Risk Management

Braxton Risk Management

Risk Management

The Braxton Group is exposed to operational and financial risks in the day-to-day running of the business. Operational risks occur mainly in running the local businesses, whereas financial risks arise because the Braxton Group has external financing needs and operates in a number of foreign currencies. To allow local businesses to fully focus on their operations, financial risk management is centralised as far as possible to group management, governed by Braxton’s finance policy.

The objectives of the Braxton’s risk management may be summarised as follows:

•ensure that the risks and benefits of new investments and contingent liabilities are in line with Braxton’s finance policy;
•reduce business cycle risks through brand diversity, geographic diversification and by ensuring there is an appropriate mix of leased, managed and franchised businesses;
•carefully evaluate investments in high-risk regions, matching this with premium returns on investments;
•protect brand values through strategic control and operational policies;
•review and assess Braxton’s insurance programmes on an on-going basis.

Operational Risks

Market Risks

The general market, economic, financial conditions and the development of RevPAR in the markets where Rezidor operates are the most important factors influencing the company’s earnings.

In order to reduce the operational risks the Braxton Group use different business models, including franchising to an independent owner and receive a franchise fee.

The client base is well distributed. Braxton is not dependent on a small number of customers or any particular industry.

Braxton operate a well defined multi brand portfolio of businesses covering different segments of the market.

Financial Risk

Braxton’s financial risk management is governed by a finance policy approved by the Board of Directors. According to the finance policy, the corporate treasury function of the Group systematically monitors and evaluates the finan­cial risks, such as foreign exchange, interest rate, credit, liquidity and market risks. Measures aimed at managing and handling these financial risks at the local hotel level are imple­mented in a finance manual within the parameters and guidelines set forth in Braxton’s finance policy. Operating routines and delegation authorisation with regard to financial risk management are documented in this finance manual.

According to the finance policy, the treasury function may use financial instruments, such as FX forwards, FX swaps, FX options and interest rate swaps to hedge against currency and interest rate risks. The Group may enter into hedging contracts.

Currency Risks

Braxton Group has operations in a vast number of countries with many different currencies and is therefore exposed to currency exchange rate fluctuations. The most impor­tant foreign currencies include the U.S. Dollar (USD), Euro (EUR) and Pound Sterling (GBP).

When entities within the Group generate revenues and incur costs in different currencies, they are subject to transaction exposure. In contrast to the leased business, where the nature of the business normally is local and the exposure consequently also limited, the fee business is generally subject to a relatively notable transaction exposure. This transaction exposure arises when fees are collected by entities located in another country than that of the business from which the fee originates and is mainly related to fees from businesses (include franchised centers) located outside Western Europe.

Braxton Group presents its financial statements in EUR. Since certain of Braxton’s foreign operations have a functional currency other than EUR, the consolidated financial statements and shareholders’ equity are exposed to exchange rate fluctuations when the income statements and balance sheets in foreign currencies are translated into EUR. The exposure on the consolidated equity is however lowered through the decision to not own any real estate as this reduces the total assets denominated in foreign currencies.

Credit Risks
At the local hotel level, the credit exposure is normally limited, as the accounts regularly are settled in cash or by accepted credit cards. Credits are only offered to customers under a contract and only to companies or registered organisations with a legal structure. Credit terms must be described in the contract and comply with the central treasury guidelines as described in the finance manual. As for managed and franchised hotels, a thorough background check of the hotel owner is made before entering into a new contract, including an investigation of the creditworthiness. The credit term is 30 days for both local hotel customers and for fees. The central treasury guidelines set strict rules for the follow-up of receivables overdue and for credit meetings. In some cases Rezidor grants loans to owners of Rezidor’s hotels, or to joint venture partners and associated companies in early stages of new projects. The terms for such loans vary, but in principle there is an agreement on interest on the loans and the repayment schedule is based on the project opening and project progress. Based on market conditions, interest rates, repayment schedules, security arrangements have been agreed upon.
Central treasury is responsible to coordinate the handling of surplus liquidity and liquidity reserve, and only central treasury or persons authorised by central treasury may engage in external investment transactions. Individual hotels and administration units with excess liquidity which cannot be held on accounts within the cash pool structure can invest externally only with a prior consent of central treasury and in accordance with the finance policy. According to the finance policy, the investments of surplus liquidity can only be made in creditworthy interest bearing securities, in securities with high liquidity, in investments/securities/deposits with short-term maturity and as regards deposits only in financial institutions with a rating of A-1/P1.

Liquidity Risks
Liquidity risk is that the Company is unable to meet its payment obligations as a result of insufficient liquidity or difficulty in raising external financing. Raising of capital and placement of excess liquidity is managed centrally by the central treasury function. The Group has objectives for liquidity reserves, such as excess cash and irrevocable credit facilities, that the Group should have available at any time. The central treasury function monitors the cash position of the different entities within the Group on a daily basis to ensure an efficient and adequate use of cash and overdraft facilities.
As part of Rezidor’s efforts to streamline its banking structure and secure appropriate overdraft and credit facilities, a long term agreement was signed in 2008 with a leading European Bank. The new banking structure provides a cross-border cash pool in which a majority of the cash flows within the Group will be concentrated. The new cash pool was partially implemented in December 2008 and is being fully implemented in the beginning of 2009. Through this bank agreement, the Company has also secured combined overdraft and guarantee facilities for a total amount of MEUR 105. In addition, the Group has credit facilities of MEUR 1.8 granted by other banks.

Market Risks
Apart from interest rate risks and currency risks, which are described above, the Group, through subsidiaries,  is also subject to price risk related to changes in fair value of the investments in other shares and participations. These investments are classified as available-for-sale investments with changes in fair value recognised directly in equity. However, there is no active market for these shares and the value is consequently not subject to changes in quoted market prices.

Credit Risks
At the local business level, the credit exposure is normally limited, as the accounts typically are settled in advance. Credits are only offered to customers under a contract and only to companies or registered organisations with a legal structure. Credit terms must be described in the contract and comply with the central treasury guidelines as described in the finance manual. As for franchised business, a thorough background check of the hotel owner is made before entering into a new contract, including an investigation of the creditworthiness. The central treasury guidelines set strict rules for the follow-up of receivables overdue and for credit meetings.

Central treasury is responsible to coordinate the handling of surplus liquidity and liquidity reserve, and only central treasury or persons authorised by central treasury may engage in external investment transactions. Individual businesses and administration units with excess liquidity which cannot be held on accounts within the cash pool structure can invest externally only with a prior consent of central treasury and in accordance with the finance policy. According to the finance policy, the investments of surplus liquidity can only be made in creditworthy interest bearing securities, in securities with high liquidity, in investments/securities/deposits with short-term maturity and as regards deposits only in financial institutions with a rating of A-1/P1.

Liquidity Risks

Liquidity risk is that the Group is unable to meet its payment obligations as a result of insufficient liquidity or difficulty in raising external financing. Raising of capital and placement of excess liquidity is managed centrally by the central treasury function. The Group has objectives for liquidity reserves, such as excess cash and irrevocable credit facilities, that the Group should have available at any time. The central treasury function monitors the cash position of the different entities within the Group on a daily basis to ensure an efficient and adequate use of cash and overdraft facilities.