Risk Management

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. As the hotel business is by its nature cyclical, the current recession puts industry RevPAR under pressure. In order to balance the market-related risks Rezidor use three different business models:

• the company leases hotel properties and operate the hotels as its own operations
• the company manages a hotel on behalf of a hotel owner and receives a management fee
• the company franchises one of its brands to an independent owner and receives a franchise fee.

Out of the three contract types the management and franchise models are the most resilient whilst the leased model is more volatile and sensitive to market fluctuations. Rezidor operate leased hotels only in Northern and Western Europe. Rezidor’s strategy is to grow by adding mainly managed and franchised hotel to the portfolio.

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

Rezidor operates a well defined multibrand portfolio of hotels covering different segments of the market.

Political Risks

Rezidor is operating in Europe, the Middle East and Africa (EMEA). The company’s growth focus includes emerging markets such as Russia/CIS, the Middle East and Africa with a higher political risk than the more mature markets of Northern and Western Europe.

In order to balance the political risks, Rezidor only operates under management contracts with no or limited financial exposure in the emerging markets.

Rezidor acknowledges that terrorism as well as other issues such as social unrest, crime and weakness of local infrastructure can be threats to safe and secure hotel operations at certain times in certain locations. With the aid of external expertise threat assessments are continuously carried out and hotels notified if a possible change in their threat situation is detected.

Partner Risks

The company does not own the brands under which the hotels are operated. Rezidor develops and operates the brands Radisson Blu, Park Inn by Radisson and Country Inn in EMEA under a master franchise agreement with Carlson and the agreement runs until 2052. Carlson is the majority shareholder of Rezidor.

Hotel Missoni is Rezidor’s fourth brand, and the company has the worldwide rights to the brand until 2020. The brand is owned by the Italian fashion house Missoni.

Rezidor doesn’t own the real estate in which the company operates hotels. The company cooperates with a large number of hotel owners and real estate owners and is not dependent on any particular partner. With a business model focussing on managing its partner’s assets under lease, management or franchise contracts, Rezidor is dependent on these partners’ operational and financial capabilities.

Employee Related Risks

The employee turnover in the hospitality industry is relatively high. The job satisfaction among employees in Rezidor’s hotels is assessed by an independent organisation on an annual basis. The scores in 2011 was 86.7, the same as in 2010.

Rezidor’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 Company 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 contained in a finance manual with the parameters and guidelines set forth in Rezidor’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. At year-end, the Company had not entered into any hedging contracts. FX swaps have however been used to reduce the use of overdraft facilities as described under ‘Liquidity risks’.

Interest Rate Risks

Virtually all financial liabilities and receivables bear floating interest rates. It is the policy of the Company that borrowings and investments should have short interest duration. Since all interest-bearing receivables are measured at amortised cost, there is no impact from changes in market interest rates on the carrying values of these receivables and consequently no impact on the income statement or equity.

The main financing risk is related to Rezidor’s ability to control and meet the company’s off-balance sheet commitments under leases with fixed rent payments and management agreements with guarantees. Such fixed lease and guaranteed amounts have historically been agreed on a fixed rate basis with indexation as a percent of change in the relevant consumer price index, and are, therefore, not exposed to variations in the market interest rates. In addition, these commitments are normally limited to an agreed maximum financial exposure, which is usually capped at 2–3 times the annual guaranteed result under a contract or an annual minimum lease.

Currency Risks

The Company 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 are the Swedish Krona (SEK), the Norwegian Krone (NOK), the Danish Krone (DKK), the U.S. Dollar (USD) and Pound Sterling (GBP). The exposure from the DKK is, however, limited as the currency is virtually pegged to the EUR.

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 hotel from which the fee originates and is mainly related to fees from managed and franchised hotels located outside the Nordics and the rest of Western Europe. Hotels in these regions with a large international customer base, however, generally adjust their room rates charged in the local currency to take into account volatile fluctuations in the EUR, Rezidor’s reporting currency, or the USD. As a result, the exposure to exchange rate fluctuations on fee revenue from Rezidor’s managed and franchised hotels is mitigated through the company’s policy to adjust prices based on fluctuations, except for food and beverage where Rezidor does not adjust prices.

All hotels use a reservation system that is set up and managed by the Carlson Group; for which the hotels pay a fee to the Carlson Group. The fees are collected centrally by Rezidor and paid further on to the Carlson Group. As these fees are paid in USD, the Group is exposed to fluctuations in the value of the USD, also affecting the leased hotels. For the managed and franchised hotels, this exposure is limited as the fees collected from these hotels in USD also are matched by an outflow in USD when the fees are paid further on to the Carlson Group. Rezidor also pays franchise fees to the Carlson Group for the use of the brand names as well as a minor portion of the marketing fees collected. These fees are all paid in USD. However, as the base for the calculation of the fees is the revenue of the hotels in local currency, the transaction exposure is limited.

The Company presents its financial statements in EUR. Since certain of Rezidor’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 normally 30 days for both local hotel customers and for fees. The central treasury guidelines set strict rules for the followup of overdue receivables 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.

Cash not necessary for the normal course of business is deposited in a bank. Central treasury is responsible to coordinate the handling of surplus liquidity and liquidity reserves, 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 the 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 or higher.

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.

Rezidor has secured appropriate overdraft and credit facilities through a long term agreement with a leading European Bank with solid credit ratings. The banking structure provides a cross-border cash pool in which a majority of the cash flows within the Group is concentrated. Through this bank agreement, the Company has also secured combined overdraft and guarantee facilities with varied terms for a total amount of MEUR 105. In addition, the Group has credit facilities of MEUR 1.8 granted by other banks. Effective 1st June 2011, Rezidor favourably renegotiated the terms of its banking structure including the existing long term credit facility with its main bank, a leading Nordic institution. The tenor of its committed overdraft facility and credit line ranges between one and four years, combined with customary covenants. The Group has not pledged any assets or given any guarantees to secure these facilities. In order to reduce the use of overdraft, Rezidor regularly enters into short term FX swaps, in which currencies with deposits in the cash pool are swapped into currencies with an overdraft in the cash pool.

Euro Zone Risk

Rezidor’s functional currency is Euro. A majority of the company’s cash needs are in Euro and its credit lines are denominated in the same currency, which mitigates the currency risk. Rezidor’s financial exposure in the currently volatile Euro zone countries, such as Greece, Spain and Portugal is also very limited.

Several of Rezidor’s cash generating legal entities are non-Euro based, in stable Western European countries such as Norway, Sweden, and Switzerland. The leased hotels in those markets have an inherent hedge as the revenues and the costs are in local currencies. The surplus cash, which is non-Euro, is pooled at the group level and helps finance our Euro needs from time to time, mainly through short-term currency swaps. Consequently, volatility stemming from the current uncertain market and economic conditions in some of the Euro zone countries creates limited financial exposure to the company’s cash and credit balances.

Market Risks

Apart from interest rate risks and currency risks, which are described above, the Company is also subject to price risk related to changes in fair value of the investments in other shares and participations. These investments, normally the result of equity financing in early stages of certain hotel projects, are classified as available-for-sale investments with changes in fair value recognised in other comprehensive income. The Company is also subject to price risk from changes in fair value on FX swaps, classified as held for trading, with fair value recognised through profit or loss.