The Company's activities expose it to capital risk, currency risk (including both transactional and translational currency risk), interest rate risk, credit risk and liquidity risk. The Company seeks to minimise adverse effects from the unpredictability of financial markets on the Company's financial performance.
(a) Capital risk
The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance.
The capital structure of the Company consists of debt, cash and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in Note 15.
(b) Currency risk
The Company transacts in North America, Europe and Asia and its activities expose it to transactional risks resulting from changes in foreign currency exchange rates. The Company monitors and manages these transactional foreign exchange risks relating to the operations of the Company through internal reports analysing major currency exposures. Where possible the Company seeks to offset exposures by matching monetary asset and liability exposures in like currencies against each other often using its bank facilities to square off or reduce exposures. To manage the currency risk, the Company manages the overall currency exposure mainly through currency forwards.
The Company's risk management policy is to hedge 100% of highly probable forecast transactions for Europe sales in the next 12 months.
The risk is measured through a forecast of highly probable EUR sales and tracking of firm commitment in EUR. The objective of the hedges is to minimise the volatility of the Company's currency cost of highly probable transactions and firm commitment. In order to achieve these objectives, the Company entered into cash flow hedges for highly probable sale transactions. The foreign exchange forwards are denominated in the same currency as the highly probable sale transactions, therefore the hedge ratio is 1:1.
Hedge effectiveness
Hedge effectiveness is determined at the inception of the hedging relationship, and through periodic prospective effective assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.
The Company enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item, and so a qualitative assessment of effectiveness is performed. 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.
Hedge ineffectiveness may occur due to changes in the credit risk of the derivative counterparty or the Company. There was no ineffectiveness during 2018 in relation to the revenue hedge.
In addition, the Company is exposed to translation risk when the results of its operations and balance sheet are converted from its functional currency to Sterling, the Group's reporting currency. In particular a significant proportion of the Company's revenues and earnings are derived in US Dollars. The Company regards this as a fundamental consequence of operating in markets which are dominated by US Dollar transactions. The Company does not hedge this translational risk as there is no underlying mismatch of foreign currencies as the translation is merely performed for reporting the Company's results in Sterling.
The Company's currency exposure based on the information provided to key management is as follows:
At 31 December 2018
£'000 | GBP | EUR | USD | Others | Total |
| Financial assets | | | | | |
| Cash and cash equivalents | 17 | 352 | 3,495 | 1,001 | 4,865 |
| Trade and other receivables | 72 | 1,369 | 14,962 | 316 | 16,719 |
| Other current assets | – | – | 68 | – | 68 |
| Long-term receivables | – | – | 28,171 | – | 28,171 |
| Subtotal | 89 | 1,721 | 46,696 | 1,317 | 49,823 |
| Financial liabilities | | | | | |
| Trade and other payables | (6,014) | (196) | (27,849) | (131) | (34,190) |
| Subtotal | (6,014) | (196) | (27,849) | (131) | (34,190) |
| Net financial (liabilities)/assets | (5,925) | 1,525 | 18,847 | 1,186 | 15,633 |
| Add: Firm commitments and highly probable forecast transactions in foreign currency | – | 12,604 | – | – | 12,604 |
| Currency forwards | 14,975 | (10,841) | – | – | 4,134 |
| Currency profile excluding non-financial assets and liabilities | 9,050 | 3,288 | 18,847 | 1,186 | 32,371 |
| Less: Financial assets denominated in the entity's functional currency | – | – | 18,847 | – | 18,847 |
| Currency exposure of financial assets | 9,050 | 3,288 | – | 1,186 | 13,524 |
At 31 December 2017
£'000 | GBP | EUR | USD | Others | Total |
| Financial assets | | | | | |
| Cash and cash equivalents | 81 | 208 | 4,079 | 265 | 4,633 |
| Trade and other receivables | 393 | 964 | 7,677 | 147 | 9,181 |
| Other current assets | – | – | 63 | – | 63 |
| Long-term receivables | – | – | 18,495 | – | 18,495 |
| Subtotal | 474 | 1,172 | 30,314 | 412 | 32,372 |
| Financial liabilities | | | | | |
| Trade and other payables | (6,311) | 14 | (14,729) | (184) | (21,210) |
| Subtotal | (6,311) | 14 | (14,729) | (184) | (21,210) |
| Net financial (liabilities)/assets | (5,837) | 1,186 | 15,585 | 228 | 11,162 |
| Add: Firm commitments and highly probable forecast transactions in foreign currency | – | 10,935 | – | – | 10,935 |
| Currency forwards | 5,900 | (7,844) | – | – | (1,944) |
| Currency profile excluding non-financial assets and liabilities | 63 | 4,277 | 15,585 | 228 | 20,153 |
| Less: Financial assets denominated in the entity's functional currency | – | – | 15,585 | – | 15,585 |
| Currency exposure of financial assets | 63 | 4,277 | – | 228 | 4,568 |
(c) Interest rate risk
Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As the Group has no significant interest-bearing assets, the Group's income is substantially independent of changes in the market interest rates.
The Company borrows from subsidiaries at an interest rate of 1.5% – 2.0% above LIBOR. If the average interest rates on these borrowings increased/decreased by 0.75% (2017: 0.5%) with all other variables, including tax rates, being held constant, the profit before tax will be lower/higher by £102,844 (2017: £20,183) as a result of higher/lower interest expense on these borrowings.
(d) Credit risk
Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in a financial loss to the Company. For trade receivables the Company adopts a policy of only dealing with customers of appropriate credit history or rating. For other financial assets, the Company adopts the policy of only dealing with high credit quality counterparties.
The Company is not exposed to significant credit risk as a majority of the sales are made to the subsidiaries. Trade receivables are neither past due nor impaired are substantially companies with a good collection track record with the Company.
The Company does not hold any collateral and the maximum exposure to credit risk for each class of financial instruments is the carrying amount of that class of financial instruments on the balance sheet.
The Company applies the IFRS 9 simplified approach to measuring expected credit loss which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, it is based on the Company's two-year historical credit loss experience and a provision matrix has been set up using the amount of bad debt incurred over the carrying value of the trade receivables per ageing brackets at each financial year end.
The Company's credit risk exposure in relation to trade receivables under IFRS 9 are set out in the provision matrix as follows:
| |  | Past due |  | |
|---|
| £ '000 | Current | 1 -30 days | 31 – 60 days | 61 – 90 days | 91 – 120 days | > 120 days | Total |
| At 31 December 2018 | | | | | | | |
| Expected loss rate | 0% | 0% | 0% | 0% | 0% | 0% | |
| Trade receivables | 12,567 | 3,072 | 275 | 56 | 4 | 430 | 16,404 |
| Loss allowance | – | – | – | – | – | – | – |
| |  | Past due |  | |
|---|
| £ '000 | Current | 1 -30 days | 31 – 60 days | 61 – 90 days | 91 – 120 days | > 120 days | Total |
| At 1 January 2018 | | | | | | | |
| Expected loss rate | 0% | 0% | 0% | 0% | 0% | 0% | |
| Trade receivables | 6,884 | 956 | 409 | 281 | 93 | 173 | 8,796 |
| Loss allowance | – | – | – | – | – | – | – |
The Company assessed the credit risk of each intercompany loan by considering the terms of the loans, whether the loan is past due, borrower's cash position, revenue, profit before tax and net assets. Based on these, it was concluded that the credit risk is low and hence, the Company computes the expected credit loss on a 12-month basis instead of a lifetime approach.
Financial assets at amortised costs
| Category of internal credit rating | Performing | Under-performing | Non-performing | Write-off |
|---|
| Definition of category | Issuers have a low risk of default and a strong capacity to meet contractual cash flows | Issuers for which there is a significant increase in credit risk; as significant in credit risk is presumed if interest and/or principal repayment are 30 days past due | Interest and/or principal payments are 90 days past due | Interest and/or principal repayments are 120 days past due and there is no reasonable expectation of recovery |
| Basis of recognition of expected credit loss | 12-month expected credit losses | Lifetime expected credit losses | Lifetime expected credit losses | Asset is written off |
(e) Liquidity risk
The table below analyses the maturity profile of the Company's financial liabilities at the balance sheet date based on contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant.
| £'000 | Less than
1 year | Between
1 and 2 years | Between
2 and 5 years | Over
5 years | Total |
| At 31 December 2018 | | | | | |
| Trade and other payables | 34,190 | – | – | – | 34,190 |
| Total | 34,190 | – | – | – | 34,190 |
| £'000 | Less than
1 year | Between
1 and 2 years | Between
2 and 5 years | Over
5 years | Total |
| At 31 December 2017 | | | | | |
| Trade and other payables | 21,210 | – | – | – | 21,210 |
| Total | 21,210 | – | – | – | 21,210 |
The Company manages the liquidity risk by maintaining sufficient cash and bank facilities to enable it to meet its normal operating commitments.
The Company has issued a multilateral guarantee to HSBC and Fifth Third Bank for the revolving credit facility entered into by the Group. On 27 September 2017, the Group entered into a revolving credit facility amounts of US$40 million with a US$20 million additional accordion option and have a tenure of four years from the loan agreement date with a potential one year extension. In May 2018, the Group increased the revolving credit facility to US$85.0 milllion with a US$20.0 million additional accordion option. In November 2018, the Group has fully exercised US$20.0 million additional accordion option and the revolving credit facility has increased to US$105.0 million. The facility has no fixed repayment terms until maturity. The revolving loan is priced at LIBOR plus a margin of 1% for the utilisation facility and a margin of 0.4% to 5.0% for the unutilised facility.
(f) Fair value measurements
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
- Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and
- Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
The following table presents the assets measured at fair value at 31 December 2018:
£'000
2018 | Level 1 | Level 2 | Level 3 | Total |
| Assets | | | | |
| Derivative financial instruments | – | 42 | – | 42 |
| Liabilities | | | | |
| Derivative financial instruments | – | (229) | – | (229) |
| 2017 | | | | |
| Assets | | | | |
| Derivative financial instruments | – | 154 | – | 154 |
| Liabilities | | | | |
| Derivative financial instruments | – | (248) | – | (248) |
(g) Offsetting financial assets and financial liabilities
i. Financial assets
The Company has the following financial instruments subject to enforceable master netting arrangements or similar agreements as follows:
| Related amounts set off in the balance sheet | Related amounts not set off in the balance sheet |
|---|
£'000
At 31 December 2018 | Gross
amounts –
financial
assets | Gross
amounts –
financial
liabilities | Net amounts –
financial assets presented in the balance sheet | Financial
assets /
liabilities | Financial
collateral
received | Net amount |
| Trade receivables | – | – | – | 12,168 | – | 12,168 |
| Total | – | – | – | 12,168 | – | 12,168 |
| At 31 December 2017 | | | | | | |
| Trade receivables | 1,592 | (168) | 1,424 | 4,822 | – | 6,246 |
| Total | 1,592 | (168) | 1,424 | 4,822 | – | 6,246 |
ii. Financial liabilities
The Company has the following financial instruments subject to enforceable master netting arrangements or similar agreements as follows:
| Related amounts set off in the balance sheet | Related amounts not set off in the balance sheet |
|---|
£'000
At 31 December 2018 | Gross
amounts –
financial
liabilities | Gross
amounts –
financial
assets | Net amounts –
financial liabilities presented in the balance sheet | Financial
assets /
liabilities | Financial collateral pledged | Net amount |
| Trade receivables | – | – | – | (29,596) | – | (29,596) |
| Total | – | – | – | (29,596) | – | (29,596) |
| At 31 December 2017 | | | | | | |
| Trade receivables | (168) | 168 | – | (15,631) | – | (15,631) |
| Total | (168) | 168 | – | (15,631) | – | (15,631) |