Unilever 2002 Annual Report Download - page 41

38 Financial review
equivalent of €418 million of term financing in the Thai
capital market, all of which carried a Unilever NV guarantee
excluding political risk, through a combination of bank loans
and the issuance of a debenture with a 5-year maturity.
During 2002, net debt decreased to €16 966 million
(2001: €23 199 million). This was due to strong operating
cash flow, the proceeds of business disposals and the
favourable effect of currency movements.
Borrowings at the end of 2002 totalled €20 444 million
(2001: €25 500 million). Taking into account the various
cross currency swaps and other derivatives, 78% of
Unilever’s borrowings were in US dollars, 1% in euros
and 7% in sterling with the remainder spread over a
large number of other currencies.
Long-term borrowings decreased by €3 288 million
to €10 933 million at the end of 2002. At the end of
2002 short-term borrowings were €9 511 million (2001:
€11 279 million), including €4 854 million of long-term
debt coming to within a year of maturity at the year-end.
At the end of 2002, 68% of the long-term debt is repayable
within five years (2001: 77%).
Unilever’s contractual obligations at the end of 2002 include
capital expenditure commitments, borrowings, operating
lease commitments and other commitments. Details are set
out in the following notes to the accounts: note 10 on page
81, note 14 on page 83, and note 24 on page 99. Details
on derivatives are given in note 15 on pages 85 and 86.
Cash and current investments at the end of 2002 totalled
€3 478 million (2001: €2 301 million); these funds were
held in euros (34%), sterling (4%), US dollars (14%), and
other currencies (48%). The funds are mainly to support
day-to-day needs and are predominantly invested in short-
term bank deposits and high-grade marketable securities.
Treasury and hedging policies
Unilever Treasury’s strategic purpose is to provide financial
flexibility in support of Unilever’s Path to Growth strategy
within the context of the financial strategy set out in the
‘Finance and liquidity’ section above. Unilever Treasury’s role
is to ensure that appropriate financing is always available for
all value-creating investments. Additionally, Treasury delivers
financial services to allow operating companies to manage
their financial transactions and exposures in an efficient,
timely and low cost manner.
Unilever Treasury operates as a service centre and is
governed by policies and plans agreed by the Executive
Committee of the Board. In addition to policies, guidelines
and exposure limits, a system of authorities and extensive
independent reporting covers all major areas of activity.
Performance is monitored closely. Reviews are undertaken
by the corporate internal audit function.
The key financial instruments used by Unilever are short-
and long-term borrowings, cash and other fixed and
current investments and certain straightforward derivative
instruments, principally comprising interest rate swaps and
foreign exchange contracts. The accounting for derivative
instruments is discussed in Accounting policies on page 68.
The use of leveraged instruments is not permitted.
Unilever Treasury manages a variety of market risks,
including the effects of changes in foreign exchange rates,
interest rates and credit spreads. Other risks managed
include liquidity, country and counterparty risks.
Unilever has an interest rate management policy aimed at
optimising net interest cost and reducing volatility. This is
achieved by modifying the interest rate exposure of debt
and cash positions through the use of interest rate swaps.
At the 2002 year-end the application of this policy resulted
in approximately 80% of our projected net debt for 2003
and 47% for 2004 being fixed.
Unilever’s foreign exchange policy requires that operating
companies hedge trading and financial foreign exchange
exposures. This is achieved primarily through the use of
forward foreign exchange contracts. Some flexibility is
permitted within overall exposure limits. At year-end there
was no material exposure from companies holding assets
and liabilities other than in their functional currency.
Unilever aims to hedge its net investment in operating
companies through borrowings in the same currency, except
where inhibited by local regulations, lack of local liquidity or
local market conditions. An exception may also be made
where the economic value of the net assets locally is
considered to exceed their book value substantially. The
business in the US is one such example where the economic
value of the assets is considerably in excess of book value
and accordingly we have higher US dollar debt. From time
to time, currency revaluations will trigger exchange
translation movements in our balance sheet as a result
of these exceptions.
In 2002, we suffered significant retranslation differences as
aresult of the devaluations in Brazil (€1 106 million) and
Argentina (€502 million), partly offset by the effect of the
weakening of the US dollar. The above figures reflect the
effect exchange rate movements have on the book values
of assets and liabilities but do not take into account the
underlying value of our assets or future earnings potential
in the countries involved.
Our policies and strategies for the management of liquidity
risk are discussed in more detail on pages 37 and above.
Counterparty exposures are minimised by restricting dealing
counterparties to a limited number of financial institutions
that have secure credit ratings, by working within agreed
counterparty limits and by setting limits on the maturity of
exposures. Counterparty credit ratings are closely monitored
and concentration of credit risk with any single counterparty
Unilever Annual Report & Accounts and Form 20-F 2002