CONTENTS - Capgemini

VI – FINANCING POLICY AND MARKET
RISKS
Detailed information relating to (i) Capgemini’s cash and cash
equivalents and debt; and (ii) the Group’s use of derivatives to
manage its interest and currency risks is respectively provided in
Notes 17 and 18 to Capgemini’s consolidated financial statements
for the year ended December 31, 2006.
6.1. Financing policy
Cap Gemini’s financing policy is intended to provide the Group
with adequate financial flexibility and is based on the following
main criteria:
A moderate use of debt leveraging: over the last ten years Cap
Gemini has strived to maintain a limited level of net debt (and
even a positive net cash position), including with respect to
financing external growth. By paying for the bulk of its acquisitions
in shares, Cap Gemini S.A. has pursued the dual aim of
(i) maintaining a solid financial structure, and (ii) implicating
as far as possible the employees transferred to the Group as a
result of these acquisitions in their success.
A high degree of financial flexibility: Capgemini aims to ensure
a good level of liquidity as well as durable financial resources,
which means maintaining:
– a high level of available funds (€2,859 million at December
31, 2006, including the proceeds from the €507 million capital
increase carried out in December 2006), which could be
expanded further by a €500 million undrawn multi-currency
syndicated line of credit (expiring on November 14, 2011)
and a €550 million commercial paper program;
– durable financial resources: at December 31, 2006, 85% of the
Group’s debt falls due beyond two years (see Note 17.III).
Diversified financing sources adapted to the Group’s financial
profile: Capgemini seeks to maintain a balance between bank
financing (including the above-mentioned syndicated credit line,
use of leasing to finance property and IT equipment in particular)
and market financing (issue of OCEANE bonds convertible
and/or exchangeable for new or existing shares for €460 million
in June 2003 and €437 million in June 2005 (see Note 17.II).
Lastly, the appropriate balance between the cash cost of financing
and the return on cash investments, including the corresponding
tax treatment, as well as the potential dilutive impact for Cap
Gemini shareholders, are determining factors for the Group in
its choice of financing sources. In this regard, with the issue of
the OCEANE 2005 bonds Cap Gemini decided to neutralize the
potential dilutive impact of the OCEANE bonds issued in June
2003 via the purchase of call options on 9,019,607 of its own
shares (see section 4.8 above).
6.2. Market risks
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.
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.
Moreover, in line with its policy for managing currency and
interest rate risks (see below), Cap Gemini enters into hedging
agreements with leading financial institutions; counterparty risk
can therefore be deemed negligible.
Liquidity risk: the principal financial liabilities whose early
repayment could expose the Group to liquidity risk are the
two convertible bonds mentioned above (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 Cap Gemini to comply with certain financial ratios
(covenants). As of December 31, 2006, the Group complied
with all such ratios (see Note 17.II.D).
It is also stated that a change in the credit rating attributed by
Standard & Poor’s to Cap Gemini 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).
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.
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 this trend is set to increase in
the future, Cap Gemini has already defined and implemented
an overall policy to minimize exposure to exchange rates and
ANNUAL REPORT 2006 Capgemini
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