Holiday Inn 2012 Annual Report Download - page 114

112 IHG Annual Report and Financial Statements 2012
Notes to the Group Financial Statements continued
A general strengthening of the US dollar (specifically a five cent
fall in the sterling:US dollar rate) would increase the Group’s profit
before tax by an estimated $2.8m (2011 $3.3m) and increase net
assets by an estimated $1.8m (2011 decrease of $10.4m). Similarly,
a five cent fall in the euro:US dollar rate would reduce the Group’s
profit before tax by an estimated $2.3m (2011 $1.9m) and decrease
net assets by an estimated $16.1m (2011 $10.3m).
Interest rate exposure is managed within parameters that stipulate
that fixed rate borrowings should normally account for no less
than 25% and no more than 75% of net borrowings for each major
currency. This is usually achieved through the use of interest rate
swaps. Due to relatively low interest rates and the level of the
Group’s debt, 100% of borrowings in major currencies were fixed
rate debt at 31 December 2012.
Based on the year-end net debt position and given the underlying
maturity profile of investments, borrowings and hedging instruments
at that date, neither a one percentage point rise in US dollar, euro nor
sterling interest rates would impact the annual net interest charge
in the current or prior year.
Liquidity risk exposure
The treasury function ensures that the Group has access to
sufficient funds to allow the implementation of the strategy set
by the Board. Medium and long-term borrowing requirements
are met through the $1.07bn Syndicated Facility which expires in
November 2016, through the £250m 6% bonds that are repayable
on 9 December 2016 and through the £400m 3.875% bonds
repayable on 28 November 2022. The $1.07bn Syndicated Facility
was undrawn at the year end. The £400m 3.875% bonds, which
were issued during the year under the Group’s £750m Medium
Term Notes programme, extend the maturity profile and diversify
the sources of the Group’s debt. Short-term borrowing
requirements are met from drawings under bilateral bank facilities.
The Syndicated Facility contains two financial covenants: interest
cover and net debt divided by earnings before interest, tax,
depreciation and amortisation (EBITDA). The Group is in
compliance with all of the financial covenants in its loan documents,
none of which is expected to present a material restriction on
funding in the near future.
At the year end, the Group had cash of $195m which is
predominantly held in short-term deposits and cash funds which
allow daily withdrawals of cash. Most of the Group’s funds are
held in the UK or US, although $7m (2011 $2m) is held in a
country where repatriation is restricted as a result of foreign
exchange regulations.
Credit risk exposure
Credit risk on treasury transactions is minimised by operating a
policy on the investment of surplus cash that generally restricts
counterparties to those with an A credit rating or better or those
providing adequate security.
Notwithstanding that counterparties must have an A credit rating
or better, during periods of significant financial market turmoil,
counterparty exposure limits are significantly reduced and
counterparty credit exposure reviews are broadened to include
the relative placing of credit default swap pricings.
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 respect of credit risk arising from financial assets, the Group’s
exposure to credit risk arises from default of the counterparty,
with a maximum exposure equal to the carrying amount of
these instruments.
Capital risk management
The Group manages its capital to ensure that it will be able to
continue as a going concern. The capital structure consists of
net debt, issued share capital and reserves totalling $1,382m at
31 December 2012 (2011 $1,085m). The structure is managed to
maintain an investment grade credit rating, to provide ongoing
returns to shareholders and to service debt obligations, whilst
maintaining maximum operational flexibility. A key characteristic
of IHG’s managed and franchised business model is that it is highly
cash generative, with a high return on capital employed. Surplus
cash is either reinvested in the business, used to repay debt or
returned to shareholders. The Group’s debt is monitored on the
basis of a cash flow leverage ratio, being net debt divided by
EBITDA, with the objective of maintaining an investment grade
credit rating.
Hedging
Interest rate risk
The Group hedges its interest rate risk by taking out interest rate
swaps to fix the interest flows on between 25% and 75% of its net
borrowings in major currencies, although 100% of interest flows
were fixed at 31 December 2012. At 31 December 2012, the Group
did not hold any interest rate swaps (2011 notional principals held
of $100m swapping floating for fixed). The Group designates
its interest rate swaps as cash flow hedges (see note 23 for
further details).
Foreign currency risk
The Group is exposed to foreign currency risk on income streams
denominated in foreign currencies. From time to time, the Group
hedges a portion of forecast foreign currency income by taking out
forward exchange contracts. The designated risk is the spot foreign
exchange risk. There were no such contracts in place at either
31 December 2012 or 31 December 2011.
Hedge of net investment in foreign operations
The Group designates its foreign currency bank borrowings
and currency derivatives as net investment hedges of foreign
operations. The designated risk is the spot foreign exchange
risk for loans and short dated derivatives and the forward risk
for the seven-year currency swaps. The interest on these financial
instruments is taken through financial income or expense except
for the seven-year currency swaps where interest is taken to the
currency translation reserve.
At 31 December 2012, the Group held currency swaps with a
principal of $415m (2011 $415m) and short dated foreign exchange
swaps with principals of EUR75m (2011 EUR75m) and USD170m
(2011 USD nil) (see note 23 for further details). The maximum
amount of foreign exchange derivatives held during the year as net
investment hedges and measured at calendar quarter ends were
currency swaps with a principal of $415m (2011 $415m) and short
dated foreign exchange swaps with principals of EUR75m (2011
EUR100m) and USD350m (2011 USD100m).
Hedge effectiveness is measured at calendar quarter ends.
No ineffectiveness arose in respect of either the Group’s cash
flow or net investment hedges during the current or prior year.
21. Financial risk management continued