24 Financial instruments

	2006		2005
	Book value £m	Fair value £m	Book value £m	Fair value £m
Financial assets
Available for sale current assets	20.1	20.1	12.2	12.2
Investment loan	12.5	12.5	–	–
Cash in hand	9.7	9.7	–	–
Interest rate swaps	–	–	1.6	1.6
Financial liabilities
Bank overdraft	0.5	0.5	19.3	19.3
Obligations under finance leases	0.5	0.5	0.2	0.2
Loan notes	22.2	22.2	22.7	22.7
Bonds	372.0	372.0	198.6	198.6
Currency swaps	6.4	6.4	2.6	2.6

In addition to the above financial liabilities, at the year end there is an amount of £27.5m (2005: £28.2m) of asset-based securitised financing. This form of financing initially arose as a consequence of the acquisition of BDML Connect Ltd in 2005. The purpose of this arrangement is to securitise customer receivables derived through the provision of instalment credit facilities to insurance customers of that company.

The fair value of derivatives and borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates.

Interest rate risk

The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's long term debt obligations with floating interest rates.

The Group's policy is to manage its interest cost using a mix of fixed and variable rate debts. To manage this, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated to hedge underlying debt obligations.

The interest rate profile of the financial assets and liabilities of the Group as at 31 December is as follows:

The effect of the interest rate swap and the currency swap is disclosed below. Bonds are classified as floating rate due to the effect of the interest and currency swaps.

Foreign Currency risk

The Group has exposure to foreign currency risk where it has limited investments in overseas operations which are affected by foreign exchange movements. The Group is not exposed to significant foreign currency risk nor does it intend to significantly increase its overseas operations, so only limited hedging of these exposures is executed.

Hedges

Fair value hedges The Group has in issue fixed rate dollar and sterling bonds which it has hedged through a combination of interest rate and currency swaps.

At 31 December 2006 and 31 December 2005, the Group had an interest rate swap in place with a notional amount of £55.0m whereby it receives a fixed rate of interest of 6.44% and pays a variable rate based on 6 month LIBOR. The swap is being used to hedge the exposure to changes in the fair value of £55.0m of the Group's 6.44% bonds.

At December 2006 and December 2005, the Group had in place currency swaps whereby it receives a fixed rate of interest and pays a variable rate based on 6 month LIBOR.

The swaps are being used to hedge the exposure to changes in the value of its US Dollar issued bonds. The unsecured bonds, currency and interest rate swaps have the same critical terms including the amount and the date of maturity (see note 21). The Group may, at its option, upon notice of not less than 30 days and not more than 60 days, repay at any time all or part of the notes at no more than the present value of future payments. In addition, the Group has covenanted to maintain a specified consolidated leverage ratio and a consolidated net interest expense coverage ratio.

Credit risk

The Group trades only with recognised, creditworthy third parties. It is the Group's policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts is not significant.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, available for sale financial investments and certain derivative instruments, the Group's exposure to credit risk arises from default of the counterparty.

The Group has a maximum exposure equal to the carrying amount of the above receivables and instruments.

The Group has a master netting arrangement in respect of its banking facilities resulting in the legal right of set-off for its overdraft and cash balances.

Liquidity risk

The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations.

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, loan notes, bonds and finance leases.

Capital management

The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios to support its business and maximise shareholder value.

The Group manages its capital structure and makes adjustments to it, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 31 December 2006 and 31 December 2005.

The Group does not set a target level of gearing but uses capital opportunistically to add value for shareholders. The key discipline adopted by the Group is to widen the margin between the return on capital employed and the cost of that capital as shown in the business review.

The following is summary quantitative data of the components the Group manages as capital: