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Annual Report & Accounts 2016 - Notes
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101 25. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT CONTINUED 25.3 Interest rate risk The Group earns interest from bank deposits. During the year, the Group held cash on deposits with a range of maturities of less than three months. The Group had a non-interest bearing loan (see note 17) which did not carry any interest rate risk and which was repaid in 2016. On 4 September 2015, the Group entered into an agreement with Cerberus Business Finance LLC for a loan of up to €400m, in order to part-fund the proposed acquisition of bwin.party. At 31 December 2016, the Group had €386.5m (2015: €19.8m) of committed and drawn-down borrowing facilities under this loan arrangement, including €13.5m repaid during the year. The interest on these loans was based on EURIBOR with a floor of 1%, plus a margin of 11.5%. This facility was repaid on 31 January 2017. Management do not consider the impact of possible interest rate movements based on current market conditions to be material to the net result for the year or the equity position at the year end for either the year ended 31 December 2015 or 31 December 2016. 25.4 Credit risk The Group seldom has any significant concentrations of credit risk, with exposure spread over a large number of customers. The Group grants credit facilities to its customers and the maximum exposure to credit risk is represented by the carrying amount of each financial asset in the Statement of Financial Position. The Group has material exposure to credit risk through amounts owed by payment processors (third party collection agencies) of €60.0m (2015: €21.7m) and cash and cash equivalent balances held with banking institutions of €367.0m (2015: €28.2m). There is an inherent concentration of risk with PSPs, most of which are not investment grade banks, in that the majority derive most of their income from the online gaming sector. To this end, where practicable and economic, the Group seeks to substitute non-investment grade PSPs with investment grade, or, at least, better quality PSPs. The Group considers the general credit risk associated with these balances to be low, having assessed the credit ratings and financial strength of the counter-parties involved. Nevertheless, the Group maintains a general provision against the recovery of these processing entities. For one particular processor the Group considered that a specific provision may be necessary due to concerns about the recoverability of that specific debt and accordingly a specific impairment of €4.2m was recorded in the year ended 31 December 2016. No further significant receivable amounts were past due date at 31 December 2016 (2015: €nil). 25.5 Liquidity and capital risk Liquidity risk arises from the Group's management of its working capital as well as the finance charges and principal repayments on its debt instruments. In essence, it is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. Management monitors liquidity to ensure that sufficient liquid resources are available to the Group. The Group's principal financial assets are cash, bank deposits, loans and trade and other receivables. In common with many internet companies that have few physical assets, the Group has no policy as to the level of equity capital and reserves other than to address statutory requirements. The primary capital risk to the Group is the level of debt relative to the Group's net income. At 31 December 2016, the Group had cash and cash equivalents and short-term investments of €367.0m (2015: €28.2m). Whilst current assets are significantly lower than current liabilities, this predominantly relates to the Cerberus loan which was refinanced to a longer term facility in 2017. Accordingly, the liquidity risk for the Group is judged to be low. 25.5.1 Maturity analysis All financial liabilities within the Group's balance sheet are due within one year except for certain contingent consideration of €4.4m which falls due based on certain events. Management's best estimates are that these will fall due after more than one year but before five years. 25.5.2 Net debt 2016 €m 2015 €m Loans and borrowings 403.5 19.8 Client liabilities 112.0 14.8 Progressive prize pools 22.8 - Gross debt 538.3 34.6 Cash and cash equivalents 354.8 28.2 NET DEBT 183.5 6.4