Electrolux 2014 Annual Report Download - page 104

ture resulting in an efficient weighted cost of capital and sufficient credit
worthiness where operating needs and the needs for potential acquisi-
tions are considered.
To achieve and keep an efficient capital structure, the Financial Policy
states that the Group’s long-term ambition is to maintain a long-term rat-
ing within a safe margin from a non-investment grade. In November
, Standard & Poor’s downgraded Electrolux from BBB+ with nega-
tive outlook to BBB with stable outlook.
Rating
Long-term
debt Outlook
Short-term
debt
Short-term
debt, Nordic
Standard & Poor’s BBB Stable A- K-
When monitoring the capital structure, the Group uses different key fig-
ures which are consistent with methodologies used by rating agencies
and banks. The Group manages the capital struc ture and makes adjust-
ments to it in light of changes in economic conditions. In order to main-
tain or adjust the capital structure, the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders, buy back
own shares or issue new shares, or sell assets to reduce debt.
Financing risk
Financing risk refers to the risk that financing of the Group’s capital
requirements and refinancing of existing borrowings could become
more difficult or more costly. This risk can be decreased by ensur ing that
maturity dates are evenly distributed over time, and that total short-term
borrowings do not exceed liquidity levels. The net borrowings, total bor-
rowings 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  years, and
an even spread of maturi ties. A maximum of SEK ,m of the long-
term borrowings is allowed to mature in a -month period. For addi-
tional information, see Note  on page .
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
such effects, the Group covers these risks within the framework of the
Financial Policy. The Group’s overall currency exposure is managed cen-
trally.
Transaction exposure from commercial flows
The Financial Policy stipulates the hedging of forecasted flows in foreign
currencies. Taking into consideration the price-fixing periods, commercial
circumstances and the competitive environment, business sectors within
Electrolux can have a hedging horizon of up to  months of forecasted
flows. Hedging horizons outside this period are subject to approval from
Group Treasury. The operating units hedge % of the flows for the first
 months and % up to  months. Group subsidiaries cover their risks in
commercial currency flows mainly through the Group’s 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 remaining transaction exposure is either
related to internal sales from producing entities to sales companies or
external exposures from pur chasing of components and input material for
the production paid in foreign currency. These external imports are often
priced in US dollars. The global presence of the Group, however, leads to
a significant netting of the transaction exposures. For additional information
on exposures and hedging, see Note  on page .
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 transla-
tion exposures arising from income statements of foreign subsidiaries
are included in the sensitivity analysis mentioned below.
Foreign-exchange sensitivity from transaction
and translation exposure
The major currencies that Electrolux is exposed to are the US dollar, the
euro, the Brazilian real, and the Australian dollar. Other significant expo-
sures are the Swiss franc, the British pound and the Chinese renminbi.
These currencies represent the majority of the exposures of the Group,
but are largely offsetting each other as different currencies represent net
inflows and outflows. Taking into account all currencies of the Group, a
change up or down by % in the value of each currency would affect
the Group’s profit and loss for one year by approximately SEK +/– m
(), as a static calculation. The model assumes the distribution of earn-
ings and costs effective at year-end  and does not include any
dynamic effects, such as changes in competitiveness or consumer
behavior arising from such changes in exchange rates.
Sensitivity analysis of major currencies
Risk Change
Profit or loss
impact 
Profit or loss
impact 
Currency
BRL/SEK –% – –
GBP/SEK –% – –
CAD/SEK –% – –
AUD/SEK –% – –
CHF/SEK –% – –
CLP/SEK –% – –
ARS/SEK –% – –
EUR/SEK –%  
CNY/SEK –%  
USD/SEK –%  ,
Exposure from net investments (balance sheet exposure)
The net of assets and liabilities in foreign subsidiaries constitute a net
investment in foreign currency, which generates a translation difference
in connection with consolidation. This exposure can have an impact on
the Group’s total comprehensive income, and on the capital structure.
Net investments are only hedged to ensure any of the following objec-
tives: ) to protect key ratios important to the Group’s credit rating,
) financial covenants (if any), and ) to protect net investments corre-
sponding to financial investments such as excess liquidity. In case of
hedging the Group’s net investments, it is implemented within the Parent
Company in Sweden.
A change up or down by % in the value of each currency against
the Swedish krona would affect the net investment of the Group by
approximately SEK +/– ,m (,), as a static calculation at year-end
. At year-end , as well as year-end , none of the net
investments were currency hedged.
Commodity-price risks
Commodity-price risk is the risk that the cost of direct and indirect mate-
rials could increase as underlying commodity prices rise in global mar-
kets. The Group is exposed to fluctuations in com modity prices through
agreements with suppliers, whereby the price is linked to the raw-mate-
rial price on the world market. This exposure can be divided into direct
commodity exposure, which refers to pure commodity exposures, and
indirect commodity exposure, which is defined as exposure arising from
only part of a component. Commodity-price risk is mainly managed
through contracts with the suppliers. A change in price up or down by
% in steel would affect the Group’s profit or loss with approximately
SEK +/– m () and in plastics with approximately SEK +/– m
(), based on volumes in .
Credit risk
Credit risk in financial activities
Exposure to credit risks arises from the investment of liquid funds, and
derivatives. In order to limit exposure to credit risk, a counterpart list has
been established, which specifies the maximum permissible exposure in
relation to each counterpart. Both investments of liquid funds and deri-
vates are done with issuers and counterparts holding a long-term rating
of at least A– defined by Standard & Poor’s or a similar rating agency.
Group Treasury can allow exceptions from this rule, e.g., to enable
money deposits within countries rated below A–, but this represents only
a minor part of the total liquidity in the Group. The Group strives for
arranging master netting agreements (ISDA) with the counterparts for
derivative transactions and has established such agreements with the
majority of the counterparts, i.e., if counterparty will default, assets and
liabilities will be netted. To reduce the settlement risk in foreign exchange
transactions made with banks, Group Treasury uses Continuous Linked
Settlement (CLS). CLS eliminates temporal settlement risk since both
legs of a transaction are settled simultaneously.
Credit risk in trade receivables
Electrolux sells to a substantial number of customers in the form of large
retailers, buying groups, independent stores, and professional users.
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 ELECTROLUX ANNUAL REPORT 
All amounts in SEKm unless otherwise stated