Punch Taverns plc 2011 Annual Report

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Punch Taverns plc
Annual Report and Financial Statements 2011
Notes to the financial statements continued
for the 52 weeks ended 21 August 2011
23 Financial instruments continued
Liquidity risk
The Group’s funding strategy is to ensure a mix of financing methods offering flexibility and cost-effectiveness to match the
requirements of the Group. The Group is primarily financed by secured loan notes, with approximately 85% (August 2010: 90%)
of the capital balance on these loan notes being repayable after more than five years from the balance sheet date, subject to relevant
covenants being met. The Board continues to review alternative sources of finance. The Group’s objective is to smooth the debt
maturity profile and to arrange funding ahead of requirements where required so maturing short-term debt may be refinanced
or paid as it falls due. Cash flow forecasts are frequently produced to assist management in identifying liquidity requirements and
are stress-tested for possible scenarios. This includes assessments of the ability to meet the restricted payment conditions in the
two securitisation structures in order that cash can be released to the top company level. Should either securitisation not meet the
restricted payment conditions, then cash generated may under certain circumstances become trapped within that securitisation
(not made available to the wider Group) to naturally de-lever that securitisation. Cash balances are invested in short-term deposits
such that they are readily available to settle short-term liabilities or to fund capital additions.
Capital risk
The Group’s capital structure is made up of net debt, issued share capital and reserves. These are managed effectively to minimise
the Group’s cost of capital, to add value to shareholders and to service debt obligations, ultimately ensuring that the Group continues
as a going concern. The Group’s debt is divided into two separate securitisations. The securitised debt is monitored by a variety of
measures, which are reported to the debt providers on a quarterly basis. The Group assesses the performance of the business, the
level of available funds and the short- to medium-term strategic plans concerning capital spend as well as the need to meet financial
covenants, and such assessment influences the level of dividends payable. In the current period, excluding the impact of the demerger,
the Group has reduced the nominal value of its securitised debt by £133.2m through normal amortisation of the loan notes and by
prepaying some debt ahead of schedule. The period end Debt Service Cover Ratio (DSCR) covenants for the two securitisations at
20 August 2011 were 1.37 times EBITDA and 1.52 times EBITDA, ahead of the financial covenant of 1.25 times EBITDA. The Group
has provided support into the securitisations during the period to ensure that the DSCR remains above its covenanted level.
Credit risk
With the exception of cash and short-term deposits invested with banks and financial institutions, there are no significant
concentrations of credit risk within the Group. The maximum credit risk exposure relating to financial assets is represented by the
carrying value as at the balance sheet date. The Group’s objective is to minimise credit risk by ensuring that surplus funds are invested
with banks and financial institutions with high credit ratings and that the Group deals with third parties that have been subject to
credit checks, or that have good credit scores, where appropriate. Trade and other receivables, as shown on the Consolidated balance
sheet, comprise a large number of individually small amounts from unrelated customers and are shown net of a provision for doubtful
debts. Management estimates the provision for doubtful debts based on a review of all individual receivable accounts, experience
and known factors at the balance sheet date, taking into account any collateral held in the form of cash deposits, which is quantified.
These cash deposits are applied against unpaid debt when licensees leave the pubs, and vary in size. The amount of cash deposits
held at 20 August 2011 is £26.2m (August 2010: £33.2m). These are held on the balance sheet within trade and other payables.
Receivables are written off against the doubtful debt provision when management deems the debt no longer recoverable.
An analysis of the provision held against trade receivables for doubtful debts is shown below:
20 August
2011
£m
21 August
2010
£m
Provision for doubtful debts at beginning of period 5.3 7.4
Charged to income statement 6.4 5.6
Utilised during the period (3.5) (5.9)
Released during the period (4.1) (1.8)
Derecognised on demerger of Spirit business (1.0) –
Provision for doubtful debts at end of period 3.1 5.3