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26 Financial risk management

In the context of its operating activities, the Haniel Group is exposed to financial risks. These primarily include liquidity risks, default risks, risks resulting from changes in interest and exchange rates, and price fluctuations in the stock or commodity markets. The purpose of financial risk management is to reduce the extent of these financial risks.

The Management Board lays down the basic guidelines for financial risk management and determines the general procedures to be followed for hedging financial risks. The holding companies of the divisions have their own treasury departments, which identify, analyse and assess the financial risks before initiating preventive or mitigating measures. The central treasury department advises the subsidiaries and, in addition to its own hedging transactions, enters into hedges on their behalf as well. All hedges relate to an underlying hedged item. No derivative financial instruments are used for speculative purposes.

For financing purposes, the Haniel Group uses a variety of financing instruments in keeping with industry and commercial practice and subject to customary contractual provisions. No special financial risks arise from this practice. The contractual conditions governing the euro bonds issued in February 2012 by Franz Haniel & Cie. GmbH with an issue volume of EUR 400 million provide for an interest rate increase of 125 basis points if Haniel’s rating falls below BB or Ba2.

Liquidity risk
Liquidity risk is the risk of being unable to guarantee the Haniel Group’s solvency at all times. Liquidity risk is managed by financial planning measures taken by the divisions’ holding companies to ensure that the necessary resources are available to fund the operating business and investments. The financing requirement is determined according to the financial plans of the subsidiaries and the Haniel Holding Company. In order to cover the financing requirement, the Haniel Holding Company has at its disposal committed, unutilised credit facilities as well as a commercial paper programme and a Debt Issuance Programme. The liquidity risk is also managed within the divisions, which also have their own unutilised bilateral short- and long-term credit facilities. The Haniel Group seeks as a general rule to maintain an appropriate reserve of available credit facilities.

Default risk
The default or credit risk is the risk of the Haniel Group’s contractual partners not fulfilling their obligations. The Haniel Group is exposed to a default risk both in its operating business and in connection with financial instruments.

In view of the Haniel Group’s diverse activities and the large number of existing customer relationships, entailing as a rule minor individual receivables, a concentration of default risks generally does not arise from trade receivables. From the Group’s perspective, the default risk is not significant. In the ELG division, however, due to its industry there are some significant individual trade receivables vis-à-vis major customers that are hedged with default insurance policies.

The investment of cash in selected financial products is governed by directives in the Haniel Group. Depending on the assessment of the counterparty’s creditworthiness, corresponding limits are prescribed and monitored in order to avoid a concentration of default risks. Based on internal and external ratings, the default risks with respect to current and non-current financial assets, derivative financial instruments with positive fair values, as well as cash and cash equivalents may be summarised as follows.

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EUR million 31 Dec. 2015 31 Dec. 2014
Low credit risk 1,075 612
Medium credit risk 165 95
Total 1,240 707

In addition to the carrying amounts of the (derivative) financial instruments with positive fair values recognised in the statement of financial position, the maximum default risk of the Haniel Group also includes the nominal volume of the financial guarantee contracts issued. As at the reporting date the nominal volume of financial guarantee contracts totalled EUR 17 million (previous year: EUR 21 million).

Interest rate risk
Interest rate risk is the risk of profit or loss being negatively affected by fluctuating market interest rates. The interest rate risk is limited with derivative financial instruments, chiefly interest rate swaps. Decisions on the use of derivative financial instruments are made on the basis of the planned indebtedness, investment position and interest rate expectations. The interest rate hedging strategy is reviewed and new targets are defined at regular intervals. The Haniel Group generally seeks to maintain an appropriate hedged interest rate position.

The following interest rate sensitivity analysis illustrates the hypothetical effects on profit before taxes, other comprehensive income and equity, had the prevailing market interest rates changed on the reporting date. It is based on the assumptions that the figures as at the reporting date are representative for the whole year, and that the supposed change in market interest rates could have occurred on the reporting date. Tax effects are disregarded.

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31 Dec. 2015 + 100 basis points - 100 basis points
EUR million Profit before taxes Other comprehensive income Equity Profit before taxes Other comprehensive incomeEquity
Euro market interest rates   -9 -9   99
USD market interest rates 3 1 4 -3 -1-4
GBP market interest rates   1 1   -1-1
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31 Dec. 2014 + 100 basis points - 100 basis points
EUR million Profit before
taxes
Other comprehensive income Equity Profit before
taxes
Other comprehensive incomeEquity
Euro market interest rates     0    0
USD market interest rates 2 1 3 -2 -1-3
GBP market interest rates -1 1 0 1 -10

Exchange rate risk
Exchange rate risks arise from investments and financing measures undertaken in foreign currencies, and from the operating business in connection with buying and selling merchandise and services in currencies other than the functional currency. The resulting risk exposure is determined continually and hedged primarily by entering into forward currency contracts and currency swaps. The majority of exchange rate risks originate from changes in the USD-EUR and GBP-EUR rates.

Micro-hedges are the principal instruments used to hedge exchange rate risks. These entail the direct hedging of an underlying transaction with a currency derivative. Currency derivatives are also used to hedge forecast transactions in foreign currencies. In this case, the currency derivative (or a combination of several derivatives) that best reflects the probability of occurrence and timing of the forecast transaction is selected.

An exchange rate sensitivity analysis illustrates the theoretical effects on profit before taxes, other comprehensive income and equity from changes in the exchange rates of the currencies that are significant for the Haniel Group. The exchange rate sensitivity analysis is based on the non-derivative and derivative financial instruments held by the Group companies in non-functional currencies on the reporting date. It assumes that the exchange rates change by an indicated percentage rate on the reporting date. Movements over time, actual observed changes in other market parameters and tax effects are disregarded.

The medium- and long-term borrowing is predominantly done by the Franz Haniel & Cie. GmbH, the holding companies of the divisions and the financing companies located in Germany and the Netherlands. Depending on the borrowing requirements of the individual Group companies, these companies can also obtain loans in currencies other than the euro for disbursement within the Group. Since these loans are not taken out in the companies’ functional currency, IFRS 7.40 requires that they be taken into account when measuring the exchange rate risk, even though such a risk does not exist from the perspective of the Group as a whole.

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31 Dec. 2015 +10% -10%
EUR million Profit before
taxes
Other compre- hensive income Equity Profit before
taxes
Other compre- hensive incomeEquity
USD-EUR exchange rate 21   21 -21  -21
GBP-EUR exchange rate 8   8 -8  -8
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31 Dec. 2014 +10% -10%
EUR million Profit before
taxes
Other compre- hensive income Equity Profit before
taxes
Other compre- hensive incomeEquity
USD-EUR exchange rate 36   36 -36  -36
GBP-EUR exchange rate 7   7 -7  -7

Share price risk
Share price risks in Haniel’s consolidated financial statements result from the exchangeable bond linked to ordinary shares of METRO AG issued in May 2015. Fluctuations in the quoted share price of METRO AG have a direct impact on the measurement of the obligation to deliver. A hypothetical 10 per cent increase (decrease) in METRO AG’s quoted share price as at 31 December 2015 would lead to a decrease (increase) in the profit before taxes of EUR 12 million (EUR 11 million). Compensating changes in value from the Metro shares held are not included in the aforementioned sensitivity analysis due to their treatment as an investment accounted for at equity in accordance with IFRS 7.3(a).

Other price risks
These price risks concern the risks arising from fluctuating commodity prices, especially the price of nickel. The ELG division continually determines the risk exposures resulting from the purchase and sale of products and hedges these with respect to nickel primarily through the use of derivative financial instruments (nickel futures).

The sensitivities are measured, taking into account the effect on profit or loss of value changes in the (derivative) financial instruments, disregarding the compensating value changes in the hedged items.

A hypothetical increase (decrease) in the nickel price by USD 1,682 per tonne (previous year: USD 1,774 per ton) (financial year: 19 per cent; previous year: 12 per cent of the spot nickel price as at the reporting date) would have reduced (raised) profit before taxes by EUR 14 (14) million (previous year: EUR 18 (18) million). The assumed change in the nickel price corresponds to the initial margin established by the London Metal Exchange (LME). This is the amount that must be deposited as margin when entering into a contract.

Hedge Accounting
The Haniel Group enters into hedging transactions for the purpose of hedging both the fair values of certain assets or liabilities and future cash flows. This also includes currency hedges of planned sales and purchases of merchandise and services, and of investments and divestments.

In accordance with IAS 39, all derivatives entered into by the Haniel Group are initially recognised in the statement of financial position at cost, corresponding to fair value, and are subsequently measured at their fair value as at the reporting date. When accounting for hedges, the hedge accounting rules are sometimes applied. Under the hedge accounting rules, a derivative is classified either as a hedging instrument in a cash flow hedge if it is used to hedge future cash flows, as a hedging instrument in a fair value hedge if it is used to hedge the fair values of certain assets and liabilities, or as a hedging instrument in a hedge of a net investment in a foreign operation if it is used to hedge an investment recognised in a foreign currency.

Currency derivatives used to hedge existing items of the statement of financial position are usually not subjected to formal hedge accounting. The changes in the fair values of these derivatives, which, from an economic point of view, represent effective hedges in the context of the Group strategy, are recognised in profit or loss. Those changes are generally matched by opposite changes in the fair values of the hedged items.

Cash flow hedges – interest rate hedging
The Haniel Group obtains financing largely by way of long-term and short-term bilateral credit facilities, bonds and promissory loan notes. The bilateral credit facilities are generally utilised on a revolving basis with a short-term fixedrate period. By entering into derivative financial instrument transactions, the Group hedges against rising market interest rates and thus against future increases in interest expenses. At the reporting date, the Group has hedged interest payments amounting to EUR 0 million, USD 2 million and GBP 1 million. These hedges originate from floating- rate liabilities with a nominal volume of EUR 25 million, USD 70 million and GBP 15 million. In the previous year, the Group had hedged interest payments amounting to EUR 1 million, USD 1 million and GBP 1 million. These hedges originated from floating-rate liabilities with a nominal volume of EUR 25 million, USD 30 million and GBP 15 million.

Cash flow hedges – currency hedging
The Haniel Group enters into forward exchange contracts to hedge euro-denominated payments. The designated hedged items are highly probable payments denominated in various foreign currencies.

The designated underlying transactions as at 31 December 2015 amount to EUR 28 million. They will mature in the amount of EUR 12 million in Q1 2016, in the amount of EUR 10 million in Q2 2016, and in the amount of EUR 6 million in Q3 2016.

The designated underlying transactions as at 31 December 2014 amounted to EUR 27 million. They matured in the amount of EUR 12 million in Q1 2015, in the amount of EUR 10 million in Q2 2015, and in the amount of EUR 5 million in Q3 2015.

In connection with cash flow hedges, EUR 0 million (previous year: losses of EUR 7 million) were recognised in other comprehensive income for the financial year. Losses in the amount of EUR 4 million (previous year: losses of EUR 19 million) were transferred from other comprehensive income to finance costs. Of these amounts, EUR 1 million were recognised in finance costs in the financial year (previous year: EUR 16 million) because previously existing hedges were revoked upon the disposal of the hedged items. In the previous year, an additional loss of EUR 3 million was recognised in profit after taxes from discontinued operations.

As in the previous year, there were no significant ineffective portions of cash flow hedges.

Fair value hedge
As in the previous year, fair value hedge accounting was not applied in the financial year.

Hedge of a net investment in a foreign operation
Non-derivative financial liabilities denominated in foreign currency are used to hedge the net investment in a foreign operation. As in the previous year, there were no significant ineffective portions of the net investment hedges.