| 49.1 |
Financial risk factors
The group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk
and other price risk), credit risk and liquidity risk. The group’s overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance
of the group. The group uses derivative financial instruments to hedge certain risk exposures.
Risk management process
The Tsogo Sun Hotel’s board recognises that the management of business risk is crucial to the group’s continued
growth and success and this can only be achieved if all three elements of risk – namely threat, uncertainty and
opportunity – are recognised and managed in an integrated fashion. The audit and risk committee is mandated by
the board to establish, coordinate and drive the risk management process throughout the group. It has overseen
the establishment of a comprehensive risk management system to identify and manage significant risks in the
operational divisions, business units and subsidiaries. Internal financial and other controls ensure a focus on critical
risk areas are closely monitored and are subject to management oversight and internal audit reviews.
The systems of internal control are designed to manage rather than eliminate risk, and provide reasonable, but not
absolute, assurance as to the integrity and reliability of the financial statements, the compliance with statutory laws
and regulations and to safeguard and maintain accountability of the group’s assets. The board and executive
management acknowledge that an integrated approach to the total process of assurance improves the assurance
coverage and quality in addition to being more cost-effective.
In addition to the risk management processes embedded within the group, the group executive committee
identifies, quantifies and evaluates the group’s risks annually utilising a facilitated risk assessment workshop. The
severity of risks is measured in qualitative (e.g. zero tolerance for regulatory risks) as well as quantitative terms,
guided by the board’s risk tolerance and risk appetite measures. The scope of the risk assessment includes risks
that impact shareholder value or that may lead to a significant loss, or loss of opportunity. Appropriate risk responses
to each individual risk are designed, implemented and monitored.
The risk profiles, with the risk responses, are reviewed by the audit and risk committee at least once every six
months. In addition to the group risk assessment, risk matrices are prepared and presented to the audit and risk
committee for each operational division. This methodology ensures that identified risks and opportunities are
prioritised according to the potential impact on the group and cost-effective responses are designed and
implemented to counter the effects of risks and take advantage of opportunities.
Financial risk management is carried out by a central treasury department (Group Treasury) under policies approved
by the board of directors. Group Treasury identifies, evaluates and hedges financial risks in close cooperation with
the group’s operating units. The board provides principles for overall risk management, as well as written policies
covering specific areas, such as foreign exchange risk, interest rate risk, use of derivative financial instruments and
non-derivative financial instruments and investing excess liquidity.
Credit risk is managed at an entity level for trade receivables.
| (a) |
Market risk
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.
| (i) |
Currency risk
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates
The group is not exposed to significant foreign exchange risk as the group seeks to mitigate this
exposure, where cost-effective, by securing its debt denominated in US Dollar and/or Euro in the
offshore entities with assets and cash flows of those offshore operations where the functional currency
of those entities is US Dollar and/or Euro, with no recourse to the South African operations. As a result,
no forward cover contracts are required in respect of this debt. The group does not hedge currency
exposures from the translation of profits earned in foreign currency subsidiaries, associates and
joint ventures.
Foreign exchange risk also arises from exposure in the foreign operations due to trading transactions
denominated in currencies other than the functional currency.
The following significant exchange rates against the SA Rand applied during the year:
|
|
Average rate |
Reporting date closing rate |
|
|
2019 |
2019 |
| One US Dollar is equivalent to |
|
14.83 |
|
13.66 |
17.88 |
|
14.51 |
| One Euro is equivalent to |
|
16.47 |
|
15.83 |
19.66 |
|
16.29 |
A 10% strengthening of the functional currency against the following currencies at 31 March would
have increased/(decreased) profit or loss by the amounts shown below due to foreign exchange gains
or losses on foreign denominated trade receivables, cash and cash equivalents and trade payables
recorded in the local currency of the foreign operations. This analysis assumes no hedging and that all
other variables, in particular interest rates, remain constant. This analysis was performed on the same
basis for 2019.
|
|
2019
Rm |
| Euro |
|
* |
|
– |
| Mozambican Meticals |
|
2 |
|
– |
| Nigerian Naira |
|
– |
|
(1) |
| US Dollar |
|
1 |
|
(1) |
| Other |
|
1 |
|
1 |
* Amount less than R1 million.
A 10% weakening of the functional currency against above currencies at 31 March would have had the
equal but opposite effect on the above currencies to the amounts shown above, on the basis that all
other variables remain constant. |
The following carrying amounts were exposed to foreign currency exchange risk:
| (ii) |
Interest rate risk
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
Hedge accounting is applied to the group’s interest rate swaps. The group’s primary interest rate risk
arises from long-term borrowings (excluding bank overdrafts). Borrowings at variable rates expose the
group to cash flow interest rate risk. Borrowings at fixed rates expose the group to fair value interest
rate risk. In line with group policy, a portion of the group debt is hedged. Refer to notes 35 and 51.
The group’s policy is to borrow in floating rates, having due regard that floating rates are generally lower
than fixed rates in the medium term.
The group manages its interest rate risk by using floating-to-fixed interest rate swaps. Interest rate
swaps have the economic effect of converting floating rate borrowings to fixed rates. Where the group
raises long-term borrowings at floating rates, it swaps them into fixed rates in terms of group policy.
Under the interest rate swaps, the group agrees with other parties to exchange, at specified intervals
(mainly quarterly), the difference between fixed contract rates and floating rate interest amounts
calculated by reference to an agreed reference interest rate calculated on agreed notional principal
amounts. The settlement dates coincide with the dates on which interest is payable on the underlying
debt and settlement occurs on a net basis.
Group policy requires that between 25% and 75% of its net borrowings (net borrowings = gross
borrowings net of cash and cash equivalents) are to be in fixed rate instruments over a 12-month
rolling period. As at 31 March 2020, 40% (2019: 35%) of consolidated gross borrowings and
49% (2019: 45%) of consolidated net borrowings were in fixed rates taking into account interest rate
swaps. The hedge ratio is monitored on an ongoing basis taking into account the interest rate cycle.
Hedge effectiveness is determined at the inception of the hedge relationship, and at each reporting
date (mainly half-yearly and annually) when effectiveness is assessed to ensure that an economic
relationship exists between the hedged item and the hedging instrument. The group enters into interest
rate swaps that have similar terms as the hedged item, such as reference rate, reset dates, payment
dates, maturities and notional amounts. As the group does not hedge 100% of its borrowings, the
hedged item is identified as a proportion of the outstanding borrowings up to the notional amount of
the swaps. The effectiveness of the hedges is tested at inception and thereafter annually and the
ineffective portion is recognised immediately in profit or loss. Hedge ineffectiveness for interest rate
swaps may occur due to:
- The credit or debit value adjustment on the interest rate swaps which is not matched by borrowings;
- Differences in critical terms between the interest rate swaps and borrowings; and
- Costs of hedging (including the costs of adjusting an existing hedging relationship).
Fixed interest rate swaps ranged from 6.69% to 7.42% as at 31 March 2020 referenced against the
three month JIBAR of 5.61% (2019: Fixed interest rate swaps ranged from 7.16% to 7.42% as at
31 March 2019 referenced against the three-month JIBAR of 7.15%).
At 31 March, floating rate borrowings are linked/referenced to various rates the carrying amounts of
which are as follows:
|
|
2019
Rm |
| Linked to three-month JIBAR |
|
2 550 |
1 959 |
| Linked to three-month USD LIBOR |
|
1 398 |
1 178 |
| Linked to Central Bank prime rate in Mozambique |
|
32 |
46 |
|
|
3 980 |
3 183 |
At 31 March, the interest rate profile of the group’s interest-bearing financial instruments, excluding the
effect of interest rate swaps and bank overdrafts, was:
|
|
Carrying amount |
|
|
|
| Variable rate instruments |
|
|
|
| Financial assets |
|
– |
– |
| Financial liabilities |
|
3 980 |
3 183 |
|
|
3 980 |
3 183 |
Cash flow sensitivity analysis for variable rate instruments
A change of 100 basis points in interest rates would have increased/decreased pre-tax profit or loss by
R40 million (2019: R32 million), including the effects of the interest rate swaps. This analysis assumes
that all other variables, in particular foreign currency rates, remain constant. The analysis was performed
on the same basis for 2019. |
| (iii) |
Other price risk
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices (other than those arising from currency risk or interest rate risk), whether
those changes are caused by factors specific to the individual financial instruments or its issuer,
or factors affecting all similar financial instruments traded in the market.
The group has pricing risk – refer note 23. |
|
|
|
| (b) |
Credit risk
The risk that one party to a financial instrument will cause a financial loss for the other party by failing to
discharge an obligation.
The group has no significant concentrations of credit risk. Overall credit risk is managed on a group basis
with exposure to trade receivables managed at entity level.
Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks
and financial institutions, as well as credit exposures to the group’s customer base, including outstanding
receivables and committed transactions.
For banks and financial institutions, only group audit and risk committee approved parties are accepted (on
behalf of the board). The group has policies that limit the amount of credit exposure to any bank and financial
institution. The group limits its exposure to banks and financial institutions by setting credit limits based on
their credit ratings and generally only with counterparties with a minimum credit rating of BBB by Standard &
Poor’s and Baa3 from Moody’s. For banks with a lower credit rating, or with no international credit rating,
limits are set by the audit and risk committee on behalf of the board. The utilisation of credit limits is regularly
monitored. To reduce credit exposure, the group has International Swaps and Derivatives Association Master
Agreements with most of its counterparties for financial derivatives which permit net settlement of assets and
liabilities in certain circumstances.
Refer note 27: Trade and other receivables for further credit risk analysis in respect of trade and other
receivables. |
| (c) |
Liquidity risk
The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability
of funding through an adequate amount of committed credit facilities and the ability to close out market
positions. Due to the dynamic nature of the underlying businesses, Group Treasury aims to maintain flexibility
in funding by keeping committed credit lines available.
Management monitors rolling forecasts of the group’s liquidity headroom on the basis of expected cash flow
and the resultant borrowing position compared to available credit facilities. This process is performed during
each financial year for five years into the future in terms of the group’s long-term planning process.
The group’s policy is to ensure that it has, at all times, in excess of 15% of surplus, undrawn committed
borrowing facilities. At 31 March 2020, the group had 19% (2019: 15%) surplus facilities. Bank overdrafts are
not considered to be long-term debt but rather working capital arrangements as part of cash management
as set up with the banking institutions.
|
|
2019
Rm |
| Debt at 1 April |
|
(3 165) |
|
(2 920) |
| Net increase in debt during the year |
|
(816) |
|
(263) |
| Accrued interest |
|
– |
|
18 |
| Debt at 31 March |
|
(3 981) |
|
(3 165) |
| Credit facilities(1) |
|
4 921 |
|
3 784 |
| Headroom available |
|
940 |
|
619 |
| (1) |
Excludes indirect facilities (letters of guarantees, forward exchange contracts and letters of credit), finance leases and bank
overdrafts. |
The group sources its funding from a syndicate of three large South African banks thereby reducing liquidity
concentration risk. The facilities for continuing operations comprise a mix of short, medium and long-term
tenure, with utilisations and available facilities as follows:
|
|
2020 facility |
|
2019 facility |
|
|
Total
Rm |
Utilisation
Rm |
Available
Rm |
| Demand facilities (overdrafts) |
|
40 |
– |
40 |
|
20 |
– |
20 |
| Term facilities maturing 15 April 2019 |
|
– |
– |
– |
|
230 |
230 |
– |
| Term facilities maturing 20 February 2020 |
|
– |
– |
– |
|
104 |
60 |
44 |
| Overnight loan facilities maturing 12 June 2020 |
|
300 |
– |
300 |
|
– |
– |
– |
| Term facilities maturing 31 August 2020 |
|
– |
– |
– |
|
1 050 |
550 |
500 |
| Term facilities maturing 31 March 2021 |
|
– |
– |
– |
|
218 |
218 |
– |
| Revolving credit facilities maturing 30 April 2020 |
|
250 |
150 |
100 |
|
– |
– |
– |
| Term facilities maturing 31 December 2021 |
|
259 |
259 |
– |
|
210 |
210 |
– |
| Term facilities maturing 31 March 2022 |
|
532 |
439 |
93 |
|
852 |
797 |
55 |
| Term facilities maturing 31 August 2022 |
|
500 |
500 |
– |
|
500 |
500 |
– |
| Revolving credit facilities maturing 31 December 2022 |
|
500 |
200 |
300 |
|
– |
– |
– |
| Revolving credit facilities maturing 11 February 2023 |
|
393 |
286 |
107 |
|
– |
– |
– |
| Term facilities maturing 31 March 2023 |
|
600 |
600 |
– |
|
600 |
600 |
– |
| Term facilities maturing 31 March 2024 |
|
300 |
300 |
– |
|
– |
– |
– |
| Term facilities maturing 30 September 2024 |
|
800 |
800 |
– |
|
– |
– |
– |
| Revolving credit facilities maturing 11 February 2025 |
|
447 |
447 |
– |
|
– |
– |
– |
|
|
4 921 |
3 981 |
940 |
|
3 784 |
3 165 |
619 |
The table below analyses the group’s financial liabilities that will be settled into relevant maturity groupings
based on the remaining period at the balance sheet date to the contractual maturity date. The amounts
disclosed in the table are the contractual undiscounted cash flows, inclusive of capital and interest:
|
|
| At 31 March 2020 |
|
|
|
|
|
| Bank borrowings |
|
131 |
967 |
1 524 |
– |
| Corporate bonds |
|
124 |
124 |
1 931 |
– |
| Lease liabilities |
|
119 |
515 |
1 442 |
– |
| Bank overdrafts |
|
559 |
– |
– |
– |
| Derivative financial instruments |
|
– |
– |
50 |
– |
| Trade and other payables |
|
423 |
– |
– |
– |
|
|
1 356 |
1 606 |
4 947 |
– |
| At 31 March 2019 |
|
|
|
|
|
| Bank borrowings |
|
172 |
901 |
1 625 |
– |
| Corporate bonds |
|
370 |
55 |
709 |
– |
| Bank overdrafts |
|
195 |
– |
– |
– |
| Derivative financial instruments |
|
– |
– |
2 |
– |
| Trade and other payables |
|
409 |
– |
– |
– |
|
|
1 146 |
956 |
2 336 |
– |
Gross cash inflows and outflows in respect of the group’s derivative financial instruments are not material and
therefore no further information has been presented. |
|
