Holiday Inn 2014 Annual Report Download - page 137

20. Financial risk management
Overview
The Group’s treasury policy is to manage financial risks that arise in relation to underlying business needs. The activities of the treasury
function are carried out in accordance with Board approved policies and are subject to regular audit. The treasury function does not
operate as a profit centre.
The treasury function seeks to reduce the financial risks faced by the Group and manages liquidity to meet all foreseeable cash needs.
Treasury activities may include money market investments, spot and forward foreign exchange instruments, currency swaps, interest
rate swaps and forward rate agreements. One of the primary objectives of the Group’s treasury risk management policy is to mitigate
the adverse impact of movements in interest rates and foreign exchange rates.
Market risk exposure
The US dollar is the predominant currency of the Group’s revenue andcash flows. Movements in foreign exchange rates can affect
theGroup’s reported profit, net assets and interest cover. To hedge translation exposure, wherever possible, the Group matches
the currency of its debt (either directly or via derivatives) to the currency ofits net assets, whilst maximising the amount of US dollars
borrowedto reflect the predominant trading currency.
From time to time, foreign exchange transaction exposure is managed by the forward purchase or sale of foreign currencies.
Most significant exposures of the Group are in currencies that are freely convertible.
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 $4.5m (2013 $4.1m, 2012 $2.8m) and increase net assets by an estimated $29.1m (2013 $16.0m, 2012 $1.8m).
Similarly, a five cent fall in the euro:US dollar rate would reduce the Group’s profit before tax by an estimated $2.2m (2013 $2.6m, 2012
$2.3m) and decrease net assets by an estimated $10.9m (2013 $14.8m, 2012 $16.1m).
Interest rate exposure is managed, using interest rate swaps if appropriate, within set parameters depending on the term of the debt,
with a minimum fixed proportion of 25% of borrowings for each major currency. No interest rate swaps were used during 2013 or 2014.
Based on the year-end net debt position plus the $400m bilateral term loan drawn in 2015 to finance the Kimpton acquisition (see note
21), a one percentage point rise in USdollar interest rates would increase the annual net interest charge by $6.7m. A similar rise in euro
interest rates would increase the annual net interest charge by approximately $0.9m, and a similar rise in sterling interest rates would
reduce the annual net interest charge by approximately $0.7m. 100% of borrowings in major currencies were fixed rate debt at
31 December 2013.
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 bonds were issued under the Group’s £750m Medium Term Notes programme. 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 has been in compliance with all of the financial covenants in its loan documents throughout the
year, 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 $162m which is predominantly held in short-term deposits and cash funds which allow daily
withdrawals of cash. The Group also had overdrafts of $107m as part of cash pooling arrangements (see note 17). Most of the Group’s
funds are held in the UK or US, although $4m (2013 $12m) is held in countries where repatriation is restricted as a result of foreign
exchange regulations.
The Group had net liabilities of $717m at 31 December 2014 reflecting that its brands, in accordance with accounting standards, are not
recorded on the balance sheet.
STRATEGIC REPORT GOVERNANCE
GROUP FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
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