directors report and accounts 2006 - Treasury operations


 Treasury operations

Treasury is tasked with raising finance for the Group, managing the financial risks arising from underlying operations and managing the Group's cash resources. 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 Finance Director chairs the boards of the major central finance companies. Any significant departure from agreed policies is subject to the prior approval of the Board.

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. The Group’s treasury position is monitored by the Group Treasury Committee, which meets seven times a year and is chaired by the Finance Director. Regular reports are provided to senior management, and treasury operations are subject to periodic independent reviews and audits, both internal and external.

One of the principal responsibilities of Treasury is to manage the financial risk arising from the Group’s underlying operations. Specifically, Treasury manages, within an overall policy framework, the Group's exposure to funding and liquidity, interest rate, foreign exchange and counterparty risks. Derivative contracts are only entered into to facilitate the management of these risks.

During 2005, the Group issued one further bond maturing in 2012, which raised €750 million; the proceeds were used to refinance maturing bond issues. In addition, the Group’s central banking facility was renewed for an increased amount of £1.75 billion for a term of five years (with two additional one year extension options) and on significantly improved terms.

During 2006, the Group issued three bonds (€525 million maturing in 2010, €600 million maturing in 2014 and £325 million maturing in 2016) and the proceeds were used to refinance maturing bond issues. In addition, the Group’s central banking facility was extended on existing terms under the first extension option to a term of five years (plus one remaining one year extension).

The Group continues to target investment-grade credit ratings; as at 31 December 2006 the ratings from Moody’s and S&P were Baa1/BBB+ (end 2005: Baa1/BBB+). The strength of the ratings has underpinned the debt issuance during 2005 and 2006 and the Group continues to enjoy full access to the debt capital markets.