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4.3 Liquidity risk<br />
Liquidity risk is the risk that <strong>Vesuvius</strong> might have difficulties in meeting its financial obligations.<br />
<strong>Vesuvius</strong> manages this risk by ensuring that it maintains sufficient levels of committed borrowing<br />
facilities and cash and cash equivalents to ensure that it can meet its operational cash flow<br />
requirements and any maturing financial liabilities, while at all times operating within its financial<br />
covenants. The level of operational headroom provided by <strong>Vesuvius</strong>’ committed borrowing facilities<br />
is reviewed at least annually as part of <strong>Vesuvius</strong>’ three-year planning process. Where this process<br />
indicates a need for additional finance, this is normally addressed 12 to 18 months in advance by<br />
means of either additional committed bank facilities or raising finance in the capital markets.<br />
As at 30 June 2012, <strong>Vesuvius</strong> had committed borrowing facilities of £759.2 million (HY 2011:<br />
£873.9 million; FY 2011: £883.7 million; FY 2010: £855.4 million, FY 2009: £876.2 million), of<br />
which £184.7 million (HY 2011: £339.4 million; FY 2011: £339.5 million; FY 2010: £350.0 million,<br />
FY 2009: £350.0 million) were undrawn. <strong>Vesuvius</strong>’ borrowing requirements as at 30 June 2012 were<br />
met by $250 million of issued US Private Placement loan notes and a multi-currency committed<br />
syndicated bank facility of £600 million (HY 2011: £600 million; FY 2011: £600 million; FY 2010:<br />
£573.2 million, FY 2009: £674.9 million). The US Private Placement loan notes are repayable $110<br />
million in 2017 and $140 million in 2020. The syndicated bank facility comprises a £600 million<br />
revolving credit facility which expires in April 2016. An amendment has been agreed to the<br />
syndicated bank facility whereby, upon the Demerger, <strong>Vesuvius</strong> will retain the facility, but it will<br />
reduce from £600 million to £425 million.<br />
5 Off-balance sheet arrangements<br />
In compliance with current reporting requirements, certain arrangements entered into by <strong>Vesuvius</strong> in its<br />
normal course of business are not reported in <strong>Vesuvius</strong>’ balance sheet. Of such arrangements, those<br />
considered material by the Directors include: inventory held either under precious metal consignment<br />
arrangements or on behalf of customers for processing (note 20 to <strong>Vesuvius</strong>’ consolidated financial<br />
statements in section B of Part IX of this document); future lease payments in relation to assets used by<br />
<strong>Vesuvius</strong> under non-cancellable operating leases (note 28); and trade receivable balances that have been<br />
subject to non-recourse factoring arrangements.<br />
Under its non-recourse factoring arrangements, <strong>Vesuvius</strong> sells trade receivables balances to a third-party<br />
factoring company in exchange for a cash payment from the factoring company, net of fees. All the risks<br />
and rewards of the trade receivables subject to these arrangements are transferred to the factoring company<br />
and, accordingly, the trade receivables are derecognised in the <strong>Vesuvius</strong>’ balance sheet. Such arrangements<br />
are used from time to time by <strong>Vesuvius</strong> to manage the recovery of cash from its trade receivables. As at<br />
30 June 2012, the balance sheet included £28.3 million (HY 2011: £27.6 million; FY 2011: £28.5 million;<br />
FY 2010: £25.5 million; FY 2009: £22.1 million) of cash that would otherwise have been reported as trade<br />
receivables if these arrangements were not in place. Factoring fees incurred during the six months ended<br />
30 June 2012, which are written off to the income statement within ordinary finance costs, amounted to<br />
£0.5 million (HY 2011: £0.7 million; FY 2011: £1.4 million; FY 2010: £1.2 million; FY 2009: £1.1<br />
million).<br />
6 Critical judgements in applying accounting policies and key sources of estimation uncertainty<br />
Determining the carrying amount of some assets and liabilities requires estimation of the effect of<br />
uncertain future events. The major sources of estimation uncertainty that have a significant risk of resulting<br />
in a material adjustment to the carrying amounts of assets or liabilities are noted below.<br />
6.1 Goodwill and other intangible assets<br />
The Directors use their judgement to determine the extent to which goodwill and other capitalised<br />
intangible assets have a value that will benefit the performance of <strong>Vesuvius</strong> over future periods. To<br />
assist in making this judgement, the Directors undertake an assessment, at least annually, of the<br />
carrying value of <strong>Vesuvius</strong>’ capitalised goodwill and other intangible assets. In the assessment<br />
undertaken as at 31 December 2011, further details of which are given in note 18 to <strong>Vesuvius</strong>’<br />
consolidated financial statements in section B of Part IX of this document, value in use was derived<br />
from discounted five-year cash flow projections, using a growth rate of 2.5 per cent. in the years<br />
beyond the projection period and pre-tax discount rates. The projection period is, in the opinion of<br />
the Directors, an appropriate period over which to view the future results of <strong>Vesuvius</strong>’ businesses for<br />
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