Our primary listing is on the London Stock Exchange (LSE:RTO).

Debt information

Rentokil Initial finances its operations using a mixture of medium-term notes, bank borrowings and leases.

The Group targets a BBB investment grade credit rating with Standard & Poor's and is currently rated BBB with a stable outlook. At year-end 2019, the Group had a net debt:EBITDA ratio of approximately 1.8 times.

The Group has established a European medium-term note programme (EMTN) to facilitate access to capital markets. The offering circular may be found here. A supplement to the offering circular may be found here. A debt investor presentation may be found here.

As at 31 December 2019, the Group had a well-spread maturity profile with outstanding medium-term notes as below:

  Interest coupon Maturity date
€350m bond Fixed rate – 3.25% pa 07 Oct 2021
€400m bond Fixed rate – 0.95% pa 22 Nov 2024
€500m bond
Fixed rate - 0.875% pa 30 May 2026

On 24 August 2019 the Group requested, and was granted, the first of two maturity date extensions on is Revolving Credit Facility (RCF) to 22 August 2024. On 28 November 2019 the Group requested a voluntary reduction to the RCF from £600m to £550m. At 31 December 2019 £550m is available for drawings.

The group signed a three year $50m bilateral term loan facility on 19 June 2017. At 31 December 2019 the facility was fully drawn.

Market risk

Interest rate risk

The Group seeks to manage interest rate risk to ensure reasonable certainty of its interest charge while allowing an element of risk exposure consistent with the variability of its cash flows. Interest rate risk is managed by the use of fixed interest debt and interest rate derivatives, which are approved in advance by the Treasury Committee. The Group policy is to fix a minimum of 50% of its estimated future interest rate exposures (excluding pensions) for a minimum period of 12 months forward. The Treasury Committee reviews this exposure monthly.

A hypothetical 1.0% increase in euro interest rates would reduce the market value of the Group’s bond liabilities by £45.9m at 31 December 2019 (2018: £51.7m). The income statement impact is £nil as changes in interest rates do not change the expected cash flows on the bonds.

The Group had outstanding bond debt issues at 31 December 2019 with a market value of £1,082.7m (2018: £1,146.6m). This exceeds the book value of £1,051.5m (2018: £1,120.1m) as a result of reductions in interest rates in Europe. There are no circumstances where the Group would be obliged to pay the fair market value. The Group could however decide to redeem some or all of its bonds early and the fair market value is indicative of the price that would be required to do so.

Foreign exchange risk

The Group’s worldwide operations generate profits and cash flows in foreign currencies. Sales and purchases are typically denominated in the currency of the country in which they are transacted, and the Group’s cross-border procurement is considered insignificant. Sterling procurement and central costs mean that foreign currencies constitute more than 100% of Group adjusted operating profit at approximately 107%.

The Group’s primary exposure to foreign exchange risk is in relation to the translation of assets and liabilities, and the Group aims to hold debt in currencies in proportion to its forecast foreign currency profits and investments. FX derivatives are used to manage foreign currency exposures in excess of £0.5m that are not covered by debt or assets in the same (or another highly-correlated) currency. The Treasury Committee monitors foreign exchange exposures on a monthly basis. Dealing in foreign exchange products is controlled by dealing mandates approved by the Treasury Committee and all FX transactions are covered by ISDA documentation.

The most significant foreign currency groups are euros and US dollars, which make up 41.7% and 34.9% of Group adjusted operating profit respectively.

At 31 December 2019 the Group’s net debt was approximately 64% euro (2018: 64%), reflecting that it is the Group's principal cash flow exposure; and 36% US dollars (2018: 39%), reflecting the size of the US market and the Group’s strong growth and investment in this region. The translation of the interest element of euro and US dollar debt provides a partial income statement offset to the translation of earnings.

The Group calculates the impact on the income statement and other comprehensive income of a 10% movement in foreign exchange rates. The Group’s principal foreign currency exposure is the euro. A 10% movement in £/€ would result in a £16.0m increase/decrease (2018: £14.4m) in adjusted operating profit, offset by a £2.3m decrease/increase (2018: £2.1m) in interest payable. For US dollars, a 10% movement in £/$ would result in a £12.2m increase/decrease (2018: £10.3m) in adjusted operating profit, offset by a £1.1m decrease/increase (2018: £1.6m) in interest payable.

Where possible, currency cash flows are used to settle liabilities in the same currency in preference to selling currency in the market.

Treasury risk

The Group’s treasury activities are governed by a treasury policy, which is reviewed and approved by the Board on an annual basis. The treasury policy covers all activities associated with managing the above risks. The policy requires that financial instruments are only utilised to manage known financial exposures and speculative derivative contracts are not entered into. The treasury policy requires that treasury must approve opening and closing of all bank accounts, and that funds transfers and other payments are only made in accordance with bank mandates. To ensure an appropriate control environment exists in the treasury function, duties are segregated between front and back office teams. In addition a number of controls are in place to protect against potential cyber security risks.

Liquidity risk

The Group is committed to ensuring it has sufficient liquidity to meet its business needs, and appropriate reserves to cover operational underperformance or dislocation in the financial markets. The Group’s policy is to have headroom of unrestricted cash and available committed facilities of at least £150m, and the Treasury Committee manages financing requirements and associated headroom at least 12 months forward.

At 31 December 2019 the Group’s earliest maturity is the $50m term loan due in June 2020. The Group had unrestricted cash of £266.7m and £550.0m of available commitments under its credit facilities, giving combined headroom of £816.7m to meet this obligation (2018: £638.4m of combined headroom).

Capital risk

The Group is committed to maintaining a debt/equity structure that allows continued access to a broad range of financing sources and sufficient flexibility to pursue commercial opportunities as they present themselves, without onerous financing terms and conditions. The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to support the Group’s strategy. Capital consists of ordinary shares, retained earnings and non-controlling interests in the Group. Management monitor the return on capital as well as the level of dividends to ordinary shareholders.

Debt credit rating

The group’s debt is rated by Standard & Poor’s as BBB with a stable outlook. The group targets a rating of BBB or above for debt issuance over the medium term. A rating of BBB- or above is considered an ’investment grade’ rating. The group’s euro denominated bonds, contain a ’coupon step-up’ increasing the coupon payable by 1.25% in the event that the group is downgraded to BB+ or below (sub-investment grade).

Financial covenants

The group's medium-term notes may be recalled by its investors in the event of a change of control of the group, or within 120 days if:

Change of control

The group's medium-term notes may be recalled by its investors in the event of a change of control of the group, or within 120 days if:

(a) the group's debt is downgraded below investment grade or the rating is withdrawn; and
(b) the rating agency confirms in writing, either publicly or in writing to the issuer or the Trustee, that the rating action occurred either wholly or in part due to the change of control.

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