AstraZeneca Annual Report and Form 20-F Information 2008

Notes to the Financial Statements (Group)

• 11 Inventories
• 12 Trade and other receivables
• 13 Cash and cash equivalents
• 14 Interest bearing loans and borrowings
• 15 Financial risk management objectives and policies

15 Financial risk management objectives and policies

The Group’s principal financial instruments, other than derivatives, comprise bank overdrafts, loans, current and non-current investments, cash and short-term deposits. The main purpose of these financial instruments is to manage the Group’s funding and liquidity requirements. The Group has other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

The principal financial risks to which the Group is exposed are those of liquidity, interest rate, foreign currency and credit. Each of these are managed in accordance with Board-approved policies. These policies are set out below.

The Group uses foreign currency borrowings, foreign currency forwards and options, interest rate swaps and forward rate agreements for the purpose of hedging its foreign currency and interest rate risks. The Group may designate certain financial instruments as either fair value hedges or net investment hedges in accordance with IAS 39. Key controls, applied to transactions in derivative financial instruments, are to use only instruments where good market liquidity exists, to revalue all financial instruments regularly using current market rates and to sell options only to offset previously purchased options. The Group does not use derivative financial instruments for speculative purposes.

Capital management

The capital structure of the Group consists of shareholders’ equity (Note 20), debt (Note 14) and cash (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 in 2008 reaffirmed the 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. The Board also initially stated an intention to re-purchase $1bn of shares in 2008, subject to business needs. Actual re-purchases in 2008 were $610m as the Board decided in quarter three that no further share re-purchases should take place in 2008 in order to maintain flexibility to invest in the business.

Following the debt financed acquisition of MedImmune in 2007, the Group has been reducing debt and during 2008 has reduced outstanding debt by $3.3bn to $11.8bn at the end of the year. The Group’s policy is to manage its debt level so as to maintain a strong investment grade credit rating. 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 and on an ad hoc basis. 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.

In addition to cash balances (comprising fixed deposits, cash and cash equivalents less overdrafts) of $4,177m, the Group has committed bank facilities of $4.3bn available to manage liquidity. As at 31 December 2008, the Group has issued $3,307m under an EMTN programme, $7,874m under a SEC-registered shelf, $324m under a previous SEC-registered programme and has $163m of commercial paper outstanding. The Company regularly monitors the credit standing of the banking group and currently does not anticipate any issue with drawing on the committed facilities should this be necessary. The committed facilities were undrawn as at 31 December 2008.

In 2008, the Group issued a €500m 18 month bond under the EMTN programme to re-finance maturing commercial paper. The $3.35bn five year committed facilities maturing in October 2012 were increased to $3.6bn and $0.7bn of the $1.8bn 364 day committed facilities, which matured in October 2008, were renewed for a further 364 day term.

Market risk

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 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 $2.5bn, 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.

Foreign currency risk

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.

Translational

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.

The Group will maintain 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, can be applied. The €500m 2010 bond issued in 2008 was issued in non-US dollar currencies to match investors’ appetite but currency swaps were transacted to convert it into a fixed rate 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.

Transactional

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.

Credit risk

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 and 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 and other receivables

Trade receivable exposures are managed locally in the operating units where they arise and credit limits are set as deemed appropriate for the customer. The Group is exposed to customers ranging from government backed agencies and large private wholesalers to privately owned pharmacies, and the underlying local economic and sovereign risks vary throughout the world. Where appropriate, the Group endeavours to minimise risks by the use of trade finance instruments such as letters of credit and insurance. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of specific trade and other receivables where it is deemed that a receivable may not be recoverable. When the debt is deemed irrecoverable, the allowance account is written off against the underlying receivable.

Other financial assets

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 $3.0bn of the Group’s cash as at 31 December 2008, are rated AAA by Standard & Poor’s. There were no other significant concentrations of credit risk at the balance sheet date. All financial derivatives are transacted with commercial banks, in line with standard market practice and are not backed with cash collateral. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments recorded, in the balance sheet.

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