Holiday Inn 2014 Annual Report Download - page 138

20. Financial risk management continued
Credit risk exposure
Credit risk on treasury transactions is minimised by operating a policy on the investment of surplus cash that generally restricts
counterparties to those with an A credit rating or better or those providing adequate security. 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. Itis 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 theseinstruments.
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 $808m at 31December 2014 (2013 $1,071m). 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.
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 2013 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 2014 or 31 December 2013.
Hedge of net investment in foreign operations
The Group designates its 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.
At 31 December 2014, the Group held no currency swaps (2013 $415m) and short dated foreign exchange swaps with principals of €220m
(2013 €75m) and $31m (2013 $100m) (see note 22 for further details). 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 $415m (2013 $415m) and
short dated foreign exchange swaps with principals of €220m (2013 €75m) and $165m (2013 $310m).
Hedge effectiveness is measured at calendar quarter ends. Noineffectiveness arose in respect of either the Group’s cash flow ornet
investment hedges during the current or prior year.
continuedNotes to the Group Financial Statements
IHG Annual Report and Form 20-F 2014
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