Registration Document - Pernod Ricard

The fair value of the debt is determined for each loan by discounting
future cash flows on the basis of market rates at the balance sheet
date, adjusted for the Group’s credit risk. For floating rate bank debt,
fair value is approximately equal to carrying amount.
The market value of instruments recognised in the financial
statements at the balance sheet date was calculated on the basis of
available market data, using standard discounted cash flow methods.
The disparity of valuation models implies that these valuations do not
necessarily reflect the amounts that could be received or paid if these
instruments were to be settled in the market.
The methods used are as follows:
◆ bonds: market liquidity enabled the bonds to be valued at their fair
value;
◆ other long-term financial liabilities: the fair value of other longterm
financial liabilities is calculated for each loan by discounting
future cash flows using an interest rate taking into account the
Group’s credit risk at the balance sheet date;
◆ derivative instruments: the fair value of foreign currency forwards
and interest rate and foreign currency swaps was calculated using
the market prices that the Group should pay or receive to settle
these contracts.
2. Risk management
Management and monitoring of financial risks is performed by the
Financing and Treasury Department, which has ten staff members.
This department, which is part of the Group Finance Department,
manages all financial exposures and prepares monthly reporting to
the attention of General Management. It processes or validates all
hedging transactions in the context of a programme approved by
General Management.
All financial instruments used hedge existing or forecast hedge
transactions or investments. They are contracted with a limited
number of counterparts who benefit from a first class rating from
specialised rating agencies.
Management of liquidity risk
At 30 June 2009, cash and cash equivalents totalled €520 million. An
additional €1,532 million of medium-term credit facilities with banks
were confirmed and remained undrawn at this date. Group funding is
provided in the form of long-term debt (syndicated loan, bonds, etc.)
and short-term financing (commercial paper, bank overdraft, etc.)
which provide adequate financial resources to ensure the continuity
of its business. Net short-term financial debt was €383 million.
In addition, the Group’s bank and bond debt contracts include
covenants. Breaches of these covenants could force the Group to
make accelerated payments. As of 30 June 2009, the Group was in
c ompliance with the covenants (consolidated EBITDA/net financing
cost and Net debt/consolidated EBITDA) under the terms of its
syndicated loans.
Similarly , while the vast majority of the Group’s cash surplus is placed
with branches of global banks enjoying the highest agency ratings,
it cannot be ruled out that these Group investments may experience
reduced liquidity and severe volatility.
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS 4
Notes to the annual consolidated fi nancial statements
Management of currency risk
The Group prepares its financial statements in euros and is therefore
exposed to fluctuations against the euro of other currencies in which
its assets and liabilities are denominated (asset risk) or in which it
carries out its operations (transaction and currency translation
risks).
Although certain hedging strategies can limit exposure, there is no
absolute protection against the impact of exchange rate movements.
Regarding asset risk, financing foreign currency-denominated assets
acquired by the Group with debt in the same currency provides natural
hedging. This principle was applied to the acquisition of Seagram,
Allied Domecq and Vin&Sprit assets denominated in American dollars
and Japanese yen.
Movements in currencies against the euro (notably the American
dollar) may impact the nominal amount of these debts and the
financial costs published in euros in the consolidated financial
statements, and this could affect the Group’s reported results.
Regarding operational risk, due to its international exposure, the
Group faces currency risks related to transactions carried out by
subsidiaries in a currency other than their functional currency.
In all cases, the Group policy is to invoice end customers in the
functional currency of the distributing entity. Currency exposure
generated by intrag roup billings between producer and distributor
subsidiaries are managed through a monthly centralisation and
netting process. This process involves most countries whose
currencies are freely convertible and transferable and whose
domestic laws allow their participation. This system hedges against
net exposure using forward exchange contracts.
Residual risk is partially hedged using financial derivatives (forward
buying, forward selling or options) to hedge certain or highly probable
non-Group operating receivables and payables.
Sensitivity analysis of financial instruments
to currency risks
Financial liabilities classified as hedges of a net investment are
essentially sensitive to fluctuations in the American dollar; a 1%
increase or decrease in the dollar/euro exchange rate would affect
Group shareholders’ equity by +/-€18 million. This impact would be
offset by change in the translated value of the net investment being
hedged.
Management of interest rate risk
At the time the syndicated loans for the acquisition of Seagram and
Allied Domecq assets were put in place, the Group exceeded the
hedging obligation required by the banks. The hedging portfolio
includes swaps and interest rate options in addition to fixed-rate
debt.
Analysis of the sensitivity of financial instruments
to interest rate risks (impacts on the income
statement):
I REFERENCE DOCUMENT 2008/2009 I PERNOD RICARD 107
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a 50bp increase or decrease in (USD and EUR) interest rates would
increase or reduce the cost of net financial debt by 4%;
changes in the fair value of fair value hedges resulting from
movements in the market rates of hedging and hedged instruments
consist chiefly of: