Holiday Inn 2015 Annual Report Download - page 126
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Notes to the Group Financial Statements continued
20. Financial risk management continued
Credit risk
Credit risk on treasury transactions is minimised by operating a policy on the investment of surplus cash that generally restricts counterparties
to those with a BBB credit rating or better or those providing adequate security. The Group uses long-term credit ratings from Standard and
Poor’s, Moody’s and Fitch Ratings as a basis for setting its counterparty limits. During the year, the policy was amended from a minimum A credit
rating to reflect current market conditions.
Short-term deposits
The table below analyses the Group’s short-term deposits at 31 December 2015 by counterparty credit rating.
AAA AA- A+ A BBB+ Total
Short-term deposits 497 82 30 79 15 703
Repurchase agreements
The Group invests in repurchase agreements, which are fully collateralised investments, with a maturity of three months or less. The Group
accepts only government or supranational bonds where the lowest credit rating is AA- or better as collateral. In the event of default, ownership
of these securities would revert to the Group. The securities held as collateral are valued at a discount of 2% to market value to protect against
market volatility in the event of a default by the counterparty. The table below contains information about the collateral held as security at
31 December 2015.
Collateral by type
2015
$m
Government bonds 36
Supranational bonds 253
289
Collateral by credit rating
2015
$m
AAA 243
AA+ 42
AA 4
289
In order to manage the Group’s credit risk exposure, the treasury function sets counterparty exposure limits using metrics including credit
ratings, the relative placing of credit default swap pricings, Tier 1 capital and share price volatility of the relevant counterparty.
The Group trades only with recognised, creditworthy third parties. Itis 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 theseinstruments.
The carrying amount of financial assets represents the maximum exposure to credit risk.
2015
$m
2014
$m
Cash and cash equivalents 1,137 162
Equity securities available-for-sale 150 144
Derivative financial instruments –2
Loans and receivables:
Other financial assets 134 113
Trade and other receivables, excluding prepayments 391 388
1,812 809
124 IHG Annual Report and Form 20-F 2015