24. Financial instruments and risk management

The Group’s activities expose it to a variety of financial risks including market risk (such as interest rate risk, foreign currency risk, commodity price risk), liquidity risk and credit risk. The Group’s funding, liquidity and exposure to interest and foreign exchange rate risks are assessed within the Group’s risk management systems and included on the Group’s risk register. Risk mitigation measures may include use of financial derivatives, foreign currency forward contracts, interest rate swaps and cash flow matching.

i) Categories of financial instruments

Financial assets and liabilities

Fair value hierarchy

The Group does not have any financial assets or financial liabilities that are carried at fair value in the Consolidated Statement of Financial Position at 31 December 2021 and 31 December 2020. In relation to those financial assets and financial liabilities where fair value is required to be disclosed in the Notes to the Consolidated Financial Position, these financial assets and financial liabilities are classified within Level 3 (2020: Level 3) of the fair value hierarchy as market observable inputs (forward rates and yield curves) which are used in arriving at fair values.

The Group has adopted the following fair value measurement hierarchy for financial instruments:

• Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities;
• Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• Level 3: techniques that use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The following are the significant methods and assumptions used to estimate fair values of financial assets and financial liabilities:

Finance lease receivable

Finance lease recognised based on the estimated net investment in the lease being the present value of the contractual future cash flows discounted at the rate implicit in the lease.

Trade and other receivables / payables

For trade receivables and trade payables, with average settlement periods of 50 days (2020: 57 days) and 81 days (2020: 76 days) respectively, the carrying value less allowance for expected credit losses, where appropriate, is estimated to reflect fair value due to their short-term nature.

Cash and cash equivalents

For cash and cash equivalents, all with a maturity of three months or less, the nominal amount is estimated to reflect fair value.

Borrowings

The fair value of bank loans has been determined based on a discounted cash flow analysis with the most significant input being the discount rate reflecting the Group’s own credit risk. For finance leases the Group considers that the incremental borrowing cost used to calculate the carrying value includes a fair estimate of counterparty risk and the carrying value approximates fair value.

Derivative financial instruments

There are no derivative financial instruments outstanding at 31 December 2021 and 31 December 2020 and none were entered into in either 2020 or 2021.

ii) Interest rate risk

At 31 December 2021, interest rates on short-term bank deposits were contracted for terms of less than three months at average effective rates of (0.3)% (2020: (0.3%)).

The interest rates on all Group borrowings at 31 December 2021 comprising loan notes and term loans has been fixed at contracted rates at the date of drawdown with the relevant lender eliminating exposure to interest rate risk on borrowings. The average interest rate at 31 December 2021 was 1.60% (2020: 1.60%) for remaining terms of between 2.9 and 9.5 years.

The interest rates on all lease liabilities at 31 December 2021 were fixed at the incremental borrowing rate at the later of the IFRS 16 effective application date of 1 January 2019 or lease commencement date eliminating exposure to interest rate risk on lease liabilities.

Sensitivity to interest rates

As all of the Group’s borrowings are fixed for the full remaining borrowing terms, the Group has not prepared calculations to measure the estimated effect of changes in market interest rates on the Consolidated Income Statement and Equity Review.

iii) Foreign currency risk management

The Group publishes its consolidated financial statements in euro and conducts business in different foreign currencies. As a result, it is subject to foreign exchange risk due to exchange rate movements which will affect the Group’s transaction costs and the translation of the results and underlying net assets of its foreign operations.

Sterling denominated profits are translated to euro at the average rate of exchange for the financial year. The average rate at which sterling profits were translated during the year was €1:£0.8596 (2020: €1:£0.8896).

Exchange rate exposures are managed within approved policy parameters. The Group did not utilise forward foreign exchange contracts during the year ended 31 December 2021 or 31 December 2020.

Sensitivity

The currency risk sensitivity analysis is set out below:

Under the assumptions; (i) a 10% strengthening in euro exchange rates against all currencies, profit before tax would have increased by €4.8 million (2020: increase of €3.2 million) and equity (before tax effects) would have increased by €3.2 million (2020: increase of €1.3 million); (ii) a 10% weakening in euro exchange rates against all currencies, profit before tax would have decreased by €6.2 million (2020: decrease of €4.0 million) and equity (before tax effects) would have decreased by €4.3 million (2020: decrease of €1.5 million).

The currency profile of the carrying amounts of the Group’s monetary assets and monetary liabilities at the reporting date are as follows:

iv) Commodity price risk

In terms of commodity price risk, the Group’s vessels consume heavy fuel oil (HFO), marine diesel / gas oil (MDO / MGO) and lubricating oils, all of which continue to be subject to price volatility. The Group must also manage the risks inherent in changes to the specification of fuel oil which are introduced under international and EU law from time to time.

The Group’s policy has been to purchase these commodities in the spot markets and to remain unhedged. In the Container and Terminal Division, movements in fuel costs are offset to a large extent by the application of pre-arranged price adjustments with our customers. Similar arrangements are in place with freight customers in the Ferries Division. In the passenger sector, changes in fuel costs are included in the ticket price to the extent that market conditions will allow.

v) Liquidity risk

The Group and Company are exposed to liquidity risk which arises primarily from the maturing of short-term and long-term debt obligations. There were no open derivative contracts at 31 December 2021 or 31 December 2020. The Group and Company’s policy is to ensure that sufficient resources are available either from cash balances, cash flows or undrawn committed bank facilities, to ensure all obligations can be met as they fall due. To achieve this objective, the Group and Company:

• monitor credit ratings of institutions with which the Group and Company maintain cash balances;
• limit maturity of cash balances; and
• borrow the bulk of its debt needs under committed bank lines or other term financing and by policy maintains a minimum level of undrawn committed facilities.

At each year-end, the Group’s rolling liquidity reserve (which comprises cash and undrawn committed facilities and which represents the amount of available cash headroom in the Group funding structure) was as follows:

Management monitors rolling cash flow forecasts on an ongoing basis to determine the adequacy of the liquidity position of the Group. This process also incorporates a longer term liquidity review to ensure refinancing risks are adequately catered for as part of the Group’s strategic planning.

Liquidity analysis

The following table sets out the maturity and liquidity analysis of the Group’s financial liabilities into the relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date:

vi) Credit risk

The Group and Company monitors its credit exposure to its counterparties via their credit ratings (where applicable) and where possible limits its exposure to any one party to ensure that there are no significant concentrations of credit risk. Notwithstanding the foregoing, due to the nature of the underlying transaction there is a material exposure to a single counterparty in relation to the lease receivable. Mitigation of this exposure to finance lease receivables is explained at note 16. Credit risk in relation to trade and other receivables and cash and cash equivalents has been discussed in notes 18 and 19 respectively. The maximum exposure to credit risk is represented by the carrying amounts in the Statement of Financial Position.

vii) Capital management

The objective when managing capital is to safeguard the Group’s ability to continue in business and provide returns for shareholders together with maintaining the confidence of all stakeholders. No changes were made in the objectives, policies or processes for managing capital during the financial years ended 31 December 2021 and 31 December 2020.

The capital structure of the Group consists of net debt (borrowings as detailed in note 22 offset by cash and cash equivalents) and equity of the Group (comprising issued capital, reserves and retained earnings as detailed in notes 20 and 21). The Group seeks to maintain an optimal capital structure to reduce the overall cost of capital while balancing the benefits of different capital sources. Within this framework the Group considers the amount and tenor of borrowings and distributions to shareholders either through dividends or buybacks.

During the year the Company bought back 4.5 million ICG units at a cost of €19.8 million and issued 0.4 million ICG Units under its share option plans raising €0.7 million. The Group repaid €77.5 million of bank borrowings (net of drawdowns), lease liabilities increased by €19.8 million and cash and cash equivalents reduced by €112.3 million.

The Group actively monitors the externally imposed capital requirements contained in our debt facilities which set a maximum leverage ratio of net debt to earnings before interest tax depreciation and amortisation. Having agreed a temporary increase in this leverage ratio against the background of the Covid-19 pandemic to 4 times which applied during the financial year ended 2021, this will revert to 3 times for testing dates after 1 January 2022. At 31 December 2021, the leverage ratio under covenant definitions was 2.6 times (2020: 1.6 times).

At 31 December 2021, the net debt position of the Group was €142.2 million (2020: net debt of €88.5 million) and total equity balances amounted to €249.7 million (2020: €265.9 million).