CONTENTS - Capgemini

30 ANNUAL
THE GROUP
Capgemini
VIII – RISK ANALYSIS
8.1 Identification of risks
Group Senior Management has discussed, drafted, approved
and distributed a set of rules and procedures known as the “Blue
Book”. Compliance with the Blue Book is mandatory for all Group
employees. The Blue Book restates and explains Capgemini’s seven
core values, sketches out the overall security framework within
which the Group’s activities must be conducted, and finally,
describes the methods to be followed in order to exercise the
necessary degree of control over the risks identified in each of
the Group’s main functions. Individual business units supplement
the Blue Book by drawing up detailed internal control procedures
which comply with the relevant laws, regulations and customary
practices in the country where they operate, in order to exercise
control more effectively over risks specific to their local market
and culture. These rules and procedures are updated regularly
to reflect the development of the Group’s business activities and
changes in its environment.
The internal audit function independently assesses the effectiveness
of these internal control procedures given that, irrespective
of how well they are drafted and how rigorously they are applied,
these procedures can only provide reasonable assurance – and not
an absolute guarantee – against all risks.
8.2 Financial risks
8.2.1 Equity risk
The Group does not hold any shares for financial investment
purposes, and does not have significant interests in listed
companies. However, it holds treasury shares in connection
with:
the implementation of the liquidity contract under its share buyback
program (the associated liquidity line amounts to €10 million),
representing 80,280 shares at December 31, 2006;
the employee-retention scheme set up in the context of the
acquisition of Ernst & Young’s consulting business in May
2000, under which the shares are designated to be reallocated
to Group employees (see Note 10.A).
The Group’s resulting exposure to equity risk is negligible.
8.2.2 Counterparty risk
The financial assets which could potentially give rise to counterparty
risk essentially consist of financial investments. These
investments mainly comprise money market securities managed
by leading financial institutions and, to a lesser degree, negotiable
debt instruments issued by companies or financial institutions
with a high credit rating from a recognized rating agency. There
is therefore no significant counterparty risk for the Group on these
short-term investments.
REPORT 2006 Capgemini
Moreover, in line with its policy for managing currency and interest
rate risks (see below), Capgemini enters into hedging agreements
with leading financial institutions; counterparty risk can therefore
be deemed negligible.
8.2.3 Liquidity risk
The principal financial liabilities whose early repayment
could expose the Group to liquidity risk are the two convertible
bonds (OCEANE 2003 and OCEANE 2005) and the
€500 million multi-currency syndicated line of credit. The
OCEANE documentation contains the usual provisions relating
to early repayment at the initiative of bondholders should
pre-defined events occur. In addition to the early repayment
clauses commonly found in these types of agreements, the
documentation for the syndicated line of credit requires
Capgemini to comply with certain financial ratios (covenants).
As of December 31, 2006, the Group complied with all such
ratios (see Note 17.II.D).
Any change in Capgemini’s credit rating, as assigned by Standard
& Poor’s would not affect the availability of these sources of
financing and would therefore not expose the Group to liquidity
risk. However, the cost of funding the syndicated line of credit
could be increased or decreased (see Note 17.II.D).
8.2.4 Interest rate risk
Capgemini’s exposure to interest rate risk should be analyzed in
light of (i) its cash position: at December 31, 2006 the Group
had €2,859 million in cash and cash equivalents invested at
market rates, compared to gross debt of €1,224 million; and (ii)
the Group’s conservative policy with respect to management of
interest rate risk: the uncapped variable-rate portion of gross
debt was limited to 6% (capped and uncapped variable-rate
debt combined accounted for 41% of the total – see Note
17.III). Consequently, based on the balance sheet at end 2006
a 1% increase in interest rates would have a positive €20 million
impact on Capgemini’s net finance costs. Conversely, a
low interest rate environment (below 2%) would expose the
Group to an increase in its net finance costs (see Note 17.
III). The main exposure to interest rate risk is at the level of
Cap Gemini S.A., which represented around 80% of Group
financing and 66% of Group cash and cash equivalents at
December 31, 2006.
8.2.5 Currency risk
Capgemini’s exposure to currency risk is low due to the fact that
the bulk of its revenue is generated in countries where operating
expenses are also incurred. However, the growing use of offshore
production centers in Poland, India and China exposes Capgemini
to currency risk with respect to a portion of its production costs.
Currently, the amounts involved are not material but given that