Financial risks

Interest rate risks

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. All investments are interest-bearing instruments, normally with maturities between 0 and 3 months. The Group Treasury manages the long-term loan portfolio to keeps 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. A downward shift in the yield curves of one percentage point reduces the Group's net interest income by approximately SEK +/- 40m.

Refinancing

Refinancing risk refers to the risk that the Group's capital requirements and existing financial debt could become more difficult or more costly. The debt financing of the Group is managed by Group Treasury in order to ensure efficiency and risk control. Financial 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. The risk is further decreased by ensuring that maturity dates are evenly distributed over time. The net financial debt, total financial debt less liquid funds, excluding seasonal variances, shall be long-term according to the Financial Policy.

The Group's financial debt contains no financial covenants that can trigger premature cancellation of the loans. For long-term financial debt, the Group's goal is to have an average maturity of at least two years, and an even spread of maturities.

Capital structure

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 maintain 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. Electrolux has an A- credit rating with stable outlook by Standard & Poor's.

Counterparty risks

Exposure to financial credit risks arises from the investment of liquid funds, and derivatives. This is managed as a financial counterparty risk within the Group. In order to limit exposure to financial credit risk, a counterparty list has been established, which specifies the maximum permissible exposure in relation to each counterparty. Both investments of liquid funds and derivatives are normally done with issuers and counterparts holding a long-term rating of at least A– defined by Standard & Poor’s or a similar rating agency.

Pension commitments

At year-end 2019, Electrolux Group, including Professional Products, had commitments for defined benefit obligations amounting to approximately SEK 32bn. The Group's pension commitments are coordinated centrally by Group Treasury, supervising pension assets of approximately SEK 28bn through regional pension funds. Net provisions for post-employment benefits amounted to SEK 4,060m.

The main risks related to pension risk management consists of market fluctuations impacting both capital markets and the discount rates used to calculate the present value of the pension obligations. Actuarial assumption changes, such as longevity and inflation, also represent a key pension risk as these changes impact the level of future expected pension payments.

Currency risk

Currency 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.

Read more about Electrolux foreign exchange exposure.