41061 Unite AR22 HI-RES WEB-READY - Flipbook - Page 219
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
217
OTHER INFORMATION
4.5 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risks (primarily interest rate risk), credit risk and
liquidity risk. The Group’s Treasury Policy focuses on the unpredictability of financial markets and seeks to minimise
potential adverse effects on the Group’s financial performance. Details on credit risk can be found in note 5.3.
4.5a) Interest rate risk
The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest
rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings,
and by the use of interest rate swap contracts and forward interest rate contracts. Hedging activities are evaluated
regularly to align with interest rate views and defined risk appetite; ensuring the most cost-effective hedging strategies
are applied.
The Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk
management section of this note.
The Group holds its debt finance under both floating and fixed rate arrangements. The majority of floating debt is hedged
through the use of interest rate swap agreements. The Group’s Policy guideline has been to hedge 75%-95% of the Group’s
exposure for terms of approximately two to ten years.
At 31 December 2022, after taking account of interest rate swaps, 97% (2021: 89%) of the Group’s borrowing was held at
fixed rates. Excluding the £200 million (2021: £nil million) of swaps the fixed investment borrowing is at an average rate of
3.1% (2021: 3.1%) for an average period of 5.3 years (2021: 6.4 years), including all debt with current swaps the average rate
is 3.3% (2021: 3.0%). In addition, Unite Group Plc has £300m forward starting interest rate swaps at rates meaningfully
below prevailing market levels with weighted average maturity of 10.8 years.
Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest
amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of
changing interest rates upon the issuance of forecast fixed rate debt held and the cash flow exposures on the issued
variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the
future cash flows using the curves at the reporting date and is disclosed below. The average interest rate is based on the
outstanding balances at the end of the financial year.
As the critical terms of the hedge contracts and their corresponding hedged items are the same, the Group performs a
qualitative assessment of effectiveness and it is expected that the value of the interest rate swap contracts and the value
of the corresponding hedged items will systematically change in opposite direction in response to movements in the
underlying interest rates. The main source of hedge ineffectiveness in these hedge relationships has historically been the
effect of the counterparty and the Group’s own credit risk on the fair value of the hedge contracts, which is not reflected
in the fair value of the hedged item attributable to the change in interest rates. No other sources of ineffectiveness
emerged from these hedging relationships. However, changes in anticipated draw down of debt in 2022 as a result of
planned property disposals have meant that the hedged items were no longer expected to occur. As a result the hedge
relationships were discontinued from 1 July 2021. Subsequent changes in fair value of the derivatives of £10.0 million
were recognised directly in profit and loss. The amount accumulated in cash flow hedge reserve was reclassified to profit
and loss.
The Group holds interest rate swaps and caps at 31 December 2022 against £nil (2021: £nil) of the Group’s borrowings,
designated in effective hedge relationships. The fair value of these instruments is net assets of £73.2 million (2021:
£2.5 million) with £nil million maturing in 12 months.
Hedging instruments
Applicable
interest rates
2022
%
Nominal amount
2021
%
2022
£m
Carrying amount
2021
£m
2022
£m
Change in fair value
2021
£m
2022
£m
2021
£m
Within one year
–
–
–
–
–
–
–
5.0
Between one and two years
–
–
–
–
–
–
–
2.5
Between two and five years
–
–
–
–
–
–
–
–
More than five years
–
–
–
–
–
–
–
8.6
