Holiday Inn 2015 Annual Report Download - page 127

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20. Financial risk management continued
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 $838m at 31December 2015 (2014: $808m). 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.
Derivative financial instruments
At 31 December 2015, the Group held short dated foreign exchange swaps with principals of €nil (2014: €220m) and $481m (2014: $31m).
The swaps are used to manage sterling surplus cash and reduce euro and US dollar borrowings whilst maintaining operational flexibility.
The fair value of these derivative financial instruments at 31 December 2015 was a $3m liability (2014: $2m asset).
Hedging
Interest rate risk
The Group hedges its interest rate risk by ensuring that interest flows are fixed on at least 25% of its borrowings inmajor currencies. If required,
the Group uses interest rate swaps to manage the exposure although none were held during 2015 or 2014. The Group designates interest rate
swaps as cash flow hedges.
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 2015 or 31 December 2014.
Hedge of net investment in foreign operations
Where hedge accounting is applied, the Group designates certain 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. The interest on these
financial instruments is taken through financial income or expense.
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 $nil (2014: $415m) and short dated foreign exchange swaps with principals of €285m (2014: €220m)
and $315m (2014: $165m).
Hedge effectiveness is measured at calendar quarter ends. Noineffectiveness arose in respect of the Group’s net investment hedges during the
current or prior year.
STRATEGIC REPORT GOVERNANCE GROUP FINANCIAL STATEMENTS ADDITIONAL INFORMATIONPARENT COMPANY FINANCIAL STATEMENTS
125IHG Annual Report and Form 20-F 2015