Kingfisher's treasury function has primary responsibility for managing certain financial risks to which the Group is exposed. The Board reviews the levels of exposure regularly and approves treasury policies covering the use of financial instruments required to manage these risks. Kingfisher's treasury function is not run as a profit centre and does not enter into any transactions for speculative purposes.
In the normal course of business, the Group uses financial instruments including derivatives. The main types of financial instruments used are fixed term debt, floating rate notes and deposits, money market funds, interest rate swaps and foreign exchange contracts.
Interest rate risk – Borrowings arranged at floating rates of interest expose the Group to cash flow interest rate risk, whereas those arranged at fixed rates of interest expose the Group to fair value interest rate risk. The Group manages its interest rate risk by entering into certain interest rate derivative contracts which modify the interest rate payable on its underlying debt instruments.
Currency risk – Kingfisher's principal operational currency exposures are to the Euro, Polish Zloty, Romanian New Leu and Russian Rouble, which arise through the ownership of retail businesses in France, Spain, Portugal, Germany, Ireland, Poland, Romania and Russia. It is the Group's policy not to hedge the translation of overseas earnings into Sterling. The Group continues to monitor potential exposures and risks, and considers effective risk management solutions.
In addition, the Group has significant transactional exposure arising on the purchase of inventories denominated in US Dollars, which it hedges using forward foreign exchange contracts. Under Group policy, the operating companies are required to hedge committed inventory purchases and a proportion of forecast inventory purchases arising in the next 12 months. This is monitored on an ongoing basis.
In the current year the Group has issued EUR loans at a floating rate. This exposes the Group to EUR currency risk which has been swapped to a Sterling floating rate using cross currency swaps.
Liquidity risk – The Group regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the medium term, determining the level of debt facilities required to fund the business, planning for repayments of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.
Credit risk – The Group’s exposure to credit risk at the reporting date is the carrying value of trade and other receivables, cash at bank, short-term deposits and the fair value of derivative assets.
Kingfisher deposits surplus cash with a number of banks with strong short-term credit ratings and with money market funds which have AAA credit ratings and offer same day liquidity. A credit limit for each counterparty is agreed by the Board covering the full value of deposits and a proportion of the fair value of derivative contracts. The credit risk is reduced further by spreading the investments and derivative contracts across several counterparties. At 31 January 2019, the highest cash investment with a single counterparty was £0m (FY 17/18: £14m).