Notes 21-25

24. Risk management policies

Foreign currency risk

The Group’s results in pounds sterling are subject to fluctuation as a result of exchange rate movements. The Group does not hedge this translation exposure to its earnings but does hedge the currency element of its net assets using foreign currency borrowings, cross-currency swaps and forward foreign exchange contracts.

The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or ‘functional’) currencies of its main operating units. The majority of the Group’s debt is therefore denominated in US dollars, pounds sterling and euros. Borrowings in these currencies represented 97.18% of the Group’s gross indebtedness at 31 December 2008 (at $3,060 million, £749 million and €1,405 million) and 96.48% of the Group’s average gross debt during the course of 2008 (at $1,944 million, £819 million and €1,137 million).

The Group’s operations conduct the majority of their activities in their own local currency and consequently the Group has no significant transactional foreign exchange exposures. Any significant cross-border trading exposures are hedged by the use of forward foreign-exchange contracts. No speculative foreign exchange trading is undertaken.

Interest rate risk

The Group is exposed to interest rate risk on both interest-bearing assets and interest-bearing liabilities. The Group has a policy of actively managing its interest rate risk exposure while recognising that fixing rates on all its debt eliminates the possibility of benefiting from rate reductions and similarly, having all its debt at floating rates unduly exposes the Group to increases in rates.

Including the effect of interest rate and cross-currency swaps, 27.53% of the year- end US dollar net debt is at fixed rates averaging 5.79% for an average period of 56 months; and 51.50% of the sterling net debt is at a fixed rate of 5.69% for an average period of 88 months; and 55.13% of the euro net debt is at fixed rates averaging 6.80% for an average period of 58 months.

Other than fixed rate debt, the Group’s other fixed rates are achieved principally through interest rate swaps with the Group’s bankers. The Group also uses forward rate agreements and interest rate caps to manage exposure to interest rate changes. At 31 December 2008 no forward rate agreements or interest rate caps were in place. These interest rate derivatives are used only to hedge exposures to interest rate movements arising from the Group’s borrowings and surplus cash balances arising from its commercial activities and are not traded independently. Payments made under these instruments are accounted for on an accruals basis.

Going concern and liquidity risk

In considering going concern and liquidity risk, the directors have reviewed the Group’s future cash requirements and earnings projections. The directors believe these forecasts have been prepared on a prudent basis and have also considered the impact of a range of potential changes to trading performance. The directors have concluded that the Group should be able to operate within its current facilities and comply with its banking covenants for the foreseeable future and therefore believe it is appropriate to prepare the financial statements of the Group on a going concern basis.

At 31 December 2008, the Group has access to £5.2 billion of committed bank facilities with maturity dates spread over the years 2009 to 2020 as illustrated below.



£m
2009
£m
2010
£m
2011
£m
2012
£m
2013
£m
2014
£m
2015+
£m
£ bonds £200m
(6.375% ’20)
200.0             200.0
£ bonds £400m
(6% ’17)
400.0             400.0
Eurobonds €750m
(6.625% ’16)
718.3             718.3
Eurobonds €500m
(5.25% ’15)
478.8             478.8
US bond $650m
(5.875% ’14)
446.0           446.0  
Eurobonds €600m
(4.375% ’13)
574.6         574.6    
Bank revolver
$1,600m
1,097.8       1,097.8      
TNS acquisition
facilities £1,250m
1,250.0 200.0 850.0 200.0        
Total committed
facilities available
5,165.5 200.0 850.0 200.0 1,097.8 574.6 446.0 1,797.1
Drawn down facilities
at 31 December 2008
4,091.0 170.0 850.0 200.0 53.3 574.6 446.0 1,797.1
Undrawn committed
credit facilities
1,074.4              
 
Drawn down facilities
at 31 December 2008

4,091.0

 

 

 

 

 

 

 
Net cash at
31 December 2008
(1,318.1)              
TNS private
placement debt
215.7              
Other adjustments 79.0              
Net debt at
31 December 2008
3,067.6              

The Group’s borrowings are evenly distributed between fixed and floating rate debt. Given the strong cash generation of the business, its debt maturity profile and available facilities, the Directors believe the Group has sufficient liquidity to match its requirements for the foreseeable future.

Treasury activities

Treasury activity is managed centrally, from the parent company’s London, New York and Hong Kong offices, and is principally concerned with the monitoring of working capital, managing external and internal funding requirements and the monitoring and management of financial market risks, in particular interest rate and foreign exchange exposures.

The treasury operation is not a profit centre and its activities are carried out in accordance with policies approved by the Board of directors and subject to regular review and audit.

Financings completed in the year included a new 8 year bond issued in May for €750 million bearing a coupon of 6.625%. This new bond refinanced the €650 million 6% bonds redeemed in June and the $100 million 6.875% bonds redeemed in July. In addition, £1,250 million was raised from the Group’s bankers to assist in financing the acquisition of TNS. The amount is made up of a £650 million term facility with a final maturity date of July 2010 and a £600 million amortising Revolving Credit Facility with a final maturity of July 2011. The $150 million 5% Grey convertible was also redeemed in October in accordance with its terms.

The fall out from the subprime crisis has resulted in difficulties from the credit markets generally, however WPP is taking steps to ensure it is in a position to meet its requirements.

The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of peak net-borrowing levels and debt maturities are closely monitored. Targets for average net debt are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Group’s major operations.

Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 10, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 26 and 27.

Credit risk

The Group’s principal financial assets are cash and short-term deposits, trade and other receivables and investments, the carrying values of which represent the Group’s maximum exposure to credit risk in relation to financial assets, as shown in note 25.

The Group’s credit risk is primarily attributable to its trade receivables. The majority of the Group’s trade receivables are due from large national or multinational companies where the risk of default is considered low. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. A relatively small number of clients make up a significant percentage of the Group’s debtors, but no single client represents more than 5% of total trade receivables as at 31 December 2008.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies or banks that have been financed by their government.

A relatively small number of clients contribute a significant percentage of the Group’s consolidated revenues. The Group’s clients generally are able to reduce advertising and marketing spending or cancel projects at any time for any reason. There can be no assurance that any of the Group’s clients will continue to utilise the Group’s services to the same extent, or at all, in the future. A significant reduction in advertising and marketing spending by, or the loss of one or more of, the Group’s largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Group’s prospects, business, financial condition and results of operations.

Sensitivity analysis

The following sensitivity analysis addresses the effect of currency and interest rate risks on the Group’s financial instruments. The analysis assumes that all hedges are highly effective.

Currency risk
A 10% weakening of sterling against the Group’s major currencies would result in the following losses, which would be posted directly to equity. These losses would arise on the retranslation of foreign currency denominated borrowings and derivatives designated as effective net investment hedges of overseas net assets. These losses would be offset in equity by a corresponding gain arising on the retranslation of the related hedged foreign currency net assets. A 10% strengthening of sterling would have an equal and opposite effect. There are no other material foreign exchange exposures which would create gains or losses to the functional reporting currencies of individual entities in the Group.


 
2008
£m
2007
£m
US dollar 183.8 51.8
Euro 96.3 44.0

Interest rate risk
A one percentage point increase or decrease in market interest rates for all currencies in which the Group had cash and borrowings at 31 December 2008 would decrease or increase profit before tax respectively by approximately £0.4 million (2007: £11.1 million). The effect on equity as at 31 December 2008 would be £11.7 million (2007: £22.7 million). This has been calculated by applying the interest rate change to the Group’s variable rate cash and borrowings.

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