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 2015, 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 April 2016, the group had a well-spread maturity profile with outstanding medium-term notes as below:
The group's £315m Revolving Credit Facility, £270m of which can be used for cash drawings, was undrawn at 31 December 2015 and is due to mature in January 2021 following the exercise of an option to extend being granted. The group has a further option to extend the facility by a further year, exercisable in 2017 which would extend the maturity to January 2022.
The group signed a £200m and $157m Term Loan on 31 August 2015. At 31 December 2015 £130m and $102m was drawn under the facility.
Interest rate risk
All of the group's bond debt is at fixed rates of interest. The group has a small exposure to interest rate movements arising from cash balances, which will benefit from increasing interest rates.
Foreign exchange risk
The group’s worldwide operations generate profits and cash flows in foreign currencies. Sales and purchases are typically denominated in the same currency 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 113%.
The group’s primary exposure is the £/€ exchange rate, with euro APBITA making up 62% of group APBITA. The next most significant currency group is US dollars forming approximately 20% of group APBITA. Emerging market currencies contribute approximately 12% of APBITA and other currencies including the Australian dollar and Nordic currencies contribute approximately 19%. Following the acquisition of Steritech, it is anticipated that the US dollar exposure will become similar in proportion to the euro.
At 31 December 2015 the group’s net debt was approximately 57% euro (2014: 80%) (reflecting that it is the group's principal cash flow exposure and the low cost of euro funding); and 44% US dollars (2014: 20%) (reflecting the size of the US market and the group’s strong growth and investment in this region). 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 £13.3m increase/decrease (2014: £17.6m) in adjusted operating profit, offset by a £1.9m decrease/increase (2014: £2.4m) in interest payable. For US dollars, a 10% movement in £/$ would result in a £4.2m increase/decrease (2014: £3.8m) in adjusted operating profit, offset by a £0.9m decrease/increase (2014: £0.8m) 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 average headroom of at least £150 million and minimum headroom of at least £100 million.
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 sustain future development of the business. 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 negative 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.