Electrolux 2005 Annual Report Download - page 60

Notes
56 Electrolux Annual Report 2005
Amounts in SEKm, unless otherwise stated
Note 2 continued
Derivative financial instruments like Futures and Forward-Rate Agree-
ments 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 40m (70). For more
information, see Note 17 on page 63.
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 restrictions. The Group’s borrowings contain no terms (finan-
cial triggers) for premature cancellation based on rating. For more
information, see Note 17 on page 63.
Interest-rate risk in long-term borrowings
The Financial Policy states for the year 2005 that the benchmark for
the long-term loan portfolio is an average interest-fixing period of one
year. The benchmark has, however, been changed by the end of year
2005 and as from January 1, 2006, the benchmark for the long-term
loan portfolio is an average interest-fixing period of six months. Group
Treasury can choose to deviate from this benchmark on the basis of a
risk mandate established by the Board of Directors. However, the max-
imum fixed-rate period is three years. Derivatives, such as interest-rate
swap agreements, are used to manage the interest-rate risk by chang-
ing the interest from fixed to floating or vice versa. On the basis of 2005
volumes and interest fixing, a one-percentage point shift in interest
rates paid would impact the Group’s interest expenses by approxi-
mately SEK +/–30m (20) in 2005. This calculation is based on a parallel
shift of all yield curves simultaneously by one-percentage point. Elec-
trolux 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.
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, but Moody’s outlook was changed from
stable to negative in the beginning of 2005.
Ratings
Long-term Short-term Short-term
debt Outlook debt debt Sweden
Moody’s Baa1 Negative 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 borrowing 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 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. Exceptions are made when the net borrowing position of the
Group is small. For more information, see Note 17 on page 63.
Foreign-exchange risk
Foreign-exchange risk refers to the adverse effects of changes in for-
eign-exchange rates on the Group’s income and equity. In order to
manage such effects, the Group covers these risks within the frame-
work of the Financial Policy. The Group’s overall currency exposure is
managed centrally.
The major currencies that Electrolux is exposed to are the US dol-
lar, the euro, the Canadian dollar, and the British pound. Other signifi-
cant exposures are the Danish krona, the Australian dollar, and vari-
ous Eastern European currencies.
Transaction exposure from commercial flows
The Group’s financial policy stipulates the hedging of forecasted
sales in foreign currencies, taking into consideration the price fixing
periods and the competitive environment. The business sectors within
Electrolux have varying policies for hedging depending on their com-
mercial circumstances. The sectors define a hedging horizon between
6 and up to 12 months of forecasted flows. Hedging horizons outside
this period are subject to approval from Group Treasury. The Financial
Policy permits the operating units to hedge invoiced and forecasted
flows from 75% to 100%. The maximum hedging horizon is up to 18
months. Group subsidiaries cover their risks in commercial currency
flows mainly through the Group’s four regional 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 table on page 26 shows
the distribution of the Group’s sales and operating expenses in major
currencies. As the table indicates, there was a good currency balance
during the year in the US dollar and the euro. For more information on
exposures and hedging, see Note 17 on page 63.
Translation exposure from consolidation
of entities outside Sweden
Changes in exchange rates also affect the Group’s income in connec-
tion with translation of income statements of foreign subsidiaries into
Swedish krona. Electrolux does not hedge such exposure. The trans-
lation exposures arising from income statements of foreign subsidiar-
ies are included in the sensitivity analysis mentioned below.
Foreign-exchange sensitivity from transaction and
translation exposure
Electrolux is particularly exposed to changes in exchange rates
between the Swedish krona and the US dollar, the euro, the Canadian
dollar and the British pound. For example, a change up or down by
10% in the value of each of the USD, EUR, CAD, and GBP against the
SEK would affect the Group’s income after financial items for one year
by approximately SEK +/–600m, as a static calculation. The model
assumes the distribution of earnings and costs effective at year-end
2005 and does not include any dynamic effects, such as changes in
competitiveness or consumer behavior arising from such changes in
exchange rates.