5. Capital and financial risk management

5.1. Capital Management

Randstad Holding’s policy is to maintain a strong capital base. We aim to be perceived as investment grade at all times. We believe this is important in order to maintain candidate, client, creditor and investor confidence and to sustain the future development of our business.
We aim to safeguard the Group’s ability to continue as a going concern in order to provide returns for our shareholders and maintain an optimal capital structure to reduce the cost of capital.

Capital includes equity attributable to shareholders and preferred shares:

	2008		2007
Shareholders’ equity (including preferred shares as equity 2008)	2,416.9		1,021.6
Preferred shares (including preferred shares as liabilities 2007)	-		165.8
Total capital	2,416.9		1,187.4

Early in 2008 the conditions of the preferred shares were changed such that preferred shares classify as equity instead of as a liability; the carrying amount of € 165.8 million has been transferred from non-current liabilities to equity.

We monitor the geographic spread of shareholders as well as the concentration of shareholdings, including stakes in the share capital of above 5%. We aim to maintain a good balance between stability and liquidity of the shares. The contract Randstad signed with its leading shareholder (for details please see here) is in line with the aim of achieving continuity. To ensure a good geographic spread we include many different countries in our roadshow programs, while we aim to include all investor types in these schedules as well as to ensure liquidity.

In 2007 we reviewed our capital structure. Randstad maintains its long term and conservative view on its balance sheet. We target a leverage ratio (net debt/EBITDA) of between 0 and 2, independent of the size of the company. This range is in line with our aim to be perceived as investment grade.

Prolonged net cash positions (held over 1 year) will in the future be paid back to shareholders, preferably through share buy backs. We obtained authorization at the AGM of May 7, 2008 for the executive board to have the company acquire its own shares, up to a maximum of 10% of the total number of issued ordinary shares. The authorization is limited to a maximum of 18 months and the aim is to renew the authorization each year. We intend to create long-term flexibility. Acquired shares are put in treasury and can be used for future acquisitions or to offset dilution from management share plans.

Randstad updated its dividend policy as from 2007. We aim at a floor of € 1.25 in the dividend and consistent dividend growth through the cycle, based on a flexible pay-out ratio of 30% to 60% of net profit adjusted for amortization of acquisition-related intangible assets. The policy is in line with the cash flow trends, which usually show a more gradual development than earnings trends.

5.2 Financial risk management

The Group’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, foreign currency exchange risk and interest rate risk. The Group’s overall risk management program is aimed at minimizing potential adverse effects on the financial performance of the Group.
Risk management procedures are carried out under policies that have been approved by the executive board. Risk management procedures, as well as the actual financial risks, are also the subject of discussion in the audit committee of the supervisory board. Our risk & control framework is in place to ensure that risks are detected, measured and reported properly.

5.2.1 Credit risk
Credit risk within the Group arises from the possibility that customers and other counterparties may not be able to settle their obligation towards the Group as agreed.

Credit control departments of the operating companies manage the credit risk arising from operations. Credit control policies are included in our blueprints. To manage this risk, credit checks are performed up front for new customers. For high-risk customers, credit limits are put in place based on internal and/or external ratings. The risks included in trade receivables are strictly monitored on a day-to-day basis.
The Group has no significant concentrations of credit risk, as the Group has very many customers in a large number of industries and countries.
The Group has established an allowance account for impairment of trade receivables.
The Group’s (excess) cash positions are invested with its preferred financial partners, which are considered to be high quality financial institutions with sound credit ratings, or in high rated liquidity funds. The Group has policies in place that limit the amount of credit exposure to any one financial institution.

5.2.2 Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to liquidity risk is to ensure, as far as possible, that it will always have sufficient funds available to meet its liabilities when due, under both normal and stressed conditions. This risk is managed by having sufficient availability of cash and committed and uncommitted credit lines, both at Group and local level, while optimizing the short term interest results and other related expenses. Cash flow forecasts and manual and automated cash concentration techniques are used in this respect.

The Group has a € 2,700 million multi-currency syndicated revolving credit facility at its disposal. The facility agreement contains a covenant in respect of the net debt to EBITDA ratio as well as a paragraph on material adverse changes. The net debt to EBITDA ratio has a limit of 3.5 as per the contractual arrangements and is calculated over the combined pro forma results of Randstad and Vedior on an annual basis. The actual net debt to EBITDA ratio of 1.8 at December 31, 2008 is within the limits of the facility agreement.

5.2.3 Foreign currency exchange risk
The Group is exposed to foreign currency exchange risk because it operates businesses in Asia, Australia, Europe, North and Latin America. The Group uses the euro as its reporting currency. Currencies other than the euro that are of primary importance for the Group are the US dollar, the UK pound sterling, the Australian dollar and the Canadian dollar.

The foreign currency exchange risk of the Group in respect of transactions is limited, because for the biggest part operating companies generate both revenues and expenses locally and therefore in the same currency.

All other foreign exchange transactions that mostly consist of intercompany financial flows (equity increases, dividends, intercompany loans and interests) are executed on a more or less spot basis. To limit the effect of volatility on the net debt to EBITDA ratio (which is a covenant in the financing arrangement) the Group has a policy to match the currencies in the net debt positions with the mix in the cash flow generation of the major currencies. In practice this is mostly only done for currencies that are at least 5% of the total EBITDA of the Group. The currency mix of the debt can easily be adjusted, as the € 2.700 million syndicated revolving credit facility is a multi-currency facility. Therefore the use of derivatives is in principle unnecessary.

Currency fluctuations can however affect the consolidated results, due to the translation of local results into the Group reporting currency.
Translation effects from consolidation may also impact shareholders’ equity. The Group has a number of net investments in foreign subsidiaries whose assets and liabilities are exposed to currency translation risk that is accounted for in equity. Currency exposures arising from the net assets of the Group’s foreign operations are monitored and, when considered necessary, primarily controlled through borrowings denominated in the relevant foreign currencies. These borrowings can be classified as a net investment hedge; translation differences on borrowings classified as such, are included directly equity.

If during the year 2008 the euro had weakened 10% on average against the currencies mentioned above, with all other variables held constant, operating profit for the year would have been higher in the range of € 0 - € 2 million per currency. The effect on shareholders’ equity would have been the same (before tax effects).

5.2.4 Interest rate risk
As the staffing industry has a natural hedge to interest rate changes (EBITDA levels usually move up and down more or less in line with interest rate levels), and since the Group is cash generating, the general policy towards interest rate risk is to keep interest rates on net debt floating as much as possible. We also believe this adds value for the shareholders in the long term, as over time the short interest rates are on average significantly lower than the longer interest rates.
Group Treasury also manages the interest risk by assessing the risk of interest rates being able to cause a breach in any financing covenant.
If the interest rate had been 1%-point higher on average, with all other variables held constant, net interest expenses for the year 2008 would have been € 12 million higher, due to the net effect of the increase of interest income on cash positions and interest expenses on floating rate borrowings.