Unilever 2009 Annual Report Download - page 107

Notes to the consolidated financial statements Unilever Group
104 Unilever Annual Report and Accounts 2009
Financial statements
15 Financial instruments and treasury risk management
Uncertainty and volatility in the financial markets: impact on Treasury
We believe our strong single-A rating and active financial management have served us well in the current financial uncertainty. Maintaining our
strong single-A rating has been and will remain a key priority.
To cope with the volatility and uncertainty in the financial markets, we undertook, amongst others, the following actions:
Liquidity management:
• During 2009 we issued four bonds at competitive rates for a total of €2.2 billion to take advantage of historically low long term interest rates;
• As a result, we have been able to keep commercial paper at a low level, issuing at significant discounts to Libor, when needed; and
• As the business successfully managed working capital positions throughout the year, Unilever closed the year with a cash and cash equivalents
balance of around €2.6 billion.
Counterparty exposures:
We regularly reviewed and tightened counterparty limits. Banking exposures were actively monitored on a daily basis. During the year most of
our deposits remained on an overnight basis providing maximum flexibility. Unilever benefits from collateral agreements with our principal banks
(see also page 106) based on which banks need to deposit securities and/or cash as collateral for their obligations in respect of derivative financial
instruments. Unilever did not encounter any material counterparty exposure loss from financial institutions during 2009.
Funding costs:
Throughout the year, in general, credit spreads have decreased significantly but remain volatile. During 2009 we were able to issue commercial
paper and bonds at competitive rates, with a very good reception by the markets.
Bank facility renewal:
Our bank facilities are renewed annually. On 31 December 2009 we had US $6,050 million of undrawn committed facilities. For further details,
see ’Liquidity risk' section below.
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. 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 2009, 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 other factors the impact on the income
statement, to hedge such net investments. 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). 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 for the next five years are managed within agreed fixing bands, with minimum and
maximum fixing level percentages, decreasing by 10 percentage points per calendar year. 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 2009, interest rates were fixed on approximately 95% of the projected net of cash and financial liability positions for 2010, slightly
higher than 90%, the upper limit of the band due to the good cash delivery from the business and 75% for 2011 (compared with 56% for 2009
and 51% for 2010 at the end of 2008).