27 Financial instruments

a) Fair values of financial instruments

There is no difference between the fair values and the carrying values shown in the balance sheet.

b) Financial instruments risks

Exposure to credit, interest rate and currency risks arises in the normal course of the Group's business, and the Group continues to monitor and reduce any exposure accordingly. Information has been disclosed relating to the individual company only where a material risk exists.

(i) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers.

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis.

Credit evaluations are performed on all customers requiring credit over a predetermined amount. Bad debt insurance is taken out on all key accounts where the cost is appropriate given the risk covered. All overdue debts are monitored regularly and customers are put on credit hold if payments are not received on time.

The carrying amount of trade receivables represents the maximum credit exposure for the Group. Therefore, the maximum exposure to credit risk at the balance sheet date was £24.88 million (2011: £23.47 million), being the total carrying amount of trade receivables net of an allowance. Management do not consider there to be any significant unimpaired credit risk in the year end balance sheet (2011: £nil).

At the balance sheet date there were no significant concentrations of credit risk. The amount of trade receivables which are beyond 90 days from their due date is £1.01 million (2011: £1.11 million). This represents 4% of the total gross receivable balance.

Impairment losses

The movement in the allowance for impairment in respect of loans and receivables during the year was as follows:


2012
£000
2011
£000
Balance at 1 April (822) (640)
Reversal/(Impairment) movement 371 (182)
Balance at 31 March (451) (822)

There are no significant losses/bad debts provided for specific customers.

(ii) Liquidity and interest risk

The Group holds net debt and hence its interest and liquidity risks are associated with the maturity of its loans against cash inflows from around the Group. The Group's objective is to maintain a balance of continuity of funding and flexibility through the use of loans and banking facilities as applicable.

As at 31 March 2012, the Group had an outstanding term loan of £1.00 million, which expires on 31 December 2012 and is secured by corporate guarantees and debentures over the Group's UK and Swedish entities.

It also had an Asset Based Lending facility (maximum £15.80 million) available, secured over the receivables and stock of the Group's UK Subsidiaries and the property of the Holding Company.

In December 2011, to part fund the Power Steel & Electro-Plating Works SDN Bhd acquisition, TR Asia Investment Holdings Pte Ltd took out a five-year Term Loan with the Singaporean bank DBS at a fixed rate of 3.14% which is secured by Corporate Guarantees from the Company and TR Formac Pte Ltd.

Covenant headroom

The current term facilities are subject to quarterly covenant testing as follows:

Interest cover: Underlying EBITDA to Net Interest to exceed a ratio of three.
Cash flow cover: Adjusted cash flow to Debt Service to exceed a ratio of one.

With respect to the Asian loan facility, the covenant testing is as follows:

Minimum Tangible Net worth (TR Asia Investment Holdings Pte Ltd) of S$20 million
Minimum Consolidated Tangible Net worth (Asia Group) of S$35 million
Maximum Asia Group Net Debt to EBITDA ratio of 2.0X
Minimum Asia Group Debt Service Cover (DSC) of 1.2X

These covenants currently provide sufficient headroom and forecasts indicate no breach is anticipated.

Liquidity headroom

Trading forecasts show that the current facilities provide sufficient liquidity headroom. Some of the Groups' facilities as disclosed in note 21 will come up for review in the ordinary course of business within the next 12 months. The Group continues to maintain positive relationships with a number of banks and the Directors believe that appropriate facilities will continue to be made available to the Group as and when they are required.

Interest risk

The Group monitors closely all loans outstanding which currently incur interest at floating rates.

The Company has taken out a 3% Fixed Cap interest rate hedging instrument for three years to protect the Group against interest rate fluctuations on the Asset Based lending and term loans.

In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature:

Company20122011
Effective
interest
rate
%
Total
£000
0 to
<1 year
£000
1 to
2 years
£000
Effective
interest
rate
%
Total
£000
0 to
<1 year
£000
1 to
2 years
£000
Cash and cash
equivalents

1,081 1,081 373 373
Secured bank loans 4.25 (999) (999) 4.25 (2,333) (1,333) (1,000)
Bank overdrafts
(5,042) (5,042) (4,064) (4,064)
Total Company
(4,960) (4,960) (6,024) (5,024) (1,000)
Group







Cash and cash
equivalents

12,612 12,612 7,142 7,142
Secured bank loans 3.43 (19,987) (14,347) (5,640) (14,283) (13,283) (1,000)
Finance lease liabilities 2.98-4.00 (221) (173) (48) 3.53
Bank overdrafts
(814) (814) (2) (2)
Total Group
(8,410) (2,722) (5,688) (7,143) (6,143) (1,000)

With the exception of the loan taken out by TR Asia Investment Holdings Ltd, which bears a fixed interest rate of 3.14%, all other assets and liabilities bear interest at a floating rate and therefore may change within one year.

Sensitivity analysis

A change of 1% point in interest rates at the balance sheet date would change equity and profit and loss by £0.13 million (2011: £0.14 million). This calculation has been applied to risk exposures existing at the balance sheet date.

This analysis assumes that all other variables, in particular foreign currency rates, remain consistent and considers the effect of financial instruments with variable interest rates. The analysis is performed on the same basis for the comparative period.

(iii) Foreign currency risk

The Group is exposed to foreign currency risk on sales, purchases and cash borrowings that are denominated in a currency other than local functional currency. The Group faces additional currency risks arising from monetary financial instruments held in non-functional local currencies.

Operational foreign exchange exposure

Where possible the Group tries to invoice in the local currency at the respective entity. If this is not possible, then to mitigate any exposure, the Group tries to buy from suppliers and sell to customers in the same currency.

Where possible the Group tries to hold the majority of its cash and cash equivalent balances in the local currency at the respective entity.

Monetary assets/liabilities

The Group continues to monitor exchange rates and buy or sell currencies in order to minimise open exposure to foreign exchange risk. The Group does not speculate on exchange rates.

The Group's exposure to foreign currency risk is as follows (based on the carrying amount for monetary financial instruments held in non-functional currencies):

31 March 2012Sterling
£000
Euro
£000
US Dollar
£000
Singapore
Dollar
£000
Total
£000
Cash and cash equivalents 580 964 1,499 240 3,283
Balance sheet exposure 580 964 1,499 240 3,283
31 March 2011Sterling
£000
Euro
£000
US Dollar
£000
Singapore
Dollar
£000
Total
£000
Cash and cash equivalents 95 2,116 1,556 3,767
Balance sheet exposure 95 2,116 1,556 3,767

Sensitivity analysis

Group

A 1% change in the following currencies against local functional currency at 31 March would have changed equity and profit and loss by the amount shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date.

This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant. The analysis is performed on the same basis for the comparative period.


Equity & Profit or Loss
2012
£000
2011
£000
US Dollar to Sterling (15) (15)
Euro to Sterling (10) (21)

A 1% strengthening of the above currencies against the pound Sterling 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.

(iv) Capital Management

The Group's objectives when managing capital are to ensure that all entities within the Group will be able to continue as going concerns, while maximising the return to Shareholders through the optimisation of the debt and equity balance. We regularly review and maintain or adjust the capital structure as appropriate in order to achieve these objectives and this is consistent with the management of capital for previous periods.

The Group has various borrowings and available facilities that contain certain external capital requirements ('covenants') that are considered normal for these types of arrangements. As discussed above, we remain comfortably within all such covenants.

Identification of the total funding requirement is achieved via a detailed cash flow forecast which is reviewed and updated on a monthly basis.

The capital structure of the Group is presented below:


2012
£000
2011
£000
Cash and cash equivalents (note 20) 11,798 7,140
Borrowings (note 21) (20,208) (14,283)
Net debt (8,410) (7,143)
Equity (53,488) (42,845)
Capital (61,898) (49,988)

There is a continuous process for identifying, evaluating and managing the key risks faced by the Group. Activities are co-ordinated by the Audit Committee. It has responsibility, on behalf of the Board, for ensuring the adequacy of systems for identifying and assessing significant risks, that appropriate control systems and other mitigating actions are in place, and that residual exposures are consistent with the Group's strategy and objectives. Assessments are conducted for all material entities.

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