Risk Factors
28
Ahold Annual Report 2003
Risk Factors
improve our liquidity on terms that are favorable to us.
If we are unable to raise additional financing when
needed, this could materially adversely affect our
financial condition, results of operations and liquidity.
For additional information, please see "Operating
and Financial Review and Prospects - Liquidity and
Capital Resources."
Further downgrading of our credit ratings could make
it more difficult and expensive to finance our business
and our future operating income could be diminished
as a result.
During 2003, Moody's Investors Services ("Moody's")
and Standard Poor's Ratings Services ("S&P")
downgraded our credit ratings to ratings below
investment grades as discussed under "Operating
and Financial Review and Prospects - Liquidity and
Capital Resources - Credit Ratings." As a result of the
downgrades, some institutional investors, which are
required by their internal policies to hold only investment
grade securities in their investment portfolios, were
compelled to sell our publicly traded securities and
some of our vendors required us to post letters of credit
or to provide cash collateral. Further downgrades could
result in our vendors' inability to obtain credit insurance,
as a result of which they may require us to post letters
of credit or modify payment terms to the extent they
have not already done so. Third-party insurance carriers
and surety companies have required us to increase
the amount of letters of credit and cash collateral in
connection with our self-insurance programs, which
are described later in this annual report, and the surety
bonds required in numerous aspects of our business.
These amounts may increase further if there are
additional downgrades. For additional information about
our insurance programs, please see "Operating and
Financial Review and Prospects - Liquidity and Capital
Resources - Off-Balance Sheet Arrangements -
Retained or Contingent Interests - Insurance."
The December 2003 Credit Facility contains step-up
provisions that increase the interest costs on loans for
credit rating downgrades below specified thresholds, as
discussed under "Operating and Financial Review and
Prospects - Liquidity and Capital Resources - the
December 2003 Credit Facility." In addition, costs
associated with the sale of instruments under our
accounts receivable securitization programs could
increase if, among other possible causes, our credit
ratings are downgraded. For a further discussion of the
effect that additional downgrades would have on our costs
of borrowing, please see Note 24 to our consolidated
financial statements included in this annual report. For a
description of our accounts receivables securitization
programs, please see "Operating and Financial Review
and Prospects - Liquidity and Capital Resources - Off-
Balance Sheet Arrangements."
As part of our new strategy to restore our financial
health, we intend to return to an investment grade
profile by the end of 2005. However, we cannot assure
you that we will be able to achieve this or that we will
not be subject to further downgrades in the future,
particularly if the steps we are taking to reduce our
indebtedness are not successful. In addition, we may
not be able to return to an investment grade credit
rating profile as a result of various other factors,
including a continued economic downturn and any
adverse outcome of the pending or any future external
investigations and legal proceedings. While none of our
credit facilities or other debt instruments contain direct
events of default that are triggered by credit rating
downgrades, additional downgrades by either S&P or
Moody's could exacerbate liquidity concerns, increase
our costs of borrowing, result in our being unable to
secure new financing or affect our ability to make
payments on outstanding debt instruments and comply
with other existing obligations, which could have a
material adverse effect on our financial condition, results
of operations and liquidity.
Our current insurance coverage may not be adequate,
and insurance premiums and letters of credit and cash
collateral requirements for third-party coverage may
increase, and we may not be able to obtain insurance
or maintain our existing insurance at acceptable rates,
or at all.
Since year-end 2002, as a result of the announcements
on February 24, 2003 and subsequently, as well as
issues affecting the U.S. insurance market as a whole,
the third-party insurance companies that provide the
fronting insurance that is part of our self-insurance
programs that are described later in this annual report
require us to provide significantly greater amounts
of cash collateral, letters of credit and surety bonds.
We have also, in some circumstances, been required
to replace our self-insurance programs with high
deductible programs from third-party insurers at a
higher cost. Although we currently are able to provide
sufficient letters of credit for our insurance and surety
bond requirements, our future letters of credit
requirements for our insurance and other cash collateral
needs may increase significantly. In this event, we will
need to obtain additional financing sources. We
recognize provisions for probable liability under our
self-insurance programs. Our corporate costs in 2003
increased by EUR 45 million as a result of an additional
increase in our provision for self-insurance. If we
experience an increase in the amount of claims filed or
higher losses under our self-insurance programs, we
may have to increase our provision for self-insurance
in the future.
