Financial statements
Notes to the financial statements
18 Financial risk management
The funding objective of the Group and Company is that each category of investment is broadly matched with liabilities and shareholders' funds according to the risk and maturity characteristics of the assets and that funding needs are met ahead of planned investment.
Credit risk
Financial assets are predominantly unsecured investments in unquoted companies, in which the maximum credit risk is considered to be the carrying value of the asset. The portfolio is well diversified and for this reason credit risk exposure is managed on an asset-specific basis by investment managers.
Liquidity risk
During the financial year 3i generated a surplus of £857 million (2006: £1,089 million) from its operating activities, and cash resources at the end of the period amounted to £2,154 million (2006: £1,955 million). In addition, the Group had available to it undrawn facilities of £491 million at 31 March 2007 (2006: £488 million).
Price risk
The valuation of unquoted investments depends upon a combination of market factors and the performance of the underlying asset. The Group does not currently hedge the price risk inherent in the portfolio but manages asset performance risk on an asset-specific basis.
Foreign exchange risk
The Group reports in sterling and pays dividends from sterling profits. Structural currency exposures are reduced by matching assets denominated in foreign currency with borrowings in the same currency. The Group makes some use of derivative financial instruments to effect foreign exchange management. The exposure to the Euro, US dollar, Swedish krona, Indian rupee, Swiss franc and all other currencies combined, is shown in the table below.
| 2007 | 2007 | 2007 | 2007 | 2007 | 2007 | 2007 | 2007 | |
| Sterling £m |
Euro £m |
US dollar £m |
Swedish krona £m |
Indian rupee £m |
Swiss franc £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|
| Total assets | 4,718 | 1,423 | 376 | 202 | 79 | 32 | 19 | 6,849 |
| Total liabilities | (434) | (1,544) | (290) | (206) | (79) | (31) | (16) | (2,600) |
| Net assets | 4,284 | (121) | 86 | (4) | – | 1 | 3 | 4,249 |
| 2006 | 2006 | 2006 | 2006 | 2006 | 2006 | 2006 | 2006 | |
| Sterling £m |
Euro £m |
US dollar £m |
Swedish krona £m |
Indian rupee £m |
Swiss franc £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|
| Total assets | 3,820 | 1,511 | 475 | 385 | – | 124 | 55 | 6,370 |
| Total liabilities | (103) | (1,453) | (370) | (316) | – | (92) | (30) | (2,364) |
| Net assets | 3,717 | 58 | 105 | 69 | – | 32 | 25 | 4,006 |
Cash flow interest rate risk
The Group has a mixture of fixed and floating rate assets. The assets are funded with a mixture of shareholders' funds and borrowings according to the risk characteristics of the assets. The interest rate exposure is minimised by matching the type and maturity of the borrowings to those of the corresponding assets. Some derivative instruments are used to achieve this objective.
The interest rate profile of the financial assets and liabilities of the Group is shown in the table below by the earlier of the contractual repricing or maturity date.
| 2007 | 2007 | 2007 | 2007 | 2007 | 2007 | 2007 | |
| Within 1 year £m |
1–2 years £m |
2–3 years £m |
3–4 years £m |
4–5 years £m |
Over 5 years £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Fixed rate | |||||||
| Loans and receivables | 34 | 51 | 7 | 46 | 12 | 1,005 | 1,155 |
| Deposits | 1,668 | – | – | – | – | – | 1,668 |
| Cash and cash equivalents | 486 | – | – | – | – | – | 486 |
| Loans and borrowings | (474) | – | – | – | – | (600) | (1,074) |
| Convertible Bonds | – | (363) | – | – | – | – | (363) |
| Subordinated liabilities | – | – | – | – | – | (21) | (21) |
| Derivatives | (281) | (33) | (18) | (162) | (22) | (383) | (899) |
| 1,433 | (345) | (11) | (116) | (10) | 1 | 952 | |
| Floating rate | |||||||
| Loans and receivables | 103 | – | – | – | – | – | 103 |
| Loans and borrowings | (517) | – | – | – | – | – | (517) |
| Derivatives | 899 | – | – | – | – | – | 899 |
| 485 | – | – | – | – | – | 485 |
| 2006 | 2006 | 2006 | 2006 | 2006 | 2006 | 2006 | |
| Within 1 year £m |
1–2 years £m |
2–3 years £m |
3–4 years £m |
4–5 years £m |
Over 5 years £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Fixed rate | |||||||
| Loans and receivables | 28 | 41 | 63 | 42 | 121 | 889 | 1,184 |
| Deposits | 1,108 | – | – | – | – | – | 1,108 |
| Cash and cash equivalents | 847 | – | – | – | – | – | 847 |
| Loans and borrowings | (230) | (200) | – | – | – | (600) | (1,030) |
| Convertible Bonds | – | – | (365) | – | – | – | (365) |
| Subordinated liabilities | – | – | – | – | – | (24) | (24) |
| Derivatives | 188 | (282) | (32) | (19) | (164) | (406) | (715) |
| 1,941 | (441) | (334) | 23 | (43) | (141) | 1,005 | |
| Floating rate | |||||||
| Loans and receivables | 182 | – | – | – | – | – | 182 |
| Loans and borrowings | (444) | – | – | – | – | – | (444) |
| Derivatives | 715 | – | – | – | – | – | 715 |
| 453 | – | – | – | – | – | 453 |
The derivatives line shows the notional value of interest rate swaps.
Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.
Fair value interest rate risk
The fair value of the Group's derivative assets and liabilities is subject to interest rate risk. At 31 March 2007 the fair value of derivative financial instruments was £168 million (2006: £149 million).