Financial risk management and derivative financial instruments

12 Months Ended

Dec. 31, 2023

Text Block [Abstract]

Financial risk management and derivative financial instruments

24. Financial risk management and derivative financial instruments

Overview

The Group is exposed to financial risks that arise in relation to underlying business activities. These risks include: market risk, liquidity risk, credit risk and capital risk. There are Board approved policies in place to manage these risks. Treasury activities to manage these risks may include money market funds, repurchase agreements, spot and forward foreign exchange instruments, currency swaps, interest rate swaps and forward rate agreements.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises: foreign exchange risk and interest rate risk. Financial instruments affected by market risk include loans and other borrowings, cash and cash equivalents, debt and equity investments and derivatives.

Foreign exchange risk

Movements in foreign exchange rates can affect the Group’s reported profit or loss, net liabilities and its interest cover. The most significant exposures of the Group are in currencies that are freely convertible. The Group’s reported debt has an exposure to borrowings held in sterling and euros. After the effect of currency swaps, the Group holds its bond debt in sterling, which is the primary currency of shareholder returns, and in US dollars, the predominant currency of the Group’s revenue and cash flows. US dollar borrowing or currency derivatives may also act as a net investment hedge of US dollar denominated assets.

When the Group borrows in currencies different from the functional currency of the borrowing entity, currency swaps are transacted at the same time to minimise foreign exchange risk. Currency swaps were transacted against the €500m 2.125% 2027 and €500m 1.625% 2024 bonds, in November 2018 and October 2020 respectively, swapping the bonds’ proceeds and interest flows into sterling. Similar currency swaps were transacted against the €600m 4.375% 2029 bonds in November 2023, swapping the bond proceeds and interest flows into US dollars (see page 200).

Interest rate risk

The Group is exposed to interest rate risk in relation to its fixed and floating rate borrowings. The Group’s policy requires a minimum of 50% fixed rate debt over the next 12 months. With the exception of overdrafts, 100% of borrowings were fixed rate debt at 31 December 2023 (2022: 100%).

Derivative financial instruments

Derivatives are recorded in the Group statement of financial position at fair value (see note 25) as follows:

Derivatives	2023 $m			2022 $m
Currency swaps		(20	)		(4	)
Currency forwards		15			–
Analysed as:
Non-current assets		20			7
Current liabilities		(25	)		–
Non-current liabilities		–			(11	)
		(5	)		(4	)

The carrying amount of currency swaps and forwards comprises $2m loss (2022: $4m loss) relating to exchange movements on the underlying principal, included within net debt (see note 23), and a $3m loss (2022: $nil) relating to other fair value movements.

Details of the credit risk on derivative financial instruments are included on page 203.

Currency swaps and forwards have been transacted as follows:

Date of designation	Hedge type	Pay leg	Interest rate	Receive leg	Interest rate	Maturity	Risk	Hedged item
November 2018	Cash flow	£436m	3.5%	€500m	2.125%	May 2027	Foreign exchange	€500m 2.125% bonds 2027
October 2020	Cash flow	£454m	2.7%	€500m	1.625%	October 2024	Foreign exchange	€500m 1.625% bonds 2024
November 2023	Cash flow	$657m	6.0%	€600m	4.375%	November 2029	Foreign exchange	€600m 4.375% bonds 2029
October 2023	Net investment	$425m	n/a	£344m	n/a	October 2028	Spot foreign  exchange	Net assets of specified subsidiaries with US dollar foreign currency

Cash flow hedges

There is an economic relationship between the hedged item and the hedging instrument as the critical terms are aligned, such that the hedge ratio is 1:1.

The change in the fair value of hedging instruments used to measure hedge ineffectiveness in the period mirrors that of the hypothetical derivative (hedged item) and was $14m loss (2022: $48m gain).

Hedge ineffectiveness arises where the cumulative change in the fair value of the swaps exceeds the change in fair value of the future cash flows of the bonds, and may be due to any opening fair value of the hedging instrument, or a change in the credit risk of the Group or counterparty. There was no cumulative ineffectiveness in 2023 or 2022.

Amounts recognised in the cash flow hedge reserves are analysed in note 29.

Net investment hedges

The Group designates the following as net investment hedges of its foreign operations, being the net assets of certain Group subsidiaries with a US dollar functional currency:

• Borrowings under the RCF;

• Long-dated currency forward contracts; and

• Certain short-dated foreign exchange swaps.

There is an economic relationship between the hedged item and the hedging instrument as the net investment creates a foreign exchange risk that will match the foreign exchange risk on the US dollar borrowings or foreign exchange swaps or forwards. The hedge ratio is 1:1 as the underlying risk of the hedging instrument is identical to the hedged risk component. Hedge effectiveness is assessed by comparing changes in the carrying amount of the hedging instrument that is attributable to a change in the spot rate with changes in the investment in the foreign operation due to movements in the spot rate.

The change in value of hedging instruments recognised in the currency translation reserve through other comprehensive income was a gain of $15m (2022: $6m loss). There was no ineffectiveness recognised in the Group income statement during the current or prior year.

 

Interest and foreign exchange risk sensitivities

The following table shows the impact of a general strengthening in the US dollar against sterling and euro on the Group’s profit or loss before tax and net liabilities, and the impact of a rise in US dollar, euro and sterling interest rates on the Group’s profit before tax. The impact of the strengthening in the euro against sterling on net liabilities is also shown, as this impacts the fair value of the currency swaps.

			2023 $m			2022 $m			2021 $m
(Decrease)/increase in profit before tax
Sterling: US dollar exchange rate	$0.05 fall		(14	)		(3	)		7
Euro: US dollar exchange rate	$0.05 fall		(3	)		–			–
US dollar interest rates	1% increase		2			4			7
Sterling interest rates	1% increase		9			4			5
(Increase)/decrease in net liabilities
Sterling: US dollar exchange rate	$0.05 fall		(12	)		27			29
Euro: US dollar exchange rate	$0.05 fall		49			50			50
Sterling: euro exchange rate	€0.05 fall		64			60			67

Interest rate sensitivity relates to cash balances and would only be realised to the extent deposit rates increase by 1%.

Interest rate sensitivities include the impact of hedging and are calculated based on the year-end net debt position.

Liquidity risk

Group policy ensures sufficient liquidity is maintained to meet all foreseeable medium-term cash requirements and provide headroom against unforeseen obligations.

Cash and cash equivalents are held in short-term deposits, repurchase agreements and cash funds which allow daily withdrawals of cash. Most of the Group’s funds are held in the UK or US, although $30m (2022: $24m) is held in countries where repatriation is restricted (see note 18).

Medium- and long-term borrowing requirements are met through committed bank facilities and bonds as detailed in note 22.

The RCF contains two financial covenants: interest cover (Covenant EBITDA: Covenant interest payable) and a leverage ratio (Covenant net debt: Covenant EBITDA). These are tested at half year and full year on a trailing 12-month basis.

		31 December     2023 and 2022		31 December 2021
Covenant test levels for RCF
Leverage		<4.0x		waived
Interest cover		>3.5x		waived
Liquidity		n/a		$400m	a

a  Defined as unrestricted cash and cash equivalents (net of bank overdrafts) plus undrawn facilities with a remaining term of at least six months.

		2023			2022			2021a
Covenant measures
Covenant EBITDA ($m)		1,086			896			601
Covenant net debt ($m)		2,328			1,898			1,801
Covenant interest payable ($m)		88			109			133
Leverage		2.14			2.12			3.00
Interest cover		12.34			8.22			4.52
Liquidity ($m)		n/a			n/a			2,655

a At 31 December 2021, the leverage and interest covenants under the previous facilities were waived and replaced with a liquidity requirement of $400m.

The interest margin payable on the RCF is linked to the Group’s credit rating and is currently 0.60%.

The following are the undiscounted contractual cash flows of financial liabilities, including interest payments. Liabilities relating to the Group’s deferred compensation plan are excluded; their settlement is funded entirely by the realisation of the related deferred compensation plan investments and no net cash flow arises.

31 December 2023	Less than 1 year $m			Between 1 and 2 years $m			Between 2 and 5 years $m			More than 5 years $m			Total $m
Non-derivative financial liabilities:
Bank overdrafts		44			–			–			–			44
€500m 1.625% bonds 2024		563			–			–			–			563
£300m 3.75% bonds 2025		14			397			–			–			411
£350m 2.125% bonds 2026		9			9			456			–			474
€500m 2.125% bonds 2027		12			12			577			–			601
£400m 3.375% bonds 2028		17			17			561			–			595
€600m 4.375% bonds 2029		29			29			87			694			839
Lease liabilities		57			52			130			3,164			3,403
Trade and other payables (excluding deferred and contingent purchase consideration)		651			1			3			2			657
Deferred and contingent purchase consideration		13			–			81			–			94
Financial guarantee contracts		50			–			–			–			50
Derivative financial liabilities:
Currency swaps hedging €500m 1.625% bonds 2024 outflows		594			–			–			–			594
Currency swaps hedging €500m 1.625% bonds 2024 inflows		(563	)		–			–			–			(563	)
Currency swaps hedging €500m 2.125% bonds 2027 outflows		19			19			585			–			623
Currency swaps hedging €500m 2.125% bonds 2027 inflows		(12	)		(12	)		(577	)		–			(601	)
Currency swaps hedging €600m 4.375% bonds 2029 outflows		40			40			119			696			895
Currency swaps hedging €600m 4.375% bonds 2029 inflows		(29	)		(29	)		(87	)		(694	)		(839	)
Forward currency contract 2028 inflows		–			–			(438	)		–			(438	)
Forward currency contract 2028 outflows		–			–			425			–			425

31 December 2022a	Less than 1 year $m			Between 1 and 2 years $m			Between 2 and 5 years $m			More than 5 years $m		Total $m
Non-derivative financial liabilities:
Bank overdrafts		55			–			–			–		55
€500m 1.625% bonds 2024		9			543			–			–		552
£300m 3.75% bonds 2025		14			14			375			–		403
£350m 2.125% bonds 2026		9			9			439			–		457
€500m 2.125% bonds 2027		11			11			568			–		590
£400m 3.375% bonds 2028		16			16			49			498		579
Lease liabilities		53			50			126			3,201		3,430
Trade and other payables (excluding deferred and contingent purchase consideration)		660			1			1			2		664
Deferred and contingent purchase consideration		–			13			39			42		94
Financial guarantee contracts		50			–			–			–		50
Derivative financial liabilities:
Currency swaps hedging €500m 1.625% bonds 2024 outflows		14			561			–			–		575
Currency swaps hedging €500m 1.625% bonds 2024 inflows		(9	)		(543	)		–			–		(552	)
Currency swaps hedging €500m 2.125% bonds 2027 outflows		18			18			571			–		607
Currency swaps hedging €500m 2.125% bonds 2027 inflows		(11	)		(11	)		(568	)		–		(590	)

a  Re-presented for the application of IFRS 9 ‘Financial Instruments’ to financial guarantee contracts.

 

Credit risk

Credit risk on cash and cash equivalents is minimised by operating a policy on the investment of surplus cash that generally restricts counterparties to those with a BBB- credit rating or better or those providing adequate security. The Group uses long-term credit ratings from S&P, Moody’s and Fitch Ratings as a basis for setting its counterparty limits.

In order to manage the Group’s credit risk exposure, the treasury function sets counterparty exposure limits using metrics including credit ratings, the relative placing of credit default swap pricings, tier 1 capital and share price volatility of the relevant counterparty.

Repurchase agreements are fully collateralised investments, with a maturity of three months or less. The Group accepts only government or supranational bonds where the lowest credit rating is AA- or better as collateral. In the event of default, ownership of these securities would revert to the Group. The securities held as collateral are to protect against default by the counterparty.

The Group’s exposure to credit risk arises from default of the counterparty, with the maximum exposure equal to the carrying amount of each financial asset, including derivative financial instruments. The expected credit loss on cash and cash equivalents is considered to be immaterial.

The table below analyses the Group’s short-term deposits, money market funds and repurchase agreement collateral classified as cash and cash equivalents by counterparty credit rating:

31 December 2023

AAA  $m

AA+ $m

AA $m

AA- $m

A+ $m

A $m

A- $m

BBB+ and below $m

Total $m

Short-term deposits

–

–

–

129

147

258

77

21

632

Money market funds

375

–

–

–

–

–

–

–

375

Repurchase agreement collateral

110

6

–

20

–

–

–

–

136

31 December 2022

AAA $m

AA+  $m

AA $m

AA- $m

A+ $m

A $m

A- $m

BBB+ and below $m

Total $m

Short-term deposits

–

–

–

66

127

141

50

37

421

Money market funds

360

–

–

–

–

–

–

–

360

Repurchase agreement collateral

22

2

6

–

–

–

–

–

30

Capital risk management

The Group manages its capital to ensure that it will be able to continue as a going concern. The capital structure consists of net debt, issued share capital and reserves. The structure is managed with the objective of maintaining an investment grade credit rating, to provide ongoing returns to shareholders and to service debt obligations, while maintaining maximum operational flexibility. A key characteristic of IHG’s managed and franchised business model is that it is highly cash generative, with a high return on capital employed. Surplus cash is either reinvested in the business, used to repay debt or returned to shareholders.

The Group’s debt is monitored on the basis of a cash flow leverage ratio, being net debt divided by adjusted EBITDA. The Group has a stated aim of maintaining this ratio at 2.5x to 3.0x. The ratio at 31 December 2023 (which differs from the ratio as calculated for covenant tests) was 2.09 (2022: 2.07).

The Group currently has a senior unsecured long-term credit rating of BBB from S&P and obtained, in 2023, a Baa2 rating from Moody’s. In the event of either rating being downgraded below BBB- and Baa3 respectively (a downgrade of two levels) there would be an additional step-up coupon of 1.25% payable on the bonds which are subject to those ratings.

Market risk

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises: foreign exchange risk and interest rate risk. Financial instruments affected by market risk include loans and other borrowings, cash and cash equivalents, debt and equity investments and derivatives.

Foreign exchange risk

Movements in foreign exchange rates can affect the Group’s reported profit or loss, net liabilities and its interest cover. The most significant exposures of the Group are in currencies that are freely convertible. The Group’s reported debt has an exposure to borrowings held in sterling and euros. After the effect of currency swaps, the Group holds its bond debt in sterling, which is the primary currency of shareholder returns, and in US dollars, the predominant currency of the Group’s revenue and cash flows. US dollar borrowing or currency derivatives may also act as a net investment hedge of US dollar denominated assets.

When the Group borrows in currencies different from the functional currency of the borrowing entity, currency swaps are transacted at the same time to minimise foreign exchange risk. Currency swaps were transacted against the €500m 2.125% 2027 and €500m 1.625% 2024 bonds, in November 2018 and October 2020 respectively, swapping the bonds’ proceeds and interest flows into sterling. Similar currency swaps were transacted against the €600m 4.375% 2029 bonds in November 2023, swapping the bond proceeds and interest flows into US dollars (see page 200).

Interest rate risk

The Group is exposed to interest rate risk in relation to its fixed and floating rate borrowings. The Group’s policy requires a minimum of 50% fixed rate debt over the next 12 months. With the exception of overdrafts, 100% of borrowings were fixed rate debt at 31 December 2023 (2022: 100%).

Derivative financial instruments

Derivative financial instruments

Derivatives are recorded in the Group statement of financial position at fair value (see note 25) as follows:

Derivatives	2023 $m			2022 $m
Currency swaps		(20	)		(4	)
Currency forwards		15			–
Analysed as:
Non-current assets		20			7
Current liabilities		(25	)		–
Non-current liabilities		–			(11	)
		(5	)		(4	)

The carrying amount of currency swaps and forwards comprises $2m loss (2022: $4m loss) relating to exchange movements on the underlying principal, included within net debt (see note 23), and a $3m loss (2022: $nil) relating to other fair value movements.

Details of the credit risk on derivative financial instruments are included on page 203.

Currency swaps and forwards have been transacted as follows:

Date of designation	Hedge type	Pay leg	Interest rate	Receive leg	Interest rate	Maturity	Risk	Hedged item
November 2018	Cash flow	£436m	3.5%	€500m	2.125%	May 2027	Foreign exchange	€500m 2.125% bonds 2027
October 2020	Cash flow	£454m	2.7%	€500m	1.625%	October 2024	Foreign exchange	€500m 1.625% bonds 2024
November 2023	Cash flow	$657m	6.0%	€600m	4.375%	November 2029	Foreign exchange	€600m 4.375% bonds 2029
October 2023	Net investment	$425m	n/a	£344m	n/a	October 2028	Spot foreign  exchange	Net assets of specified subsidiaries with US dollar foreign currency

Liquidity risk

Liquidity risk

Group policy ensures sufficient liquidity is maintained to meet all foreseeable medium-term cash requirements and provide headroom against unforeseen obligations.

Cash and cash equivalents are held in short-term deposits, repurchase agreements and cash funds which allow daily withdrawals of cash. Most of the Group’s funds are held in the UK or US, although $30m (2022: $24m) is held in countries where repatriation is restricted (see note 18).

Medium- and long-term borrowing requirements are met through committed bank facilities and bonds as detailed in note 22.

The RCF contains two financial covenants: interest cover (Covenant EBITDA: Covenant interest payable) and a leverage ratio (Covenant net debt: Covenant EBITDA). These are tested at half year and full year on a trailing 12-month basis.

		31 December     2023 and 2022		31 December 2021
Covenant test levels for RCF
Leverage		<4.0x		waived
Interest cover		>3.5x		waived
Liquidity		n/a		$400m	a

a  Defined as unrestricted cash and cash equivalents (net of bank overdrafts) plus undrawn facilities with a remaining term of at least six months.

		2023			2022			2021a
Covenant measures
Covenant EBITDA ($m)		1,086			896			601
Covenant net debt ($m)		2,328			1,898			1,801
Covenant interest payable ($m)		88			109			133
Leverage		2.14			2.12			3.00
Interest cover		12.34			8.22			4.52
Liquidity ($m)		n/a			n/a			2,655

a At 31 December 2021, the leverage and interest covenants under the previous facilities were waived and replaced with a liquidity requirement of $400m.

The interest margin payable on the RCF is linked to the Group’s credit rating and is currently 0.60%.

The following are the undiscounted contractual cash flows of financial liabilities, including interest payments. Liabilities relating to the Group’s deferred compensation plan are excluded; their settlement is funded entirely by the realisation of the related deferred compensation plan investments and no net cash flow arises.

31 December 2023	Less than 1 year $m			Between 1 and 2 years $m			Between 2 and 5 years $m			More than 5 years $m			Total $m
Non-derivative financial liabilities:
Bank overdrafts		44			–			–			–			44
€500m 1.625% bonds 2024		563			–			–			–			563
£300m 3.75% bonds 2025		14			397			–			–			411
£350m 2.125% bonds 2026		9			9			456			–			474
€500m 2.125% bonds 2027		12			12			577			–			601
£400m 3.375% bonds 2028		17			17			561			–			595
€600m 4.375% bonds 2029		29			29			87			694			839
Lease liabilities		57			52			130			3,164			3,403
Trade and other payables (excluding deferred and contingent purchase consideration)		651			1			3			2			657
Deferred and contingent purchase consideration		13			–			81			–			94
Financial guarantee contracts		50			–			–			–			50
Derivative financial liabilities:
Currency swaps hedging €500m 1.625% bonds 2024 outflows		594			–			–			–			594
Currency swaps hedging €500m 1.625% bonds 2024 inflows		(563	)		–			–			–			(563	)
Currency swaps hedging €500m 2.125% bonds 2027 outflows		19			19			585			–			623
Currency swaps hedging €500m 2.125% bonds 2027 inflows		(12	)		(12	)		(577	)		–			(601	)
Currency swaps hedging €600m 4.375% bonds 2029 outflows		40			40			119			696			895
Currency swaps hedging €600m 4.375% bonds 2029 inflows		(29	)		(29	)		(87	)		(694	)		(839	)
Forward currency contract 2028 inflows		–			–			(438	)		–			(438	)
Forward currency contract 2028 outflows		–			–			425			–			425

31 December 2022a	Less than 1 year $m			Between 1 and 2 years $m			Between 2 and 5 years $m			More than 5 years $m		Total $m
Non-derivative financial liabilities:
Bank overdrafts		55			–			–			–		55
€500m 1.625% bonds 2024		9			543			–			–		552
£300m 3.75% bonds 2025		14			14			375			–		403
£350m 2.125% bonds 2026		9			9			439			–		457
€500m 2.125% bonds 2027		11			11			568			–		590
£400m 3.375% bonds 2028		16			16			49			498		579
Lease liabilities		53			50			126			3,201		3,430
Trade and other payables (excluding deferred and contingent purchase consideration)		660			1			1			2		664
Deferred and contingent purchase consideration		–			13			39			42		94
Financial guarantee contracts		50			–			–			–		50
Derivative financial liabilities:
Currency swaps hedging €500m 1.625% bonds 2024 outflows		14			561			–			–		575
Currency swaps hedging €500m 1.625% bonds 2024 inflows		(9	)		(543	)		–			–		(552	)
Currency swaps hedging €500m 2.125% bonds 2027 outflows		18			18			571			–		607
Currency swaps hedging €500m 2.125% bonds 2027 inflows		(11	)		(11	)		(568	)		–		(590	)

a  Re-presented for the application of IFRS 9 ‘Financial Instruments’ to financial guarantee contracts.

Credit risk

Credit risk

Credit risk on cash and cash equivalents is minimised by operating a policy on the investment of surplus cash that generally restricts counterparties to those with a BBB- credit rating or better or those providing adequate security. The Group uses long-term credit ratings from S&P, Moody’s and Fitch Ratings as a basis for setting its counterparty limits.

In order to manage the Group’s credit risk exposure, the treasury function sets counterparty exposure limits using metrics including credit ratings, the relative placing of credit default swap pricings, tier 1 capital and share price volatility of the relevant counterparty.

Repurchase agreements are fully collateralised investments, with a maturity of three months or less. The Group accepts only government or supranational bonds where the lowest credit rating is AA- or better as collateral. In the event of default, ownership of these securities would revert to the Group. The securities held as collateral are to protect against default by the counterparty.

The Group’s exposure to credit risk arises from default of the counterparty, with the maximum exposure equal to the carrying amount of each financial asset, including derivative financial instruments. The expected credit loss on cash and cash equivalents is considered to be immaterial.

The table below analyses the Group’s short-term deposits, money market funds and repurchase agreement collateral classified as cash and cash equivalents by counterparty credit rating:

31 December 2023

AAA  $m

AA+ $m

AA $m

AA- $m

A+ $m

A $m

A- $m

BBB+ and below $m

Total $m

Short-term deposits

–

–

–

129

147

258

77

21

632

Money market funds

375

–

–

–

–

–

–

–

375

Repurchase agreement collateral

110

6

–

20

–

–

–

–

136

31 December 2022

AAA $m

AA+  $m

AA $m

AA- $m

A+ $m

A $m

A- $m

BBB+ and below $m

Total $m

Short-term deposits

–

–

–

66

127

141

50

37

421

Money market funds

360

–

–

–

–

–

–

–

360

Repurchase agreement collateral

22

2

6

–

–

–

–

–

30

Capital risk management

Capital risk management

The Group manages its capital to ensure that it will be able to continue as a going concern. The capital structure consists of net debt, issued share capital and reserves. The structure is managed with the objective of maintaining an investment grade credit rating, to provide ongoing returns to shareholders and to service debt obligations, while maintaining maximum operational flexibility. A key characteristic of IHG’s managed and franchised business model is that it is highly cash generative, with a high return on capital employed. Surplus cash is either reinvested in the business, used to repay debt or returned to shareholders.

The Group’s debt is monitored on the basis of a cash flow leverage ratio, being net debt divided by adjusted EBITDA. The Group has a stated aim of maintaining this ratio at 2.5x to 3.0x. The ratio at 31 December 2023 (which differs from the ratio as calculated for covenant tests) was 2.09 (2022: 2.07).

The Group currently has a senior unsecured long-term credit rating of BBB from S&P and obtained, in 2023, a Baa2 rating from Moody’s. In the event of either rating being downgraded below BBB- and Baa3 respectively (a downgrade of two levels) there would be an additional step-up coupon of 1.25% payable on the bonds which are subject to those ratings.