Notes 20

The Group has established objectives concerning the holding and use of financial instruments which are discussed in the Treasury Management section of the Business and Financial Review. The key objective is to manage the financial risks faced by the Group, which are discussed below.

Formal policies and guidelines have been set to achieve this objective and it is the responsibility of Group Treasury to implement these policies using the strategies set out below.

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of debt and equity balance. The capital structure of the Group consists of debt, which includes the Group's borrowings, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital and reserves and retained earnings.

The Group does not trade in financial instruments nor engage in speculative arrangements and it is the Group’s policy not to use any complex financial instruments, unless, in exceptional circumstances, it is necessary to cover defined risks.

Management of financial risk

The Group considers its major financial risks to be currency risk, liquidity risk, interest rate risk and credit risk. The Group's policies with regard to these risks and the strategies concerning how financial instruments are used to manage these risks are set out below.

Currency risk

A significant portion of the Group’s activities takes place overseas. The Group therefore faces currency exposures on transactions undertaken by subsidiaries in foreign currencies and upon consolidation following the translation of the local currency results and net assets/liabilities of overseas subsidiaries.

The Group's foreign currency management policy requires subsidiaries to hedge all transactions and financial instruments with material currency exposures. The Group is a party to a number of foreign currency forward contracts in the management of its exchange rate exposures. The instruments purchased are primarily denominated in the currencies of the Group’s principal markets. These are held at fair value at the balance sheet date. The total notional amounts of outstanding forward foreign exchange contracts that the Group has committed are shown below.

	2007 £m	2006 £m
Forward foreign exchange contracts	42.4	42.6

The fair values of currency derivatives included in the balance sheet are based on market values supplied by the banks through which the currency derivatives were acquired. Movements in the fair value of forward foreign exchange contracts are taken to the income statement.

It is the Group's policy not to hedge exposures arising from the translation of profits or net assets as these represent an accounting rather than cash exposure.

The Group's policy is to borrow locally wherever possible to act as a natural hedge against the translation risk arising from its net investments overseas. A currency analysis of borrowings is given below.

It is estimated that a strengthening of sterling by 1% would reduce 2007 profit before tax by £1.7 million.

Liquidity risk

The Group's objective of ensuring that adequate funding is in place is achieved by having agreed sufficient committed bank facilities. The Group also seeks to manage its working capital requirement by requiring clients to pay for media in advance whenever possible.

At 31 December 2007, the Group had net debt (before issue costs of new debt) of £246.8 million (2006: £208.9 million). The Group had cash and cash equivalents of £356.8 million at 31 December 2007 (2006: £284.2 million) and gross borrowings of £603.6 million (2006: £493.1 million). The Group's principal debt instruments are subject to certain financial covenants.

Also included within gross borrowings is £6.5 million (US$13 million) (2006: £67.1 million (US$131.5 million)) of unsecured loan notes issued on 20 November 2000, which are repayable in full between 2006 and 2008, and £172.3 million (US$342 million) (2006: £174.6 million (US$342 million)) of unsecured loan notes issued on 28 July 2005, which are repayable in full between 2012 and 2017, and £63.0 million (US$125m) of unsecured loan notes issued on 17 September 2007 which are repayable in full between 2014 and 2017.

In addition to the net debt at 31 December 2007, the Group has undrawn committed facilities of £185.6 million (2006: £265.4 million).

Interest rate risk

The Group's unsecured loan notes, referred to above, are at fixed rates. All other borrowings are at floating rates. The Group has entered into long-term hedging arrangements to swap the interest relating to US$160 million of unsecured loan notes (Private Placement Debt – November 2000) from fixed into floating rates. The balance at the end of the period was US$13 million.

The Group has in place cash pooling arrangements in a number of territories. These enable the Group to minimise the interest paid on short-term borrowings and overdrafts, whilst allowing net surplus funds to be invested in interest bearing accounts.

Credit risk

The Group's credit risk is primarily attributable to its trade receivables and cash balances. The amounts presented in the balance sheet in respect of trade receivables are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of the current economic environment. Trade credit risk is managed in each territory through the use of credit checks on new clients and individual credit limits, where considered necessary. In some instances clients are required to pay for media in advance.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.

The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including financial instruments, in the balance sheet.

Short-term debtors and creditors and currency disclosures

Short-term debtors and trade creditors have been excluded from all disclosures provided in this note. Group companies do not have material, unhedged monetary assets and liabilities in currencies other than their local currencies. Hence, no currency risk disclosures have been provided.

Private Placement Debt – November 2000

On 20 November 2000, the Group issued US$160 million of unsecured loan notes, repayable between 2006 and 2008. These loan notes are guaranteed by the Company and certain of its subsidiaries. Interest rate swaps have been entered into for the duration of the loan notes to convert this fixed rate borrowing into floating rate based upon the US six-month LIBOR rate. These interest rate swaps are designated as hedging instruments of interest rate risk in respect of this debt. When the hedge relationship is effective, the carrying value of this debt is adjusted by the changes in fair value attributable to interest rate risk at the balance sheet date. The Group is exposed to cash flow interest rate risk in respect of the above borrowings being at floating rates. US$118.5 million was settled during the year.

Interest rate swaps

The fair value of the interest rate swaps entered into at 31 December 2007 and included in the balance sheet is £0.1 million (2006: £0.9 million). The fair value is based on a discounted cash flow model and market interest yield curves applicable and represents unrecognised profits which the Group expects to realise as a result of lower variable interest payments under the swap compared with the fixed interest rate applicable on the underlying loan notes. £0.1 million of this is expected to be realised in 2008. The interest rate swaps are designated and effective as fair value hedges against changes in the fair value of the debt caused by changes in interest rates. Movements in the fair value of the interest rate swaps are taken to the income statement where they offset against very similar but opposite movements in the fair value of the debt caused by movements in interest rates.

Private Placement Debt – July 2005

On 28 July 2005, the Group issued US$342 million of unsecured loan notes, repayable between 2012 and 2017. On 9 November 2005 cross currency swaps were entered into for US$142 million of the loan notes due in 2012 and US$50 million of the loan notes due in 2015 to convert this US$ fixed rate borrowing into EUR fixed rate borrowing. These loan notes are guaranteed by the Company and certain of its subsidiaries and are used to provide a hedge against US dollar-denominated investments. To the extent that this hedging relationship is effective, exchange differences arising on the re-translation of the US$150 million of debt not impacted by the cross currency swaps are taken directly to reserves.

Cross currency swaps

The fair value of the cross currency swaps entered into at 31 December 2007 is (£15.9) million (2006: (£9.3) million). The fair value is based on a discounted cash flow model and market interest yield curves applicable and represents movements in the Euro/US$ foreign exchange spot rate and in Euro and US$ interest rate yields. The cross currency swaps are synthetically split, for accounting purposes, to reflect the Group's functional currency of Sterling. The US$/Sterling leg of the swaps act as cash flow hedges against the Group's US$ loan notes and the Euro/Sterling leg of the swaps act as net investment hedges in respect of certain of the Group's Euro-denominated investments.

Multi-currency credit facility – June 2006

On 9 June 2006, the Group raised a five-year £450 million multi-currency credit facility with a group of international banks. The facility is committed and revolving and allows drawings under a variety of currencies. Pricing is based on the inter-bank rate of the relevant currency for the corresponding period of the drawing with the interest margin determined by reference to a grid based on the consolidated net borrowings to consolidated net EBITDA ratio. The facility is unsecured but guaranteed by the Company and certain of its subsidiaries.

Private Placement Debt – September 2007

On 17 September 2007, the Group issued US$125 million of unsecured loan notes repayable between 2014 and 2017. These loan notes are guaranteed by the Company and certain of its subsidiaries.

a) Maturity profile of Group financial assets and liabilities

Financial assets

In addition to the financial assets above, the Group had available-for-sale financial asset investments of £2.3 million (2006: £2.8 million) principally in US dollars (see note 17), which do not yield an interest-related income and which do not have a fixed maturity date.

There are no material differences between the book and fair values of the Group's financial assets at 31 December 2007. The fair values of financial assets reflect market values or are based upon readily available market data.

Financial liabilities

There are no material differences between the book and fair values of the Group's financial liabilities at 31 December 2007. The fair values of financial liabilities reflect market values or are based upon readily available market data.

Analysis of derivative financial instruments

Loans and receivables are discussed in this note and note 18, and financial assets available for sale are disclosed in note 17. All other financial instruments are held at amortised cost except for forward exchange contracts which are financial liabilities held for trading at fair value through Profit and Loss.

The total movement in the fair value of derivatives is as follows:

	2007 £m	2006 £m
Cash flow hedge
Cash flow hedge reserve	(1.4)	(2.9)
Income statement	1.3	13.4
Net investment hedge
Foreign exchange reserve	10.0	(2.3)
Income statement	(3.3)	(0.5)
	6.6	7.7

Maturity of borrowings

The maturity profile of the anticipated future cash flows including interest in relation to the Group's non-derivative financial liabilities, on an undiscounted basis and which, therefore, differ from both the carrying value and fair value, is as follows:

The maturity profile of the Group's financial derivatives (which include interest rate and foreign exchange swaps), using undiscounted cash flows, is as follows:

	2007 Payable £m	2007 Receivable £m	2006 Payable £m	2006 Receivable £m
Less than 1 year	(46.9)	47.7	(46.7)	48.6
1-2 years	(4.5)	5.1	(4.1)	5.4
2-5 years	(12.1)	13.8	(12.4)	15.6
More than 5 years	(3.2)	3.6	(5.8)	7.2
	(66.7)	70.2	(69.0)	76.8

Borrowing facilities

The Group had the following undrawn, committed bank borrowing facilities available at 31 December in respect of which all conditions precedent had been met at that date:

	2007 £m	2006 £m
Expiring within one year	-	-
Expiring between one and two years	-	-
Expiring between two and five years	185.6	265.4
	185.6	265.4

b) Interest rate profile

The following interest rate and currency profile of the Group's financial assets and liabilities is after taking into account any interest rate and cross currency swaps entered into by the Group.

Financial assets

	Floating rate £m	Non- interest bearing £m	2007 Total £m	Floating rate £m	Non- interest bearing £m	2006 Total £m
GBP	3.2	1.0	4.2	5.9	0.5	6.4
USD (restated)	67.2	9.7	76.9	35.1	24.4	59.5
EUR	128.4	3.7	132.1	108.2	26.2	134.4
Other worldwide currencies	129.0	14.6	143.6	89.7	10.9	100.6
	327.8	29.0	356.8	238.9	62.0	300.9
Trade receivables			1,837.2			1,417.2
Other receivables			123.7			86.5
Derivative financial assets			0.4			1.0
			2,318.1			1,805.2

The majority of cash is invested in short-term fixed rate deposits of less than one month with the balance in interest bearing current accounts. It is management's view that the short term nature of these deposits means they effectively act as floating rate assets.

Cash and cash equivalents of £356.8 million (2006: £284.2 million) and other financial assets of £0.3 million (2006: £16.4 million) represent the floating rate financial assets above.

The Group has reclassified certain bank accounts during the period and as a result it has reclassified £21.7 million at 31 December 2006 from trade and other receivables to cash.

In addition to the financial assets above, the Group had available-for-sale financial asset investments of £2.3 million (2006: £2.8 million) principally in US dollars, which do not yield an interest-related income.

Financial liabilities

The weighted average interest rates paid were as follows:

	2007 %	2006 %
Bank overdrafts	5.4	3.4
Bank loans	6.0	4.9
Loan notes	5.4	5.0
Convertible bond	-	7.2

The Group's borrowings, excluding the US$342 million of unsecured loan notes issued in 2005 and US$125 million of unsecured loan notes issued in 2007 but including the US$13 million (2006: US$131.5 million) unsecured loan notes referred to above, are at floating rates. The Group has entered into long-term hedging arrangements to swap the interest relating to the US$13 million (2006: US$131.5 million) unsecured loan notes from fixed into floating rates.

At 31 December 2007, it is estimated that a general simultaneous parallel uplift of 1% in interest rates would reduce the Group's reported profit by approximately £0.1 million. The sensitivity is symmetrical.

Sensitivity analysis

The following table details the Group's sensitivity to a 1% increase in Sterling against the significant foreign currencies of the Group. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 1% change in foreign currency rates. The sensitivity analysis includes external loans. For a 1% weakening of sterling against the relevant currency, there would be an equal and opposite impact on the profit and other equity.

	2007 Euro currency impact £m	2006 £m	2007 US dollar currency impact £m	2006 £m
Potential profit increase	0.1	(0.2)	0.7	0.7
Other equity	2.1	2.0	0.7	0.8

In management's opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the hedging instruments are hedging recognised items that are outside the scope of IFRS7. This sensitivity analysis excludes the foreign currency translation risk of the foreign operations, and had this been included the results would have been disclosed as follows:

	2007 Euro currency impact £m	2006 £m	2007 US dollar currency impact £m	2006 £m
Sensitivity analysis including hedging instruments that are outside the scope of IFRS 7
Potential profit reduction	0.1	(0.1)	-	(0.1)
Other equity	-	-	-	-