Notes to the financial statements
28 Analysis of net debt
| 26 March
2006 £m |
Cash flow £m |
Disposals £m |
Other
non-cash movements £m |
24 March
2007 £m |
|
|---|---|---|---|---|---|
| Current assets | |||||
| Cash and cash equivalents (excluding Sainsbury’s Bank) | 862 | 266 | — | — | 1,128 |
| Sainsbury’s Bank cash and cash equivalents | 166 | (166) | — | — | — |
| 1,028 | 100 | — | — | 1,128 | |
| Current liabilities | |||||
| Bank overdrafts | (186) | (177) | — | — | (363) |
| Borrowings | (67) | 57 | — | — | (10) |
| Derivative financial instruments | (10) | — | — | 8 | (2) |
| (263) | (120) | — | 8 | (375) | |
| Non-current liabilities | |||||
| Borrowings | (2,081) | 22 | — | 20 | (2,039) |
| Finance leases | (52) | — | — | 1 | (51) |
| Loan from minority shareholder | (45) | — | 45 | — | — |
| Derivative financial instruments | (2) | — | — | (41) | (43) |
| (2,180) | 22 | 45 | (20) | (2,133) | |
| (2,443) | (98) | 45 | (12) | (2,508) | |
| Total net debt | (1,415) | 2 | 45 | (12) | (1,380) |
Net debt incorporates the Group’s borrowings (including accrued interest), bank overdrafts, fair value of derivatives and obligations under finance leases, less cash and cash equivalents.
At 24 March 2007, Sainsbury’s Bank plc is equity accounted for as a joint venture (note 7) and hence, its net debt is not included within Group net debt.
Reconciliation of net cash flow to movement in net debt
| 2007 £m |
2006 £m |
|
|---|---|---|
| (Decrease)/increase in cash and cash equivalents | (77) | 142 |
| Decrease in debt | 79 | 91 |
| Loan disposed of with part disposal of Sainsbury’s Bank | 45 | — |
| Repayment of finance leases | — | 1 |
| Other non-cash movements | (12) | (5) |
| Decrease in net debt before impact of IAS 32 and IAS 39 | 35 | 229 |
| IAS 32 and IAS 39 adjustments to net debt | — | (203) |
| Decrease in net debt in the year | 35 | 26 |
| Opening net debt at the beginning of the year | (1,415) | (1,441) |
| Closing net debt at the end of the year | (1,380) | (1,415) |
29 Financial risk management
Treasury management
Treasury policies are reviewed and approved by the Board. The Chief Executive and Chief Financial Officer have joint delegated authority from the Board to approve finance transactions up to £300 million. The central treasury function is responsible for managing the Group’s liquid resources, funding requirements and interest rate and currency exposures. Group policy permits the use of derivative instruments but only for reducing exposures arising from underlying business activity and not for speculative purposes.
Financial instruments
The Group holds or issues financial instruments to finance its operations and to manage the interest rate and currency risks associated with its sources of finance. Various other financial instruments e.g. trade receivables and payables also arise out of the Group’s commercial operations.
The Group finances its operations by a combination of secured loans from finance companies, unsecured bank loans, share capital and cash generated by operating subsidiaries. The Group borrows in sterling at fixed, floating and inflation-linked rates of interest, using swaps and options where appropriate to generate the desired interest rate profile. The main risks arising from the Group’s use of financial instruments include interest and foreign exchange rate risk, liquidity risk and credit risk.
Interest rate risk
The Group’s exposure to interest rate fluctuations is managed through the use of interest rate swaps and options. The Group’s objectives are to match the interest rate profiles of its borrowings to that of its revenues, to minimise interest expense and reduce rate volatility by holding an appropriate mix of borrowings at fixed, floating and inflation-linked rates of interest. Group policy provides that the relative proportion of fixed, floating and inflation-linked borrowings may be varied within defined bands around neutral benchmarks.
Currency risk
The Group incurs currency exposure in respect of overseas trade purchases made in currencies other than sterling. The Group uses a programme of rolling forward contracts to reduce the exchange rate risk associated with these purchases, which may be either contracted or not contracted. Gains and losses on these contracts are deferred in equity when the transaction qualifies for hedge accounting in accordance with IAS 39 ‘Financial instruments: Recognition and Measurement’.
Liquidity risk
The Group’s exposure to liquidity risk is managed by pre-funding cash flow requirements and maturing debt obligations, maintaining a diversity of funding sources and spreading debt repayments over a range of maturities. The Group’s core funding takes the form of term loans secured over property assets. Short-term funds are raised on the wholesale money markets. Contingent liquidity is maintained through a new £400 million five-year revolving credit facility, entered into in February 2007. As at 24 March 2007 there were £nil drawings under this facility (2006: £nil drawings under 2006 bank facility).
Credit risk
The Group’s exposure to credit risk is managed by limiting credit positions to banks or financial institutions carrying A1/P1 credit ratings. Counterparty exposures are monitored on a regular basis and dealing activity is controlled through the use of dealing mandates and the operation of standard settlement instructions.
Fair value estimation
The fair values of short-term deposits, receivables, overdrafts, payables and loans of a maturity of less than one year are assumed to approximate to their book values.
The fair value of interest rate swaps is based on the market price of comparable instruments at the balance sheet date if they are publicly traded. The fair value of the forward currency contracts has been determined based on market forward exchange rates at the balance sheet date.
In the case of bank loans and other loans due after more than one year, the fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. The fair value of the other financial asset is based on the market values of the underlying property portfolio.