Notes to the financial statements
19. Derivative financial instruments
The fair value of derivative financial instruments is set out below:
| Group | Company | ||||
|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
||
| Assets | |||||
| Interest rate swaps | 0.9 | 0.7 | 5.4 | – | |
| Foreign currency contracts | 0.8 | – | 0.6 | – | |
| Total | 1.7 | 0.7 | 6.0 | – | |
| Group | Company | ||||
|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
||
| Liabilities | |||||
| Interest rate swaps | 9.8 | 0.2 | 5.1 | – | |
| Foreign currency contracts | 4.6 | 0.5 | 4.6 | 0.2 | |
| Total | 14.4 | 0.7 | 9.7 | 0.2 | |
The fair value of derivative financial instruments has been calculated by discounting expected future cash flows using interest rate yield curves and forward foreign exchange rates prevailing at 31 December.
The Group uses interest rate swaps in order to fix the interest payable on a large proportion of its borrowings and foreign currency contracts to hedge against specified future foreign currency cash flows. In addition the Group also enters into foreign exchange forward contracts to economically hedge against forecast profits denominated in foreign currency. These foreign exchange contracts do not hedge against a specific future cash flow so do not qualify for hedge accounting; changes in their fair value are therefore taken to the income statement. None of these contracts were outstanding at the balance sheet date.
Cash flow hedges
The Group uses interest rate swaps (cash flow hedges) to hedge those interest cash flows that are expected to occur within four years of the balance sheet date and foreign currency swaps (cash flow hedges) to hedge those foreign currency cash flows that are expected to occur within 12 months of the balance sheet date. The effect on the income statement will also be within these periods. An amount of £8.9m has been charged to equity for the Group in the period in respect of cash flow hedges (2007: credit of £1.4m), Company: credit of £0.2m (2007: £nil).
Interest rate swaps
The total notional principal of outstanding interest rate swaps that the Group is committed to is £582.3m (2007: £250.1m). The total notional principal of outstanding interest rate swaps that the Company is committed to is £482.8m (2007: £nil). These interest rate swaps cover a proportion of both current borrowings and forecast future borrowings (which includes rollovers of current borrowings).
The majority of the interest rate swaps are designated, and are effective under IAS 39, as cash flow hedges, and the fair value thereof has been deferred in equity within the hedging reserve. A charge of £nil (2007: £0.2m) has been made to the income statement in the year representing the movement in the fair value of the ineffective portion of the interest rate swaps.
The weighted average interest rate and period to maturity of the Group interest rate swaps was as follows:
| 2008 | 2007 | ||||||
|---|---|---|---|---|---|---|---|
| Group | Weighted average interest rate % |
Range of interest rates % |
Weighted average period to maturity Years |
Weighted average interest rate % |
Range of interest rates % |
Weighted average period to maturity Years |
|
| Polish zloty | 6.2 | 5.5-7.0 | 1.7 | 5.5 | 5.4-5.8 | 1.5 | |
| Czech crown | 4.0 | 3.7-4.7 | 0.9 | 3.9 | 3.8-4.2 | 1.4 | |
| Slovak crown* | 4.3 | 3.7-4.5 | 1.2 | 4.5 | 4.4-4.5 | 1.6 | |
| Hungarian forint | 7.8 | 6.8-11.3 | 1.3 | 7.0 | 6.8-7.3 | 1.6 | |
| Mexican peso | 9.5 | 8.2-11.7 | 1.9 | 8.5 | 8.2-9.7 | 1.5 | |
| Euro | 3.9 | 3.5-4.5 | 2.7 | – | – | – | |
| Romanian leu | 10.4 | 9.8-11.1 | 1.9 | – | – | – | |
The weighted average interest rate and period to maturity of the Company interest rate swaps was as follows:
| 2008 | 2007 | ||||||
|---|---|---|---|---|---|---|---|
| Company | Weighted average interest rate % |
Range of interest rates % |
Weighted average period to maturity Years |
Weighted average interest rate % |
Range of interest rates % |
Weighted average period to maturity Years |
|
| Polish zloty | 6.7 | 6.2-7.1 | 2.1 | – | – | – | |
| Czech crown | 4.0 | 3.8-4.3 | 0.7 | – | – | – | |
| Slovak crown* | 4.2 | 3.7-4.7 | 1.2 | – | – | – | |
| Hungarian forint | 10.7 | 9.8-11.3 | 1.5 | – | – | – | |
| Euro | 4.0 | 3.5-4.5 | 2.7 | – | – | – | |
| Romanian leu | 10.5 | 9.8-11.3 | 1.9 | – | – | – | |
*The Slovak crown denominated swaps which were outstanding at 31 December 2008 were converted into Euro denominated swaps on 1 January 2009.
The Company enters into interest rate swaps with an external bank and then enters into an equal and offsetting swap with its subsidiaries to ensure there is a hedging relationship within the relevant subsidiary company. The Company held no interest rate swaps in 2007.
Foreign currency contracts
The total notional amount of outstanding foreign currency contracts that the Group is committed to at 31 December 2008 is £47.5m (2007: £30.7m). These comprise:
- foreign currency contracts to buy or sell various currencies for a total notional amount of £16.6m (2007: £17.6m). These contracts have various maturity dates up to October 2009 (2007: November 2008). These contracts have been designated and are effective as cash flow hedges under IAS 39 and accordingly the fair value thereof has been deferred in equity; and
- foreign currency contracts to buy or sell sterling for a total notional amount of £30.9m (2007: £13.1m). These contracts have various maturity dates up to March 2009 (2007: June 2008). These contracts exactly match the underlying item and therefore the amounts charged / credited to the income statement are offset by credits / charges in respect of the underlying item.
The total notional amount of outstanding foreign currency contracts that the Company is committed to at 31 December 2008 is £39.5m (2007: £13.1m). These comprise:
- foreign currency contracts to buy or sell sterling for a total notional amount of £30.9m (2007: £13.1m). These contracts have various maturity dates up to March 2009 (2007: June 2008). These contracts exactly match the underlying item and therefore the amounts charged / credited to the income statement are offset by credits / charges in respect of the underlying item;
- foreign currency contracts to buy or sell various currencies for a total notional amount of £2.0m (2007: £nil). These contracts have various maturity dates up to October 2009 (2007: November 2008). These contracts have been designated and are effective as cash flow hedges under IAS 39 and accordingly the fair value thereof has been deferred in equity; and
- foreign currency contracts to buy and sell various currencies for a total notional amount of £6.6m (2007: £nil). £3.3m of these contracts are held with external providers to buy and sell currency and £3.3m of these contracts are equal and off-setting contracts with other group companies to buy and sell the same amounts of currency. This leaves the Company with no residual risk and ensures the relevant subsidiary company has an effective foreign currency contract in its books.