22 Financial instruments
Treasury policy and financial risk management
The Group operates a centralised treasury function to manage the Group’s funding requirements and financial risks in line with the Board approved treasury policies and procedures, and their delegated authorities.
The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as trade debtors and trade creditors, that arise directly from its operations. The main purpose of these financial instruments is to finance the Group’s operations.
Group treasury also enters into derivative transactions, principally interest rate and currency swaps and forward currency contracts. The purpose of these transactions is to manage the interest rate and currency risks arising from the Group’s operations and financing.
It remains the Group’s policy not to hold or issue financial instruments for trading purposes, except where financial constraints necessitate the need to liquidate any outstanding investments. The treasury function is managed as a cost centre and does not engage in speculative trading.
The principal financial risks faced by the Group are liquidity/funding, interest rate, foreign currency and counterparty risks. The policies and strategies for managing these risks are summarised as follows:
(a) Liquidity/funding risk
The risk that the Group could be unable to settle or meet its obligations as they fall due at a reasonable price.
- The Group’s funding strategy ensures a mix of funding sources offering flexibility and cost effectiveness to match the requirements of the Group.
- Operating subsidiaries are financed by a combination of retained profits, bank borrowings, medium-term notes and committed syndicated bank facilities.
At year end, the Group had a committed syndicated bank revolving credit facility of £1.2bn set to mature on 26 March 2013. This facility contains only one financial covenant being the ratio of earnings before interest, tax, depreciation, amortisation and rents payable; to interest plus rents payable. The covenant is measured semi-annually. In addition, the term out option under the £400m credit agreement which expired on 13 February 2009 was converted into a committed facility for the same period, expiring on 11 February 2010. This facility has the same financial covenant as the main £1.2bn facility. The Group also has a number of undrawn uncommitted facilities available to it. At year end, these amounted to £105m (last year £155m), all of which are due to be reviewed within a year. At the balance sheet date a sterling equivalent of £764m (last year £614m) was drawn under the committed facilities and £nil (last year a further £29m) was drawn under the uncommitted facilities.
In addition to the existing borrowings, the Group has a euro medium-term note programme of £3bn, of which £1.4bn (last year £1.4bn) was in issuance as at the balance sheet date.
The contractual maturity of the Group’s non-derivative financial liabilities and derivatives is as follows:
|
Bank loans
and
overdrafts
£m |
Syndicated
bank facility
£m |
Medium-
term
notes
£m |
Finance lease
liabilities
£m |
Partnership
liability to the
M&S UK
Pension
Scheme
£m |
Total
£m |
Derivative
assets
£m |
Derivative
liabilities
£m |
Total
£m |
| Timing of cash flows |
|
|
|
|
|
|
|
|
|
| Within one year |
(257.4) |
(615.0) |
(112.6) |
(11.6) |
(50.0) |
(1,046.6) |
643.4 |
(663.7) |
(20.3) |
| Between one and two years |
– |
– |
(112.6) |
(19.2) |
(71.9) |
(203.7) |
90.7 |
(90.9) |
(0.2) |
| Between two and five years |
– |
– |
(1,088.9) |
(26.2) |
(215.7) |
(1,330.8) |
84.8 |
(83.0) |
1.8 |
| More than five years |
– |
– |
(1,866.5) |
(214.9) |
(719.0) |
(2,800.4) |
747.3 |
(736.4) |
10.9 |
|
(257.4) |
(615.0) |
(3,180.6) |
(271.9) |
(1,056.6) |
(5,381.5) |
1,566.2 |
(1,574.0) |
(7.8) |
| Effect of discounting and foreign exchange |
– |
– |
1,321.4 |
188.4 |
333.4 |
1,843.2 |
|
|
|
| At 29 March 2008 |
(257.4) |
(615.0) |
(1,859.2) |
(83.5) |
(723.2) |
(3,538.3) |
|
|
|
| Timing of cash flows |
|
|
|
|
|
|
|
|
|
| Within one year |
(147.9) |
(781.2) |
(123.8) |
(18.3) |
(71.9) |
(1,143.1) |
949.4 |
(919.8) |
29.6 |
| Between one and two years |
(11.2) |
– |
(123.8) |
(16.9) |
(71.9) |
(223.8) |
70.4 |
(63.6) |
6.8 |
| Between two and five years |
– |
– |
(1,476.8) |
(34.4) |
– |
(1,511.2) |
114.0 |
(83.2) |
30.8 |
| More than five years |
– |
– |
(1,706.2) |
(209.4) |
– |
(1,915.6) |
1,003.8 |
(708.9) |
294.9 |
|
(159.1) |
(781.2) |
(3,430.6) |
(279.0) |
(143.8) |
(4,793.7) |
2,137.6 |
(1,775.5) |
362.1 |
| Effect of discounting and foreign exchange |
– |
– |
1,412.1 |
177.1 |
3.9 |
1,593.1 |
|
|
|
| At 28 March 2009 |
(159.1) |
(781.2) |
(2,018.5) |
(101.9) |
(139.9) |
(3,200.6) |
|
|
|
This table does not include trade and other payables (see note 20) due to the low associated liquidity risk.
(b) Counterparty risk
Counterparty risk exists where the Group can suffer financial loss through default or non-performance by financial institutions.
Exposures are managed through Group treasury policy which limits the value that can be placed with each approved counterparty to minimise the risk of loss. The counterparties are limited to the approved institutions with secure long-term credit ratings A+/A1 or better assigned by Moody’s and Standard & Poor’s respectively, unless approved on an exception basis by a Board director. Limits are reviewed regularly by senior management. The credit risk of these financial instruments is estimated as the fair value of the assets resulting from the contracts.
The table below analyses the Group’s cash and cash equivalents and derivative assets by credit exposure excluding bank balances, store cash and cash in transit.
|
Credit rating of counterparty |
|
AAA/Aaa
£m |
AA/Aaa
£m |
AA/Aa1
£m |
AA-/Aa1
£m |
AA-/Aa2
£m |
AA-/Aa3
£m |
Total |
|
|
|
|
|
|
|
|
| Money market deposits 1 |
– |
3.4 |
63.6 |
– |
– |
– |
67.0 |
| Derivative assets 2 |
5.2 |
11.6 |
6.2 |
– |
0.6 |
0.6 |
24.2 |
| At 29 March 2008 |
5.2 |
15.0 |
69.8 |
– |
0.6 |
0.6 |
91.2 |
|
AAA/Aaa
£m |
AA/Aa1
£m |
AA/Aa2
£m |
A+/Aa3
£m |
A+/A1
£m |
A/A23
£m |
Total |
|
|
|
|
|
|
|
|
| Money market deposits1 |
– |
– |
116.1 |
4.1 |
13.0 |
– |
133.2 |
| Derivative assets2 |
105.4 |
25.9 |
27.7 |
142.0 |
8.8 |
9.8 |
319.6 |
| At 28 March 2009 |
105.4 |
25.9 |
143.8 |
146.1 |
21.8 |
9.8 |
452.8 |
The Group has very low retail credit risk due to transactions being principally of a high volume, low value and short maturity.
The maximum exposure to credit risk at the balance sheet date was as follows: trade receivables £84m (last year £85m), other receivables £64m (last year £46m), cash and cash equivalents £423m (last year £318m) and derivatives £347m (last year £37m).
(c) Foreign currency risk
Transactional foreign currency exposures arise from both the export of goods from the UK to overseas subsidiaries, and from the import of materials and goods directly sourced from overseas suppliers.
Group treasury hedge these exposures principally using forward foreign exchange contracts progressively covering up to 100% out to 18 months. Where appropriate hedge cover can be taken out longer than 18 months with Board approval. The Group is primarily exposed to foreign exchange risk in relation to sterling against movements in US dollar and euro.
Forward foreign exchange contracts in relation to the Group’s forecast currency requirements are designated as cash flow hedges with fair value movements recognised directly in equity. To the extent that these hedges cover actual currency payables or receivables then associated fair value movements previously recognised in equity are recorded in the income statement in conjunction with the corresponding asset or liability. As at the balance sheet date the gross notional value in sterling terms of forward foreign exchange sell or buy contracts amounted to £768m (last year £619m) with a weighted average maturity date of six months (last year seven months).
The translation exposures arising on the overseas net assets are hedged with foreign currency debt. As at the balance sheet date, €276m (last year €243m) and HK$178m (last year HK$107m) currency debt was hedging overseas net assets.
The Group also hedges foreign currency intercompany loans where these exist. Forward foreign exchange contracts in relation to the hedging of the Group’s foreign currency intercompany loans are designated as held for trading with fair value movements being recognised in the income statement. The corresponding fair value movement of the intercompany loan balance results in an overall nil impact on the income statement. As at the balance sheet date, the gross notional value of intercompany loan hedges was £108m (last year £80m).
Gains and losses in equity on forward foreign exchange contracts as at 28 March 2009 will be released to the income statement at various dates over the following 14 months (last year 19 months) from the balance sheet date.
After taking into account the hedging derivatives entered into by the Group, the currency and interest rate exposure of the Group’s financial liabilities is as set out below excluding short-term payables and the Marks and Spencer Czech Republic a.s. put option:
|
|
|
2009 |
|
|
|
2008 |
|
Fixed rate
£m |
Floating rate
£m |
Total
£m |
|
Fixed rate
£m |
Floating rate
£m |
Total
£m |
| Currency |
|
|
|
|
|
|
|
| Sterling |
2,252.4 |
629.9 |
2,882.3 |
|
2,665.9 |
673.0 |
3,338.9 |
| Euro |
7.6 |
286.1 |
293.7 |
|
– |
192.5 |
192.5 |
| Hong Kong dollar |
– |
16.4 |
16.4 |
|
– |
6.9 |
6.9 |
| Other |
0.3 |
7.9 |
8.2 |
|
– |
– |
– |
|
2,260.3 |
940.3 |
3,200.6 |
|
2,665.9 |
872.4 |
3,538.3 |
The floating rate sterling and euro borrowings are linked to interest rates related to LIBOR. These rates are for periods between one and three months.
As at the balance sheet date and excluding finance leases but including the partnership liability, the fixed rate sterling borrowings are at an average rate of 6.0% (last year 6.0%) and the weighted average time for which the rate is fixed is nine years (last year ten years).
(d) Interest rate risk
The Group is exposed to interest rate risk in relation to the sterling, US dollar, euro and Hong Kong dollar variable rate financial assets and liabilities.
- The Group’s policy is to use derivative contracts where necessary to maintain a mix of fixed and floating rate borrowings to manage this risk. The structure and maturity of these derivatives correspond to the underlying borrowings and are accounted for as fair value or cash flow hedges as appropriate.
- At the balance sheet date fixed rate borrowings amounted to £2,260.3m (last year £2,665.9m) representing the public bond issues and finance leases, and amounting to 71% (last year 75%) of the Group’s gross borrowings.
The effective interest rates at the balance sheet date were as follows:
|
2009
% |
2008
% |
| Committed and uncommitted borrowings |
4.0 |
5.5 |
| Medium-term notes |
6.2 |
6.2 |
| Finance leases |
4.8 |
5.0 |
| Partnership liability to the Marks and Spencer UK Pension Scheme |
5.7 |
5.7 |
Sensitivity analysis
The table below illustrates the estimated impact on the income statement and equity as a result of market movements in foreign exchange and interest rates in relation to all of the Group’s financial instruments. The Group considers that a 2% (last year 1%) +/- movement in interest rates and a 20% (last year 10%) weakening or strengthening in sterling represents reasonable possible changes. However, this analysis is for illustrative purposes only.
The impact in the income statement due to changes in interest rates reflects the effect on the Group’s floating rate debt as at the balance sheet date. The impact in equity reflects the fair value movement in relation to the Group’s cross currency swaps. The impact from foreign exchange movements reflects the change in the fair value of the Group’s transactional foreign exchange cash flow hedges and the net investment hedges at the balance sheet date.
The equity impact shown for foreign exchange sensitivity relates to derivative and non-derivative financial instruments hedging net investments. This value is expected to be fully offset by the retranslation of the hedged foreign currency net assets leaving a net equity impact of zero. The table excludes financial instruments that expose the Group to interest rate and foreign exchange risk where such risk is fully hedged with another financial instrument. Also excluded are trade receivables and payables as these are either sterling denominated or the foreign exchange risk is hedged.
|
1% decrease
in interest
rates
£m |
1% increase
in interest
rates
£m |
|
10%
weakening in
sterling
£m |
10%
strengthening
in sterling
£m |
| At 29 March 20081 |
|
|
|
|
|
| Impact on income statement: gain/(loss) |
6.5 |
(6.5) |
|
(6.3) |
5.2 |
| Impact on equity: gain/(loss) |
4.1 |
(3.3) |
|
(15.5) |
12.7 |
|
2% decrease
in interest
rates
£m |
2% increase
in interest
rates
£m |
|
20%
weakening
in sterling
£m |
20%
strengthening
in sterling
£m |
| At 28 March 2009 |
|
|
|
|
|
| Impact on income statement: gain/(loss) |
13.6 |
(15.1) |
|
(15.2) |
10.2 |
| Impact on equity: gain/(loss) |
208.7 |
(134.3) |
|
(11.1) |
7.4 |
Derivative financial instruments
|
|
|
2009 |
|
|
2008 |
|
|
Assets
£m |
Liabilities
£m |
|
Assets
£m |
Liabilities
£m |
| Current |
|
|
|
|
|
|
| Options |
– held for trading |
27.0 |
(27.0) |
|
12.4 |
(12.4) |
| Commodity swap |
– cash flow hedge |
– |
(16.7) |
|
– |
– |
| Forward foreign exchange contracts |
– cash flow hedges |
59.9 |
(27.4) |
|
5.0 |
(21.8) |
|
– held for trading |
5.7 |
(0.4) |
|
1.0 |
(0.9) |
| Interest rate swaps |
– held for trading |
– |
(4.7) |
|
– |
– |
|
|
92.6 |
(76.2) |
|
18.4 |
(35.1) |
| Non-current |
|
|
|
|
|
|
| Commodity swap |
– cash flow hedge |
– |
(1.5) |
|
|
|
| Cross currency swaps |
– cash flow hedges |
253.9 |
– |
|
16.9 |
– |
| Forward foreign exchange contracts |
– cash flow hedges |
0.1 |
(1.5) |
|
1.3 |
– |
|
|
254.0 |
(3.0) |
|
18.2 |
– |
The Group holds a number of cross currency swaps to redesignate its fixed rate US dollar debt to fixed rate sterling debt. The attributes of these derivatives match the characteristics of the underlying debt hedged with rates of 7.034% (2017 bond) and 7.238% (2037 bond). The amounts reported as options held for trading in derivative assets and liabilities represent the fair value of the call option with the puttable callable reset notes mirrored by the fair value of the sold option to have this call assigned. During the year the Group entered into energy swap contracts to fix a portion of the forecast energy usage for the 2009/10 financial year. These swaps are accounted for as cash flow hedges.
Fair value of financial instruments
With the exception of the Group’s fixed rate bond debt, there were no material differences between the carrying value of non-derivative financial assets and financial liabilities and their fair values as at the balance sheet date.
The carrying value of the Group’s fixed rate bond debt was £2,018.5m (last year £1,859.2m), the fair value of this debt was £1,616.6m (last year £1,740.7m).
Capital policy
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a capital structure that optimises the cost of capital. In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.