4.13
13. Financial risk management

This note explains Accell Group’s exposure to financial risks and how these risks could affect its future financial performance. Current year profit and loss information has been included where relevant to add further context.

Financial risk management is predominantly controlled by the central treasury department (‘Group Treasury’) under policies approved by the Board of Management. Those policies cover specific areas, such as foreign exchange risk, interest rate risk and credit risk. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the group companies.

When all relevant criteria are met, hedge accounting is applied to remove the accounting mismatch between the hedging instrument and the hedged item. This will effectively result in the recognition of interest expense at a fixed interest rate for the hedged floating rate loans and inventory at the fixed foreign currency rate for the hedged purchases.
 

 


 

A. Market risk

i. Foreign exchange risk

Exposure 
Accell Group’s exposure to foreign currency risk from recognized financial assets and liabilities not denominated in functional currencies at the end of the reporting period is limited as the significant exposure to USD, JPY and TWD are respectively 82%, 96% and 58% hedged with foreign currency forwards (see instruments used).

Accell Group is also exposed to currency translation risks related to the Turkish Lira. Our manufacturing unit in Turkey is matching purchase and sales transactions per currency (mainly USD, EUR), but this can lead to timing mismatches and related currency translation effects between reporting periods. In 2021 this impact has increased due to the significant depreciation of the Turkish Lira in the last quarter and longer lead-times caused by supply chain disruptions.

Instruments used
Foreign exchange risk arises from future commercial transactions and recognized assets and liabilities denominated in a currency that is not the functional currency of the relevant group entity. The risk is measured through a forecast of highly probable purchase (or sales) transactions denominated in foreign currencies. The risk is hedged with the objective of minimizing the volatility of Accell Group’s currency cost of highly probable forecasted transactions.

Accell Group’s strategy is to hedge 75%-100% of its forecasted purchases in foreign currencies for one year ahead following a monthly rolling approach. 

For the year ended 31 December 2021, approximately 89% (2020: 103%) of inventory purchases were hedged in respect of foreign currency risk. At 31 December 2021 100% (2020: 100%) of forecasted purchases (or sales) during 2021 qualified as ‘highly probable’ forecast transactions for hedge accounting purposes.

Accell Group uses foreign currency forwards to hedge its exposure to foreign currency risk. Under the group’s policy the critical terms of the forwards must align with the hedged items.

Only the spot component of the FX forwards is designated in the hedge relationships and the fair value change is accounted for in the hedge reserve (as far as the hedging relation is effective). The spot component is determined with reference to relevant spot market exchange rates. The differential between the contracted forward rate and the spot market exchange rate is defined as the forward points. It is discounted, where material. When the critical terms of the FX forward match the hedge item, the forward component is accounted for as cost of hedging. When there is a mismatch in critical terms, the forward component is recognized as cost of hedging to the extent that the forward element is related to the hedged item (aligned forward element). The remainder is recognized in the income statement.

Hedge of net investment in foreign entity
Due to its international operations Accell Group holds net investments in foreign operations, mainly in CHF, GBP, DKK and TRY and to a smaller extent in USD, TWD, CNY and SEK, and as such is exposed to foreign exchange risk. The risk management strategy is not to hedge the foreign exchange risk in net investments in foreign operations.

Effects of hedge accounting on the financial position and performance
The effects of the foreign currency related hedging instruments on Accell Group’s financial position and performance are as follows:

  USD JPY TWD Other
  2021 2020 2021 2020 2021 2020 2021 2020
Foreign currency forwards        
Hedge ratio 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1
Carrying amount (€ x 1.000) 13,694 -9,720 -610 -3,160 2,217 -975 736 -205
Notional amount (€ x 1.000) 343,900 240,646 8,225,600 14,825,000 2,656,300 816,000    
Maturity date Jan 2022 - Jan 2023 Jan 2021 - Jan 2022 Jan 2022 - Jan 2023 Jan 2021 - Jan 2022 Jan 2022 - Jan 2023 Jan 2021 - Jun 2021 Jan 2022 - Jan 2023 Jan 2021 - Jun 2021
                 
Weighted average hedge rate for the year (including forward points) 1.20 1.17 130.11 122.98 32.11 32.61 n.a. n.a.

 

ii. Cash flow and fair value interest rate risk
Accell Group’s main interest rate risk arises from borrowings at variable rates, which exposes the group to cash flow interest rate risk. Accell Group manages its exposure to interest rate risk through the proportion of fixed and variable rate debt in its total debt portfolio. Such a proportion is determined once each year by the Board of Management on the recommendation of Group Treasury as part of the annual budget process. In 2021 and 2020, Accell Group’s borrowings at variable rate were mainly denominated in euro.

Accell Group’s borrowings and receivables are carried at amortized cost. The borrowings are periodically contractually repriced (see below) and to that extent are also exposed to the risk of future changes in market interest rates. The exposure of Accell Group’s borrowing to interest rate changes and the contractual repricing dates of the borrowings at the end of the reporting period are as follows:

  2021 2021 2020 2020
  € x 1,000 % of total loans € x 1,000 % of total loans
Bank overdrafts 48,266 21% 19,046 9%
Other borrowings - repricing dates:        
6 months or less 164,959 70% 177,256 79%
6-12 months 4,935 2% 9,891 4%
1-5 years 15,688 7% 15,938 7%
Over 5 years 1,292 1% 1,487 1%
Total interest-bearing liabilities 235,140 100% 223,618 100%

 

An analysis by maturities is provided in note 9.1. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowings.

Instruments used 
The swap currently in place covers approximately 39% (2020: 41%) of the loan principal outstanding based on variable interest rates. The fixed interest rate of the swap is 0.64% (2020: 0.64%) and the variable margins of the loans are between 1.30% and 2.30% (2020: 1.20% and 2.3%) above the 3-month Euribor which at the end of the reporting period was -0.57% (2020: -0.55%). On the syndicate financing agreement (excluding GO-C facility) contains a floor of 0.0% regarding the 3-month Euribor. 

The interest rate swap contract requires settlement of net interest receivable or payable every 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt.

Effects of hedge accounting on the financial position and performance
The effects of the interest rate swap on the financial position and performance are as follows:

  2021 2020
Interest rate swaps    
Hedge ratio 1:1 1:1
Carrying amount (€ x 1.000) 893 1,619
Notional amount (€ x 1.000) 85,000 85,000
Maturity date Mar 2024 Mar 2024
     
Weighted average hedged rate for the year (excluding margin): 0.64% 0.64%

 

iii. Sensitivity
In respect of foreign exchange risk Accell Group is primarily exposed to changes in the EURUSD and EURJPY and EURTWD exchange rates. The sensitivity of the profit or loss to changes in the exchange rates arises mainly from the unhedged portion (less than 25%) of highly probable purchase transactions denominated in USD, JPY and TWD. Equity changes as a result of profit or loss impact and from foreign exchange forward contracts designated as cash flow hedges. A strengthening of the EUR leads to a profit in profit or loss (foreign currency can be bought cheaper in the spot market) and to a loss in equity (profit or loss impact and the fair value of the forward contracts decreases). A weakening of the EUR leads to a loss in profit or loss (foreign currency must be bought more expensively in the spot market) and to a profit in equity (profit or loss impact and the fair value of the forward contracts increases).

The impact of foreign exchange risk from net investment risk is ignored.

In respect of interest rate risk, profit or loss is sensitive to higher/lower interest expenses from unhedged borrowings as a result of changes in interest rates. Equity changes as a result of profit or loss impact and an increase/decrease in the fair value of the cash flow hedges of borrowings through other comprehensive income. An increase in interest rates leads to a loss in the profit or loss (higher interest expense on unhedged borrowings) and to a profit in equity (profit or loss impact and the fair value of the interest rate swap increases). A decrease in interest rates leads to a profit in profit or loss (lower interest expense on unhedged borrowings) and a loss in equity (profit or loss impact and the fair value of interest rate swap decreases). This calculation ignores the floor in the interest rate swap. The sensitivity analysis demonstrates the effects of a change in the relevant variable holding all other variables constant.

2021 Profit before tax Equity before taxes
  Strengthening Weakening Strengthening Weakening
  € x 1,000 € x 1,000 € x 1,000 € x 1,000
EURUSD (5% movement) 3,102 -3,428 -11,304 12,494
EURJPY (5% movement) 2,885 -3,188 -1,131 1,250
EURTWD (5% movement) 139 -154 -2,854 3,154
Variable interest rate (100 bps movement) -572 - 278 -850

 

B. Credit risk
Credit risk arises from cash and cash equivalents and favourable derivative financial instruments with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables.

i. Risk management
Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a rating between B to AA- based on Fitch or S&P ratings are accepted.

If wholesalers and retailers are independently rated, these ratings are used. Otherwise, if there is no independent rating, management assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the Board of Management. Line management regularly monitors compliance with the credit limits set for wholesalers and retailers. Wholesalers and retailers with accounts receivables balances greater than € 0.1 million are required to be insured through Accell Group's global credit insurance programme. Sales to consumers are required to be settled in cash or using major credit cards, mitigating credit risk.

There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions.

The derivative contracts are entered into with banks and financial institution counterparties that are rated A- to A+, based on Fitch or S&P ratings.

ii. Impairment of financial assets
Accell Group’s trade receivables are subject to the simplified expected credit loss model (see note 8.2), while other financial assets, other receivables and cash and cash equivalents are subject to the general impairment requirements of IFRS 9. Like in 2020, the identified impairment loss was deemed immaterial.

C. Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due. Due to the dynamic nature of the underlying businesses, Group Treasury maintains flexibility in funding by maintaining availability under committed credit lines.

Group Treasury provides daily reporting on Accell Group’s net debt position and usage of funding sources. Short-term and long-term cash flow forecasts are prepared on a monthly rolling basis. This includes projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.

Management has concluded that there are no events and conditions that may cast significant doubt on Accell Group’s ability to continue as a going concern.

i. Financing arrangements
Accell Group has access to the following undrawn borrowing facilities at the end of the reporting period:

  Limit Usage Undrawn Limit Usage Undrawn
  2021 2021 2021 2020 2020 2020
  € x 1,000 € x 1,000 € x 1,000 € x 1,000 € x 1,000 € x 1,000
             
Committed 402,000 221,662 180,338 515,000 201,768 313,232
Uncommitted 22,000 13,478 8,522 28,000 21,850 6,150
Total 424,000 235,140 188,860 543,000 223,618 319,382

 

Out of the € 275 million revolving credit facility, as set out in note 9.1, € 75 million is allocated to bank overdraft facilities. The bank overdraft facilities may be drawn at any time and are committed at the same tenor as the long-term funding facilities. The overview of committed and uncommitted borrowing facilities excludes the optional (uncommitted) undrawn accordion facility for the remaining sum of € 100 million.

ii. Maturities of financial liabilities
The tables below show an analysis of Accell Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for:

  • all non-derivative financial liabilities, and
  • net and gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows.

The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the end of the reporting period.

2021   Carrying amount Total < 1 year 1-5 year > 5 year
    Contractual cash flows
  Notes € x 1,000 € x 1,000 € x 1,000 € x 1,000 € x 1,000
Lease liabilities 9.1 30,224 30,224 9,726 18,319 2,179
Revolving credit facility 9.1 60,420 60,420 60,420 - -
Bank overdrafts 9.1 48,266 48,266 48,266 - -
Term loans (including Schuldschein) 9.1 124,475 129,385 2,007 127,378 -
Other bank loans 9.1 1,979 2,044 474 1,315 255
Trade and other payables 8.3 276,555 276,555 276,555 - -
Non-derivative financial liabilities   541,919 546,894 397,448 147,012 2,434
             
Interest rate swaps used for hedging (net) 12 893 1,215 540 675 -
Forward exchange contracts used for hedging (net) 12 -16,037 -16,037 -16,321 284 -
Derivative financial liabilities (assets)   -15,144 -14,822 -15,781 959 -

 

2020            
Lease liabilities 9.1 28,957 30,036 8,799 18,389 2,848
Revolving credit facility 9.1 13,936 13,936 13,936 - -
Bank overdrafts 9.1 19,046 19,046 19,046 - -
Term loans (including Schuldschein) 9.1 183,211 192,594 39,125 153,469 -
Other bank loans 9.1 7,425 7,445 5,502 1,471 473
Trade and other payables 8.3 186,909 186,909 186,909 - -
Non-derivative financial liabilities   439,484 449,967 273,318 173,329 3,321
             
Interest rate swaps used for hedging (net) 12 1,619 1,754 540 1,214 -
Forward exchange contracts used for hedging (net) 12 14,060 14,060 14,010 50 -
Derivative financial liabilities (assets)   15,679 15,814 14,550 1,264 -