AstraZeneca Annual Report and Form 20-F Information 2008

Financial risk management

FINANCIAL RISK MANAGEMENT POLICIES

Insurance

Our risk management processes are described in the Risk section. These processes enable us to identify risks that can be partly or entirely mitigated through use of insurance. We negotiate best available premium rates with insurance providers on the basis of our extensive risk management procedures. In the current insurance market, the level of cover is decreasing whilst premium rates are increasing. Rather than simply paying higher premiums for lower cover, we focus our insurance resources on the most critical areas, or where there is a legal requirement, and where we can get best value for money. Risks to which we pay particular attention include business interruption, Directors’ and Officers’ liability and property damage.

Taxation

Tax risk management forms an integrated part of the Group risk management processes. Our tax strategy is to manage tax risks and tax costs in a manner consistent with shareholders’ best long-term interests, taking into account both economic and reputational factors. We draw a distinction between tax planning using artificial structures and optimising tax treatment of business transactions, and we only engage in the latter.

Treasury

The principal financial risks to which the Group is exposed are those of liquidity, interest rate, foreign currency and credit. The Group has a centralised treasury function to manage these risks in accordance with Board-approved policies. Specifically, liquidity risk is managed through maintaining access to a number of sources of funding to meet anticipated funding requirements, including committed bank facilities and cash resources. Interest rate risk is managed through maintaining a debt portfolio that is weighted towards fixed rates of interest. Accordingly the Group’s net interest charge is not significantly affected by changes in floating rates of interest. We do not currently hedge the impact on earnings and cash flow of changes in exchange rates, with the exception of the currency exposure that arises between booking and settlement date on non-local currency purchases and sales by subsidiaries and the external dividend, along with certain non-US dollar debt. Credit risk is managed through setting and monitoring credit limits appropriate for the assessed risk of the counterparty.

Our risk management objectives and policies are described in further detail below and in the Risk section.

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Capital management

The capital structure of the Group consists of shareholders equity (see Note 20), debt (see Note 14) and cash (see Note 13). For the foreseeable future, the Board will maintain a capital structure that supports the Group's strategic objectives through:

• Managing funding and liquidity risk
• Optimising shareholder return
• Maintaining a strong investment grade rating

Funding and liquidity risk are reviewed regularly by the Board and managed in accordance with policies described below. The Board’s distribution policy comprises both a regular cash dividend and, subject to business needs, a share re-purchase component. The Board regularly reviews its shareholders’ return strategy, and for 2008 reaffirmed the current dividend policy, which is to grow dividends in line with reported earnings before restructuring and synergy costs, with an aim to maintain at least two times dividend cover. With respect to share re-purchases, the Board decided in quarter three that no further share re-purchases should take place in 2008 in order to maintain the flexibility to invest in the business. For the same reason, the Board has decided that no share re-purchases will take place in 2009.

The Group’s current long-term credit rating is A1 by Moody’s and AA- by Standard and Poor’s, both with a stable outlook.

Liquidity risk

The Board reviews the Group’s ongoing liquidity risks annually as part of the planning process. The Board considers short-term requirements against available sources of funding taking into account cash flow. The Group manages liquidity risk by maintaining access to a number of sources of funding, which are sufficient to meet anticipated funding requirements. Specifically, the Group uses US commercial paper, committed bank facilities and cash resources to manage short-term liquidity and manages long-term liquidity by raising funds through the capital markets. Facilities available to the Group are detailed in Note 15 to the Financial Statements.

Foreign exchange

The US dollar is the Group’s most significant currency. As a consequence, the Group results are presented in US dollars and exposures are managed against US dollars accordingly.

Approximately 57% of Group external sales in 2008 were denominated in currencies other than the US dollar, while a significant proportion of manufacturing and R&D costs were denominated in sterling and Swedish krona. Surplus cash generated by business units is substantially converted to, and held centrally, in US dollars. As a result, operating profit and total cash flow in US dollars will be affected by movements in exchange rates.

This currency exposure is managed centrally based on forecast cash flows for the currencies of Swedish krona, sterling, euro, Australian dollar, Canadian dollar and Japanese yen. The impact of movements in exchange rates is mitigated significantly by the correlations which exist between the major currencies to which the Group is exposed and the US dollar. Monitoring of currency exposures and correlations is undertaken on a regular basis and hedging is subject to pre-execution approval. Except as noted below, no hedges were outstanding at the year-end.

The Group will hold debt in non-US dollar currencies to the extent that there is an underlying net investment in the same currency and therefore a net investment hedge as defined by IFRS 7, can be applied. The €500 million 2010 bond issued in 2008 was issued in euros to match investors’ appetite but currency swaps were transacted to convert it into a US dollar instrument. As at 31 December 2008, after currency swaps, 4.2% of interest bearing loans and borrowings were denominated in sterling and 17.8% of interest bearing loans and borrowings were denominated in euros

The transaction exposures that arise from non-local currency sales and purchases by subsidiaries are, where practicable, fully hedged using forward foreign exchange contracts. In addition, the Group’s external dividend, which is paid principally in sterling and Swedish krona, is fully hedged from announcement to payment date.

Sensitivity analysis considering the Group’s exposure to exchange rate movements is detailed in Note 16 to the Financial Statements.

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Interest rate risk

The Group maintains a mix of fixed and floating rate debt. The portion of fixed rate debt was approved by the Board and any variation requires Board approval. A significant portion of the long-term debt entered into in 2007 in order to finance the acquisition of MedImmune, has been held at fixed rates of interest. The Group uses interest rate swaps and forward rate agreements to manage this mix.

As at 31 December 2008, the Group held interest rate swaps with a notional value of $2.5 billion, converting the 5.4% callable bond maturing in 2014, and the 7% guaranteed debentures payable in 2023 to floating rates and partially converting the 5.4% callable bond maturing in 2012 and the 5.9% callable bond maturing in 2017 to floating rates. No new interest rate swaps were entered into during 2008. The majority of the Group’s cash balances are held with third party fund managers with floating rates of interest being earned.

Sensitivity analysis considering the Group’s exposure to interest rate movements is detailed in Note 16 to the Financial Statements.

Credit exposure

The Group is exposed to credit risk on financial assets, such as cash balances (including fixed deposits and cash and cash equivalents), derivative instruments, trade and other receivables. The Group is also exposed in its net asset position to its own credit risk in respect of the 2023 debentures and 2014 bonds which are accounted for at fair value through profit or loss.

During the year, the Company established a credit risk oversight group, consisting of senior members of the Finance function to monitor credit related risks and risk management processes, in response to the ongoing financial markets and economic uncertainty.

Trade receivable exposures are managed locally in the operating units where they arise and credit limits are set as deemed appropriate for the customer.

Exposure to financial counterparty credit risk is controlled by the treasury team centrally in establishing and monitoring counterparty limits, which are set according to the assessed risk of each counterparty. Centrally managed funds are invested entirely with counterparties whose credit rating is ‘A’ or better. During the year, funds held in money market funds have been progressively transferred to US Treasury funds, in light of the ongoing financial crisis.

External fund managers, who manage $3.0 billion of the Group’s cash, are rated AAA by Standard & Poor’s.

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