Ardagh Glass Finance plc - Irish Stock Exchange

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Financial assets and liabilities
Financial Risk Factors
The financial risk management activities of the Group are subject to controls imposed by the
board of directors. The overall objective of the board, in the management of the various treasury
related risks faced by the Group in the normal course of business, is to protect the underlying value of
the business from changes in the value of underlying markets. Financial risks are managed, on an
on-going basis, by the directors on the advice of senior management. The Group does not permit the
use of treasury instruments for speculative purposes, under any circumstances.
The Group’s activities expose it to a variety of financial risks: market risk (including interest rate
risk and foreign currency risk), energy risk, credit risk and liquidity risk.
Interest Rate Risk Management
The directors’ policy, in the management of interest rate risk, is to strike the right balance between
the Group’s fixed and floating rate balance sheet financial instruments. The balance struck by the
directors is dependent on prevailing interest rate markets at any point in time.
The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable
rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the
Group to fair value interest rate risk. During 2008 and 2007, the Group’s borrowings at variable rate
were denominated in Euro and the UK pound.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps.
Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed
rates. Generally, the Group raises long-term borrowings at floating rates and swaps them into fixed
rates that are lower than those available if the Group borrowed at fixed rates directly. Under the
interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (primarily
quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by
reference to the agreed notional amounts.
At 31 December 2008, the Group’s borrowings were 77% (2007: 86%) fixed (after including the
impact of interest rate swaps) with a weighted average interest rate of 7.54% (2007: 7.46%).
Foreign Currency Risk Management
The Group operates internationally and is exposed to foreign exchange risk arising from various
currency exposures, primarily with respect to the UK pound but also Swedish Krona, Danish Kroner
and Polish Zloty. Foreign exchange risk arises from future commercial transactions, recognised assets
and liabilities and net investments in foreign operations.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign
currency translation risk. Currency exposure arising from the net assets of the Group’s foreign
operations is managed primarily through borrowings denominated in the relevant foreign currencies.
In addition to currency translation risk, Ardagh is subject to currency transaction risk. Ardagh’s
policy is, where practical, to match net investments in foreign currencies with borrowings in the same
currency. In order to provide a ‘‘natural’’ hedge, Ardagh currently has some of its borrowings that
relate to the U.K. operations in pounds. Interest payments in pounds help to offset exposure to
fluctuations in pre-tax profits, as measured in Euro, due to currency fluctuation, while pounddenominated
debt is matched by pound-denominated assets. However, the debt and interest payments
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