Vesuvius plc Prospectus

4.2 Market risk
Market risk is the risk that either the fair values or the cash flows of Vesuvius’ financial instruments
may fluctuate because of changes in market prices. Vesuvius is principally exposed to market risk
through fluctuations in exchange rates (“currency risk”) and interest rates (“interest rate risk”).
4.2.1 Currency risk
Vesuvius is exposed to currency risk on its borrowings and financial assets (being cash and
short-term deposits) as at 30 June 2012 that are denominated in currencies other than
pounds sterling. Vesuvius’ general policy is to broadly match the currency profile of its core
borrowings with the currency profile of its earnings and net assets; achieved, where
necessary, by the use of forward foreign exchange contracts (“FX swaps”).
Based upon the currency profile of Vesuvius’ borrowings and financial assets, while not
impacting reported profit, the change in net debt arising from a 10 per cent. strengthening of
sterling would increase reported equity as at 30 June 2012 by £22.6 million (HY 2011:
£32.2 million; FY 2011: £20.7 million; FY 2010: £21.9 million; FY 2009: £12.3 million)
and a corresponding 10 per cent. weakening of sterling would reduce equity by
£27.6 million (HY 2011: £39.4 million; FY 2011: £25.3 million; FY 2010: £26.7 million;
FY 2009: £15.1 million).
4.2.2 Interest rate risk
Vesuvius’ interest rate risk principally arises in relation to its borrowings. Where
borrowings are held at floating rates of interest, fluctuations in interest rates expose
Vesuvius to variability in the cash flows associated with its interest payments and where
borrowings are held at fixed rates of interest, fluctuations in interest rates expose Vesuvius
to changes in the fair value of its borrowings. Vesuvius’ policy is to maintain a mix of fixed
and floating rate borrowings, within certain parameters agreed from time to time by the
Board, in order to reduce volatility in reported earnings.
As at 30 June 2012, Vesuvius had $250 million (£159 million) of US Private Placement
loan notes outstanding, which carry a fixed rate of interest, representing just over a quarter
of Vesuvius’ total borrowings outstanding at that date. Vesuvius had also entered into
floating to fixed interest rate swaps in order to increase the level of fixed rate borrowings to
around 40 per cent.
Vesuvius’ floating rate financial liabilities bear interest at the inter-bank offered rate of the
appropriate currency, plus a margin. The fixed rate financial liabilities of £233.2 million as
at 30 June 2012 (HY 2011: £372.9 million; FY 2011: £357.0 million; FY 2010: £380.3
million; FY 2009: £201.2 million) have a weighted average interest rate of 4 per cent. (HY
2011: 5.1 per cent.; FY 2011: 5.4 per cent.; FY 2010: 5.1 per cent.; FY 2009: 8.0 per cent.)
and a weighted average period for which the rate is fixed of 5 years (HY 2011: 3.9 years;
FY 2011: 3.7 years; FY 2010: 4.5 years; FY 2009: 1.5 years). The financial assets attract
floating rate interest at the inter-bank offered rate of the appropriate currency, less a margin.
Based upon the interest rate profile of Vesuvius’ financial assets and liabilities, a 100 basis
point increase in market interest rates would increase both the net finance costs charged in
the income statement and the net interest paid in the statement of cash flows for the first
half of 2012 by £1.4 million (HY 2011: £0.5 million; FY 2011: £0.6 million; FY 2010: £0.1
million; FY 2009: £2.3 million) and a 100 basis point reduction in market interest rates
would decrease both the net finance costs charged in the income statement and the net
interest paid in the statement of cash flows by £1.4 million (HY 2011: £0.5 million; FY
2011: £0.6 million; FY 2010: £0.1 million; FY 2009: £2.3 million). Similarly, a 100 basis
point per cent. increase in market interest rates would result in a decrease of £9.9 million
(HY 2011: £10.9 million; FY 2011: £10.9 million; FY 2010: £11.5 million; FY 2009: £3.2
million) in the fair value of Vesuvius’ net debt and a 100 basis point decrease in market
interest rates would result in an increase of £10.6 million (HY 2011: £11.7 million; FY
2011: £11.7 million; FY 2010: £12.3 million; FY 2009: £3.3 million) in the fair value of
Vesuvius’ net debt.
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