Unilever 2007 Annual Report Download - page 99

Unilever Annual Report and Accounts 2007 97
Financial statements continued
17 Financial instruments and treasury risk management
Treasury Risk Management
Unilever manages a variety of market risks, including the effects of changes in foreign exchange rates, interest rates, liquidity and counterparty
risks.
Currency risks
Because of Unilever’s broad operational reach, it is subject to risks from changes in foreign currency values that could affect earnings. As a practical
matter, it is not feasible to fully hedge these fluctuations. Additionally, Unilever believes that most currencies of major countries in which it operates
will equalise against the euro over time. Unilever does have a foreign exchange policy that requires operating companies to manage trading and
financial foreign exchange exposures within prescribed limits. This is achieved primarily through the use of forward foreign exchange contracts. On
a case by case basis, depending on potential income statement volatility that can be caused by the fair value movement of the derivative,
companies decide whether or not to apply cash flow hedge accounting. Regional groups monitor compliance with this foreign exchange policy. At
the end of 2007, there was no material exposure from companies holding assets and liabilities other than in their functional currency.
In addition, as Unilever conducts business in many foreign currencies but publishes its financial statements and measures its performance in euros,
it is subject to exchange risk due to the effects that exchange rate movements have on the translation of the underlying net assets of its foreign
subsidiaries. Unilever aims to minimise its foreign exchange exposure in operating companies by borrowing in the local currency, except where
inhibited by local regulations, lack of local liquidity or local market conditions. For those countries that in the view of management have a
substantial retranslation risk, Unilever may decide on a case by case basis, taking into account amongst others the impact on the income
statement, to hedge such net investment. This is achieved through the use of forward foreign exchange contracts on which hedge accounting is
applied. Nevertheless, from time to time, currency revaluations on unhedged investments will trigger exchange translation movements in the
balance sheet.
Interest rate risks
Unilever has an interest rate management policy aimed at achieving an optimal balance between fixed and floating rate interest rate exposures on
expected net debt (gross borrowings minus cash and cash equivalents) levels for the next five calendar years. The objective of the policy is to
minimise annual interest costs and to reduce volatility. This is achieved by issuing fixed rate long-term debt and by modifying the interest rate
exposure of debt and cash positions through the use of interest rate swaps. The fixing levels per calendar year are determined by fixing bands, with
minimum and maximum fixing level percentages, decreasing by 10 percentage points per calendar year. The minimum level in the first year
amounts to 50% and the maximum level amounts to 90%. The minimum level is set to avoid unacceptable interest cost volatility and the
maximum level is set to prevent over-fixing, recognising that future debt levels can be volatile.
At the end of 2007, interest rates were fixed on approximately 68% of the projected net of cash and financial liability positions for 2008 and 53%
for 2009 (compared with 48% for 2007 and 52% for 2008 at the end of 2006).
Liquidity risk
A material and sustained shortfall in our cash flow could undermine our credit rating and overall investor confidence and could restrict the Group’s
ability to raise funds.
Operational cash flow provides the funds to service the financing of financial liabilities and enhance shareholder return. Unilever manages the
liquidity requirements by the use of short-term and long-term cash flow forecasts. Unilever maintains access to global debt markets through an
infrastructure of short-term and long-term debt programmes. In addition to this, Unilever has committed credit facilities in place to support its
commercial paper programmes and for general corporate purposes.
Unilever had the following undrawn committed facilities at 31 December 2007:
• revolving 364-day bilateral credit facilities of in aggregate US $3 630 million (2006: US $3 930 million) with a 364-day term out;
• revolving 364-day notes commitments of US $200 million (2006: US $200 million) with the ability to issue notes with a maturity up to
364 days; and
• 364-day bilateral money market commitments of in aggregate US $1 720 million (2006: US $1 420 million), under which the
underwriting banks agree, subject to certain conditions, to subscribe for notes with maturities of up to three years.
These facilities have been renewed until November 2008.
The revolving five-year bilateral credit facilities of in aggregate US $334 million and a revolving 364-day bilateral credit facility of in aggregate
US $333 million matured in November 2007 and were not renewed.
The financial market turbulence and associated illiquidity in credit markets during the second half of 2007 did not impact Unilever’s ability to meet
its financing requirements.
Notes to the consolidated accounts Unilever Group