Strong performance in uncertain economic times

Conditions in the markets in which we operate have been difficult since the onset of the global downturn in 2008. Our approach during this period was to focus on maintaining acceptable levels of impairment, controlling costs and growing only where economic conditions improved and trading performance allowed.

We have demonstrated the resilience of the business model during this period and delivered a strong performance in 2010 with a record pre-tax profit of £92.1 million, an increase in pre-exceptional profit before taxation from continuing operations of 49.3%. At the same time, borrowings reduced by £28.3 million to £304.3 million, the ratio of equity to receivables rose to 54.5% and headroom over our core funding covenants has increased.

Refinancing successfully completed

During the year we were pleased to secure funding through to the end of 2013 to support growth in the business, in very difficult market conditions. As part of this process we were able to remove our reliance on bank funding by securing new sources of funding through our inaugural Eurobond issue under our Euro Medium Term Note (‘EMTN’) programme as well as being recognised as the first non-domestic issuer of corporate bonds on the Warsaw Stock Exchange. We were also able to diversify and extend the maturity profile of our debt funding with the introduction of a significant proportion of five-year funding.

In 2010 we put in place the following debt funding structure:

• in August we issued €225 million (£193.1 million) five-year bonds at a fixed coupon of 11.5% under our EMTN programme;
• in September, we issued 200 million Polish zloty bonds (£43.4 million) maturing 30 June 2015 (the ‘PMTN bond’). The coupon is a floating rate of six-month WIBOR (the relevant Polish bank reference rate) plus a margin of 750 basis points; and
• in November 2010 we entered into new three-year syndicated and bilateral bank facilities totalling £198.3 million priced at 400 basis points over reference rate.

There was no change to the Group’s financial covenants arising from any of these funding initiatives.

The actual cost of the funding in local currency terms is usually higher than the EMTN bond’s coupon rate due to the markets in which we operate having higher base rates than the Euro. In the period from the date the bonds were issued to the year end, the weighted average interest cost of EMTN funding, when translated into operating currencies, was 14.8%.

Our syndicated and bilateral facilities reflect a broad banking group that has a good strategic and geographical fit with our operations. These facilities are provided by the following institutions: Citibank, HSBC, VUB, BZWBK, Unicredit, ING, Alior, DZ Bank and OTP Bank.

Robust investment proposition

We believe that there are five key reasons why the Group represents a robust investment proposition.

1. Resilient business model

We operate a long-established business model that was stress tested in the 2008 and 2009 economic downturn. Most loans issued by the Group are for terms of around one year with, on average, just five months remaining at any time. This enables us to readily change the risk / return profile of the business to respond to changes in the external economic environment. This speed of response, together with prudent provisioning, means that the impact of adverse economic conditions is reported in the income statement quickly: the reduction in profitability in 2009 was largely reported in the first quarter of the year with year-on-year profit growth resuming in the second half. In 2010 we reported further increases in profitability on a quarterly basis and a record profit for the full year by concentrating on controlled growth and improved credit quality.

The business model generates good margins and returns. In 2010 we generated a profit margin of 15.1% and a return on capital employed of 21.9%. This includes a margin of 21.8% and return on capital employed of 29.5% in our established Central European businesses.

* For this purpose equity has been calculated as 55% of receivables and tax has been allocated across the businesses at the Group rate.