Notes to the consolidated financial statements

20. Financial instruments continued

(b) Treasury operations

The main purpose of the Group’s treasury function is to assess the Group’s ongoing capital requirement and to raise funding on a timely basis, taking advantage of any favourable market opportunities. It also invests any surplus funds the Group may have, based upon its forecast requirements and in accordance with the Group’s treasury policy. On occasions, derivatives are used as part of this process but the Group’s policies prohibit their use for speculation.

(c) Risks arising from the Group’s financial instruments

The main risks arising from the Group’s financial instruments are liquidity risk, interest rate risk and foreign currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. All treasury activities are conducted in accordance with these policies.

(d) Liquidity risk

As regards day to day liquidity, the Group’s policy is to have available standby committed bank borrowing facilities with a value of no less than £50.0 million and with a bank agreement availability period of no less than three months. At 31 March 2009, the Group had £75.0 million of undrawn committed bank facilities (2008: £75.0 million).

(e) Interest rate risk

The Group finances its operations through a mixture of retained profits and bank borrowings. It borrows at both fixed and floating rates of interest and, accordingly, uses interest rate swaps to generate the desired interest profile and to manage the Group’s exposure to interest rate fluctuations. The Group’s policy is to keep a minimum 60% of its borrowings at fixed rates of interest. At 31 March 2009, 75% (2008: 63%) of the Group’s borrowings were at fixed rates of interest. Index linked borrowings are treated as variable rate debt.

(f) Foreign currency risk

The Group’s policy is that any foreign currency exposure in excess of £100,000 sterling equivalent of a transactional nature, or £3.0 million sterling equivalent of a translation nature, should be covered immediately on identification.

(g) Market price risk

The Group’s exposure to market price risk principally comprises interest rate exposures. The Group’s policy is to accept a degree of interest rate risk. On the basis of the Group’s analysis, it is estimated that a 1% rise in interest rates would not have a material effect on the Group’s pre-tax profits.

(h) Credit risk

There are no significant concentrations of credit risk within the Group. Management’s assessment of the maximum credit risk exposure relating to financial assets is represented by carrying value as at the balance sheet date. A significant proportion of the trade debtor balances are with domestic customers who are unlikely to have a published credit rating.

(i) Counterparty risk

The treasury strategy which is approved by the Board, requires that investments are limited to certain money market and treasury instruments, and that the Group’s exposure to any single bank, building society or market is controlled, with maximum deposits allowed with any single counterparty. The investment criteria cover credit rating and asset size, including sovereign and political risk. Current market conditions have resulted in closer monitoring of counterparties and cancellation or suspension of deposits.