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The following section describes the way in which the Group manages and controls its treasury function and ensures it is financed in an appropriate and cost-effective manner.

Treasury management

All treasury activities are co-ordinated through a central function (Group Treasury), the purpose of which is to manage the financial risks of the Group and to secure short and long term funding at the minimum cost to the Group. It operates within a framework of clearly defined Board-approved policies and procedures, including permissible funding and hedging instruments, exposure limits and a system of authorities for the approval and execution of transactions. It operates on a cost centre basis and is not permitted to make use of financial instruments or other derivatives other than to hedge identified exposures of the Group. Speculative use of such instruments or derivatives is not permitted.

Group Treasury prepares reports at least annually to the Board, and on a monthly basis to the Finance Director and other senior executives of the Group. In addition, liquidity, interest rate, currency and other financial risk exposures are monitored weekly. The overall indebtedness of the Group is reported on a weekly basis to the Chief Executive and the Finance Director. The Group Treasury function is subject to an annual internal and external review of controls.

Funding and liquidity

The Group funds its operations through a mixture of retained earnings and borrowing facilities, including bank and capital markets borrowings and leasing. The relative proportions of equity and borrowings are governed by specific Board-approved parameters. These are designed to preserve prudent financial ratios, including interest, dividend and cash flow cover, whilst also minimising the overall weighted average cost of capital to the Group.

The Group’s borrowing facilities are arranged by Group Treasury and the funds raised are then lent to operating subsidiaries on commercial arm’s length terms. In some cases, operating subsidiaries have external borrowings, but these are supervised and controlled centrally. The Group’s objective is to maintain a balance between continuity of funding and flexibility through borrowing at a range of maturities. Wherever practicable, pooling, netting or concentration techniques are employed to minimise gross debt of the Group.

At 31 December 2008 the Group had committed revolving credit facilities of £445 million (utilising 12 different banks) of which £43 million was utilised. In addition, £45 million of uncommitted bank lines and overdraft were available of which £20 million was drawn. On 5 January 2009 on completion of the acquisition of the Airbus UK wing component and sub-assembly facility at Filton, £180 million of additional committed revolving credit facilities with a five year maturity became available.

Capital market borrowings of £675 million include unsecured issues of £325 million 7% bonds maturing in May 2012 and £350 million 6.75% bonds maturing in October 2019.

In total, the Group’s revolving credit facilities have maturities ranging from 2010 to 2013. The weighted average maturity profile of the Group’s committed borrowing facilities was 5 years. This leaves the Group well placed in the short term to withstand sudden changes in liquidity in the financial markets, although the tightening of available credit means that it may be more difficult and more expensive to refinance the Group’s borrowing facilities as they mature.

All of the Group’s committed revolving credit facilities have a single financial covenant requiring EBITDA of subsidiaries to be at least 3.5 times net interest payable. EBITDA of subsidiaries is before restructuring and impairment charges, amortisation of non-operating intangible assets and other non-cash charges arising on business combinations, profit and losses on sale or closure of businesses and the change in the value of derivative and other financial instruments. Net interest payable excludes the finance element of postemployment costs. For the 12 months to 31 December 2008 this ratio stood at 8.0 times.

Financial resources and going concern

At 31 December 2008 the Group had net borrowings of £708 million. In addition, it had available, but undrawn, committed borrowing facilities totalling £402 million. As referred to above, new revolving credit facilities totalling £180 million became available to the Group in January on completion of the Filton acquisition. Of the Group’s total committed borrowing facilities, £350 million is due to expire in July 2010.

The Directors have assessed the future funding requirements of the Group and the Company and compared them to the level of committed available borrowing facilities. The assessment included a review of both divisional and Group financial forecasts, financial instruments and hedging arrangements for the 15 months from the balance sheet date. Recognising that a number of industries and especially the automotive sector continue to be affected by the sharp global decline in demand, the Directors considered a range of potential scenarios within the key markets the Group serves and how these might impact on the Group’s cash flow, facility headroom and banking covenants. The Directors also considered what mitigating actions the Group could take to limit any adverse consequences.

Having undertaken this work, the Directors are of the opinion that the Group has adequate committed resources to fund its operations for the foreseeable future and so determine that it is appropriate for the financial statements to be prepared on a going concern basis.

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