Treasury is responsible for raising finance for the Group, managing the Group’s cash resources and managing the financial risks arising from underlying operations. All these activities are carried out under defined policies, procedures and limits.
The Board reviews and agrees the overall treasury policies and procedures, delegating appropriate authority to the Finance Director, the Treasury function and the boards of the central finance companies. The policies include a set of financing principles including the monitoring of credit ratings, interest cover and liquidity. These provide a framework within which the Group’s capital, including debt, is managed.
Clear parameters have been established, including levels of authority, on the type and use of financial instruments to manage the financial risks facing the Group. Such instruments are only used if they relate to an underlying exposure; speculative transactions are expressly forbidden under the Group’s treasury policy.
It is the policy of the Group to maximise financial flexibility and minimise refinancing risk by issuing debt with a range of maturities, generally matching the projected cash flows of the Group, and obtaining this financing from a wide range of providers. The Group targets an average centrally managed debt maturity of at least five years with no more than 20 per cent of centrally managed debt maturing in a single year. As at 31 December 2009, the average centrally managed debt maturity was seven years (2008: five years) and the highest proportion of centrally managed debt maturing in a single year was 18 per cent (2008: 18 per cent).
The Group continues to maintain investment-grade credit ratings; as at 31 December 2009, the ratings from Moody’s and S&P were Baa1/BBB+ with a stable outlook (end 2008: Baa1/BBB+). The strength of the ratings has underpinned the debt issuance during 2008 and 2009 and, despite the impact of the turbulence in financial markets, the Group is confident of its ability to successfully access the debt capital markets.
Subsidiary companies are funded by share capital and retained earnings, loans from the central finance companies on commercial terms, or through local borrowings by the subsidiaries in appropriate currencies. All contractual borrowing covenants have been met and none of them is expected to inhibit the Group’s operations or funding plans.
In the year ended 31 December 2009, the Group entered into a number of transactions in the capital markets. The first was the repayment of the €900 million maturing debt at the end of February 2009. This was financed from bond issues during 2008 and from cash generated from operations. In May, there was the repayment of a MYR100 million bond, which was subsequently replaced in August by a new MYR250 million bond due 2014. The additional proceeds were used for the repayment of a MYR150 million bond which matured in November 2009.
In June, the Group issued a £250 million bond with maturity of June 2022. In November 2009, the terms of €481 million of the €1.0 billion bond maturing in 2013 were modified by extending the maturity to 2021. At the same time, the Group issued an additional €169 million bond with a maturity of 2021. In addition, £199 million of the £350 million bond maturing in 2013 was purchased and cancelled; at the same time, the Group issued a new £500 million bond with a maturity of 2034.
On 13 February 2008, the Group entered into an acquisition credit facility whereby lenders agreed to make available an amount of US$2 billion. On 1 May 2008, this facility was syndicated in the market and was redenominated into two euro facilities of€420 million and €860 million; €395 million and €759 million were outstanding as at31 December 2008 respectively. The €395 million was repaid in September 2009 and €759 million was repaid in October 2009. The €759 million was refinanced by a new €700 million term loan facility with a maturity date of 31 October 2012 with an option to extend it to October 2013, at the discretion of the banking participants in the syndicated facility.
In mid-2009, the Group also re-established its euro commercial paper (ECP) programme of £1 billion.
At year end 2009, the £1.75 billion revolving credit facility described below, was undrawn. The revolving credit facility acts as a backstop for the ECP programme and £187 million of ECP was outstanding at year end.
In the year ended 31 December 2008, the €1.8 billion revolving acquisition credit facility arranged in December 2007 was cancelled and replaced with the issue of €1.25 billion and £500 million bonds maturing in 2015 and 2024 respectively. In addition to this, the Group increased its €1 billion (5.375 per cent, maturity 2017) bond by an additionalv250 million, bringing the total size of the bond to €1.25 billion.
During 2008, the Group also issued US$300 million and US$700 million bonds, maturing in 2013 and 2018 respectively, pursuant to Rule 144A and RegS under the US Securities Act. The Group also repaid US$330 million and £217 million bonds upon maturity in May and November respectively. In addition, on 22 September 2008, the Group repurchased its maturing Mexican 2011 MXN1,055 million UDI bond and refinanced it with a floating rate borrowing of MXN1,444 million.
The IFRS cash flow includes all transactions affecting cash and cash equivalents, including financing. The alternative cash flow shown above is presented to illustrate the cash flows before transactions relating to borrowings.
The growth in underlying operating performance, partially offset by the timing of working capital movements, resulted in a £468 million increase in cash flow before restructuring costs and taxation, to £5,160 million. Although there was a £152 million increase in tax outflows, reflecting higher profits and the timing of payments, with the improved operating cash flow and lower restructuring costs, the Group’s net cash flow from operating activities was £339 million higher at £3,878 million.
Free cash flow is the Group’s cash flow before dividends, share buy-backs and investing activities. Although net interest payments, capital expenditure and dividends paid to minorities increased, the free cash flow was £26 million higher than 2008 at £2,630 million. The free cash flow exceeded the total cash outlay on dividends to shareholders by £832 million.
The ratio of free cash flow per share to adjusted diluted earnings per share was 86 per cent (2008: 101 per cent), with free cash flow per share increasing by 2 per cent.
During 2009, the cash outflows of £370 million on the purchase of Bentoel comprise the purchase price, together with the related acquisition costs and the acquired net cash and cash equivalents and overdrafts. There was also an outflow of £12 million in 2009 in respect of the acquisition of the Tekel assets, and a net cash inflow of £187 million from the disposal of ST trademarks. For 2008, the cash outflows of £873 million and £1,243 million respectively, on the purchase of Tekel assets and ST businesses, comprise the purchase price, the acquisition costs less acquired net cash and cash equivalents and overdrafts.
The other net flows principally reflect the impact of the level of shares purchased by the employee share ownership trusts, together with the impact of flows in respect of certain derivative financial instruments.
The above flows resulted in a net cash inflow of £433 million compared to an outflow of £1,532 million in 2008. After taking account of exchange rate movements of £672 million, acquired debt of £84 million with the Bentoel acquisition and changes in accrued interest and other, total net debt was £8,842 million at 31 December 2009, down £1,049 million from £9,891 million on 31 December 2008.
Cash flow and net debt movements
|Net cash from operating activities excluding restructuring costs and taxation||5,160||4,692|
|Net cash from operating activities||3,878||3,539|
|Net capital expenditure||(515)||(482)|
|Dividends paid to minority interests||(234)||(173)|
|Free cash flow||2,630||2,604|
|Dividends paid to shareholders||(1,798)||(1,393)|
|Share buy-back|| ||(400)|
|Purchase of Bentoel||(370)|| |
|Purchase of Tekel cigarette assets||(12)||(873)|
|Proceeds from ST trademark disposals and purchase of ST usinesses||187||(1,243)|
|Purchases of other subsidiaries, associates and minority interests||(1)||(9)|
|Other net flows||(203)||(218)|
|Net cash flows||433||(1,532)|
| || || |
|Opening net debt||(9,891)||(5,581)|
|Exchange rate effects||672||(2,622)|
|Acquired debt||(84)|| |
|Accrued interest and other||28||(156)|
|Closing net debt||(8,842)||(9,891)|