19. Financial instruments

For the purposes of the disclosures that follow in this note, short-term debtors and creditors which arise directly from the Group’s operations have been excluded as permitted under FRS 13. The disclosures therefore, focus on those financial instruments which play a significant medium term role in the financial risk profile of the Group. Financial assets are separately disclosed in note 11.


A. Treasury management

The Group treasury function, as part of the Group finance function, operates as a centralised service which aims to ensure cost-efficient funding for the Group and to manage its financial risks. The main risks identified are interest rate, foreign exchange and liquidity risk. The activities of Group treasury are routinely reported to members of the Board and are subject to review by internal audit. Group treasury does not engage in speculative activity and undertakes its operations in a risk averse manner. The main financial instruments used to manage interest rate and foreign exchange risk arising from the Group’s operations are interest rate swaps and forward foreign exchange contracts and all derivatives are undertaken with appropriate counterparties.


B. Interest rate risk management

The interest rate risk profile of the Group’s financial liabilities as at 31 December was as follows:

  2009   2008  
  €'000 % €'000 %
Fixed rate financial liabilities 100,022 56 100,084 61
Floating rate financial liabilities 78,828 44 63,637 39
(note 17) 178,850 100 163,721 100
Weighted average fixed debt interest rates   4.32%   4.03%
Weighted average fixed debt period — years   1.0   2.0

All of the Group’s borrowings are in Euro. The amounts shown above take into account the effect of interest rate swaps used to manage interest rate exposures.

The Group seeks to have between 50% and 80% of its core debt fixed at all times however, under certain circumstances, as approved by the Board, it may fix a percentage outside of this band. At the end of 2009 56% of the Group’s debt was fixed (2008:61%).

Floating rate debt comprises bank borrowings bearing interest at rates fixed in advance for periods ranging from overnight to less than one year largely by reference to inter-bank interest rates (EURIBOR). The Group minimises cash balances.

This strategy ensures that a 1% increase in interest rates would cost the Group €788,000 (2008: €636,000) in additional interest charges per annum.


C. Liquidity risk

The maturity profiles of debt as at 31 December 2008 and 2009 are as follows:

  2009   2008  
  €'000 % €'000 %
In one year or less 21,150 12 44,212 27
Between one and two years - - 42,009 26
Between two and five years 157,700 88 77,500 47
Total 178,850 100 163,721 100

The maturity profile is determined by reference to the earliest date on which payment can be required or on which the liability falls due.

The group had undrawn facilities of €18.8m (2008: €36.0m) as at 31 December 2009.


D. Fair Values

Fair value is the amount at which a financial instrument could be exchanged in an arms length transaction between informed and willing parties, other than in a forced or liquidation sale. The following table provides a comparison of the carrying amounts (book value) and fair value amounts of the Group’s financial assets and liabilities.

The fair value of fixed rate debt is estimated by discounting the future cash flows to net present values using market rates prevailing at the year end.

  Book value Fair value Mark-to-market
  2009 2008 2009 2008 2009 2008
  €'000 €'000 €'000 €'000 €'000 €'000
Financial assets 1,434 1,587 1,434 1,587 - -
Cash 1,497 2,534 1,497 2,534 - -
Overdrafts 21,128 11,638 21,128 11,638 - -
Floating rate debt 157,700 152,000 157,700 152,000 - -
Finance leases 22 83 22 83 - -
Interest rate swaps - - (3,127) (2,023) (3,127) (2,023)
Foreign exchange contracts - - (87) 2,323 (87) 2,323

E. Currency contracts (Sterling)

At 31 December 2009, the Group had entered into Euro / Stg£ foreign exchange contracts for the sale of the total principal amount of Stg £20.4 million at the rate of 0.89. There was a loss of €65,000 on sterling forward contracts marked to market at 31 December 2009.

At 31 December 2009, the Group had Euro / Stg £ foreign exchange options and collars for the sale of the total principal amount of Stg £8.3 million at the rate of 0.92. There was a loss of €21,000 on these instruments as at 31 December 2009.


F. Gains and losses on hedges

The Group enters into forward interest rate swaps and foreign currency contracts to manage exposures that arise on interest rates and revenue and costs denominated in foreign currencies. Changes in the fair value of instruments used as hedges are not recognised in the financial statements until the hedged position matures.
An analysis of these unrecognised gains and losses is as follows:

  Gains Losses 2009 2008
      Total Total
  €'000 €'000 €'000 €'000
Unrecognised gains and losses on hedges at 1 January 2009 2,323 (2,023) 300 1,989
Gains and losses arising in previous years       -
recognised prior to 1 January 2009 (2,323) - (2,323) (1,319)
Gains / (losses) arising in 2009 that were not        
recognised prior to 1 January 2009 - (1,191) (1,191) (370)
Unrecognised gains and losses on hedges        
at 31 December 2009 - (3,214) (3,214) 300
Expected to mature        
Within one year - (341) (341) 2,323
After one year - (2,873) (2,873) (2,023)
  - (3,214) (3,214) 300