Banana Republic 2011 Annual Report Download - page 48

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Derivative Financial Instruments
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate
fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases
denominated primarily in U.S. dollars made by our international subsidiaries whose functional currencies are their local
currencies, forecasted intercompany royalty payments, and intercompany obligations that bear foreign exchange risk
using foreign exchange forward contracts. We also use foreign exchange forward contracts to hedge the net assets of
international subsidiaries to offset the foreign currency translation and economic exposures related to our investment
in the subsidiaries. These contracts are entered into with large, reputable financial institutions that are monitored for
counterparty risk. The principal currencies hedged against changes in the U.S. dollar are Euro, British pounds, Japanese
yen, and Canadian dollars. Our use of derivative financial instruments represents risk management; we do not enter
into derivative financial contracts for trading purposes. Additional information is presented in Item 8, Financial
Statements and Supplementary Data, Note 7 of Notes to Consolidated Financial Statements. Our derivative financial
instruments are recorded in the Consolidated Balance Sheets at fair value as of the balance sheet dates. As of
January 28, 2012, we had foreign exchange forward contracts outstanding to buy the notional amount of $873 million,
31 million British pounds, 16 million Euro, and 2.6 billion Japanese yen related to our forecasted merchandise purchases
for foreign operations, forecasted intercompany royalty payments, and intercompany obligations that bear foreign
exchange risk. As of January 28, 2012, we did not have any foreign exchange forward contracts outstanding to hedge
the net assets of our subsidiaries.
We have performed a sensitivity analysis as of January 28, 2012 based on a model that measures the impact of a
hypothetical 10 percent adverse change in the level of foreign currency exchange rates to U.S. dollars (with all other
variables held constant) on our underlying exposure, net of derivative financial instruments. The foreign currency
exchange rates used in the model were based on the spot rates in effect as of January 28, 2012. The sensitivity
analysis indicated that a hypothetical 10 percent adverse movement in foreign currency exchange rates would
have an unfavorable impact on the underlying cash flow exposure, net of our foreign exchange derivative financial
instruments, of $39 million as of January 28, 2012.
Short-Term Borrowings
In September 2010, we entered into two separate agreements to make unsecured revolving credit facilities
available for our operations in China (the “China Facilities”). The China Facilities are set to expire in September 2012.
As of January 28, 2012, there were borrowings of $19 million (118 million Chinese yuan) at an interest rate of 6.53
percent under the China Facilities. We do not expect the interest rate of the borrowings under the China Facilities
for fiscal 2012 to differ materially from the rate of 6.53 percent as of January 28, 2012.
Long-Term Debt
In April 2011, we issued $1.25 billion aggregate principal amount of 5.95 percent Notes due April 2021 and received
proceeds of $1.24 billion in cash, net of underwriting and other fees. Interest is payable semi-annually on April 12
and October 12 of each year and commenced on October 12, 2011. The Notes are not subject to market risk, as they
have a fixed interest rate.
In April 2011, we also entered into a $400 million, five-year, unsecured term loan due April 2016, which was funded
in May 2011. Repayments of $40 million are payable on April 7 of each year, commencing on April 7, 2012, with a
final repayment of $240 million due on April 7, 2016. In addition, interest is payable at least quarterly based on an
interest rate equal to LIBOR plus a margin based on our long-term senior unsecured credit ratings. The average
interest rate during fiscal 2011 was 2 percent.
34 Gap Inc. Form 10-K