Luxottica Group, S.p.A. (LUX)

Interest Rate Sensitivity

At December 31, 2008 and 2007, our interest rate sensitivity was limited to the amount of our unhedged variable rate outstanding debt under our credit facilities and bank overdraft facilities.

Included in this amount are:

·                  Tranche B and Tranche C borrowings on our subsequently amended credit facility with a group of banks, of Euro 1,130 million and U.S.$325 million (of which Euro 677.9 million and Euro 567.4 million were borrowed under Tranche C as of December 31, 2008 and 2007, respectively, and U.S.$325 million was borrowed under Tranche B as of December 31, 2008). However, in 2007, we entered into interest rate swaps to effectively hedge the floating rate to a fixed rate for Tranche B. As of December 31, 2008, this credit facility bore interest at EURIBOR on Euro-denominated loans and LIBOR on U.S.$-denominated loans, plus a margin between 0.20 and 0.40 percent based on the Net Debt/ EBITDA ratio as defined in the agreement (3.397 percent on Tranche C for amounts borrowed in Euro and 1.189 percent for amounts borrowed in U.S.$ as of December 31, 2008).

·                  Our Euro 150 million credit facility, of which Euro 150 million was borrowed as of December 31, 2008. This credit facility accrues interest at EURIBOR plus 0.375 percent (3.604 percent as of December 31, 2008).

·                  Our Euro 250 million credit facility, of which Euro 250.0 million was borrowed as of December 31, 2008. This credit facility accrues interest at EURIBOR plus a margin between 0.40 percent and 0.60 percent based on the “Net Debt/EBITDA” ratio, as defined in the agreement (3.741 percent as of December 31, 2008).

·                  Our Tranche D U.S.$1.0 billion credit facility, of which U.S.$1.0 billion was borrowed as of December 31, 2008 (unchanged from 2007). This credit facility accrues interest at LIBOR plus a margin between 0.20 and 0.40 percent based on the Net Debt/EBITDA ratio as defined in the agreement (1.545 percent as of December 31, 2008). However, in 2008, we entered into interest rate swaps for a notional amount of U.S. $500 million that effectively hedge the floating rate to a fixed rate for a portion of Tranche D.

Additionally, in 2003 we issued U.S.$300 million of fixed rate senior unsecured guaranteed notes in three series (Series A, B and C). We immediately entered into three interest rate swaps to hedge such series of notes, thereby effectively changing the fixed rate to a variable rate of six-month LIBOR plus a spread of 0.6575 percent or 0.73 percent depending on the series. These swaps were terminated by a payment to the bank in December 2005, and we will amortize the final fair value adjustment to the debt as an adjustment to the fixed-rate yield over the remaining life of the debt. This has effectively increased our fixed rate on such Series A, B and C notes to 5.64 percent, 5.99 percent and 5.44 percent, respectively.

However, the effect of a ten percent change in interest rates (upward or downward) at December 31, 2008 and 2007, would not have had a material effect on our future annual pretax earnings and cash flows. This was calculated by us, based on our expected future pretax earning and cash flows with an interest rate adjustment of ten percent above and below the rates in effect as of December 31, 2008 and 2007. We calculated this effect both on a single year basis and an accumulated basis using a present value calculation for all variable-rate debt instruments. For U.S.$-denominated activities, we used an exchange rate of Euro 1.00 = U.S.$1.30 and Euro 1.00 = U.S.$1.45 as of December 31, 2008 and 2007, respectively.

We monitor our exposure to interest rate fluctuations and may enter into hedging arrangements to mitigate our exposure to increases in interest rates if we believe it is prudent to do so. We have 35 interest rate derivatives outstanding as of December 31, 2008:

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Interest Rate Sensitivity

At December 31, 2007 and 2006, our interest rate sensitivity was limited to the amount of our unhedged variable rate outstanding debt under our credit facilities and bank overdraft facilities.

Included in this amount are:

·      Tranche B and Tranche C borrowings on our subsequently amended credit facility with a group of banks, of Euro 1,130 million and U.S.$325 million (of which Euro 567.4 million and Euro 244.0 million was borrowed under Tranche C as of December 31, 2007 and 2006 respectively, and U.S.$325 million was borrowed under Tranche B as of December 31, 2007). However, in 2007, we entered into interest rate swaps to effectively hedge the floating rate to a fixed rate for Tranche B. As of December 31, 2007, this credit facility bore interest at EURIBOR on Euro-denominated loans and LIBOR on
U.S.$-denominated loans, plus a margin between 0.20 and 0.40 percent based on the Net Debt/ EBITDA ratio as defined in the agreement (5.239 percent on Tranche C as of December 31, 2007).

·      Our Euro 100 million credit facility, of which Euro 100 million was borrowed as of December 31, 2007 (unchanged from 2006). This credit facility accrues interest at EURIBOR plus 0.25 percent (4.98 percent as of December 31, 2007).

·      Our Euro 50 million credit facility, of which Euro 25 million was borrowed as of December 31, 2007 (unchanged from 2006). This credit facility accrues interest at EURIBOR plus 0.55 percent (4.988 percent as of December 31, 2007).

·      Our US$ 1.0 billion credit facility, of which US$ 1.0 billion was borrowed as of December 31, 2007. This credit facility accrues interest at LIBOR plus a margin between 0.20 and 0.40 percent based on the Net Debt/EBITDA ratio as defined in the agreement (5.503 percent as of December 31, 2007).

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Interest Rate Sensitivity

At December 31, 2005 and 2006, our interest rate sensitivity was limited to our unhedged variable rate outstanding debt under our credit facilities and bank overdraft facilities. Included in this amount are the following credit agreements:  (i) Tranche B and Tranche C borrowings on our subsequently amended credit facility with a group of banks of Euro 740 million (Euro 1,130 million starting as of March 10, 2006) and U.S.$325 million (of which Euro 294.9 million and 244.0 million was outstanding under Tranche C as of December 31, 2005 and 2006, respectively, and U.S.$325 million was outstanding under Tranche B (unchanged from 2005), (ii) our AUD 30 million multi currency loan of which AUD  20.88 million (Euro 13.59 million) and AUD 20.22 million (Euro 12.1 million) was outstanding as of December 31, 2005 and 2006, respectively, (iii) our Euro 100 million 18-month credit facility of which Euro 100 million was outstanding (unchanged from 2005), and (iv) Euro 50 million credit facility of which Euro 25 million was outstanding . As of such date, debt under our credit facility with a group of banks bore interest at the rate of Euribor, on Euro-denominated loans, and LIBOR, on U.S.$ denominated loans, plus a margin between 0.20 percent and 0.40 percent based on the “Net Debt/EBITDA” ratio as defined in the agreement (5.62 percent for the Tranche B loan denominated in U.S.$ and 4.93 percent for the weighted average Tranche C loan for the relevant interest period at December 31, 2006). Debt under the AUD 30 million and new Euro 100 million credit facility accrue interest at BBR or HIBOR plus 0.275 percent and EURIBOR plus 0.25 percent, respectively. BBR, HIBOR and EURIBOR as defined in the agreements were 6.38 percent, 3.91 percent and 3.72 percent, respectively, at December 31, 2006.

Additionally, in 2003 we issued U.S.$300 million of fixed rate senior unsecured guaranteed notes in three series (series A, B and C). We immediately entered into three interest rate swaps to hedge such series of notes, thereby effectively changing the fixed rate to a variable rate of six-month LIBOR plus a spread of 0.6575 percent or 0.73 percent depending on the series. These Swaps were terminated by a payment to the bank in December 2005, and we will amortize the final fair value adjustment to the debt as an adjustment to the fixed-rate yield over the remaining life of the debt. This has effectively increased our fixed rate on such series A, B and C notes to 5.64 percent, 5.99 percent, and 5.44 percent, respectively.

However, the effect of a ten percent change in interest rates (upward or downward) at December 31, 2005 and 2006 would not have had a material effect on our future annual pretax earnings and cash flows. This was calculated by us, based on our expected future pretax earning and cash flows with an interest rate adjustment of ten percent above and below the rates in effect as of December 31, 2005 and 2006. We calculated this effect both on a single year basis and an accumulated basis using a present value calculation for all variable-rate debt instruments. For U.S.$-denominated activities, we used an exchange rate of Euro 1.00 = U.S.$ 1.244 and Euro 1.00 = U.S.$1.35 as of December 31, 2005 and 2006, respectively.

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We monitor our exposure to interest rate fluctuations and may enter into hedging arrangements to mitigate our exposure to increases in interest rates if we believe it is prudent to do so. We have 13 interest rate derivatives outstanding as of December 31, 2006, unchanged from December 31, 2005:

·                  In June 2005, the Company entered into nine interest rate swap transactions with various banks with an aggregate initial notional amount of Euro 405 million, which will decrease by Euro 45 million every three months starting on June 3, 2007 (“Club Deal Swaps”). These swaps will expire on June 3, 2009. The Club Deal Swaps were entered into as a cash flow hedge on Tranche A of the credit facility discussed above. The Club Deal Swaps exchange the floating rate of Euribor for an average fixed rate of 2.40 percent per annum.

·                  In June 2005, the Company entered into four interest rate swap transactions with various banks with an aggregate initial notional amount of Euro 120 million, which will decrease by Euro 30 million every six months starting on March 30, 2007 (“Intesa OPSM Swaps”). These swaps will expire on September 30, 2008. The Intesa OPSM Swaps were entered into as a cash flow hedge on a portion of the Banca Intesa Euro 200 million unsecured credit facility discussed above. The Intesa OPSM Swaps exchange the floating rate of Euribor for an average fixed rate of 2.38 percent per annum.

Interest Rate Sensitivity

At December 31, 2004, our interest rate sensitivity was limited to our unhedged variable rate outstanding debt under our credit facilities and bank overdraft facilities and certain fixed-rate debt that was converted to floating rate through an interest rate swap (see below). Included in this amount are the following credit agreements: Unicredito Italiano of U.S. $350 million (of which U.S. $170 million was outstanding), our credit facilities with Banca Intesa S.p.A. of Euro 650 million (of which Euro 275 million was outstanding and Euro 175 million was unhedged) and of Euro 200 million (of which Euro 175 million were outstanding), and our credit facility with a group of banks of Euro 740 million and U.S. $325 million (of which Euro 612 million and U.S. $325 million was outstanding). As of such date, debt under the UniCredito Italiano facility bore interest at LIBOR plus 0.5 percent (2.920 percent for the term loan and 2.917 percent for the revolving loan for the relevant interest period at December 31, 2004), debt under unhedged the Banca Intesa credit facility of Euro 650 million bore interest at the rate of Euribor plus 0.45 percent (2.628 percent for the term loan and 2.623 percent for the revolving loan for the relevant interest period at December 31, 2004), debt under the Banca Intesa credit facility of Euro 200 million bore interest at the rate of Euribor plus 0.55 percent (2.729 percent for the term loan and 2.697 percent for the revolving loan for the relevant interest period at December 31, 2004) and debt under our credit facility with a group of banks bore interest at the rate of Euribor, on Euro-denominated loans, and LIBOR, on U.S. $ denominated loans, plus a margin between 0.40 percent and 0.60 percent based on the “Net Debt/EBITDA” ratio as defined in the agreement (2.628 percent for the term loan denominated in Euro and 2.456 percent for the term loan denominated in U.S. $ and 2.889 percent for the revolving loan for the relevant interest period at December 31, 2004). Additionally, in 2003 we issued U.S. $300 million of fixed rate senior unsecured guaranteed notes in three series. We immediately entered into three interest rate swaps to hedge such series of notes, thereby effectively changing the fixed rate to a variable rate of six-month LIBOR plus a spread of 0.6575 percent or 0.73 percent depending on the series. This Swap has effectively increased our exposure to interest rate fluctuations. However, the effect of a ten percent change in interest rates (upward or downward) at December 31, 2004 would not have had a material effect on our future annual pretax earnings and cash flows. This was calculated by us, based on our expected future pretax earning and cash flows with an interest rate adjustment of ten percent above and below the rates in effect as of December 31, 2004. We calculated this effect both on a single year basis and an accumulated basis using a present value calculation. For U.S.$-denominated activities, we used an exchange rate of Euro 1.00 = U.S. $1.30.

We monitor our exposure to interest rate fluctuations and may enter into hedging arrangements to mitigate our exposure to increases in interest rates if we believe it is prudent to do so. We have six interest rate derivatives outstanding as of December 31, 2004:

•                  We have an outstanding Convertible Swap Step-up (“Swap”) with an initial notional amount of U.S. $275 million. This Swap converts a portion of the U.S. $350 million UniCredito loan to a mixed position rate agreement. This Swap allows our U.S. subsidiary to pay a fixed rate of interest if LIBOR remains under certain thresholds and for our U.S. subsidiary to receive an interest payment of three-month LIBOR as defined in the agreement. This instrument does not qualify as a hedge for the debt and as such the changes in its fair value are recorded in the statement of operations in the period they occur;

•                  In December 2002, we entered into two interest rate swap transactions (the “Intesa Swaps”) beginning with an aggregate maximum notional amount of Euro 250 million, which decreased by Euro 100 million on June 28, 2004 and will decrease by Euro 25 million in each subsequent three-month period. These Intesa Swaps will expire on December 27, 2005. The Intesa Swaps were entered into as a cash flow hedge of a portion of the Banca Intesa Euro 650 million unsecured credit facility disclosed above. The Intesa Swaps exchange the floating rate based on Euribor to a fixed rate of 2.985 percent per annum;

•                  In September 2003, we entered into three interest rate swap agreements with Deutsche Bank AG (the “DB Swap”). The three separate agreements, notional amounts and interest payment dates coincide with those of the Senior Unsecured Guaranteed Notes issued on the same date. The DB Swap exchanges the fixed rate of the Notes to a floating rate of the six-month LIBOR rate plus 0.6575 percent for the Series A Notes and to a floating rate of the six month LIBOR rate plus 0.73 percent for the Series B and Series C Notes. These swaps are treated as fair value hedges of the related debt and qualify for the shortcut method of hedge accounting (assuming no ineffectiveness in a hedge in an interest rate swap). Thus the interest income/expense on the swaps is recorded as an adjustment to the interest expense on the debt effectively changing the debt from a fixed rate of interest to the swap rate.

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