Rentokil Initial finances its operations using a mixture of medium-term notes, bank borrowings and leases.
The group targets a BBB investment grade credit rating with Standard & Poor's and is currently rated BBB with a stable outlook. At year end 2016, the group had a net debt:EBITDA ratio of approximately 2.5 times on a reported basis (which excludes operating lease debt and other items adjusted for by rating agencies).
The group has established a European medium-term note programme (EMTN) to facilitate access to capital markets. The offering circular may be found here.
As at 1 March 2017, the group had a well-spread maturity profile with outstanding medium-term notes as below:
The group has a £420m Revolving Credit Facility, £360m of which can be used for cash drawings. At 31 December 2016, £146m was drawn. The facility matures in January 2022.
The group signed a three year $25m bilateral revolving credit facility on 21 December 2016. At 31 December 2016 the facility was undrawn.
The group’s £200m and $157m Term Loan, which matures in December 2018 was fully drawn on 31 December 2016.
Interest rate risk
The group seeks to manage interest rate risk to ensure reasonable certainty of its interest charge whilst allowing an element of risk exposure consistent with the variability of its cash flows. Interest rate risk is managed by the use of fixed interest debt and interest rate derivatives, which are approved in advance by the Treasury Committee. The group policy is to fix a minimum of 50% of its estimated future interest rate exposures (excluding pensions) for a minimum period of 12 months forward.
Foreign exchange risk
The group’s worldwide operations generate profits and cash flows in foreign currencies. Sales and purchases are typically denominated in the currency of the country in which they are transacted, and the group’s cross-border procurement is considered insignificant. Sterling procurement and central costs mean that foreign currencies constitute more than 100% of group adjusted profit before interest, tax and amortisation (APBITA) at approximately 111%.
The group’s primary exposure to foreign exchange risk is in relation to the translation of assets and liabilities, and the group aims to hold debt in currencies that match its forecast foreign currency profits and investments. FX derivatives are used to manage foreign currency exposures in excess of £0.5m that are not covered by debt or assets in the same (or another highly-correlated) currency. The Treasury Committee monitors foreign exchange exposures on a monthly basis. Dealing in foreign exchange products is controlled by dealing mandates approved by the Treasury Committee and all FX transactions are covered by ISDA documentation.
The most significant foreign currency groups are euros and US dollars, which make up 54% and 28% of group APBITA respectively.
At 31 December 2016 the group’s net debt was approximately 57% euro (2015: 57%), reflecting that it is the group's principal cash flow exposure; and 48% US dollars (2015: 44%), reflecting the size of the US market and the group’s strong growth and investment in this region. This is offset by 5% of cash in other currencies. The translation of the interest element of euro and US dollar debt provides a partial income statement offset to the translation of earnings.
The group calculates the impact on the income statement and other comprehensive income of a 10% movement in foreign exchange rates. The group’s principal foreign currency exposure is to euro. A 10% movement in £/€ would result in a £14.0m increase/decrease (2015: £13.3m) in adjusted operating profit, offset by a £2.1m decrease/increase (2015: £1.9m) in interest payable. For US dollars, a 10% movement in £/$ would result in a £7.2m increase/decrease (2015: £4.2m) in adjusted operating profit, offset by a £0.8m decrease/increase (2015: £0.9m) in interest payable.
Where possible, currency cash flows are used to settle liabilities in the same currency in preference to selling currency in the market.
The Company utilises financial instruments to manage known financial exposures in line with policies agreed by the board. The Company does not enter into any speculative derivative contracts.
The group is committed to ensuring it has sufficient liquidity to meet its payables as they fall due. To achieve this, and in accordance with the liquidity ratio requirements of the credit rating agency Standard & Poor's, significant maturities are financed at least 12 months in advance, either through existing cash balances, forecast cash flows or new debt issuance. Management models financing requirements at least 12 months ahead and aims to maintain headroom of at least £150 million. At 31 December 2016 the group’s earliest maturity was the €50m bond due March 2018. The group had unrestricted cash of £72m and £204m of available commitments under its credit facilities, giving combined headroom of £276m to meet this obligation
The group is committed to maintaining a debt/equity structure which allows continued access to a broad range of financing sources and sufficient flexibility to pursue commercial opportunities as they present themselves, without onerous financing terms and conditions. The group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to support the group’s strategy. Capital consists of ordinary shares, retained earnings and non-controlling interests in the group. Management monitor the return on capital as well as the level of dividends to ordinary shareholders.
Debt credit rating
The group’s debt is rated by Standard & Poor’s as BBB with a stable outlook. The group targets a rating of BBB or above for debt issuance over the medium term. A rating of BBB- or above is considered an ’investment grade’ rating. The group’s euro denominated bonds, contain a ’coupon step-up’ increasing the coupon payable by 1.25% in the event that the group is downgraded to BB+ or below (sub-investment grade).
The group’s RCF and Term Loan contain covenants requiring that EBITDA: Interest should be at least 4.0:1.0 and that Net Debt: Adjusted EBITDA should be no greater than 3.5:1.0 at each semi-annual reporting date. The group remains compliant.
Change of control
The group's medium-term notes may be recalled by its investors in the event of a change of control of the group, or within 120 days if:
(a) the group's debt is downgraded below investment grade or the rating is withdrawn; and
(b) the rating agency confirms in writing, either publicly or in writing to the issuer or the Trustee, that the rating action occurred either wholly or in part due to the change of control.