Unilever 2010 Annual Report Download - page 101

98 Unilever Annual Report and Accounts 2010
Financial statements
Notes to the consolidated financial statements Unilever Group
15 Financial instruments and treasury risk management
Uncertainty and volatility in the financial markets: impact on Treasury
To cope with the continuing uncertainty in the financial markets, we maintained a cautious funding strategy.
Liquidity management:
• We have run a cash balance during most of 2010, resulting from a strong cash delivery of the business, proceeds from bond issuances in 2009
and disposal proceeds;
• We have invested this cash conservatively with safe counterparties at short maturities up to six months.
Counterparty exposures:
We regularly reviewed and tightened counterparty limits. Banking exposures were actively monitored on a daily basis. Unilever benefits from
collateral agreements with our principal banks (see also page 100) based on which banks need to deposit securities and/or cash as collateral for
their obligations in respect of derivative financial instruments.
Bank facility renewal:
Our bank facilities are renewed annually. On 31 December 2010 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. In order to manage currency exposures, operating companies are required to
manage trading and financial foreign exchange exposures within prescribed limits. This is achieved primarily through the use of forward foreign
exchange contracts. Regional groups monitor compliance with this requirement. At the end of 2010, 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 re-translation 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 approach 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) for the next five years. The objective of this approach 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.
At the end of 2010, interest rates were fixed on approximately 66% of the projected net of cash and financial liability positions for 2011 and 63%
for 2012 (compared with 95% for 2010 and 75% for 2011 at the end of 2009).
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. During 2010 we did not utilise the committed facilities.
Unilever had US $6,050 million of undrawn committed facilities on 31 December 2010 as follows:
• revolving 364-day bilateral credit facilities of in aggregate US $5,495 million (2009: US $5,285 million) out of which US $5,495 million
(2009:US$5,285 million) with a 364-day term out; and
• 364-day bilateral money market commitments of in aggregate US $555 million (2009: US $765 million), under which the underwriting banks
agree, subject to certain conditions, to subscribe for notes with maturities of up to three years.
As part of the regular annual process these facilities are to be renewed in 2011.