Fiscal 2020 Universal Registration Document

NOTE 13. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICY

The Group policies and procedures are designed to prevent speculative positions. Furthermore, under them:

• substantially all borrowings must be at fixed rates of interest, or converted to fixed-rate using hedging instruments;
•  in the context of financing policy, foreign exchange risk on loans to subsidiaries must be hedged;
• the maturity of hedging instruments must not exceed the maturity of the borrowings they hedge.

13.1 Analysis of sensitivity to interest rates

As of August 31, 2020, an increase or a decrease in interest rates would have had no material impact on profit before tax or on shareholders’ equity as substantially all liabilities at those dates were at a fixed rate of interest.

13.2 Analysis of sensitivity to foreign exchange rates and exchange rate exposures on principal currencies

Because Sodexo has operations in 64 countries, all components of the financial statements are influenced by foreign currency translation effects, and in particular by fluctuations in the U.S. dollar. However, exchange rate fluctuations do not generate any operational risk, because each of the Group’s subsidiaries invoices its revenues and incurs its expenses in the same currency.

Sodexo S.A. uses derivative instruments to manage the Group’s risk exposure resulting from the volatility of exchange rates.

SENSITIVITY TO EXCHANGE RATES

13.3 Exposure to liquidity risk

The nature of the Group’s bank borrowings and bond issues as of August 31, 2020 is described in detail in note 12.4.

As of August 31, 2020, and as of August 31, 2019, more than 99% of the Group’s consolidated borrowings was raised on capital markets and bank financing covered less than 1% of the Group’s financing needs. The maturity dates of the main borrowings range between Fiscal 2022 and Fiscal 2029.

13.4 Exposure to counterparty risk

Exposure to counterparty risk is limited to the carrying amount of financial assets.

Group policies and procedures are to manage and spread counterparty risk. For derivative financial instruments, each transaction with a bank is required to be based on a master contract modeled on the standard contract issued by the French Bankers’ Association (AFB) or the International Swaps and Derivatives Association (ISDA).

Counterparty risk relating to client accounts receivable is immaterial. Due to the Group’s geographic and segment spread, there is no concentration of risk on past due individual receivables for which no provision has been recorded. Given the degradation in the economic environment resulting from the Covid-19 pandemic, the Group has reinforced its credit risk tracking.

Thus, the Group did not record any significant change in the impacts related to the proven financial failures of its customers during the year. The net carrying amount of overdue receivables amounts to 526 million euro, of which 68 million are beyond 6 months (2% of total net accounts receivable as of August 31, 2020 vs.1.9% as of August 31, 2019).

The main counterparty risk is bank-related. The Group has limited its exposure to counterparty risk by diversifying its investments and limiting the concentration of risk held by each of its counterparties. Transactions are conducted with highly creditworthy counterparties taking into consideration country risk. The Group has instituted a regular reporting of the risk spread between counterparties and of their quality.

To reduce this risk further, in Fiscal 2011 the Group implemented an international cash pooling mechanism between its main subsidiaries (with a netting facility), reducing the amount of liquidity held by third parties by concentrating it in the Group’s financial holding companies.

The maximum counterparty represents approximately 13% (18% as of August 31, 2019) of the Group’s operating cash (including restricted cash and financial assets related to the Benefits & Rewards Services activity) and is with a banking group whose rating is A-1.