Risk factors
Ahold may be placed at a competitive disadvantage by
its limited flexibility to react to changes in the industry
and economic conditions and its financial resources may
be diverted away from the expansion and improvement
of the business. As a result, Ahold could lose market share
and experience lower sales, which may have a material
adverse effect on its financial position, results of operations
and liquidity. For additional information on liquidity and
leverage risk, see "Management's discussion and analysis
- Liquidity and capital resources" and Note 26 to the
consolidated financial statements included in this
Annual Report.
Downgrading of Ahold's credit ratings could adversely
impact its ability to finance the business or increase
financing costs.
During 2005 and 2006 both Moody's Investors Services
("Moody's") and Standard Poor's Ratings Services
("S&P") upgraded Ahold's credit ratings, but such credit
ratings remain below investment grade. As part of Ahold's
strategy, the Company's target is to achieve investment
grade. While none of the Company's material credit facilities
or other debt instruments contain direct events of default
that are triggered by credit rating downgrades, a downgrade
of its long-term debt rating by either Moody's or S&P
could raise liquidity concerns, reduce Ahold's flexibility
in accessing funding sources and increase its costs of
borrowing, which could result in the Company's inability to
secure new financing or affect its ability to make payments
on outstanding debt instruments and comply with other
existing obligations. Any of these circumstances could
have a material adverse effect on the Company's financial
position, results of operations and liquidity. In addition,
Ahold cannot assure you that it will be able to achieve
investment grade, particularly if its operating strategy and
objectives are not successful. For a further discussion
of credit ratings, see "Management's discussion and
analysis-Liquidity and capital resources" and Note 26 to
the consolidated financial statements included in this
Annual Report.
Ahold's current insurance coverage may not be adequate
and its insurance costs may increase.
The third-party insurance companies that provide the
fronting insurance that is part of Ahold's self-insurance
programs as described later in this Annual Report require
the Company to provide cash collateral or letters of credit.
In some circumstances, Ahold is required to replace its
self-insurance programs with high deductible programs
from third-party insurers at a high cost. Although Ahold
is currently able to provide sufficient letters of credit for
insurance requirements, its future letter of credit
requirements for insurance and other cash collateral needs
may increase significantly. In this event, Ahold will need to
obtain additional financing sources and any cash collateral
it provides will not be available to fund the Company's
liquidity needs. It is possible that Ahold may not be able to
maintain adequate insurance coverage against liabilities
that it incurs in its business through self-insurance and high
deductible programs or, if necessary, purchase commercial
insurance to replace these programs. Ahold's insurance
premiums to third-party insurers may also increase in the
future and the Company may not be able to obtain similar
levels of insurance on reasonable terms or at all. The
inadequacy or loss of insurance coverage, or the continued
payment of higher premiums, could have a material adverse
effect on Ahold's financial position, results of operations and
liquidity. For additional information regarding self-insurance
coverage, see "Management's discussion and analysis -
Off-balance sheet arrangements - Contingent liabilities"
and Note 25 to the consolidated financial statements
included in this Annual Report.
Risks relating to currency exchange
and interest rate fluctuations
Currency translation risk
Ahold is exposed to foreign currency exchange translation
risk because it operates businesses in Europe and the
United States. A substantial portion of its assets, liabilities
and results of operations are denominated in foreign
currencies, primarily the U.S. dollar. As a result, the
Company is subject to foreign currency exchange risks
due to exchange rate movements in connection with the
translation of the operating income and the assets and
liabilities of its foreign subsidiaries into euros for inclusion
in its consolidated financial statements.
Currency transaction risk
Ahold is exposed to foreign currency exchange transaction
risk, including lease payment obligations and firm
purchase commitments denominated in foreign currencies.
The Company attempts to manage its foreign currency
exchange exposure by borrowing in local currency and
entering into currency swaps, but it cannot eliminate
such exposure and, therefore, currency exchange rate
movements and volatility can affect Ahold's
transaction costs.
Interest rate risk
Ahold is also exposed to fluctuations in interest rates.
Accordingly, changes in interest rates can affect the cost
of Ahold's floating interest-bearing borrowings. It is Ahold's
policy to attempt to mitigate interest rate risk by financing
a targeted percentage of its borrowings in fixed interest
rate instruments and by the use of derivative financial
instruments, such as interest rate swaps. Ahold's attempts
to manage its risk could result in the Company's failure
to realize savings, if interest rates fall.
Currency exchange and interest rate fluctuations could
have an adverse effect on Ahold's financial position, results
of operations and liquidity. For an additional discussion
of Ahold's risk management, see "Management's discussion
and analysis - Risk management and use of financial
instruments and derivatives" and Note 33 to the
consolidated financial statements included in this
Annual Report.
32 Ahold Annual Report 2006
