Electrolux 2004 Annual Report Download - page 52

48 Electrolux Annual Report 2004
Notes
Amounts in SEKm, unless otherwise stated
Financial risk management
The Group is exposed to a number of risks relating to financial instru-
ments including, for example, liquid funds, accounts receivables, cus-
tomer financing receivables, payables, borrowings, and derivative instru-
ments. The risks associated with these instruments are, primarily:
• Interest-rate risk on liquid funds and borrowings
• Financing risks in relation to the Group’s capital requirements
• Foreign-exchange risk on earnings and net investments in foreign
subsidiaries
• Commodity-price risk affecting the expenditure on raw material
and components for goods produced
• Credit risk relating to financial and commercial activities
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. Each business sector has specific financial and credit policies
approved by each sector-board (hereinafter all policies are referred to
as “the Financial Policy“). These risks are to be managed by amongst
others the use of derivative financial instruments according to the limi-
tations 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 managed by
four regional treasury centers located in Europe, North America, Asia/
Pacific and Latin America. Measurement of risk in Group Treasury is
performed by a separate risk controlling function on a daily basis.
Furthermore, there are guidelines in the Group’s policies and proce-
dures for managing operating risk relating to financial instruments by,
e.g., segregation of duties and power of attorney.
Proprietary trading in currency, commodities and interest-bearing
instruments is permitted within the framework of the Financial Policy.
This trading is primarily aimed at maintaining a high quality of informa-
tion flow and market knowledge to contribute to the proactive mana-
gement of the Group’s financial risks.
Interest-rate risk on liquid funds and borrowings
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
Liquid funds consist of cash on hand, bank deposits and other short-
term investments. Electrolux goal is that the level of liquid funds corre-
sponds to at least 2.5% of 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. Investment of liquid funds is mainly made in inter-
est-bearing instruments with high liquidity and with issuers with a long-
term rating of at least A- as defined by Standard & Poor’s or similar.
Interest-rate risk in liquid funds
Group Treasury manages the interest-rate risk of the investments in
relation to a benchmark position defined as a one-day holding period.
Any deviation from the benchmark is limited by a risk mandate. Deriva-
tive financial instruments like Futures and Forward-Rate Agreements
are used to manage the interest-rate risk. The holding periods of
investments are mainly short-term. The major portion of the invest-
ments is made 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 70m. For more informa-
tion, see Note 18 on page 56.
Borrowings
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 as internal loans
or capital injections. In this process various 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 restric-
tions. The Group’s borrowings contain no terms (financial triggers) for
premature cancellation based on rating. For more information, see
Note 18 on page 56.
Interest-rate risk in long-term borrowings
The Financial Policy states that the benchmark for the long-term loan
portfolio is an average interest-fixing period of one year. Group Treasury
can choose to deviate from this benchmark on the basis of a risk man-
date established by the Board of Directors. However, the maximum fixed-
rate period is three years. Derivatives, such as interest-rate swap agree-
ments, are used to manage the interest-rate risk by changing the interest
from fixed to floating or vice versa. On the basis of 2004 volumes and
interest fixing, a one-percentage point shift in interest rates paid would
impact the Group’s interest expenses by approximately SEK +/–20m in
2005. 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 consider-
ation the fact that the interest rates on different maturities and different
currencies might change differently.
Credit ratings
Electrolux has Investment Grade ratings from Moody’s and Standard
& Poor’s. The long-term ratings from both rating institutions remained
unchanged during the year.
Ratings
Short-term
Long-term Short-term debt,
debt Outlook debt Sweden
Moody’s Baa1 Stable P-2
Standard & Poor’s BBB+ Stable A-2 K-1
Financing risk
Financing risk refers to the risk that financing of the Group’s capital
requirements and refinancing of existing loans 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 (i.e., total
interest-bearing liabilities less liquid funds), excluding seasonal variances,
shall be long-term according to the Financial Policy. The Group’s goals
for long-term debts include an average time to maturity of at least two
years, and an evenly spread of maturities. A maximum of 25% of the
borrowings are normally allowed to mature in a 12-month period. Excep-
tions are made when the net borrowing position of the Group is small.
For more information, see Note 18 on page 56.
Foreign-exchange risk
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
Note 2 Financial risk management