Notes forming part of the financial statements


23. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The Group’s multinational operations expose it to various financial risks in the ordinary course of business that include credit risk, liquidity risk, commodity price risk, currency risk and interest rate risk. This note discusses the Group’s exposure to each of these financial risks and summarises the risk management strategy for managing these risks. The note is presented as follows:-

(a) Overview of the Group’s risk exposures and management strategy

(b) Financial assets and liabilities as at 29 February 2020/28 February 2019 and determination of fair value

(c) Market risk

(d) Credit risk

(e) Liquidity risk

(a) Overview of the Group’s risk exposures and management strategy

The main financial market risks that the Group is exposed to include foreign currency exchange rate risk, commodity price fluctuations, interest rate risk and financial counterparty creditworthiness. The Board continues to monitor and manage this and all other financial risks faced by the Group very closely.

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. This is executed through various committees to which the Board has delegated appropriate levels of authority. An essential part of this framework is the role undertaken by the Audit Committee, supported by the internal audit function, and the Group Chief Financial Officer. The Board, through its Committees, has reviewed the internal control environment and the risk management systems and process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks will be managed effectively. The Board has embedded these structures and procedures throughout the Group and considers them to be a robust and efficient mechanism for creating a culture of risk awareness at every level of management.

The Group’s risk management programme seeks to minimise the potential adverse effects, arising from fluctuations in financial markets, on the Group’s financial performance in a non-speculative manner at a reasonable cost when economically viable to do so. The Group achieves the management of these risks in part, where appropriate, through the use of derivative financial instruments. All derivative financial contracts entered into in this regard are in liquid markets with credit rated parties. Treasury activities are performed within strict terms of reference that have been approved by the Board. See currency risk section for further details.

(b) Financial assets and liabilities

The carrying and fair values of financial assets and liabilities by measurement category were as follows:-


Other financial assets

Other financial liabilities

Carrying value

Fair value


€m

€m

€m

€m

Group





29 February 2020





Financial assets:





Cash

123.4

-

123.4

123.4

Trade receivables

93.1

-

93.1

93.1

Advances to customers

44.7

-

44.7

44.7






Financial liabilities:





Interest bearing loans & borrowings

-

(357.0)

(357.0)

(360.7)

Leases*

-

(93.3)

(93.3)

(93.3)

Derivative contracts

-

(0.3)

(0.3)

(0.3)

Trade & other payables

-

(390.7)

(390.7)

(390.7)

Provisions

-

(9.2)

(9.2)

(9.2)


261.2

(850.5)

(589.3)

(593.0)

* See note 18 for maturity analysis of the discounted and undiscounted lease liability.


Other financial assets

Other financial liabilities

Carrying value

Fair value


€m

€m

€m

€m

Group





28 February 2019





Financial assets:





Cash

144.4

-

144.4

144.4

Trade receivables

90.0

-

90.0

90.0

Advances to customers

51.4

-

51.4

51.4






Financial liabilities:





Interest bearing loans & borrowings

-

(446.0)

(446.0)

(450.6)

Derivative contracts

-

(2.0)

(2.0)

(2.0)

Trade & other payables

-

(336.3)

(336.3)

(336.3)

Provisions

-

(15.7)

(15.7)

(15.7)


285.8

(800.0)

(514.2)

(518.8)


Other financial assets

Other financial liabilities

Carrying value

Fair value


€m

€m

€m

€m

Company





29 February 2020





Financial assets:





Amounts due from Group undertakings

263.4

-

263.4

263.4






Financial liabilities:





Interest bearing loans & borrowings

-

(13.9)

(13.9)

(17.6)

Amounts due to Group undertakings

-

(302.5)

(302.5)

(302.5)

Trade & other payables

-

(1.0)

(1.0)

(1.0)


263.4

(317.4)

(54.0)

(57.7)


Other financial assets

Other financial liabilities

Carrying value

Fair value


€m

€m

€m

€m

Company





28 February 2019





Financial assets:





Amounts due from Group undertakings

346.0

-

346.0

346.0






Financial liabilities:





Interest bearing loans & borrowings

-

(24.5)

(24.5)

(29.1)

Amounts due to Group undertakings

-

(326.3)

(326.3)

(326.3)

Trade & other payables

-

(0.6)

(0.6)

(0.6)


346.0

(351.4)

(5.4)

(10.0)

Determination of Fair Value

Set out below are the main methods and assumptions used in estimating the fair values of the Group’s financial assets and liabilities. There is no material difference between the fair value of financial assets and liabilities falling due within one year and their carrying amount as due to the short-term maturity of these financial assets and liabilities their carrying amount is deemed to approximate fair value.

Short-term bank deposits and cash

The nominal amount of all short-term bank deposits and cash is deemed to reflect fair value at the balance sheet date.

Advances to customers

Advances to customers adjusted for advances of discount prepaid is considered to reflect fair value.

Trade & other receivables/payables

The nominal amount of all trade & other receivables/payables after provision for impairment is deemed to reflect fair value at the balance sheet date with the exception of provisions which are discounted to fair value.

Interest bearing loans & borrowings

The fair value of all interest bearing loans & borrowings has been calculated by discounting all future cash flows to their present value using a market rate reflecting the Group’s cost of borrowing at the balance sheet date. All loans bear interest at floating rates.

(c) Market risk

Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates and interest rates, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

Commodity price risk

The Group is exposed to variability in the price of commodities used in the production or in the packaging of finished products, such as apples, glass, barley, aluminium, polymer, wheat and sugar/glucose. Commodity price risk is managed, where economically viable, through fixed price contracts with suppliers incorporating appropriate commodity hedging and pricing mechanisms. The Group does not directly enter into commodity hedge contracts. The cost of production is also sensitive to variability in the price of energy, primarily gas and electricity. It is Group policy to fix the cost of a certain level of its energy requirement through fixed price contractual arrangements directly with its energy suppliers.

Currency risk

The Company’s functional and reporting currency is Euro. The Euro is also the Group’s reporting currency and the currency used for all planning and budgetary purposes. The Group is exposed to currency risk in relation to sales and purchase transactions by Group companies in currencies other than their functional currency (transaction risk), and fluctuations in the Euro value of the Group’s net investment in foreign currency (primarily Sterling and US Dollar) denominated subsidiary undertakings (translation risk). Currency exposures for the entire Group are managed and controlled centrally. The Group seeks to minimise its foreign currency transaction exposure when economically viable by maximising the value of its foreign currency input costs and creating a natural hedge. Where there is a net currency exposure the Group enters into foreign currency forward contracts to mitigate and protect against adverse movements in currency risk and remove uncertainty over the foreign currency equivalent cash flows. The Group hedges a proportion of this net risk exposure, forecasting out for up to 2 years, in line with our risk management strategy. At 29 February 2020 the Group has forward foreign currency cash flow hedges outstanding to the value of €24.6m (2019: €48.7m), which are disclosed as a derivative financial instrument on the Group’s Balance sheet, at an average exchange rate of 1.1475 GBP/EUR (2019: 1.115 GBP/EUR).

In addition, the Group has a number of long-term intra-group loans for which settlement is neither planned nor likely to happen in the foreseeable future, and as a consequence of which are deemed quasi equity in nature and are therefore part of the Group’s net investment in its foreign operations. The Group does not hedge the translation exposure arising on the translation of the profits of foreign currency subsidiaries.

The net currency gains and losses on transactional currency exposures are recognised in the Income Statement and the changes arising from fluctuations in the Euro value of the Group’s net investment in foreign operations are reported separately within Other Comprehensive Income.


2020

€m

2019

€m

Derivatives



Cash flow hedges – currency forwards

(0.3)

(1.9)

Not designated as hedges (held for trading) – currency forwards

-

(0.1)

Total

(0.3)

(2.0)

Derivatives are only used for economic hedging purposes and not as speculative investments. However, where derivatives do not meet the hedge accounting criteria, they are classified as “held for trading” for accounting purposes and are accounted for at fair value through the Income Statement. They are presented as current assets or liabilities to the extent they are expected to be settled within 12 months after the end of the reporting period.


2020

€m

2019

€m

Hedging reserves



Opening balance 1 March

(1.1)

-

Change in fair value of hedging recognised in Other Comprehensive Income for the year

1.7

(1.8)

Reclassified to the cost of inventory – not recognised in Other Comprehensive Income

-

0.4

Deferred tax on cash flow hedges

(0.3)

0.3

Closing balance 28 February – continuing hedges

0.3

(1.1)

Hedge ineffectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments, to ensure that an economic relationship exists between the hedged item and hedging instrument.

For hedges of foreign currency purchases, the Group enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item. The Group therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item, such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness. The change in fair value of the hedged item used to determine hedge effectiveness is €0.3m (2019: €1.7m).

In hedges of foreign currency purchases, ineffectiveness might arise if the timing of the forecast transaction changes from what was originally estimated, or if a degree of forecast purchases are no longer highly probable to occur. The hedging ratio is 1:1 as the quantity of purchases designated matches the notional amount of the hedging instrument.

Ineffectiveness of €nil (2019: €0.3m) was recognised in the Income Statement in the period within finance expense.

The currency profile of the Group and Company’s financial instruments subject to transactional exposure as at 29 February 2020 is as :-


Euro

Sterling

USD

CAD/AUD

NZD

SGD

ZAR

Not at risk

Total


€m

€m

€m

€m

€m

€m

€m

€m

€m

Group










Cash

8.2

0.9

2.9

2.3

-

0.5

0.5

108.1

123.4

Trade receivables

4.0

0.1

1.3

0.8

-

-

-

86.9

93.1

Advances to customers

-

-

-

-

-

-

-

44.7

44.7

Interest bearing loans & borrowings

-

(17.6)

-

-

-

-

-

(339.4)

(357.0)

Leases

-

-

-

-

-

-

-

(93.3)

(93.3)

Trade & other payables

(16.1)

(24.9)

(3.3)

(0.5)

(1.8)

-

-

(344.1)

(390.7)

Provisions

-

-

-

-

-

-

-

(9.2)

(9.2)

Gross currency exposure

(3.9)

(41.5)

0.9

2.6

(1.8)

0.5

0.5

(546.3)

(589.0)


Sterling

Not at risk

Total


€m

€m

€m

Company




Interest bearing loans & borrowings

(17.6)

3.7

(13.9)

Net amounts due to Group undertakings

(19.6)

(19.5)

(39.1)

Accruals

(0.1)

(0.9)

(1.0)

Total

(37.3)

(16.7)

(54.0)

The currency profile of the Group and Company’s financial instruments subject to transactional exposure as at 28 February 2019 is as follows:-


Euro

Sterling

USD

CAD/AUD

NZD

SGD

ZAR

Not at risk

Total


€m

€m

€m

€m

€m

€m

€m

€m

€m

Group










Cash

17.4

0.6

9.6

1.9

0.7

0.7

0.9

112.6

144.4

Trade receivables

3.5

0.5

0.8

0.6

-

-

0.3

84.3

90.0

Advances to customers

-

-

-

-

-

-

-

51.4

51.4

Interest bearing loans & borrowings

-

(29.4)

-

-

-

-

-

(416.6)

(446.0)

Trade & other payables

(8.6)

(3.4)

(1.8)

(0.1)

(0.2)

-

-

(322.2)

(336.3)

Provisions

-

-

-

-

-

-

-

(15.7)

(15.7)

Gross currency exposure

12.3

(31.7)

8.6

2.4

0.5

0.7

1.2

(506.2)

(512.2)


Sterling

Not at risk

Total


€m

€m

€m

Company




Interest bearing loans & borrowings

(29.1)

4.6

(24.5)

Net amounts due to Group undertakings

(22.4)

42.1

19.7

Accruals

-

(0.6)

(0.6)

Total

(51.5)

46.1

(5.4)

A 10% strengthening in the Euro against Sterling and the Australian, Canadian and US Dollars, based on outstanding financial assets and liabilities at 29 February 2020, would have a €4.7m negative impact on the Income Statement. A 10% weakening in the Euro against Sterling, and the Australian, Canadian and US Dollars would have a €3.9m positive effect on the Income Statement. This analysis assumes that all other variables, in particular interest rates, remain constant.

Interest rate risk

The interest rate profile of the Group and Company’s interest-bearing financial instruments at the reporting date is summarised as follows:-


Group

Company


2020

2019

2020

2019


€m

€m

€m

€m

Variable rate instruments





Interest bearing loans & borrowings

(360.7)

(450.6)

(17.6)

(29.1)

Cash

123.4

144.4

-

-


(237.3)

(306.2)

(17.6)

(29.1)

The Group exposure to interest rate risk arises principally from its long-term debt obligations. A 0.25% increase/decrease in Euribor and Libor rates, impact would be less than €0.1m on the Income Statement.

(d) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade receivables, its cash advances to customers, cash including deposits with banks and derivative financial instruments contracted with banks. The Group has an indirect exposure to European Sovereigns via its defined benefit pension scheme investment portfolio. In the context of the Group’s operations, credit risk is mainly influenced by the individual characteristics of individual counterparties and is not considered particularly concentrated as it primarily arises from a wide and varied customer base; there are no material dependencies or concentrations of individual customers which would warrant disclosure under IFRS 8 Operating Segments.

The Group has detailed procedures for monitoring and managing the credit risk related to its trade receivables and advances to customers based on experience, customer track records and historic default rates and forward looking information, such as concentration maturity and the macroeconomic circumstances within the Group’s primary trading markets. The impact of COVID-19 resulted in the Group booking exceptional provisions at year end given the uncertainties that prevail around the pandemic (note 5).

Generally, individual ‘risk limits’ are set by customer and risk is only accepted above such limits in defined circumstances. A strict credit assessment is made of all new applicants who request credit-trading terms. The utilisation and revision, where appropriate, of credit limits is regularly monitored. Impairment provision accounts are used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible. At that point, the amount is considered irrecoverable and is written off directly against the trade receivable/advance to customer. The Group also manages credit risk through the use of a receivables purchase arrangement, for an element of its trade receivables. Under the terms of this arrangement, the Group transfers the credit risk, late payment risk and control of the receivables sold. As at 29 February 2020, the Group’s year end cash had benefited by €131.4m (2019: €152.6m) with respect to this purchase arrangement. The Group’s trade receivables purchase arrangement is not recognised on the Balance Sheet as it meets the de-recognition criteria under IFRS 9.

Advances to customers are generally secured by, amongst others, rights over property or intangible assets, such as the right to take possession of the premises of the customer. During the year, the Group did not exercise their right to take possession of any material collateral that would require disclosure. At 29 February 2020, the Group held collateral of €2.7m (2019: €4.3m) on financial assets that are credit impaired and recognised no expected credit loss on financial assets of €12.1m (2019:€1.3m) due to collateral.

Interest rates calculated on repayment/annuity advances are generally based on the risk-free rate plus a margin, which takes into account the risk profile of the customer and value of security given. The Group establishes an allowance for impairment of customer’s advances that represents its estimate of potential future losses.

From time to time, the Group holds significant cash balances, which are invested on a short-term basis and disclosed under cash in the Balance Sheet. Risk of counterparty default arising on short-term cash deposits is controlled within a framework of dealing primarily with banks who are members of the Group’s banking syndicate, and by limiting the credit exposure to any one of these banks or institutions. Management does not expect any counterparty to fail to meet its obligations.

The Company also bears credit risk in relation to amounts owed by Group undertakings and from guarantees provided in respect of the liabilities of wholly owned subsidiaries as disclosed in note 26.

The carrying amount of financial assets, net of impairment provisions represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:-


Group

Company


2020

2019

2020

2019


€m

€m

€m

€m

Trade receivables

93.1

90.0

-

-

Advances to customers

44.7

51.4

-

-

Amounts due from Group undertakings

-

-

263.4

346.0

Cash

123.4

144.4

-

-


261.2

285.8

263.4

346.0

The ageing of trade receivables and advances to customers together with an analysis of movement in the Group impairment provisions against these receivables are disclosed in note 15. The Group does not have any significant concentrations of risk.

(e) Liquidity risk

Liquidity risk is the risk that the Group or Company will not be able to meet its financial obligations as they fall due. Liquid resources are defined as the total of cash. The Group finances its operations through cash generated by the business and medium term bank credit facilities.

The Group’s policy is to ensure that sufficient resources are available either from cash balances, cash flows or committed bank facilities to meet all debt obligations as they fall due. To achieve this, the Group (a) maintains adequate cash balances; (b) prepares detailed 3 year cash projections; and (c) keeps refinancing options under review. In addition, the Group maintains an overdraft facility that is unsecured.

In July 2018, the Group amended and updated its committed €450m multi-currency five year syndicated revolving loan facility and executed a three year Euro term loan. Both the multi-currency facility and the Euro term loan were negotiated with eight banks, namely ABN Amro Bank, Allied Irish Bank, Bank of Ireland, Bank of Scotland, Barclays Bank, HSBC, Rabobank, and Ulster Bank. During the current financial year, the Group availed of an option within the Group’s multi-currency revolving loan facility agreement to extend the tenure for a further 364 days from termination date. The multi-currency facility agreement is therefore now repayable in a single instalment on 11 July 2024. The Euro term loan is repayable in instalments, with the last instalment payable on 12 July 2021.

The Euro term loan and multi-currency revolving facilities agreement provides for a further €100m in the form of an uncommitted accordion facility and permits the Group to avail of further financial indebtedness, excluding working capital and guarantee facilities, to a maximum value of €200m, subject to agreeing the terms and conditions with the lenders. At 29 February 2020 the Group had €343.1m drawn down from the term loan and multi-currency revolving facilities (2019: €421.5m) and €17.6m from its non-bank financial indebtedness (2019: €29.1m).

There are no externally imposed requirements with respect to capital with the exception of a financial covenant in the Group’s Euro Term loan and multi-currency debt facilities which limits the Net debt: EBITDA ratio and interest cover to a maximum of 3.5 times. A similar financial covenant exists in the Company and Group’s non-bank borrowings at year end which limits the Net debt: EBITDA ratio and interest cover to a maximum of 3.5 times. All financial covenants were complied with throughout the current and prior financial years. Given the extraordinary environment that exists post year end with COVID-19 the Group has received a waiver on its debt covenants from its lending group for FY2021, to be replaced by a minimum liquidity covenant and monthly gross debt cap.

In March 2020, the Group announced the successful issue of approximately €140 million of new US Private Placement (‘USPP’) notes. The unsecured notes have maturities of 10 and 12 years and diversify the Group’s sources of debt finance. The Group’s Euro term loan included a mandatory prepayment clause from the issuance of any Debt Capital Market instruments. A waiver of the prepayment was successfully negotiated post year end.

The Group has also received confirmation from the Bank of England that it is eligible to issue commercial paper under the COVID-19 Corporate Financing Facility (‘CCFF’’) scheme. The Group had not drawn down on this facility as at 3 June 2020.

The Company and Group has further financial indebtedness of €17.6m at 29 February 2020 (2019: €29.1m), which is repayable by instalment with the last instalment payable on 3 April 2021. The Group pays variable interest on these drawn amounts based on a variable Libor interest rate plus a margin of 2%.

All bank loans drawn under the Group’s Euro term loan and multi-currency revolving loan facility are unsecured and rank pari passu. All borrowings of the Group are guaranteed by a number of the Group’s subsidiary undertakings. The euro term loan and multi-currency facilities agreement allows the early repayment of debt without incurring additional charges or penalties.

All borrowings of the Company and Group at 29 February 2020 are repayable in full on change of control of the Group.

The Group’s Euro term loan and multi-currency debt facility incorporates the following financial covenants:

  • Interest cover: The ratio of EBITDA to net interest for a period of 12 months ending on each half-year date will not be less than 3.5:1
  • Net debt/EBITDA: The ratio of net debt on each half-year date to EBITDA for a period of 12 months ending on a half-year date falling in August 2018 and February 2019 will not exceed 3.75:1
  • Net debt/EBITDA: The ratio of net debt on each half-year date to EBITDA for a period of 12 months ending on a half-year date falling in August 2019 and thereafter will not exceed 3.5:1

The Company and Group also has covenants with respect to its non-bank financial indebtedness:

  • Interest cover: The ratio of EBITDA to net interest for a period of 12 months ending on each half-year date will not be less than 3.5:1
  • Net debt/EBITDA: The ratio of net debt on each half-year date to EBITDA for a period of 12 months ending on a half-year date will not exceed 3.5:1

Compliance with these debt covenants is monitored continuously. The Company and the Group complied with all covenants at each reporting date in the current and prior financial year. The Group has received a waiver on its debt covenants from its lending group for FY2021, to be replaced by a minimum liquidity covenant and monthly gross debt cap.

There is no effect on the Group’s covenants as a result of implementing IFRS 16 Leases in the current financial year as all covenants are calculated on a pre IFRS 16 adoption basis.

At the year end, the Group had net debt excluding lease liabilities (banking covenants are on a pre IFRS 16 adoption basis), of €233.6m (28 February 2019: €301.6m), with a Net debt/EBITDA ratio of 1.77:1 (2019: 2.51:1).

The following are the contractual maturities of financial liabilities, including interest payments-


Carrying amount

Contractual cash flows

6 months or less

6 – 12 months

1 – 2 years

Greater than 2 years


€m

€m

€m

€m

€m

€m

Group







2020







Interest bearing loans & borrowings

(357.0)

(391.6)

(10.0)

(33.3)

(97.2)

(251.1)

Trade & other payables

(390.7)

(390.7)

(390.7)

-

-

-

Lease liabilities

(93.3)

(95.9)

(11.2)

(10.6)

(20.7)

(53.4)

Provisions

(9.2)

(9.2)

(2.5)

(1.6)

(1.7)

(3.4)

Total contracted outflows

(850.2)

(887.4)

(414.4)

(45.5)

(119.6)

(307.9)








2019







Interest bearing loans & borrowings

(446.0)

(471.0)

(33.0)

(33.0)

(64.9)

(340.1)

Trade & other payables

(336.3)

(336.3)

(336.3)

-

-

-

Provisions

(15.7)

(16.5)

(3.1)

(1.7)

(1.3)

(10.4)

Total contracted outflows

(798.0)

(823.8)

(372.4)

(34.7)

(66.2)

(350.5)








Company







2020







Interest bearing loans & borrowings

(13.9)

(17.9)

(6.1)

(6.0)

(5.8)

-

Amounts due to Group undertakings

(302.5)

(302.5)

(302.5)

-

-

-

Trade & other payables

(1.0)

(1.0)

(1.0)

-

-

-

Total contracted outflows

(317.4)

(321.4)

(309.6)

(6.0)

(5.8)

-








2019







Interest bearing loans & borrowings

(24.5)

(30.2)

(6.2)

(6.2)

(12.0)

(5.8)

Amounts due to Group undertakings

(326.3)

(326.3)

(326.3)

-

-

-

Trade & other payables

(0.6)

(0.6)

(0.6)

-

-

-

Total contracted outflows

(351.4)

(357.1)

(333.1)

(6.2)

(12.0)

(5.8)