Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
principal market risks are our exposure to changes in foreign currency exchange rates.
Interest
Rate Risk
Following
the Company’s refinance in May 2021, the external borrowings of £235.0 million ($324.7 million) are provided at a
fixed rate. Therefore movements in rates such as LIBOR do not impact on the current borrowings and the only fluctuation that is expected
to be reported will be that solely caused by movements in the exchange rates between the Company’s functional currency and its
reporting currency.
Foreign
Currency Exchange Rate Risk
Our
operations are conducted in various countries around the world and we receive revenue and pay expenses from these operations in a number
of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated
in (i) currencies other than GBP, which is our functional currency, or (ii) the functional currencies of our subsidiaries, which is not
necessarily GBP. Excluding intercompany balances, our Euro functional currency net assets total approximately $7.8 million and our US
Dollar functional currency net liabilities total approximately $26.0 million. We use a sensitivity analysis model to measure the impact
of a 10% adverse movement of foreign currency exchange rates against the US Dollar. A hypothetical 10% adverse change in the value of
the Euro and the US Dollar relative to GBP as of June 30, 2021 would result in translation adjustments of approximately $0.7 million
and $2.6 million, respectively, recorded in other comprehensive loss.
Included
within our trading results are earnings outside of our functional currency. Retained losses earned in Euros and in US Dollars in the
six months ended June 30, 2021 were €1.3 million and $20.4 million, respectively. A hypothetical 10% adverse change in the value
of the Euro and the US Dollar relative to GBP as of June 30, 2021 would result in translation adjustments of approximately $0.1million
and $1.9 million, respectively, recorded in trading operations.
The
majority of the Company’s trading is in GBP, the functional currency, although the reporting currency of the Company is the US
Dollar. As such, changes in the GBP:USD exchange rate have an effect on the Company’s results. A 10% weakening of GBP against the
US Dollar would change the trading operational results by approximately $3.4 million and would result in translation adjustments of approximately
$13.0 million, recorded in other comprehensive loss.
For
further information regarding the new external borrowings, see Note 4 to the Consolidated Financial Statements, “Long Term and
Other Debt”.
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