risk
Credit risk arises from cash and cash equivalents, derivative fnancial instruments and deposits with banks and fnancial institutions, as well as
credit exposures to customers, including outstanding receivables and committed transactions. As part of the Group’s operations, cash
management and risk management activities the Group is exposed to counterparty risk arising on the fnancial assets that we have and the credit
risk on outstanding derivative f nancial instruments.
Treasury Related Credit Risk
The Group aims to reduce counterparty risk by dealing with counterparties of strong credit standing as measured by fnancial credit ratings. All
Treasury related activity is concentrated with relationship banks that provide unsecured committed facilities to the Group. Across the
subsidiaries, wherever possible and where services can be provided efciently and cost efectively, bank accounts, surplus cash and any hedging
activity are concentrated and undertaken with relationship banks.
Each counterparty that the Group uses for derivatives, bank account activity and the investment of surplus cash is assigned a maximum
credit limit dependent upon the counterparty’s credit rating. This limit gives a maximum permitted amount of cash and derivatives that can be
held or undertaken with each counterparty. All counterparties must also have a short-term rating of A1/P1. Deposits are generally for short-term
maturity of less than three months.
As at 31 December 2010 and 2009 the Group had a number of exposures to individual counterparties. These are within the maximum limits
permissible under our policy and these exposures are continually monitored and reported. No individual exposure is considered signif cant in
the ordinary course of treasury management activity and we do not expect any signifcant losses from non-performance by these counterparties.
Commercial Related Credit Risk
The Group’s exposure to commercial related credit risk is primarily attributable to its trade and fnance lease receivables and the amounts
presented in the balance sheet are net of allowances for doubtful receivables. Sales to customers are settled by a number of dif erent ways
including cash, credit cards, cheques and electronic payment methods. A customer or potential customer is assessed on a case-by-case basis to
determine whether credit terms will be provided. The Group does not expect any signifcant losses of receivables that have not been provided
for as shown in note 12.
Liquidity Risk
The Group manages its liquidity requirements through the use of short and long-term cash fow forecasts. In addition to strong cash generation
in the businesses the Group maintains unsecured committed borrowing facilities from a range of highly rated banks to mitigate this risk further.
Headroom on our facilities is regularly evaluated and consistently monitored to ensure that the Group has adequate headroom and liquidity. The
Group’s committed facilities are a $175 million revolving credit facility maturing in 2011 and a $900 million revolving credit facility maturing
in 2012.
Net
debt
£m
Fixed
rate
£m
Floating
rate
£m
Net
debt
£m
Consolidated Financial Statements — 111