Page 83 - Loomis Annual Report 2017

Loomis Annual Report 2017
Notes – Group 79
NOTE 6 Financial risk management
Financial risk management
Loomis is exposed to risk associated with nancial instruments, such as liquid funds, accounts receivable, accounts payable and loans. The risks related to these instruments are, primarily, the following:
Interest rate risks associated with liquid funds and loans Exchange rate risks associated with transactions and
recalculation of shareholder’s equity
Liquidity risks associated with short-term solvency Financing risks relating to the Company’s capital require-
ments
Credit risks attributable to nancial and commercial activities Capital risks attributable to the capital structure
Price risks associated with changes in raw material prices
(primarily fuel)
Loomis’ nancial risk management is coordinated centrally by Loomis AB’s Treasury function. By concentrating the risk man- agement, as well as internal and external nancing, economies of scale can be used to obtain the best possible interest rate for both investments and borrowings, currency uctuations, and management of xed interest rate lending.
The aim of Loomis AB’s Treasury function is to support the operating activities, optimizing the level of the nancial risks, manage the net debt effectively and ensure compliance with the terms of loan agreements.
The Financial Policy, established by the Board of Directors, comprises a framework for the overall risk management. As a complement to the Financial Policy, the CEO of Loomis estab- lishes instructions for Loomis AB’s Treasury function which more speci cally govern the manner in which the nancial risks to which Loomis is exposed are to be managed and controlled. This instruction handles the principles and limits regarding for- eign exchange risks, interest rate risks, credit risks, use of deriv- ative instruments and investment of excess liquidity. Derivatives are not used for speculative purposes, but rather only to mini- mize the nancial risks.
Financial risk factors
Interest rate risk
Interest rate risk is the risk that Loomis’ earnings will be affected by changes in market interest rates.
Loomis subsidiaries normally hedge their interest rate expo- sure by lending from Loomis AB’s Treasury function on the basis
of loans with one-year maturity or less, where permitted. The aver- age xed interest term as of December 31, 2017 was about 8 months. A permanent change in the interest rate of +1 percent as of December 31, 2017 would have an annual effect on net nan- cial items of SEK –31 million (–29). Loomis’ borrowing amounted to SEK 4,054 million (3,882). The average interest rate on the debt during the year was 2.37 percent (2.32), excluding arrangement costs for the existing credit facilities. For information regarding the assumptions relating to the de ned bene t obligation, see Note 30.
Exchange rate risk – Translation risk
Translation risk is the risk that the SEK value of assets and lia- bilities in foreign currencies will uctuate due to changes in for- eign exchange rates.
As a large number of subsidiaries operate in other coun-
tries, the Group’s balance sheet and statement of income are affected by the translation of foreign currencies to SEK. This exposure gives rise to a translation risk which means that unfa- vorable changes in exchange rates could have a negative impact on the Group’s foreign net assets when translated into SEK. Loo- mis’ capital employed as of December 31, 2017 amounted to SEK 10,860 million (10,576). If the SEK had strengthened/weak-
ened by 5 percent compared to the USD, with all other variables being the same, Loomis’ shareholders’ equity would have been affected in the amount of SEK 206 million (153). The correspond- ing gures for GBP would be SEK 25 million (23), for EUR SEK 58 million (50) and for CHF SEK 41 million (47). Loomis uses hedge accounting according to the principle of hedging net investments to limit translation risk . Loomis has two hedges, one amounting to USD 155 million (242) where the shares in subsidiaries are the hedged items. In connection with the acquisition of VIA MAT, Loo- mis entered into a hedge amounting to CHF 90 million (90) where the hedged item is the net investment. The ineffectiveness of the hedges during the year was SEK 0 million (0).
The table under the capital risk section shows the amounts of the exposure to various currencies hedged with loans and cur- rency swaps. For other currencies, loans and currency swaps constitute hedges of corresponding receivables where hedge accounting is not applied.
Exchange rate risk – Transaction risk
Transaction risk is the risk that changes in exchange rates will negatively affect the Group’s earnings. The majority of Loomis’ subsidiaries operate outside Sweden and there are certain risks associated with nancial transactions in different currencies. These risks are limited by the fact that both costs and revenues are generated in the local currency in each market. This is also the case for loans taken in foreign currencies where the risk of adverse uctuations in interest payments due to currency uc- tuations is limited by income being generated in the same cur- rencies. Since Loomis’ operations to a large degree are local, the transaction risk has not been considered material. Follow- ing the acquisition of VIA MAT the Group is exposed to transac- tion risks in its international operations due to the nature of the operations.
From the Group’s perspective, Loomis has limited operations that involve trading in foreign currencies in cash. When curren- cies are traded based on purchase orders from customers, the exchange rate risk may be hedged using a forward exchange agreement. Loomis does not apply hedge accounting for these contracts and the operating income is revalued. As of the bal- ance sheet date, the fair value of these hedges amounted to SEK 0 million (0).
Liquidity risk
Liquidity risk is the risk that Loomis will not be able to meet its payment obligations. Loomis’ liquidity risk is managed by main- taining suf cient liquidity reserves (cash and bank balances, short-term investments and the unutilized portion of granted loan facilities) equivalent to a minimum of 5 percent of the Group’s annual revenue. Loomis AB’s Treasury function follows up and monitors liquidity risk. Loomis held a liquidity reserve that was above the minimum limit in 2017. In accordance with directives, liquid fund investments consist primarily of depos-
its made in banks that have a short-term credit rating of at least A-1 according to Standard & Poor’s or with an equivalent credit rating according to a similar rating institute. The assets man- aged by Loomis represent excess liquidity. The asset manage- ment objective is to ensure that Loomis has an appropriate amount of liquid funds. To aid this process, the subsidiaries pre- pare regular liquidity forecasts.
The table below shows Loomis’ liquidity reserve (cash and bank balances, short-term investments and the unused portion of granted credit facilities).
Dec 31, 2017
839
2,345
3,184
SEK m
Liquid funds Credit facilities Total
Dec 31, 2016
663 3,156 3,819