Debt information
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. It is currently rated BBB with a stable outlook by both S&P Global and Fitch Ratings.
The group has a $1bn Revolving Credit Facility with a syndicate of 16 banks. The facility has a maturity date of 12 October 2029.
The group has a European medium-term note programme (EMTN) to facilitate access to capital markets. The offering circular may be found here.
The group also has a €1,000,000,000 European Commercial Paper Programme to facilitate access to short-term capital markets.
As at 31 December 2023, the group had a well-spread maturity profile with outstanding maturities as below:
The group seeks to manage interest rate risk to ensure reasonable certainty of its interest charge while 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. The Treasury Committee reviews this exposure monthly.
A hypothetical 1.0% increase in euro interest rates would reduce the market value of the group’s bond liabilities by £77m at 31 December 2023 (2022: £128m). The income statement impact is £nil as changes in interest rates do not change the expected cash flows on the bonds.
A hypothetical 1.0% increase in pound sterling interest rates would reduce the market value of the group’s bond liabilities by £12m at 31 December 2023 (2022: £12m). The income statement impact is also £12m (2022: £12m).
A hypothetical 1.0% increase in US dollar interest rates would have an income statement impact of £3m (2022: £6m) as 50% of the $700m term loan was hedged in 2023 (2022: 0%)
The group had outstanding bond debt issues at 31 December 2023 with a fair market value of £2,919m (2022: £2,826m). This is below the book value of £2,943m (2022: £2,987m) as a result of increases in the interest rates in UK and Europe. There are no circumstances where the group would be obliged to pay the fair market value. The group could however decide to redeem some or all of its bonds early and the fair market value is indicative of the price that would be required to do so.
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. Pound sterling procurement and central costs mean that foreign currencies constitute more than 100% of group operating profit at approximately 110%.
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 in
proportion to its forecast foreign currency profits and cash flows. Foreign exchange derivatives are used to manage foreign currency exposures in excess of £10.0m that are not covered by debt or assets in the same (or another highly correlated) currency, as long as it makes sense from an economic perspective to do so. 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 foreign exchange
transactions are covered by ISDA documentation.
The most significant foreign currency groups are US dollars and euros, which make up 64% and 22% of Group Adjusted Operating Profit respectively.
At 31 December 2023 the Group’s net debt was approximately 74% US dollar (2022: 66%), 30% euro (2022: 23%) and offset by cash 4% (2022: 11% debt) in other currencies including pound sterling. 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 a hypothetical foreign exchange impact on the income statement and foreign currency translation of net investments in foreign subsidiaries for a 10% movement in foreign exchange rates. The group’s principal foreign currency exposure is the US dollar. For US dollars, a 10% movement in £/$ would result in a £53m increase/decrease (2022: £25m) in adjusted operating profit, offset by a £12m decrease/increase (2022: £3m) in interest payable and a £349m increase/decrease (2022: £377m) in other comprehensive income. A 10% movement in £/€ would result in a £18m increase/decrease (2022: £15m) in adjusted operating profit, offset by a £5m decrease/increase (2022: £3m) in interest payable and a £nil increase/decrease (2021: £5m) in other comprehensive income. The other comprehensive income impact also includes the offsetting impact from financial instruments used to hedge the retranslation of the net investment in subsidiaries for US dollar is £182m (2022: £210m) and euro is £27m (2022: £46m). Where possible, currency cash flows are used to settle liabilities in the same currency in preference to selling currency in the market.
Treasury risk
The group’s treasury activities are governed by a treasury policy, which is reviewed and approved by the Board on an annual basis. The treasury policy covers all activities associated with managing the above risks. The policy requires that financial instruments are only utilised to manage known financial exposures and speculative derivative contracts are not entered into. The treasury policy requires that treasury must approve opening and closing of all bank accounts, and that funds transfers and other payments are only made in accordance with bank mandates. To ensure an appropriate control environment exists in the treasury function, duties are segregated between front and back office teams. In addition a number of controls are in place to protect against potential cyber security risks.
Liquidity risk
The group is committed to ensuring it has sufficient liquidity to meet its business needs, and appropriate reserves to cover operational underperformance or dislocation in the financial markets. The group’s policy is to have headroom of unrestricted cash and available committed facilities of at least £600m, and the Treasury Committee manages financing requirements and associated headroom at least 12 months forward.
The group’s next maturity is the €400m bond in November 2024.
Capital risk
The group is committed to maintaining a debt/equity structure that 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 monitors the return on capital as well as the level of dividends to ordinary shareholders.
Debt credit rating
The group’s debt is rated by S&P Global and Fitch Ratings as BBB with a stable outlook. The group targets a rating of BBB 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 issued prior to June 2022, 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 bonds issued in June 2022 do not contain such a provision.
Financial covenants
The group’s RCF has no financial covenants.
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.