Vedior is exposed to capital, credit, interest and currency risks that arise in the normal course of the Group’s business. The responsibility to assess exposure as well as to enter into and manage derivative instruments is centralised in the Company’s treasury department. The activities of the Company’s treasury department are covered by corporate policies and procedures approved by the Board of Management, which specifically prohibit the use of derivative instruments for trading and speculative purposes. The Board of Management approves the hedging strategy and monitors the underlying market risks periodically.
Capital risk
Vedior’s capital structure consists of debt, cash and cash equivalents and equity. This structure is managed and balanced through payment of dividends, as well as new share issues, share buy backs and the issue of new debt or the redemption of existing debt.
Credit risk
Credit controls are established throughout the Company to monitor credit limits on clients, assess the creditworthiness of new and current clients and promptly follow up overdue accounts. Due to the diversified client base of the Company, no major concentrations of credit risk exist.
Liquidity risk
The Group has €1,025 million of committed credit facilities and €304 million of uncommitted short term credit facilities (see this page). Our main bank facility is a €800 million multicurrency revolving credit facility which contains a number of affirmative, negative and financial covenants.
The Company’s failure to maintain these covenants would constitute an event of default under the Facility, entitling the lenders to accelerate the repayment obligations. Further details on Vedior’s financial covenants are provided here.
The borrowing requirements fluctuate significantly throughout the year, impacted by the seasonality of our business and fluctuating working capital requirements of our operating companies. The Group has long term and short term cash flow forecast reports that enable the Board of Management to assess the financial headroom under its credit facilities and respond in good time, if required. It is the policy of Vedior to have sufficient headroom under its committed credit facilities, even in less favourable scenarios.
Interest rate risk
Interest rate fluctuations may have an impact on our net results. A significant part of Vedior’s interest bearing debt consists of floating rate debt and as a result any change in interest rates may affect Vedior’s cost of borrowing. Our policy is to hedge only a minor part of our interest bearing debt against interest rate movements as we believe our exposure to cyclical economic conditions provides a natural hedge against interest rate movements in itself, assuming these interest rate changes are also mainly affected by economic cycles. On a long term basis, this relationship is monitored to test the accuracy of our policy.
A 1% decrease in floating interest rates would decrease the cost of borrowing per year end by €4 million in 2007.
Currency risk
Fluctuations in foreign currency exchange rates may have an impact on the Group’s results. In 2007, the currency composition of our net income was as follows:
|
| EUR |
62% |
| USD |
9% |
| GBP |
16% |
| AUD |
5% |
| CAD |
4% |
| Other |
4% |
| Total |
100% |
As our operating companies mainly operate locally, sales and cost of sales are in the same currency, therefore it is our policy not to hedge revenues and cash flows in foreign currencies. Our external borrowings are mainly denominated in Euro, USD, GBP, AUD and CAD in approximately the same proportion as our operating income in these currencies. The development of the currency mix of operating income is monitored regularly and the currency mix of debt is adjusted accordingly.
If the exchange rate of the Euro would have decreased by 10% against our main currencies, this would have increased net income in 2007 by 3.8%. The same decrease would have increased the exchange differences reserve in equity by €73 million.
Hedging For instruments used to hedge underlying exposures to currency exchange and interest rate risks, hedge accounting is applied. Hedge accounting recognises the offsetting effects in changes of the fair values of the hedging instrument and the hedged item.
Fair value hedges
Vedior applies fair value hedge accounting for certain interest and currency risks arising from financing activities. In the income statement, the following will be recognised: the gain or loss from re-measuring the hedging instrument at fair value and the gain or loss on the hedged item attributable to the hedged risk.
Fair value hedge accounting is discontinued when Vedior revokes the hedge relationship, the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised through the income statement from that date.
Vedior has hedged the currency and interest rate risk on USD 65 million of the Senior Notes by means of a cross currency swap from a fixed USD loan to a floating Euro liability. The terms of the USD leg of the cross currency swap exactly match the terms of the Senior Notes. The fair value changes on the cross currency swap offset the fair value changes in the Senior Notes. The hedge is 100% effective.
The result on the hedge and the hedged instrument are shown in the following table:
| in millions of Euro |
| Fair value CCY swap |
-4.8 |
-0.7 |
-4.1 |
100% |
The swap is recognised under ‘other liabilities and accruals’ as disclosed in note 8.19.
Cash flow hedge accounting/Net investment hedges
The cash flow hedge accounting method is applied for net investments in foreign operations as net investment hedges. The effective part of the gain or loss on these financial instruments is recognised in the translation reserve in equity. At the moment the foreign operation is disposed of, the related cumulative gain or loss on the financial instrument is transferred from the translation reserve to the income statement.
Currency risks on investments are, to some extent, hedged with loans in foreign currencies. These loans are designated as net investment hedges. These loans include the combination of USD 75 million Senior Notes and the GBP/USD cross currency swaps, which are designated as a net investment hedge for GBP investments. The fair value of these cross currency swaps is - €2.1 million (2006: - €2.0 million) and is recognised under ‘other liabilities and accruals’ as disclosed in note 8.19.
11 Share based payments
Equity plans
Pursuant to a stock option scheme, option rights have been granted to employees. The Company currently has two fixed stock option plans both included in the Framework plan, of which one, established in 2001, qualifies as a Time Accelerated Restricted Stock Award Plan (‘TARSAP’). In addition, the Company has a performance-based stock award plan (‘Restricted Share Plan’ or ‘RSP’) and a stock purchase plan. In general, all options may only be exercised after a lock-up period of at least three years. If this lock-up period for legal or tax reasons is not possible, exercising of option rights during this three-year period is discouraged.
For all outstanding grants under the equity plans, the blocked period shall terminate immediately and any performance conditions shall be deemed to have been satisfied in full in the event of a change of control of Vedior N.V.
Since 2005, employees at Group companies have participated in local cash based profit sharing plans which have largely replaced the equity plans.
The operation and management of the Restricted Share Plan and the Framework Plan is performed by an independent company named Vedior Equity Plans Services B.V. This company also acts as the grantor to all participants, with the exception of participants in the USA and France, where Vedior N.V. acts as grantor for legal reasons.
The fair value of services received in return for stock options granted is measured by reference to the fair value of stock options granted. The estimate of the fair value of the services received is measured based on a Black and Scholes model. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the model for the Framework Plan and Share Appreciation Rights. For the Restricted Share Plan, the expected life is assumed to be the same as the remaining time until vesting.
The inputs into the Black and Scholes option pricing model were:
| Share Appreciation Rights |
| Share price at 31 December |
17.22 |
15.71 |
| Weighted average exercise price |
16.12 |
15.34 |
| Expected volatility |
40.9% |
49.5% |
| Expected life |
5 years |
3.5 years |
| Risk free interest rate |
4.3% |
3.7% |
| Expected dividend yield |
2.3% |
2.1% |
| Restricted shares |
| Weighted average share price |
16.12 |
15.34 |
| Weighted average exercise price |
0 |
0 |
| Expected volatility |
47.2% |
49.6% |
| Expected life |
3 years |
3 years |
| Risk free interest rate |
4.1% |
3.3% |
| Expected dividend yield |
1.8% |
2.1% |
The expected dividend yield is based on the average of projections for the coming three years made by external financial analysts, and projected at a constant level thereafter. The risk free interest rate is based on the interest rate swap curve at the date of grant. For each option the risk free rate is equal to the zero-coupon yield with corresponding maturity. The expected volatility is based on historic volatility, which is calculated based on the weighted average remaining life of the stock options.
Stock options are granted under performance conditions and the condition of continued employment with the Company at the moment of vesting. The level of expected forfeiture is taken into account based on historical practice and managements expectations of future employment and the realisation of performance targets within the Group.
Additionally, several share option grants before 7 November 2002 are still outstanding. The recognition and measurement principles in IFRS 2 have not been applied to these grants in accordance with the transitional provisions in IFRS 1 and IFRS 2.
Framework Plan
The Company established a stock option plan in 1997 which enables the Company to issue options to purchase deposit shares to eligible recipients. The Board of Management annually determines grants of options under the plan which must be approved by the Supervisory Board. The number of options permitted to be granted under the plan normally may not exceed 2% of the outstanding ordinary shares of the Company on the first day of the year in which the options are granted. The exercise price of an option granted under the plan must be at least equal to the market price of the deposit share at the time the option is granted. The option period is in the range of 5-10 years.
For grants made from 2001 up to and including 2003 under the TARSAP, the only variable is when the options will vest. Ultimately, all options granted will vest six years after the grant date. However, through achievement of certain predetermined performance criteria, an employee has the ability to accelerate the vesting date. Vesting is in principle subject to continued employment with the Group at the vesting date at all times. The performance criteria affect the timing of the vesting date, but do not affect the total award. The measurement date for accounting purposes is the grant date. Awards of options with performance criteria granted as of 2004 will vest only if the relevant predetermined performance criteria have been met. The remainder will lapse.
| Framework Plan |
|
| Outstanding at the beginning of the period |
3,961,014 |
10.40 |
5,892,688 |
10.60 |
| Forfeited during the period |
-318,275 |
12.32 |
-332,179 |
12.51 |
| Exercised during the period |
-2,083,749 |
10.41 |
-1,599,495 |
8.90 |
| Granted during the period |
|
|
|
|
| Outstanding at the end of the period |
1,558,990 |
11.52 |
3,961,014 |
10.40 |
| Exercisable at the end of the period |
1,024,479 |
|
1,789,676 |
|
The options under the Framework Plan outstanding at 31 December 2007 have an exercise price in the range of €4 to €16 (2006: €4 to €16) and a weighted average contractual life of 3.9 years (2006: 5.0 years). The options exercised in 2007 have a weighted average share price of €17.87 (2006: €16.10).
Restricted Share Plan In February 2001 the Board of Management introduced an equity-based restricted share plan, pursuant to which a limited number of senior staff members and the members of the Board of Management may be granted newly issued or existing deposit shares. All grants under this plan are free of charge for the participants, but subject to the achievement of specific predetermined performance targets in order to be earned. The vesting period is in the range of 3-5 years. The maximum number of deposit shares which may be granted under this plan in any one year normally may not exceed 1% of the outstanding ordinary shares of the Company on the first day of that year.
| Restricted Share Plan |
|
Number of shares |
Number of shares |
| Outstanding at the beginning of the period |
1,537,996 |
2,027,907 |
| Forfeited during the period |
-253,967 |
-154,595 |
| Vested during the period |
-621,789 |
-707,536 |
| Granted during the period |
334,365 |
372,220 |
| Outstanding at the end of the period |
996,605 |
1,537,996 |
The restricted shares which vested in 2007 under the Restricted Share Plan had an average value of €17.57 (2006: €14.68).
Share Appreciation Rights
Vedior grants Share Appreciation Rights (SARs) to senior employees in the USA.
|
| Share Appreciation Rights |
| Outstanding at the beginning of the period |
224,950 |
14.07 |
166,035 |
13.63 |
| Forfeited during the period |
-5,454 |
13.45 |
|
|
| Exercised during the period |
-66,642 |
13.45 |
|
|
| Granted during the period |
52,658 |
16.12 |
58,915 |
15.34 |
| Outstanding at the end of the period |
205,512 |
14.82 |
224,950 |
14.07 |
|
36,634 |
|
|
|
Employee stock purchase plan
In March 2001, the Board of Management, with the approval of the Supervisory Board, introduced an employee stock purchase plan for employees in the USA. The enactment of this plan for a period of three years was approved at the Annual General Meeting of shareholders held on 4 May 2001. Extensions for additional three year periods were approved at the Annual General Meetings of shareholders held in 2004 and 2007. In October 2006, the Board of Management introduced, with the approval of the Supervisory Board, a similar plan for employees in Canada effective as of 2007. A maximum of 1,050,000 new shares can be issued under the plan during a three year period. In 2007, a total number of 103,274 (2006: 83,561) shares were purchased under this plan for which new shares were issued.