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Report and accounts 2006
Notes to the financial statements
21 Financial risk management
The funding objective of the Group and Company is that each category of investment asset is broadly matched with liabilities and shareholders' funds according to the risk and maturity characteristics of the assets and that funding needs are met ahead of planned investment.
Credit risk
3i's financial assets are predominantly unsecured investments in unquoted companies, in which the Directors consider the maximum credit risk to be the carrying value of the asset. The portfolio is well diversified and for this reason credit risk exposure is managed on an asset-specific basis by investment managers.
Liquidity risk
During the financial year 3i generated a surplus of £1,089 million (2005: £562 million) from its investing activities and cash resources at the end of the period amounted to £1,955 million (2005: £1,199 million). In addition, the Group had available to it undrawn facilities of £488 million at 31 March 2006 (2005: £764 million). The Directors currently view liquidity risk as low.
Price risk
The valuation of unquoted investments depends upon a combination of market factors and the performance of the underlying asset. 3i does not hedge the market risk inherent in the portfolio but manages asset performance risk on an asset-specific basis.
Foreign exchange risk
3i reports in sterling and pays dividends from sterling profits. The Directors seek to reduce structural currency exposures by matching assets denominated in foreign currency with borrowings in the same currency. The Group makes some use of derivative financial instruments to effect foreign exchange management. The exposure to the Euro, US dollar, Swedish krona, Swiss franc and all other currencies combined is shown in the table below.
| Sterling 2006 £m |
Euro 2006 £m |
US dollar 2006 £m |
Swedish krona 2006 £m |
Swiss franc 2006 £m |
Other 2006 £m |
Total 2006 £m |
|
|---|---|---|---|---|---|---|---|
| Total assets | 3,820 | 1,511 | 475 | 385 | 124 | 55 | 6,370 |
| Total liabilities | (103) | (1,453) | (370) | (316) | (92) | (30) | (2,364) |
| Net assets | 3,717 | 58 | 105 | 69 | 32 | 25 | 4,006 |
| Sterling 2005 (as restated)* £m |
Euro 2005 (as restated)* £m |
US dollar 2005 (as restated)* £m |
Swedish krona 2005 (as restated)* £m |
Swiss franc 2005 (as restated)* £m |
Other 2005 (as restated)* £m |
Total 2005 (as restated)* £m |
|
| Total assets | 3,862 | 1,102 | 449 | 211 | 104 | 33 | 5,761 |
| Total liabilities | (1,192) | (618) | (69) | (158) | - | (25) | (2,062) |
| Net assets | 2,670 | 484 | 380 | 53 | 104 | 8 | 3,699 |
* As restated for the adoption of IFRS.
Cash flow interest rate risk
3i has a mixture of fixed and floating rate assets. The assets are funded with a mixture of shareholders' funds and borrowings according to the risk characteristics of the assets. The Directors seek to minimise interest rate exposure by matching the type and maturity of the borrowings to those of the corresponding assets. Some derivative financial instruments are used to achieve this objective.
The interest rate profile of the financial assets and liabilities of the Group is shown in the table below by the earlier of the contractual repricing or maturity date.
| Within 1 year 2006 £m |
1-2 years 2006 £m |
2-3 years 2006 £m |
3-4 years 2006 £m |
4-5 years 2006 £m |
Over 5 years 2006 £m |
Total 2006 £m |
|
|---|---|---|---|---|---|---|---|
| Fixed rate | |||||||
| Loans and receivables | 28 | 41 | 63 | 42 | 121 | 889 | 1,184 |
| Deposits | 1,108 | 1,108 | |||||
| Cash and cash equivalents | 847 | 847 | |||||
| Loans and borrowings | (230) | (200) | (600) | (1,030) | |||
| Convertible Bonds | (365) | (365) | |||||
| Subordinated liabilities | (24) | (24) | |||||
| Derivatives | 188 | (282) | (32) | (19) | (164) | (406) | (715) |
| Total | 1,941 | (441) | (334) | 23 | (43) | (141) | 1,005 |
Floating rate |
|||||||
| Loans and receivables | 182 | 182 | |||||
| Loans and borrowings | (444) | (444) | |||||
| Derivatives | 715 | 715 | |||||
| Total | 453 | 453 | |||||
| Within 1 year 2005 (as restated)* £m |
1-2 years 2005 (as restated)* £m |
2-3 years 2005 (as restated)* £m |
3-4 years 2005 (as restated)* £m |
4-5 years 2005 (as restated)* £m |
Over 5 years 2005 (as restated)* £m |
Total 2005 (as restated)* £m |
|
| Fixed rate | |||||||
| Loans and receivables | 46 | 30 | 94 | 87 | 44 | 813 | 1,114 |
| Deposits | 885 | 885 | |||||
| Cash and cash equivalents | 314 | 314 | |||||
| Loans and borrowings | (98) | (4) | (200) | (600) | (902) | ||
| Convertible Bonds | (352) | (352) | |||||
| Subordinated liabilities | (50) | (50) | |||||
| Derivatives | (45) | 178 | (275) | (32) | (21) | (292) | (487) |
| Total | 1,102 | 204 | (381) | (297) | 23 | (129) | 522 |
Floating rate |
|||||||
| Loans and receivables | 286 | 286 | |||||
| Loans and borrowings | (396) | (396) | |||||
| Derivatives | 487 | 487 | |||||
| Total | 377 | 377 | |||||
* As restated for the adoption of IFRS.
The derivatives line shows the notional value of currency and interest rate swaps.
Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.
Fair value interest rate risk
The fair value of 3i's derivative assets and liabilities is subject to interest rate risk. At 31 March 2006 the fair value of derivative financial instruments was £149 million (2005: £45 million).