Risks and risk management Going concern, viability and s172(1) statements continued Modelling potential downside scenarios Reverse stress testing In their consideration of going concern and the future viabilityTo provide additional assurance around the Group’s viability, of the Group, the Directors have reviewed future profit two reverse stress tests have been modelled, expanding on forecasts and cash projections, which are based on market the reverse stress testing initially carried out at the end of data and reflect their experience over the last 18 months FY20. In both of these reverse stress tests we have assumed during the Covid-19 pandemic. Even in these uncertain times, that variable costs would reduce as sales reduce, that we the Group has grown sales and profit whilst navigating the would be able to save £20m per annum of current fixed costs various lockdown restrictions; the Directors have used their and that we would reduce the level of capital investment to experience gained during this period to model two different £10m per annum and suspend the payment of dividends. downside scenarios. In the first reverse stress test, we have modelled the sales decline required to breach either of the current covenants in The ‘market downturn’ scenario assumes a change in the existing Revolving Credit Facility (RCF). A sales reduction consumer spending away from homewares, as the hospitality of 30% from Q2 FY22 and a reduction of 36% in FY23 would and travel industries open up, with an additional five-week be required for covenants to be breached by the end of FY23. ‘circuit break’ lockdown in December 2021. The sales downsideIn the second reverse stress test scenario, we have modelled assumption is 2% lower growth in stores and 5% lower growth the level of sales reduction required to breach the RCF limit in online sales across all five years and the performance of £165m. This would require a reduction in sales of 50% per during the five-week lockdownperiod in December 2021 is annum from the ‘central case’ to effectively run out of funding based on the actual sales performance experienced in the by the end of FY23. various lockdowns over the past 18 months. However, we have assumed no upsurge in sales when the stores re-open Financing due to pent-up demand. Throughout this scenario we have The Group’s banking agreements and associated covenants assumed no government support, no cost mitigation actions are set out inthe CFO’s Review and include a £165m RCF to be taken and the continuation of dividend payments in line(maturing in March 2023), an accordion option with a with our current dividend policy. In this ‘market downturn’ maximum facility of £75m and a £10m uncommitted overdraft. scenario, the Group would not breach any of its financial We are currently in discussions with the banks to refinance this covenants and would not require any additional sources facility and are confident that this will be achieved before the of financing in any of the five years under review. interim results in February 2022. The ‘three-month lockdown’ scenario assumes a government The Group ended the financial year with £129m cash at enforced national lockdown over our peak trading period bank. The financial covenants are tested semi-annually in of December 2021 to February 2022, where the stores are line with our December Interim reporting and June year-end closed, but similar to the lockdown in Q3 FY21, we are able toreporting. These covenants are normally met with significant offer Click & Collect services. Smi ilar to the ‘market downturn’headroom. In both downside scenarios as explained above, scenario, we have assumed no subsequent benefit from the Group continues to forecast compliance with all financial pent-up demand, no government support, no cost mitigation covenants throughout the going concern and viability period. actions taken and the continuation of dividend payments in line with our current dividend policy. As with the ‘market downturn’ scenario, the Group would not breach any of its financial covenants and would not require any additional sources of financing in this ‘three-month lockdown’ scenario As with the ‘market downturn’ over any of the five years under review. scenario, the Group would not breach any of its financial covenants and would not require any additional sources of financing in this ‘three-month lockdown’ scenario over any of the five years under review.” 90 DUNELM GROUP PLCANNUAL REPORT & ACCOUNTS 2021