Annual Report 2009 2 Financial review
 

Note 18 - Financial instruments

Overview » Notes » Note 18 - Financial instruments

Additional and complementary information is presented in the following notes to the Annual Report: Note 1, Accounting and valuation principles, discloses the accounting and valuation policies adopted. Note 2, Financial risk management, describes the Group’s risk policies in general and regarding the principal financial instruments of Electrolux in more detail. Note 17, Trade receivables, describes the trade receivables and related credit risks.

The information in this note highlights and describes the principal financial instruments of the Group regarding specific major terms and conditions when applicable, and the exposure to risk and the fair values at year-end.

Net borrowings

At year-end 2009, the Group’s net borrowings amounted to SEK 665m (4,556). The table below presents how the Group calculates net borrowings and what they consist of.

Net borrowings    
  December 31,
  2009 2008
Short-term loans 582 1,142
Short-term part of long-term loans 912 1,004
Trade receivables with recourse  1,870 1,022
Short-term borrowings 3,364 3,168
Derivatives 343 699
Accrued interest expenses and prepaid interest income 74 116
Total short-term borrowings 3,781 3,983
Long-term borrowings 10,241 9,963
Total borrowings 14,022 13,946
Cash and cash equivalents 9,537 7,305
Short-term investments 3,030 296
Derivatives  377 1,390
Prepaid interest expenses and accrued     
interest income 413 399
Liquid funds 13,357 9,390
Net borrowings 665 4,556
Revolving credit facility (EUR 500m)1) 5,163 5,466
     
1) The revolving credit facility of EUR 500m is not included in net borrowings, but can, however, be used for short-term and long-term funding.

Liquid funds

Liquid funds as defined by the Group consist of cash and cash equivalents, short-term investments, derivatives and prepaid interest expenses and accrued interest income. The table below presents the key data of liquid funds. The carrying amount of liquid funds is approximately equal to fair value.

Liquidity profile    
  December 31,
  2009 2008
Cash and cash equivalents 9,537 7,305
Short-term investments 3,030 296
Derivatives  377 1,390
Prepaid interest expenses and accrued interest income 413 399
Liquid funds 13,357 9,390
% of annualized net sales1) 16.2 12.9
Net liquidity 9,576 5,407
Fixed-interest term, days 100 22
Effective yield, % (average per annum) 2.1 4.5
     
1) Liquid funds plus an unused revolving credit facility of EUR 500m divided by annualized net sales.

For 2009, liquid funds, including an unused revolving credit facility of EUR 500m, amounted to 16.2% (12.9) of annualized net sales. The net liquidity is calculated by deducting short-term borrowings from liquid funds.

Interest-bearing liabilities

In 2009, SEK 1,040m of long-term borrowings matured or were amortized. These maturities were refinanced in the first half of the year with new long-term borrowings of SEK 1,128m. In addition, SEK 511m were borrowed at the beginning of the year. Total new long-term borrowings in 2009 were SEK 1,639m.

At year-end 2009, the Group’s total interest-bearing liabilities amounted to SEK 11,735m (12,109), of which SEK 11,153m (10,967) referred to long-term borrowings including maturities within 12 months. Long-term borrowings with maturities within 12 months amount to SEK 912m (1,004). The outstanding long-term borrowings have mainly been made under the Swedish and European Medium-Term Note program and via bilateral loans. The majority of total long-term borrowings, SEK 10,425m (10,182), is taken up at the parent company level. As from 2005, Electrolux has a negotiated committed credit facility of EUR 500m, which can be used as either a long-term or short-term back-up facility. However, Electrolux expects to meet any future requirements for short-term borrowings through bilateral bank facilities and capital-market programs such as commercial-paper programs.

At year-end 2009, the average interest-fixing period for long-term borrowings was 1.0 years (0.5). The calculation of the average interest-fixing period includes the effect of interest-rate swaps used to manage the interest-rate risk of the debt portfolio. The average interest rate at year-end for the total borrowings was 2.6% (5.0).

The fair value of the interest-bearing borrowings was SEK 13,712m. The fair value including swap transactions used to manage the interest fixing was approximately SEK 13,596m. The borrowings and the interest-rate swaps are valued marked-to-market in order to calculate the fair value. When valuating the borrowings, the Electrolux credit rating is taken into consideration.

The table below sets out the carrying amount of the Group’s borrowings.

Borrowings            
             
        Nominal value Carrying
amount, December 31,
Issue/maturity date Description of loan  Interest rate, % Currency (in currency) 2009 2008
Bond loans 1)            
2005–2010 SEK MTN Program 3.650 SEK 500 — 505
2007–2011 SEK MTN Program 5.250 SEK 250 264 266
2007–2012 SEK MTN Program 4.500 SEK 2,000 2,114 2,116
2008–2013 Euro MTN Program Floating EUR 85 873 924
2008–2014 Euro MTN Program Floating USD 42 302 324
2008–2016 Euro MTN Program Floating USD 100 719 770
2009–2011 SEK MTN Program 4.250 SEK 500 499 —
2009–2014 Euro MTN Program Floating EUR 100 1,033 —
Total bond loans         5,804 4,905
             
Other long-term loans1)            
1996–2036 Fixed rate loans in Germany 7.870 EUR 42 420 461
2005–2010 Long-term bank loans in Sweden Floating EUR 20 — 223
2007–2010 Long-term bank loans in Sweden Floating SEK 200 — 200
2007–2013 Long-term bank loans in Sweden Floating SEK 300 300 300
2008–2011 Fixed rate loans in Thailand 6.290 THB 965 208 214
2008–2011 Long-term bank loans in Sweden Floating USD 45 324 347
2008–2013 Long-term bank loans in Sweden Floating SEK 1,000 1,000 1,000
2008–2015 Long-term bank loans in Sweden Floating EUR 120 1,239 1,312
2008–2015 Long-term bank loans in Sweden Floating PLN 338 847 892
Other long-term loans         99 109
Total other long-term loans         4,437 5,058
Long-term borrowings         10,241 9,963
             
Short-term part of long-term loans2)            
2005–2009 SEK MTN Program 3.400 SEK 500 — 499
2007–2009 SEK MTN Program Floating SEK 300 — 300
2007–2009 SEK MTN Program 4.980 SEK 200 — 205
2005–2010 SEK MTN Program 3.650 SEK 500 501 —
2005–2010 Long-term bank loans in Sweden Floating EUR 20 211 —
2007–2010 Long-term bank loans in Sweden Floating SEK 200 200 —
Total short-term part of long-term loans       912 1,004
             
Other short-term loans            
  Commercial paper program Floating SEK — — —
  Short-term bank loans in China Floating CNY 419 — 473
  Short-term bank loans in Thailand Floating THB 453 — 100
  Other bank borrowings and commercial papers       582 569
Total other short-term loans         582 1,142
Trade receivables with recourse         1,870 1,022
Short-term borrowings         3,364 3,168
Fair value of derivative liabilities         343 699
Accrued interest expenses and prepaid interest income       74 116
Total borrowings         14,022 13,946
             
1) The interest-rate fixing profile of the borrowings has been adjusted with interest-rate swaps.
2) Long-term borrowings with maturities within 12 months are classified as short-term borrowings in the Group’s balance sheet.

Short-term borrowings pertain mainly to countries with capital restrictions. The average maturity of the Group’s long-term borrowings including long-term borrowings with maturities within 12 months was 3.9 years (4.7), at the end of 2009. The table below presents the repayment schedule of long-term borrowings.

Repayment schedule of long-term borrowings, December 31          
  2010 2011 2012 2013 2014 2015- Total
Debenture and bond loans — 763 2,114 873 1,335 719 5,804
Bank and other loans — 569 31 1,315 16 2,506 4,437
Short-term part of long-term loans 912 — — — — — 912
Total 912 1,332 2,145 2,188 1,351 3,225 11,153

Other interest-bearing investments

Interest-bearing receivables from customer financing amounting to SEK 103m (83) are included in the item Trade receivables in the Group’s balance sheet. The Group’s customer-financing activities are performed in order to provide sales support and are directed mainly to independent retailers in Scandinavia. The majority of the financing is shorter than 12 months. There is no major concentration of credit risk related to customer financing. Collaterals and the right to repossess the inventory also reduce the credit risk in the financing operations. The income from customer financing is subject to interest-rate risk. This risk is immaterial to the Group.

Commercial flows

The table below shows the forecasted transaction flows, imports and exports, for the 12-month period of 2010 and hedges at year-end 2009.

The hedged amounts are dependent on the hedging policy for each flow considering the existing risk exposure. There were no hedges of significant volume above 12 months at year-end. The effect of hedging on operating income during 2009 amounted to SEK –535m (476). At year-end 2009, unrealized exchange-rate gains on forward contracts charged against other comprehensive income amounted to SEK –13m (85).

Forecasted transaction flows and hedges                  
  GBP AUD RUB DKK BRL CHF CZK HUF USD EUR Other Total
Inflow of currency, long position 2,180 2,290 2,010 1,370 1,220 1,150 790 2,790 1,290 8,950 9,390 33,430
Outflow of currency, short position –30 –200 –210 — –30 — — –4,220 –6,440 –15,200 –7,100 –33,430
Gross transaction flow 2,150 2,090 1,800 1,370 1,190 1,150 790 –1,430 –5,150 –6,250 2,290 —
Hedges –870 –820 –290 –730 –480 –340 –260 870 1,500 2,170 –750 —
Net transaction flow 1,280 1,270 1,510 640 710 810 530 –560 –3,650 –4,080 1,540 —

Fair value estimation

Valuation of financial instruments at fair value is done at the most accurate market prices available. This means that instruments, which are quoted on the market, such as, for instance, the major bond and interest-rate future markets, are all marked-to-market with the current price. The foreign-exchange spot rate is then used to convert the value into SEK. For instruments where no reliable price is available on the market, cash flows are discounted using the deposit/swap curve of the cash flow currency. In the event that no proper cash flow schedule is available, for instance, as in the case with forward-rate agreements, the underlying schedule is used for valuation purposes. To the extent option instruments are used, the valuation is based on the Black & Scholes formula.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. Effective January 1, 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value hierarchy:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices included in Level 1 that are observable for assets or liabilities, either directly, i.e., as prices or indirectly, i.e., derived from prices.

Level 3: Inputs for the assets or liabilities that are not entirely based on observable market date, i.e., unobservable inputs.

The table below presents the Group’s financial assets and liabilities that are measured at fair value according to the fair value measurement hierarchy.

Fair value measurement hierarchy                  
  2009   2008
Financial assets Level 1 Level 2 Level 3 Total   Level 1 Level 2 Level 3 Total
Financial assets 217 — 217 434   202 — 78 280
Financial assets at fair value through profit and loss 217 — — 217   202 — — 202
Available for sale — — 217 217   — — 78 78
Derivatives — 377 — 377   — 1,425 — 1,425
Derivatives for which hedge accounting  is not applied, i.e.,                  
held for trading — 92 — 92   — 440 — 440
Derivatives for which hedge accounting  is applied — 285 — 285   — 985 — 985
Short-term investments and cash equivalents 4,311 — — 4,311   296 — — 296
Financial assets at fair value through profit and loss 4,311 — — 4,311   296 — — 296
Total financial assets 4,528 377 217 5,122   498 1,425 78 2,001
                   
Financial liabilities                  
Derivatives — 351 — 351   — 784 — 784
Derivatives for which hedge accounting  is not applied,                  
i.e., held for trading — 81 — 81   — 197 — 197
Derivatives for which hedge accounting  is applied — 270 — 270   — 587 — 587
Total financial liabilities — 351 — 351   — 784 — 784
       
Changes in level 3 instruments      
  2009   2008
  Available for
sale instruments		   Available for
sale instruments
Financial assets      
Opening balance 78   481
Gains or losses recognized in profit or loss 1   —
Gains or losses recognized in other comprehensive income 138   –403
Closing balance 217   78
Total gains or losses for the period included in profit or loss 1   —
Total gains or losses for the period included in profit or loss for assets held at the reporting period 1   —

Financial derivative instruments

The table below presents the fair value of the Group’s financial derivative instruments used for managing financial risk and proprietary trading.

Financial derivatives at fair value          
  December 31, 2009   December 31, 2008
  Assets Liabilities   Assets Liabilities
Interest-rate swaps 169 53   173 10
Cash flow hedges 1 39   — 4
Fair value hedges 157 —   155 —
Held-for-trading 11 14   18 6
Cross currency interest-rate swaps — —   — —
Cash flow hedges — —   — —
Fair value hedges — —   — —
Held-for-trading — —   — —
Forward-rate agreements and futures 2 3   47 53
Cash flow hedges — —   — —
Fair value hedges — —   — —
Held-for-trading 2 3   47 53
Currency derivatives (forwards and options) 204 295   1,204 632
Cash flow hedges 104 147   737 485
Net investment hedges 23 84   93 98
Held-for-trading 77 64   374 49
Commodity derivatives 2 —   1 89
Cash flow hedges — —   — —
Fair value hedges — —   — —
Held-for-trading 2 —   1 89
Total 377 351   1,425 784

Maturity profile of financial liabilities and derivatives

The table below presents the undiscounted cash flows of the Group’s contractual liabilities related to financial instruments based on the remaining period at the balance sheet to the contractual maturity date. Floating interest cash flows with future fixing dates are estimated using the forward-forward interest rates at year-end. Any cash flow in foreign currency is converted to local currency using the FX spot rates at year-end.

Maturity profile of financial liabilities and derivatives – undiscounted cash flows    
   1 year > 1 year < 2 years > 2 years < 5 years > 5 years Total
Loans –1,774 –1,641 –6,291 –3,330 –13,036
Net settled derivatives 63 35 24 — 122
Gross settled derivatives –94 — — — –94
Whereof outflow –27,362 –22 — — –27,384
Whereof inflow 27,268 22 — — 27,290
Accounts payable –16,031 — — — –16,031
Total –17,836 –1,606 –6,267 –3,330 –29,039

Net gain/loss, fair value and carrying amount on financial instruments

The tables below present net gain/loss on financial instruments, the effect in the income statement and equity, and the fair value and carrying amount of financial assets and liabilities. Net gain/loss can include both exchange-rate differences and gain/loss due to changes in interest-rate levels.

Specification of gains and losses on fair value hedges
  2009 2008
Fair value hedges, net 6 –6
whereof interest-rate derivatives –6 202
whereof fair-value adjustment on borrowings 12 –208
                   
Net gain/loss, income and expense on financial instruments                  
  2009         2008
  Gain/loss
in profit
and loss		 Gain/loss
in OCI		 Interest
income		 Interest
expenses		   Gain/loss
in profit
and loss		 Gain/loss
in OCI		 Interest
income		 Interest
expenses
Recognized in the operating income                  
Financial assets and liabilities at fair value                  
through profit and loss –515 — — —   381 — — —
Derivatives for which hedge accounting                  
is not applied, i.e., held-for-trading 20 — — —   –95 — — —
Currency derivatives related to commercial exposure                  
where hedge accounting is applied, i.e., cash flow hedges –535 — — —   476 — — —
Loans and receivables 327 — — —   –202 — — —
Trade receivables/payables 327 — — —   –202 — — —
Available-for-sale financial assets 1 138 — —   — –403 — —
Other shares and participations 1 138 — —   — –403 — —
Total net gain/loss, income and expenses –187 138 — —   179 –403 — —
                   
Recognized in the financial items                  
Financial assets and liabilities at fair value                  
through profit and loss –385 –187 86 –55   965 –63 18 –84
Derivatives for which hedge accounting                  
is not applied, i.e., held-for-trading –311 — — —   756 — — —
Interest-related derivatives for which fair value hedge                   
accounting is applied, i.e., fair value hedges  –6 — — 75   202 — — –22
Interest-related derivatives for which cash flow hedge                  
accounting is applied, i.e., cash flow hedges — –14 — –22   — –3 — –5
Currency derivatives related to commercial exposure                  
where hedge accounting is applied, i.e., cash flow hedges  13 –98 — —   –9 24 — —
Net investment hedges where hedge accounting is applied — –75 — –108   — –84 — –57
Other financial assets carried at fair value –81 — 86 —   16 — 18 —
Loans and receivables 33 — 194 —   –425 — 201 —
Other financial liabilities 369 — — –519   –583 — — –627
Financial liabilities for which hedge accounting is not applied 357 — — –390   –375 — — –480
Financial liabilities for which hedge accounting is applied 12 — — –129   –208 — — –147
Total net gain/loss, income and expenses 17 –187 280 –574   –43 –63 219 –711
           
Fair value and carrying amount on financial assets and liabilities      
  20091)   20081)
  Fair value Carrying amount   Fair value  Carrying amount
Financial assets          
Financial assets 434 434   280 280
Financial assets at fair value through profit and loss 217 217   202 202
Available-for-sale 217 217   78 78
Trade receivables 20,173 20,173   20,734 20,734
Loans and receivables 20,173 20,173   20,734 20,734
Derivatives 377 377   1,425 1,425
Financial assets at fair value through profit and loss:          
Derivatives for which hedge accounting is not applied, i.e., held for trading 92 92   440 440
Interest-related derivatives for which fair value hedge accounting           
is applied, i.e., fair value hedges 157 157   155 155
Interest-related derivatives for which cash flow hedge           
accounting is applied, i.e., cash flow hedges 1 1   — —
Currency derivatives related to commercial exposure where           
hedge accounting is applied, i.e., cash flow hedges 104 104   737 737
Net investment hedges where hedge accounting is applied 23 23   93 93
Short-term investments 3,030 3,030   296 296
Financial assets at fair value through profit and loss 3,030 3,030   296 296
Loans and receivables — —   — —
Cash and cash equivalents 9,537 9,537   7,305 7,305
Financial assets at fair value through profit and loss 1,281 1,281   — —
Loans and receivables 2,639 2,639   4,167 4,167
Cash 5,617 5,617   3,138 3,138
Total financial assets 33,551 33,551   30,040 30,040
           
Financial liabilities          
Long-term borrowings 10,331 10,241   9,784 9,963
Financial liabilities measured at amortized cost 7,650 7,562   7,144 7,276
Financial liabilities measured at amortized cost for which fair value          
hedge accounting is applied 2,681 2,679   2,640 2,687
Accounts payable 16,031 16,031   15,681 15,681
Financial liabilities at amortized cost 16,031 16,031   15,681 15,681
Short-term borrowings 3,381 3,364   3,177 3,168
Financial liabilities measured at amortized cost 3,381 3,364   3,177 3,168
Derivatives 351 351   784 784
Financial liabilities at fair value through profit and loss:          
Derivatives for which hedge accounting  is not applied, i.e., held for trading 81 81   197 197
Interest-related derivatives for which fair value hedge accounting is applied,          
i.e., fair value hedges — —   — —
Interest-related derivatives for which cash flow hedge           
accounting is applied, i.e., cash flow hedges 39 39   4 4
Currency derivatives related to commercial exposure where           
hedge accounting is applied, i.e., cash flow hedges 147 147   485 485
Net investment hedges where hedge accounting is applied 84 84   98 98
Total financial liabilities 30,094 29,987   29,426 29,596
           
  20091)   20081)
  Fair value Carrying amount   Fair value  Carrying amount
Per category          
Financial assets at fair value through profit and loss 4,905 4,905   1,923 1,923
Available-for-sale 217 217   78 78
Loans and receivables 22,812 22,812   24,901 24,901
Cash 5,617 5,617   3,138 3,138
Total financial assets 33,551 33,551   30,040 30,040
Financial liabilities at fair value through profit and loss 351 351   784 784
Financial liabilities measured at amortized cost 29,743 29,636   28,642 28,812
Total financial liabilities 30,094 29,987   29,426 29,596
           
1) There has not been any reclassification between categories.

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