The following section describes the way in which the Group manages and controls its treasury function and ensures it is financed in an appropriate and cost-effective manner.
Treasury management
All treasury activities are co-ordinated through a central function (Group Treasury), the purpose of which is to manage the financial risks of the Group as described below and to secure short and long term funding at the minimum cost to the Group. It operates within a framework of clearly defined Board-approved policies and procedures, including permissible funding and hedging instruments, exposure limits and a system of authorities for the approval and execution of transactions. It operates on a cost centre basis and is not permitted to make use of financial instruments or other derivatives other than to hedge identified exposures of the Group. Speculative use of such instruments or derivatives is not permitted.
Group Treasury prepares reports at least annually to the Board, and on a monthly basis to the Finance Director and other senior executives of the Group. In addition, liquidity, interest rate, currency and other financial risk exposures are monitored daily and the gross and net indebtedness of the Group is reported on a weekly basis to the Chief Executive and the Finance Director. The Group Treasury function is subject to an annual internal and external review of controls.
Funding and liquidity
The Group funds its operations through a mixture of retained earnings and borrowing facilities, including bank and capital markets borrowings and leasing. The relative proportions of equity and borrowings are governed by specific Board-approved parameters. These are designed to preserve prudent financial ratios, including interest, dividend and cash flow cover, whilst also minimising the overall weighted average cost of capital to the Group.
All the Group’s borrowing facilities are arranged by Group Treasury and the funds raised are then lent to operating subsidiaries on commercial arm’s length terms. In some cases operating subsidiaries have external borrowings, but these are supervised and controlled centrally. The Group’s objective is to maintain a balance between continuity of funding and flexibility through borrowing at a range of maturities from both capital markets and bank sources. Bank borrowings are principally in the form of five year committed multi-currency bilateral revolving credit facilities that mature in 2010 with a group of relationship banks. There were no borrowings against these facilities as at 31 December 2007.
Capital market borrowings of £705 million include unsecured issues of £350 million 6.75% bonds maturing in 2019 and £325 million 7% bonds maturing in 2012, together with £30 million debenture stock of Westland Group plc, maturing in 2008, which is secured on assets of that company and certain of its subsidiaries.
At the year end the Group had committed borrowing facilities of £1,090 million, of which £734 million was drawn. The weighted average maturity profile of the Group’s committed borrowings was 7.9 years. This leaves the Group well placed to withstand sudden changes in liquidity in the financial markets.
The Group also has access to significant lines of uncommitted funds which are used principally to manage day-to-day liquidity. Wherever practicable, pooling, netting or concentration techniques are employed to minimise gross debt.
At the year end the Group had £145 million on deposit in the UK mainly held in money market funds or with banks at maturities of three months or less.
Financial resources and going concern
At 31 December 2007 the Group had net borrowings of £506 million. In addition, it had available, but undrawn, committed borrowing facilities totalling £356 million.
Having assessed the future funding requirements of the Group and the Company, the Directors are of the opinion that it is appropriate for the accounts to be prepared on a going concern basis.