The Group maintains a prudent approach to its financing and is committed to an investment grade credit rating. It is the Board’s policy to target a level of debt that enables disciplined investment and ample headroom on its covenants, with Group net debt to EBITDA maintained at a ratio of 2.0x to 2.5x over the medium term.
The Group’s key accounting debt ratios as at 31 December 2014 were as follows;
- Gearing ratio: 2.25 times EBITDA (31 December 2013: 2.5x; bank covenant not to exceed 3.5x)
- Interest cover ratio: EBITDA 6.3 times interest (31 December 2013: 6.1x; bank covenant not less than 3.5x).
The Group has a strong funding platform that underpins the delivery of its strategy. Core funding is provided from non-bank sources, to provide improved certainty and maturity of funding. At the end of 2014, this represented £742.8 million of funding, primarily from two Sterling denominated bonds comprised of a £350 million bond maturing in 2017 and a £225 million bond maturing in 2020, together with a private placement of €78 million maturing in 2021 and £110 million of finance leases.
Additional committed bank funding of £416 million, to meet seasonal working capital needs and to provide sufficient funding headroom, is provided under the Group’s unsecured Revolving Credit Facility (‘RCF’) – which was successfully renewed and extended to November 2019, at a reduced margin of 0.6% over Libor. At 31 December 2014 the Group had £499.7 million in cash and undrawn facilities available.
The Group hedges its exposure to interest rate movements to maintain a balance between fixed and floating interest rates on borrowings. To achieve the desired fixed to floating ratio the Group has entered into a series of interest rate swaps that have the effect of converting fixed rates into floating rate debt. The net effect of these transactions was that, at 31 December 2014, the proportion of Group net debt at floating rates was 28% (2013: 33%).
The Group’s exposure to foreign exchange is limited to translation of its earnings and assets, as its overseas activities are naturally hedged by earning revenue and incurring costs in local currencies. In order to hedge its exposure to currency fluctuations with regards to its financial ratios, the Group held, at 31 December 2014, Euro debt of €240 million and US dollar debt of $267 million. These correspond to 1.8 times Euro-generated EBITDA and 1.8 times US dollar-generated EBITDA in 2014.
The Group’s principal defined benefit pension schemes are all in the UK. At 31 December 2014 these schemes had a combined deficit under IAS19 of £11.9 million, an improvement from the deficit position of £30.1 million at 31 December 2013, primarily due to improved asset returns during the year. The National Express Group Staff Pension Plan (‘UK Coach plan’) is now closed to all future accrual. A funding plan aimed at bringing the plan to self-sufficiency was agreed with the trustees in 2010; National Express contributes £4.2 million per annum to this scheme. In 2011 UK Bus agreed a £5.5 million annual deficit repayment plan with the trustees of the West Midlands Passenger Transport Authority Pension Fund (‘WM plan’). The WM plan remains open to accrual for existing active members only. This scheme was further de-risked during 2012 by securing future payments for existing pensioners in a £272 million insurance buy-in to the scheme. The Group expects to contribute around £10 million per annum in total deficit contributions to its defined benefit schemes until 2017.
The IAS19 valuations at 31 December 2014 were as follows:
- UK Bus (under the WM plan and the Tayside Transport Superannuation Fund): £50.6 million deficit (2013: £40.8m deficit);
- UK Coach plan: £30.6 million surplus (2013: £12.6 million surplus)
- UK Rail/other: £8.1 million surplus (2013: £1.9m deficit). The Group’s rail business participates in the Railways Pension Scheme. This exposure transfers to an incoming operator in the event of a franchise termination.