30 Financial risk management and financial instruments (continued)
Ahold Annual Report 2012 122
Ahold at a glance
Our strategy
Our performance
Governance
Financials
Investors
Notes to the consolidated
financial statements
Interest rate risk
Ahold's interest rate risk arises primarily from its debt. To manage interest rate risk, Ahold has an interest rate management policy aimed at reducing volatility in its interest expense and
maintaining a target percentage of its debt in fixed rate instruments. Ahold's financial position is largely fixed by long-term debt issues and the use of derivative financial instruments such as
interest rate swaps and cross-currency interest rate swaps. As of December 30, 2012, after taking into account the effect of interest rate swaps and cross-currency swaps, approximately 97%
of Ahold's interest bearing debt was at fixed rates of interest (201196%).
Interest rate sensitivity analysis
The total interest expense recognized in the 2012 income statement related to the variable rates of long-term debt, net of swaps, amounted to €7 million (2011: €8 million). The Company
estimates that with a possible increase (decrease) of euro and U.S. dollar market interest rates of 25 basis points with all other variables (including foreign exchange rates) held constant, this
would result in a hypothetical effect on income before income taxes of a loss (gain) of nil (201 1nil). In addition, a hypothetical result relating to fair value movements of derivative hedges that
do not qualify for hedge accounting would have been a loss of €4 million or a gain of €4 million, respectively (2011a loss of €5 million or a gain of €5 million, respectively). In performing
this analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0%.
The total interest income recognized in the 2012 income statement amounted to €10 million (2011: €20 million) related mainly to variable rate money market fund investments and deposits.
The Company estimates that with a possible increase (decrease) of euro and U .S. dollar market interest rates of 25 basis points with all other variables (including foreign exchange rates)
held constant, this would result in a hypothetical effect on income before income taxes of a gain of €3 million or a loss of €2 million, respectively (201 1a gain (loss) of €5 million). In
performing this analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0%.
The above sensitivity analyses are for illustrative purposes only as, in practice, market rates rarely change in isolation from other factors that also affect Ahold's financial position and results.
Credit risk
Ahold has no significant concentrations of credit risk. Sales to retail customers are made in cash, checks and debit cards, or via major credit cards. Sales to franchisees are done on credit.
Derivative counterparties and cash transactions are limited to high-credit-quality financial institutions' products. Ahold invests in funds with a minimum rating of A- (Standard Poor's), and
predominantly AAA. With respect to credit risk, derivative contracts with counterparties are entered into primarily under the standard terms and conditions of the International Swap and
Derivatives Association. The counterparties have an externally validated investment grade credit rating. Ahold has policies that limit the amount of counterparty credit exposure to any single
financial institution or investment vehicle and continually monitors these exposures. The maximum exposure to credit risk is represented by the carrying amounts of the financial assets on
the balance sheet (refer to the table on fair values of financial instruments below in this note). The maximum net amount of a credit risk loss that Ahold would incur if financial institutions that are
parties to the derivative instruments completely failed to perform according to the terms of the contracts is €106 million as of December 30, 2012 (January 1, 2012: €290 million).
The majority of Ahold's past due but not impaired financial assets as of December 30, 2012, consists of receivables and is past due less than three months. The concentration of credit risk
with respect to receivables is limited as the Company's customer base and vendor base are large and unrelated. As a result, management believes there is no further credit risk provision
required in excess of the normal individual and collective impairment, based on an aging analysis performed as of December 30, 2012. For further discussion on Ahold's receivables,
see Notes 15 and 17.
Liquidity risk
Ahold manages its liquidity risk on a consolidated basis with cash provided from operating activities being the primary source of liquidity, in addition to debt and equity issuances in the capital
markets, committed and uncommitted credit facilities, letters of credit under credit facilities, and available cash. Ahold manages short-term liquidity based on projected cash flows over rolling
periods of six months. As of December 30, 2012, Ahold had €1 billion of committed undrawn bank facilities, which can be drawn on for working capital and general corporate purposes and
€1.9 billion of cash balances available to manage its liquidity.
Based on the current operating performance and liquidity position, the Company believes that cash provided by operating activities and available cash balances will be sufficient for working
capital, capital expenditures, interest payments, dividends and scheduled debt repayment requirements for the next 12 months and the foreseeable future.
