IFRS 7 paras 31-34, 39-40, liquidity, maturity analysis, fx and interest risk, sensitivities

Amer Sports Corporation – Annual report – 31 December 2018

Industry: manufacturing

29. FINANCIAL RISK MANAGEMENT (extracts)
Amer Sports is exposed to customary financial risks relating to its global businesses such as funding and liquidity risks, foreign exchange and interest rate risks, counterparty and credit risks. Financial risk management is centralized within Amer Sports Treasury, which is acting as an in-house bank providing financial services for subsidiaries within the Group. Risk management is governed by the Treasury Policy approved by the Board of Directors. The Policy includes principles and risk limits relating to debt structure, counterparties, bank relations and interest rate and foreign exchange risk management. Written guidelines have been set to manage operational risks. Amer Sports Treasury follows and monitors risks constantly and does not allow any material deviations from the Treasury Policy. The Board of Directors reviews the financial risks annually.

Funding risk
Amer Sports aims to use different sources of funding. The focus has been in debt transactions taken directly from domestic and/or international debt capital markets. During the years 2017 and 2018, Amer Sports finalized the following financial transactions:

Amer Sports financed the acquisition of Peak Performance on June 29, 2018 by a short-term debt of EUR 180.0 million for bridge financing and using the existing cash reserves. The short-debt was refinanced on July 31 by EUR 150.0 million seven (7) year floating rate Term Loan Facility from OP Corporate Bank plc. At the end of year 2018, Amer Sports had Nordea’s EUR 50.0 million short-term Term Loan Facility (bridge financing) remaining in its balance sheet. In November, Amer Sports took seven (7) year fixed rate EUR 50.0 million Term Loan from Helaba.

In November 2017, Amer Sports signed a five-year EUR 200 million amendment and restatement agreement to the Revolving Credit Facility (RCF) of EUR 150 million from 2014. The facility of EUR 200 million replacing the previous RCF is meant for general corporate purposes. The facility has an extension option of 1+1 years.

Liquidity risk
Amer Sports has a cyclical need for working capital that also defines the level of liquidity for the Group. Typically, the highest level of working capital has been reached in the third quarter when the short-term debt is tied up in inventories and accounts receivable.

Amer Sports Treasury has established several cash pooling structures with Group’s relationship banks in order to control the liquidity of the Group. Treasury Policy sets guidelines for the management of the liquidity that is outside cash pooling structures.

Short-term shortages of liquidity are covered by issuance of corporate papers through Finnish commercial paper program with total size of EUR 500 million.

Amer Sports uses sale of receivables and vendor financing with purpose to balance liquidity swings of the Group. In December 2018, EUR 89.7 (62.5) million receivables in total were sold within two different receivable sale programs that are in place for certain approved US and Europe based obligors. Other discounting programs are used within the group, but the volumes are less significant. The value of payables transferred to Asian vendor finance program was EUR 90.0 (73.4) million at year end 2018.

Depending on the projections of short-term and long-term liquidity forecasts, excess liquidity is placed on the money market within limits and instruments defined in the Treasury Policy.

Amer Sports’ EUR 200 million syndicated committed revolving credit facility is a back-up for exceptional liquidity needs. At the end of 2018 Amer Sports had no drawings from the facility.

The below table is a breakdown of the Group’s non-derivative financial liabilities and net-settled derivatives in their contractual maturities.

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Currency risk
Transaction risk arises from foreign currency denominated receivables and liabilities, cash flow estimates in foreign currencies and derivatives. Translation risk relates to the foreign currency denominated earnings when they are translated into euro. Amer Sports has operations in most of the major currency areas, and its sales are diversified in multiple currencies. On the business unit level, transaction risk arises when the unit sells in its home currency but the cost base is in foreign currencies or sells or buys goods in foreign currencies. Amer Sports’ risk management is aiming to eliminate material uncertainties relating to foreign exchange rates.

At the end of the year, Amer Sports’ currency position consisted of inter-company and external interest-free and interest-bearing currency denominated receivables and liabilities and foreign exchange derivatives. Foreign exchange derivatives include both balance sheet and cash flow hedges. The geography of Amer Sports businesses has led to the most significant currencies being US dollar, Canadian dollar, British pound, Swedish krona, Swiss franc and Japanese yen. The significance of US dollar is emphasized by its dominant role in the global procurement and the growth in Apparel and Footwear. In funding, Amer Sports has diversified its funding sources, which is reflected in diverse currency denomination of the external debt.

Balance sheet risks have been managed by financing subsidiaries in their home currencies. The risks have been concentrated on the centralized distribution and purchasing units that invoice the subsidiaries in their respective home currencies. The parent company’s balance sheet risk arises from internal and external liabilities in foreign currencies.

The following table sets out the foreign exchange position at the balance sheet date:

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The table below presents the sensitivity of shareholders’ equity and the income statement at the balance sheet date to the strengthening of the euro by 10%, provided other factors remain unchanged. The weakening of the euro by 10% would cause a similar change in the opposite direction:

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The following table presents the corresponding sensitivities at the balance sheet date in 2017:

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Earnings sensitivity before taxes is influenced by changes in the fair value of derivative instruments not used in hedge accounting and on-balance sheet hedging derivative instruments as well as changes in the value of on-balance sheet currency-denominated loans and receivables. Shareholders’ equity is affected by changes in the fair value of derivative instruments used in hedge accounting recognized under the hedge reserve.

The following table sets out Amer Sports’ cash flows (including discontinued operations) that are under hedging policy for the next 24 months (EUR million):

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The following table sets out the hedging of Amer Sports’ cash flows as at December 31, 2018 (EUR million):

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The strengthening of the euro against the USD typically improves Amer Sports’ result of operations. The strengthening of the euro against the other foreign currencies typically weakens Amer Sports’ result of operations. A significant share of the US dollar denominated procurement cost risk is eliminated against the US dollar denominated operating result. Due to the growth of the business that is dependent on sourcing from Asia, the US dollar procurement exceeded the US dollar denominated operating result significantly.

According to the hedging policy, the transaction risk arising from subsidiaries’ business operations is hedged up to 12–24 months. In practice, the hedge ratios are higher for closer months than for later months. The hedge ratio is maintained between 55% and 95% of 24 months cash flow, except in currencies with high interest rate where the hedge horizon is 12–18 months. The hedged cash flow is expected to be realized during the following 12–24 months. Amer Sports hedges only annual cash flows or other exposures with a value of over EUR 3.0 million.

The company applies hedge accounting for annual cash flows with a counter value of over EUR 10 million per currency pair in the entity. It monitors hedge ratios daily and tests effectiveness at three-month intervals. Foreign exchange differences of foreign exchange derivatives are recognized as hedging reserve while interest rate differentials related to the foreign exchange derivatives are recorded through financial profit and loss.

According to its Treasury Policy, Amer Sports may hedge 0 to 50% of subsidiaries’ equity. At the end of 2018, there were no outstanding equity hedges or net investment hedges.

Interest risk
Amer Sports is exposed to interest rate risk when it funds its operations with euro or currency denominated debt. The risk arises from the repricing of floating rate debt and with the raising of new floating rate debt. A fixed rate debt is subject to “fair value risk”. The purpose of interest rate risk management is to bring predictability for interest expenses by keeping the duration within the agreed limits with an optimal mix of fixed and floating rate debt. Treasury is constantly hedging current outstanding interest rate position of the Group and from time to time may hedge forthcoming position of the Group, up to 7 years. The interest rate derivatives that can be used in the risk management are defined in the Treasury Policy.

The neutral target for duration of interest rate position is 12 months, but it is allowed to vary between 6 and 18 months. As of December 31, 2018, the duration was 18 months. 64% of the debt portfolio was at fixed rate as of December, 2018. The company has set EUR 3.0 million sensitivity limits to 1% raise in the market rate for the following 12 months interest expenses and negative mark-to-market valuation of non-hedge accounting transactions.

Cash and cash equivalents are excluded from the interest rate risk portfolio of the company due to their short term nature.

The sensitivity of the income statement contains changes in interest expenses for the next 12 months due to an increase/decrease of 1% in market interest rates, provided that other factors remain unchanged.

Shareholders’ equity is effected by a change in the market value of the hedge accounting interest rate swaps. The change is booked to the hedge reserve.

The below table illustrates the sensitivity of shareholders’ equity and income statement to an increase of 1% in interest rates, provided that other factors remain unchanged. The sensitivity is calculated to interest-bearing liabilities. Interest rate floors are excluded from the calculations.

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In 2017, the sensitivity of the shareholders’ equity and income statement to an increase of 1% interest rates, provided that other factors remain unchanged, was:

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The effective interest rate of the total debt including interest rate hedges was 2.6%. The interest rate was 2.3% on bonds, 0.9% on bank loans and 0.2% on commercial papers.

The average interest rate of the Group’s interest-bearing debt including interest rate derivatives and facility fees was 1.7% (Dec 31, 2017: 2.5). After foreign exchange derivatives that hedge the inter-company debt, the average interest rate was 2.5% (Dec 31, 2017: 3.2).

Amer Sports applies hedge accounting to interest rate derivatives whenever it is applicable. Non-hedge accounting derivatives are measured at fair value and the result is recognized in the financing items.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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