Full Annual Report - Inchcape

Financial statements
Notes to the accounts continued
23 Financial instruments continued
Cash flow hedges
The Group principally uses forward foreign exchange contracts to hedge purchases in a non-functional currency against movements
in exchange rates. The cash flows relating to these contracts are generally expected to occur within 12 months of the end of the
reporting period.
The nominal principal amounts of the outstanding forward foreign exchange contracts relating to transactional exposures at
31 December 2009 was £587.3m (2008 – £464.7m).
Net fair value gains and losses recognised in the hedging reserve in shareholders’ equity (see note 25) on forward foreign exchange
contracts as at 31 December 2009 are expected to be released to the consolidated income statement within 12 months of the end
of the reporting period.
Fair value hedge
At 31 December 2009, the Group had in place five cross currency interest rate swaps. Four of these total US$475m which hedge
changes in the fair value of the Group’s 10 and 12 year loan notes. Under these swaps the Group receives fixed rate US dollar interest
of 5.94% on US$275m and 6.04% on US$200m and pays LIBOR +85bps and LIBOR +90bps for the 10 and 12 year notes respectively.
An additional US$39.2m cross currency interest rate swap was put in place following the US$114.2m repayment of the Private Placement
in order to offset the required portion of the original US$475m swaps. Under the new swap the Group pays US dollar interest of 6.04%
on US$39.2m and receives LIBOR +214bps for the 12 year notes only. The loan notes and cross currency interest rate swaps have the
same critical terms.
Hedge of net investment in foreign operations
Further to the US$114.2m repayment of the Private Placement during the year, US$75m was de-designated as a hedge of the net
investments in Hong Kong, Saipan and Guam which was being used to hedge the Group’s exposure to foreign exchange risk on
these investments. Gains or losses on the retranslation of this borrowing were transferred to equity, up until the point when the debt
was repaid, to offset any gains or losses on translation of net investments in the subsidiaries.
h. Capital management
The primary objective of the Group’s management of debt and equity is to ensure that it maintains a strong credit rating and healthy
capital ratios in order to support its business and maximise shareholder value.
The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust
the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.
During the year, the Group issued 4,143,316,500 new ordinary shares of 1p each by way of 9 for 1 Rights Issue (see note 24).
The committed bank facilities and Private Placement borrowings are subject to the same interest cover covenant based on an adjusted
EBITA measure to interest on consolidated borrowings. The Group is required to maintain a ratio of not less than three to one and was
compliant with this covenant throughout the year.
The Group monitors group leverage by reference to three tests: Adjusted EBITA interest cover, the ratio of net debt to EBITDA and the
ratio of net debt to market capitalisation.
2009 2008
Adjusted EBITA interest cover (times)* 14.0 8.0
Net debt to EBITDA (times)** n/a 1.4
Net debt / market capitalisation (percentage)*** n/a 227.7%
* Calculated as Adjusted EBITA / interest on consolidated borrowings
** Calculated as net debt / earnings before exceptional items, interest, tax, depreciation and amortisation
*** Calculated as net debt / market capitalisation as at 31 December
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Inchcape plc ¦ Annual Report and Accounts 2009