All amounts in SEKm unless otherwise stated
The Group is exposed to a number of risks coming from liquid funds, trade receivables, customer-financing receivables, payables, borrowings, commodities and foreign exchange. The risks are primarily:
The Board of Directors of Electrolux has approved a financial policy as well as a credit policy for the Group to manage and control these risks. (Hereinafter all policies are referred to as the Financial Policy). These risks are to be managed by, amongst others, the use of financial derivative instruments according to the limitations stated in the Financial Policy. The Financial Policy also describes the management of risks relating to pension fund assets.
The management of financial risks has largely been centralized to Group Treasury in Stockholm. Local financial issues are also managed by three regional treasury centers located in Singapore, North America, and Latin America.
Interest-rate risk refers to the adverse effects of changes in interest rates on the Group’s income. The main factors determining this risk include the interest-fixing period.
Liquid funds as defined by the Group consist of cash and cash equivalents, short-term investments, derivatives, prepaid interest expenses and accrued interest income. Electrolux target is that the level of liquid funds including unutilized committed credit facilities shall correspond to at least 2.5% of annualized net sales. In addition, net liquid funds defined as liquid funds less short-term borrowings shall exceed zero, taking into account fluctuations arising from acquisitions, divestments, and seasonal variations. The main criteria for the investments are that the instruments are highly liquid and have creditworthy issuers (see Credit risk in financial activities on page 106).
All investments are interest bearing instruments, normally with maturities between 0 and 3 months. A downward shift in the yield curves of one percentage point would reduce the Group’s interest income by approximately SEK 105m (90). For more information, see Note 18 on page 116.
The debt financing of the Group is managed by Group Treasury in order to ensure efficiency and risk control. Debt is primarily taken up at the parent company level and transferred to subsidiaries through internal loans or capital injections. In this process, swap instruments are used to convert the funds to the required currency. Short-term financing is also undertaken locally in subsidiaries where there are capital restrictions. The Group’s borrowings contain no financial covenants that can trigger premature cancellation of the loans. For more information, see Note 18 on page 116.
Group Treasury manages the long-term loan portfolio to keep the average interest-fixing period between 0 and 3 years. Derivatives, such as interest-rate swap agreements, are used to manage the interest-rate risk by changing the interest from fixed to floating or vice versa. On the basis of 2015 long-term interest-bearing borrowings with an average interest fixing period of 0.8 (1.2) years, a one percentage point shift in interest rates would impact the Group’s interest expenses by approximately SEK +/–79m (40) in 2015. This calculation is based on a parallel shift of all yield curves simultaneously by one percentage point. Electrolux acknowledges that the calculation is an approximation and does not take into consideration the fact that the interest rates on different maturities and different currencies might change differently.
The Group defines its capital as equity stated in the balance sheet including non-controlling interests. On December 31, 2015, the Group’s capital was SEK 15,005m (16,468). The Group’s objective is to have a capital structure resulting in an efficient weighted cost of capital and sufficient credit worthiness where operating needs and the needs for potential acquisitions are considered.
To achieve and keep an efficient capital structure, the Financial Policy states that the Group’s long-term ambition is to maintain a long-term rating within a safe margin from a non-investment grade. In December 2015, Standard & Poor’s upgraded Electrolux from BBB with stable outlook to BBB+ with stable outlook. The A-2 short-term corporate credit rating was affirmed and the short-term Nordic regional scale rating was raised to K-1 from K-2.
| Long-term debt | Outlook | Short-term debt | Short-term debt Nordic | |
|---|---|---|---|---|
| Standard & Poor’s | BBB+ | Stable | A–2 | K–1 |
When monitoring the capital structure, the Group uses different key figures which are consistent with methodologies used by rating agencies and banks. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, buy back own shares or issue new shares, or sell assets to reduce debt.
Financing risk refers to the risk that financing of the Group’s capital requirements and refinancing of existing borrowings could become more difficult or more costly. This risk can be decreased by ensuring that maturity dates are evenly distributed over time, and that total short-term borrowings do not exceed liquidity levels. The net borrowings, total borrowings less liquid funds, excluding seasonal variances, shall be long-term according to the Financial Policy. The Group’s goals for long-term borrowings include an average time to maturity of at least 2 years, and an even spread of maturities. A maximum of SEK 5,000m of the long-term borrowings is allowed to mature in a 12-month period. For more information, see Note 18 on page 116.
Foreign exchange risk refers to the adverse effects of changes in foreign exchange rates on the Group’s income and equity. In order to manage such effects, the Group covers these risks within the framework of the Financial Policy. The Group’s overall currency exposure is managed centrally.
The Financial Policy stipulates to what extent commercial flows are to be hedged. According to the Financial Policy edition in effect during 2015, the operating units have been required to hedge 100% of all flows for the first 2 months and 70% up to 6 months, depending on local market conditions. A new edition of the Financial Policy was approved for immediate application in January 2016 and stipulates that hedging with currency derivatives shall only be applied on invoiced flows. This means that currency exposures from forecasted flows should normally be managed by natural hedges, price adjustments and cost reductions. The hedging rules prevailing in 2015 will continue to affect the result for the first half of 2016, as the currency derivatives set up in 2015 will be held to maturity.
Group subsidiaries cover their risks in commercial currency flows mainly through the Group’s treasury centers. Group Treasury thus assumes the currency risks and covers such risks externally by the use of currency derivatives.
The Group’s geographically widespread production reduces the effects of changes in exchange rates. The remaining transaction exposure is either related to internal sales from producing entities to sales companies or external exposures from purchasing of components and input material for the production paid in foreign currency. These external imports are often priced in US dollar (USD). The global presence of the Group, however, leads to a significant netting of the transaction exposures. For additional information on exposures and hedging, see Note 18 on page 116.
Changes in exchange rates also affect the Group’s income in connection with translation of income statements of foreign subsidiaries into SEK. Electrolux does not hedge such exposure. The translation exposures arising from income statements of foreign subsidiaries are included in the sensitivity analysis mentioned below.
The major net export currencies that Electrolux is exposed to are the US dollar, the Chinese renminbi and the euro. The major import currencies that Electrolux is exposed to are the British pound, the Australian dollar, the Canadian dollar and the Brazilian real. These currencies represent the majority of the exposures of the Group, but are largely offsetting each other as different currencies represent net inflows and outflows. A change up or down by 10% in the value of each currency against the Swedish krona would affect the Group’s profit and loss for one year by approximately SEK +/– 270m (410), as a static calculation. The model assumes the distribution of earnings and costs effective at year-end 2015 and does not include any dynamic effects, such as changes in competitiveness or consumer behavior arising from such changes in exchange rates.
| Risk | Change | Profit or loss impact 2014 | Profit or loss impact 2015 |
|---|---|---|---|
| Currency | |||
| GBP/SEK | –10% | –260 | –319 |
| AUD/SEK | –10% | –247 | –308 |
| CAD/SEK | –10% | –255 | –273 |
| BRL/SEK | –10% | –520 | –258 |
| CHF/SEK | –10% | –163 | –166 |
| CLP/SEK | –10% | –113 | –114 |
| THB/SEK | –10% | 71 | 110 |
| EUR/SEK | –10% | 200 | 241 |
| CNY/SEK | –10% | 228 | 296 |
| USD/SEK | –10% | 1,083 | 1,014 |
The net of assets and liabilities in foreign subsidiaries constitute a net investment in foreign currency, which generates a translation difference in the consolidation of the Group. This exposure can have an impact on the Group’s total comprehensive income, and on the capital structure. The exposure is normally handled by natural hedges including matching assets with debts in the same currency. In exceptional cases the exposure can be managed by currency derivatives implemented on Group level within the Parent Company.
A change up or down by 10% in the value of each currency against the Swedish krona would affect the net investment of the Group by approximately SEK +/– 3,120m (3,220), as a static calculation at year-end 2015. At year-end 2015, as well as year-end 2014, none of the net investments were currency hedged with financial derivatives.
Commodity-price risk is the risk that the cost of direct and indirect materials could increase as underlying commodity prices rise in global markets. The Group is exposed to fluctuations in commodity prices through agreements with suppliers, whereby the price is linked to the raw-material price on the world market. This exposure can be divided into direct commodity exposure, which refers to pure commodity exposures, and indirect commodity exposure, which is defined as exposure arising from only part of a component. Commodity-price risk is mainly managed through contracts with the suppliers. A change in price up or down by 10% in steel would affect the Group’s profit or loss with approximately SEK +/– 800m (800) and in plastics with approximately SEK +/– 700m (600), based on volumes in 2015.
Exposure to credit risks arises from the investment of liquid funds, and derivatives. In order to limit exposure to credit risk, a counterpart list has been established, which specifies the maximum permissible exposure in relation to each counterpart. Both investments of liquid funds and derivatives are done with issuers and counterparts holding a long-term rating of at least A– defined by Standard & Poor’s or a similar rating agency. Group Treasury can allow exceptions from this rule, e.g., to enable money deposits within countries rated below A–, but this represents only a minor part of the total liquidity in the Group. The Group strives for arranging master netting agreements (ISDA) with the counterparts for derivative transactions and has established such agreements with the majority of the counterparts, i.e., if a counterparty will default, assets and liabilities will be netted. To reduce the settlement risk in foreign exchange transactions made with banks, Group Treasury uses Continuous Linked Settlement (CLS). CLS eliminates temporal settlement risk since both legs of a transaction are settled simultaneously.
Electrolux sells to a substantial number of customers in the form of large retailers, buying groups, independent stores, and professional users. Sales are made on the basis of normal delivery and payment terms. The Electrolux Group Credit Policy defines how credit management is to be performed in the Electrolux Group to achieve competitive and professionally performed credit sales, limited bad debts, and improved cash flow and optimized profit. On a more detailed level, it also provides a minimum level for customer and credit-risk assessment, clarification of responsibilities and the framework for credit decisions. The credit-decision process combines the parameters risk/reward, payment terms and credit protection in order to obtain as much paid sales as possible. In some markets, Electrolux uses credit insurance as a mean of protection. Credit limits that exceed SEK 300m are decided by the Board of Directors. For many years, Electrolux has used the Electrolux Rating Model (ERM) to have a common and objective approach to credit-risk assessment that enables more standardized and systematic credit evaluations to minimize inconsistencies in decisions. The ERM is based on a risk/reward approach and is the basis for the customer assessment. The ERM consists of three different parts: Customer and Market Information; Warning Signals; and a Credit Risk Rating (CR2). The risk of a customer is determined by the CR2 in which customers are classified.
There is a concentration of credit exposures on a number of customers in, primarily, the US, Latin America and Europe. For more information, see Note 17 on page 115.