Financial risks and instruments
Financial risks and instruments
As a consequence of the ROCKWOOL Group’s extensive international activities the Group’s income statement and equity are subject to a number of financial risks. The Group manages these risks in the following categories:
- Exchange-rate risk
- Interest-rate risk
- Liquidity risk
- Credit risk
The Group’s policy is to identify and hedge significant financial risks on an ongoing basis. This is the responsibility of the individual companies in which financial risks might arise. The parent company continuously monitors the Group’s financial risks in accordance with a framework determined by Group Management.
As a consequence of the Group’s structure, net sales and expenditure in foreign currency are to a significant degree set off against each other, so that the Group is not exposed to major exchange-rate risks.
Commercial exchange-rate risks in the companies which cannot be set off are hedged on a continuous basis, to the extent that they may significantly affect the results of the individual company in a negative direction, using currency loans, currency deposits and/or financial derivatives. Exchange-rate risks are hedged in the individual companies.
The Group’s net sales and expenditures will be subject to exchange-rate fluctuations on translation into Euro; however, the risk is assessed to be limited.
A sensitivity analysis is made for the Group’s result and equity based on the underlying currency transactions. The financial instruments included in the sensitivity analysis is cash, debtors, creditors, non-current and current liabilities and financial investments without taking hedging into consideration. The result of the sensitivity analysis cannot be directly transferred to the fluctuations on translating the financial result and equity of subsidiaries into EUR.
The Group’s result is most exposed to USD and RUB. A movement of 5%, other things equal, in USD would change the result of around EUR 6-9 million (2014: EUR 5-8 million). A 10% movement, other things equal, in RUB would give a change in the result of around EUR 4-6 million (2014: EUR 7-10 million).
The Group’s equity is most exposed to USD and RUB. A 5% movement in USD would, other things equal, result in a change in the equity of around EUR 8-11 million (2014: EUR 7-10 million) while movement in RUB of 10%, other things equal, would result in a change of around EUR 15-23 million (2014: EUR 14-17 million).
The impact on the net sales of the difference between average rate and year-end rate amounts to EUR -32.1 million (2014: EUR -53.4 million) for the 4 largest currencies, which is a change of -1.5% (2014: -2.4%).
The Group’s policy is not to hedge exchange rate risks in long-term investments in subsidiaries.
When relevant, external investment loans and Group loans are, as a general rule, established in the local currency of the company involved, while cash at bank and in hand are placed in the local currency. In the few countries with ineffective financial markets loans can be raised and surplus liquidity placed in DKK, EUR or USD, subject to the approval of the parent company’s finance function.
Most Group loans that are not established in DKK or EUR are hedged in the parent company via forward agreements, currency loans and cash pools or via the SWAP market.
The Group’s interest-rate risk primarily comprises interest-bearing debt since the Group does not currently have significant interest-bearing assets of longer duration. The Group’s policy is that necessary financing of investments should primarily be affected by raising 5 to 7 year loans at fixed or variable interest rates.
Drawings on credit facilities at variable interest rates generally match the liquid assets, and all Group loans are symmetrical in terms of interest rates. As a consequence, changes in interest rates will not have a significant effect on the result of the Group.
The current surplus and deficit liquidity in the Group’s companies is set off, to the extent that this is profitable, via the parent company acting as intra-Group bank and via cash pool systems. When considered appropriate, underlying cash pool systems are established in foreign companies. To the extent that the financial reserves are of an appropriate size, the parent company also acts as lender to the companies in the Group.
In order to ensure financial reserves of an acceptable size, investment loans can be raised on a continuous basis to partly cover new investments and to refinance existing loans. The parent company has guaranteed for some credit facilities and loans. Please refer to note 14 in the Annual Report 2015 for further specification of the loans.
The parent company has issued ownership clauses and/or deed of postponements in connection with intercompany loans. Please refer to note 29 in the Annual Report 2015.
The parent company ensures on an ongoing basis that flexible, unutilised committed credit facilities of an adequate size are established with major solid banks. The Group’s financial reserves also consist of cash at bank and in hand, and unused overdraft facilities.
As a consequence of the considerable customer spread in terms of geographical location and numbers the credit risk is fundamentally limited. To a minor degree, when considered necessary, insurance or bank guarantees are used to hedge outstanding debtors.
As a consequence of the international diversification of the Group’s activities there are business relations with a number of different banks in Europe, North America and Asia. In order to minimise the credit risk on placement of liquid funds and on entering into agreements on derived financial instruments, only major sound financial institutions are used.
No customer exceeds 10% of the Group’s net sales neither this year nor last year.
Categories of financial instruments
Financial assets and liabilities at fair value are related to foreign exchange rate forward contracts, foreign exchange rate swaps or interest rates swaps all of which has been valued using a valuation technique with market observable inputs (level 2). The Group is using no other valuation technique.
The Group enters into derivative financial instruments with financial institutions. Derivatives valued using valuation techniques with market observable inputs are mainly foreign exchange forward contracts. The most frequently applied valuation techniques include forward pricing models using present value calculations. The models incorporate various inputs including the credit quality of counterparties and foreign exchange spot rates. All derivative contracts are fully cash collateralised, thereby eliminating both counterparty and the Group’s own non-performance risk.
|Financial instruments for hedging of future cash flows||0.3||0.1||0||0|
|Fair value hedges||0||0||0||0|
|Financial assets at fair value||0.3||0.1||0||0|
|Receivables at amortised costs||355.7||330.8||662.9||626.3|
|Financial instruments for hedging of future cash flows||1.0||2.0||0||0|
|Fair value hedges||0||0||0||0|
|Financial liabilities at fair value||1.0||2.0||0||0|
|Bank loans incl. short term||4.5||35.0||0||29.0|
|Financial liabilities at amortised costs||476.0||542.5||485.9||505.8|
The carrying value of the Group’s and the parent company’s financial assets and liabilities measured at amortised costs are assessed to be a reasonable approximation of fair value.