Treasury Policies

Treasury Policy and financial risk management 
The Group's activities expose it to a variety of financial risks: liquidity risk, market risk (including currency and cash flow interest rate risk) and credit risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

The Group operates a centralized treasury function which is responsible for managing the liquidity, interest and currency risks associated with the Group’s activities.  As part of its strategy for the management of those risks, the Group uses derivative financial instruments.  In accordance with the Group’s treasury policy, derivative instruments are not entered into for speculative purposes.

The Group’s principal financial instruments, other than derivatives, are cash and short-term deposits, bank overdrafts and loans.  The main purpose of these financial instruments is to raise finance for the Group’s operations.  In addition, the Group has various other financial assets and liabilities such as trade receivables and trade payables arising directly from its operations.

Liquidity/funding risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, group treasury maintains flexibility in funding by maintaining availability under committed credit lines.

Management monitors rolling forecasts of the Group’s liquidity position which comprise an un-drawn revolving credit facility of £50m (2009: £50m) and an overdraft limit of £5m (2009 £5m) and cash and short-term deposits on the basis of expected cash flow.

The Group monitors compliance against all its financial obligations and it is Group policy to manage the performance and position of the Group so as to operate within covenanted restrictions at all times.

Interest rate risk
The Group has no fixed rate borrowings other than finance leases. The Group uses interest rate derivatives to manage the cost of its floating rate debt by entering into fixed rate derivatives, so as to reduce exposure to changes in interest rates.

The Group analyses its interest rate exposure on a dynamic basis. Various forecasting is simulated taking into consideration refinancing, alternative financing and hedging. Based on these forecasts, the Group calculates the impact on profit and loss of a defined interest rate shift. For each forecast, the same interest rate shift is used across all currencies. The scenarios are only run for liabilities that represent the major interest-bearing positions. The forecasting is done on a regular basis to verify that the maximum loss potential is within the limit given by management.

Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Group policy is to hedge approximately 50-75% of floating rate exposure.

During all periods, debt Tranches B2 and C2 were denominated in Euros and all other borrowings were in Sterling.

The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. This has the economic effect of converting borrowings from floating rates to fixed rates.

Interest rate risks are presented by way of sensitivity analysis in accordance with IFRS 7. These show the effects of changes in market interest rates on interest payments, interest income and expense and other income components. The interest rate sensitivity analyses are based on the following assumptions:

In the case of fair value hedges designed for hedging interest rate risk, the changes in the fair value of the hedged item and the hedging instrument attributable to interest rate movements balance out almost completely in the income statement in the same period. As a consequence, these financial instruments are not exposed to interest rate risk.

Certain financial instruments are designated as hedging instruments in a cash flow hedge to hedge payment fluctuations resulting from interest rate movements.  Changes in the market interest rate affect the hedging reserve in shareholder’s equity and are therefore taken into consideration in the equity-related sensitivity calculations.

Changes in the market interest rate of interest rate derivatives affect other financial income or expense and are therefore taken into consideration in the income-related sensitivity calculations.

Currency derivatives are not exposed to interest rate risks and are therefore not included in the interest rate sensitivity calculations.

Currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro and US dollar. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.

Foreign currency risk is the risk that the fair value of a financial commitment, recognized financial assets or financial liabilities will fluctuate due to changes in foreign currency rates.

The Group’s principal foreign currency exposures arise from the purchase of overseas sourced products. Group policy is to hedge a proportion of these exposures for up to 15 months ahead in order to limit the volatility in the ultimate sterling cost. This hedging activity involves the use of spot, forward and option contracts. The Group does not have a material exposure to currency movements in relation to translation of overseas assets or liabilities and consequently does not hedge any such exposure.

To manage the foreign exchange risk arising from future commercial transactions and recognized financial assets and financial liabilities, forward contracts, managed by group treasury are used.

The periodic effects are determined by relating the hypothetical changes in the risk variables to the balance of financial instruments at the reporting date. It is assumed that the balance at the reporting date is representative for the period as a whole.

The Group has decided to hold cash in a Euro denominated bank account as a natural hedge for the effect of the revaluation of the Group's Euro denominated bank borrowing. At 27 March 2010 the amount of Euros held as a natural hedge was €75.4m (2009: €75.4m) against the total Euro denominated bank borrowings of €75.4m (2009:€75.4m).

Counterparty credit risk
Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted. If wholesale customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the board. The utilization of credit limits is regularly monitored. Sales to retail customers are settled in cash or using major credit cards.

Investments of cash surpluses, borrowings and derivative financial instruments are made through banks which must fulfill a minimum credit rating of 'A'. Each bank is assessed individually with the reference to the credit it holds and a deposit limit is set accordingly and approved by the board.

Receivable balances are monitored on an ongoing basis and provision is made for estimated irrecoverable amounts.