Notes to the consolidated financial statements

Management of financial risk

The main financial risks faced by the Group are credit risk, liquidity risk, and market risks, which include interest rate risk, foreign exchange risk and certain commodity price risks. The Board regularly reviews these risks and approves written policies covering the use of financial instruments to manage these risks and set overall risk limits.

The Group Finance Director retains the overall responsibility and management of financial risk for the Group. Most of the Group’s financing, interest rate and foreign exchange risk are managed through the Group treasury company, Tate & Lyle International Finance PLC, whose operations are controlled by its board. The treasury company is chaired by the Group Finance Director and has other board members who are independent of the treasury function. The board of Tate & Lyle International Finance PLC approves policies and procedures setting out permissible funding and hedging instruments, and a system of authorities for the approval of transactions and exposures within the limits approved by the Board of Tate & Lyle PLC.

Group interest rate and currency exposures are concentrated either in the treasury company or in appropriate holding companies through market-related transactions with Group subsidiaries. These positions are managed by the treasury company within its authorised limits.

Commodity price risks are managed through divisional commodity trading functions in the USA and Europe. These functions are controlled by divisional management who are responsible for ratifying general strategy and overseeing performance on a monthly basis. Commodity price contracts are categorised as being held either for trading or for hedging price exposures. Commodity contracts held for trading within the Group are limited, confined only to tightly controlled areas within the sugar and corn pricing areas.

The derivative financial instruments approved by the Board of Tate & Lyle PLC to manage financial risks include swaps, both interest rate and currency, swaptions, caps, forward rate agreements, financial and commodity forward contracts and options, and commodity futures.

Market risks

Foreign exchange management

Tate & Lyle operates internationally and is exposed to foreign exchange risks arising from commercial transactions (transaction exposure), and from recognised assets, liabilities and investments in overseas operations (translation exposure).

Transaction exposure

The Group’s policy requires subsidiaries to hedge transactional currency exposures against their functional currency once the transaction is committed or highly probable, mainly through the use of forward foreign exchange contracts.

The amounts deferred in equity from derivative financial instruments designated as cash flow hedges are released to the income statement and offset against the movement in underlying transactions only when the forecast transactions affect the income statement.

Translation exposure

The Group manages the foreign exchange exposure to net investments in overseas operations, particularly in the USA and Europe, by maintaining a percentage of net debt in US dollars and euros to mitigate the effect of these risks. This is achieved by borrowing principally in US dollars and euros, which provide a partial match for the Group’s major foreign currency assets. A weakening of the US dollar and euro against sterling would result in exchange gains on net debt denominated in these currencies which would be offset against the losses on the underlying foreign currency assets. At the year end, net debt amounting to £814 million (2009 – £1,231 million) was held in the following currencies: net borrowings of US dollars 76% (2009 – 77%), euro 20% (2009 – 20%), pounds sterling 7% (2009 – 3%) and net deposits of other currencies 3% (2009 – net deposits of 0%). The Group’s interest cost through the income statement is impacted by changes in the relevant exchange rates.

The following table illustrates only the Group’s sensitivity to the fluctuation of the major currencies on its financial assets and liabilities, as defined and set out in Note 19:

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31 March 2010

31 March 2009

 

Income statement
–/+£m

Equity
–/+£m

Income statement
–/+£m

Equity
–/+£m

Sterling/US dollar 5% change

28

1

40

Sterling/euro 5% change

15

1

13

The Group also manages its foreign exchange exposure to net investments in overseas operations through the use of currency swap contracts. The amount deferred in equity from derivative financial instruments designated as net investment hedges is offset against the foreign currency translation effect of the net investment in overseas operations, and is released to the income statement upon disposal of those investments.

Interest rate management

The Group has an exposure to interest rate risk, arising principally from changes in US dollar, sterling and euro interest rates. This risk is managed by fixing or capping portions of debt using interest rate derivatives to achieve a target level of fixed/ floating rate net debt, which aims to optimise net finance expense and reduce volatility in reported earnings. The Group’s policy is that between 30% and 75% of Group net debt (excluding the Group’s share of joint-venture net debt) is fixed or capped (excluding out-of-the-money caps) for more than one year and that no interest rates are fixed for more than 12 years. A derogation of the maximum percentage of fixed rate debt was approved by the Tate & Lyle PLC Board until 30 June 2010. At 31 March 2010, the longest term of any fixed rate debt held by the Group was until November 2019 (2009 – June 2016). The proportion of net debt (excluding the Group’s share of joint-venture net debt) that was fixed or capped for more than one year was 82% (2009 – 55%).

If the interest rates applicable to the Group’s floating rate debt rise/fall from the levels at the end of March 2010 by an average of 100 basis points over the year to 31 March 2011, Group profit before tax will reduce/increase by approximately £1 million (2009 – £4 million). The floating rate interest payments on £136 million (2009 – £142 million) of the Group’s borrowings are hedged and designated under cash flow hedge relationships.

Price risk management

Tate & Lyle participates mainly in four markets: food and beverage; industrial ingredients; pharmaceutical and personal care; and animal feed. Food and beverage and industrial ingredients are the most significant. All ingredients are produced from renewable crops, predominantly corn (maize) and sugar cane.

Tate & Lyle is exposed to movements in the future prices of commodities in those domestic and international markets where the Group buys and sells corn, sugar and energy for production. Commodity futures, forwards and options are used where available to hedge inventories and the costs of raw materials for unpriced and prospective contracts not covered by forward product sales. In most cases, these hedging contracts mature within one year and are either traded on recognised exchanges or over the counter.

The table below illustrates the sensitivity of the Group’s commodity pricing contracts as of 31 March to the price movement of commodities.

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31 March 2010

31 March 2009

 

Income statement
–/+£m

Equity
–/+£m

Income statement
–/+£m

Equity
–/+£m

Corn 30% change

2

2

1

Sugar 20% change

3

1

The majority of the Group’s commodity pricing contracts are held for trading and changes in mark-to-market values of these contracts are taken directly into the income statement. Amounts deferred in equity from commodity pricing contracts designated as cash flow hedges are released to the income statement and offset against the movement in underlying transactions when they occur.

Credit risk management

Counterparty credit risk arises from the placing of deposits and entering into derivative financial instrument contracts with banks and financial institutions, as well as credit exposures inherent within the Group’s outstanding receivables.

The Group manages credit risk by entering into financial instrument contracts only with highly credit-rated authorised counterparties which are reviewed and approved annually by the Board.

The Group has Board approved maximum counterparty exposure limits for specified banks and financial institutions based on the long-term credit ratings of Standard & Poor’s and Moody’s (typically single A long-term credit ratings or higher). Trading limits assigned to commercial customers are based on ratings from Dun & Bradstreet and Credit Risk Monitor. In cases where published financial ratings are not available or inconclusive, credit application, reference checking, and obtaining of customers’ confidential financial information such as liquidity and turnover ratio, are required to evaluate customer’s credit worthiness.

Counterparties’ positions are monitored on a regular basis to ensure that they are within the approved limits and there are no significant concentrations of credit risks.

The Group considers its maximum exposure to credit risk as follows:

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31 March

 

2010
£m

2009
£m

Cash and cash equivalents

504

434

Trade and other receivables

398

687

Derivative financial instruments – assets

199

247

Available-for-sale financial assets

14

11

The Group’s trade receivables are short term in nature and largely comprise amounts receivable from consumers and business customers. There are no amounts included in trade receivables in respect of securitised receivables (2009 – £98 million). Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large, unrelated and internationally dispersed.

Liquidity risk management

The Group manages its exposure to liquidity risk and ensures maximum flexibility in meeting changing business needs, by maintaining access to a wide range of funding sources, including capital markets and bank borrowings. In November 2009, the Group issued a £200 million 6.75% bond which matures in November 2019, and undertook a tender offer to repurchase the 2012 sterling bonds. The objective of the new issue in conjunction with the tender offer for the 2012 sterling bonds was to extend the Group’s maturity profile and further diversify sources of funding. The Group repurchased £100 million of the 2012 sterling bonds on the completion of the tender offer. Capital market issues outstanding at 31 March 2010 include the US$300 million 6.125% 144A bond maturing in 2011, the £100 million 6.50% bond maturing in 2012, the US$500 million 5.00% 144A bond maturing in 2014, the US$250 million 6.625% 144A bond maturing in 2016, and the £200 million 6.75% bond maturing in 2019.

The Group ensures that it has sufficient undrawn committed bank facilities to provide liquidity back-up to cover its funding requirements for the foreseeable future. The Group has a core committed bank facility of US$1 billion of which US$1 billion matures in 2012. This facility is unsecured and contains common financial covenants for Tate & Lyle and its subsidiary companies that the pre-exceptional and amortisation interest cover ratio should not be less than 2.5 times and the multiple of net debt to EBITDA, as defined in our financial covenants, should not be greater than 4.0 times. In the year ended 31 March 2009, the Group amended the definition of the net debt to EBITDA covenant in the US$1 billion Revolving Credit Facility to eliminate the distortion of foreign exchange volatility, so that net debt is translated at the same average exchange rates used to translate EBITDA.

The Group monitors compliance against all its financial obligations and it is Group policy to manage the consolidated statement of financial position so as to operate well within these covenanted restrictions. In both the current and comparative reporting period, the Group complied with its financial covenants at all measurement points. The majority of the Group’s borrowings are raised through the Group treasury company, Tate & Lyle International Finance PLC, and are then on-lent to the business units on an arm’s length basis.

Current Group policy is to ensure that, after subtracting the total of undrawn committed facilities, no more than 10% of gross debt matures within 12 months and no more than 35% has a maturity within two and a half years. At 31 March 2010, after subtracting total undrawn committed facilities, there was no debt maturing within two and a half years (2009 – none). The average maturity of the Group’s gross debt was 5.4 years (2009 – 4.8 years). At the year end the Group held cash and cash equivalents of £504 million (2009 – £434 million) and had committed facilities of £659 million (2009 – £788 million) of which £515 million (2009 – £524 million) were undrawn. These resources are maintained to provide liquidity back-up and to meet the projected maximum cash outflow from debt repayment, capital expenditure and seasonal working capital needs foreseen for at least a year into the future at any one time.

The table below analyses the Group’s non-derivative financial liabilities and derivative assets and liabilities based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

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31 March 2010

Liquidity analysis

<1 year
£m

1-5 years
£m

> 5 years
£m

Borrowings including finance leases

(191)

(653)

(435)

Interest on borrowings

(62)

(190)

(115)

Trade and other payables

(474)

Derivative contracts – receipts

407

778

Derivative contracts – payments

(394)

(802)

Commodity contracts

(123)

(3)

Of the £191 million borrowings with maturities of less than one year £138 million relates to the draw down of committed facilities under the Revolving Credit Facility which matures in 2012.

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31 March 2009

 

<1 year
£m

1-5 years
£m

> 5 years
£m

Borrowings including finance leases

(525)

(483)

(598)

Interest on borrowings

(61)

(183)

(81)

Trade and other payables

(516)

Derivative contracts – receipts

521

306

Derivative contracts – payments

(505)

(351)

Commodity contracts

(232)

(9)

Included in borrowings are £2,394,000 of 6.5% cumulative preference shares. Only one year’s worth of interest payable on these cumulative preference shares is included in the less than one year category above.

Interest on borrowings is calculated based on borrowings held at year end without taking into account future issues. Floating-rate interest is calculated using forward interest rates derived from interest rate yield curves as at year end.

Derivative contracts include currency swaps, forward exchange contracts, interest rate swaps, and interest rate caps. All commodity pricing contracts such as options and futures are shown separately under commodity contracts.

Commodity contracts include only net settled commodity derivative contracts and gross settled commodity purchase contracts with negative fair values. Purchase contracts outflows represent actual contractual cash flows under the purchase contracts and not their fair values. Cash outflows from the purchase contracts are offset by cash inflows received from sale contracts; however, these inflows are not included as part of this analysis.

Financial liabilities denominated in currencies other than pounds sterling are converted to pounds sterling using year end exchange rates.

Capital risk management

The Group’s primary objectives in managing its capital are to safeguard the business as a going concern; to maintain sufficient financial flexibility to undertake its investment plans; to retain as a minimum an investment grade credit rating which enables consistent access to debt capital markets; and to optimise capital structure in order to reduce the cost of capital. The Group’s financial profile and level of financial risk is assessed on a regular basis in the light of changes to the economic conditions, business environment, the Group’s business profile and the risk characteristics of its businesses.

Tate & Lyle has contractual relationships with Moody’s and Standard and Poor’s (S&P) for the provision of credit ratings, and it is the Group’s policy to keep them informed of all major developments. At 31 March 2010, the long-term credit rating from Moody’s was Baa3 (stable outlook) and from S&P was BBB– (negative outlook). The Group is committed to maintaining investment grade credit ratings.

The Group regards its total capital as follows:

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31 March

 

2010
£m

2009
£m

Net debt

814

1 231

Total shareholders’ equity

854

1 013

Total capital

1 668

2 244

The Board of Tate & Lyle PLC has set two ongoing key performance indicators (KPIs) to measure the Group’s financial strength. The target levels for these financial KPIs are that the ratio of net debt/EBITDA should not exceed 2.5 times and interest cover should exceed 5 times. These ratios are calculated on the same basis as the external financial covenants noted above. The maximum net debt to EBITDA KPI target has been reduced from 2.5 times to 2.0 times for the year ending 31 March 2011 and beyond. The ratios for these KPIs for the financial years ended 31 March 2010 and 31 March 2009 are:

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31 March

 

2010

2009

Net debt/EBITDA

1.8

2.4

Interest cover

5.8

6.1