Note 27. Supplementary information – financial risk management
Financial risk management
Through its comprehensive international operations, Sandvik is exposed to financial risks.
Group Treasury is the function responsible for managing most of the Group’s financial risks. The primary objectives of the function are to contribute to the creation of value by managing the financial risks to which the Group is exposed to during the ordinary course of business, and to optimize the Group’s financial net.
The Board of Directors is responsible for establishing the Group’s finance policy, which comprises guidelines, objectives, and limits for financial management within Group Treasury as well as the management of financial risks within the Group.
Group Treasury supports Group companies and its tasks are to support subsidiaries with loans, deposits, foreign exchange deals, and banking solutions, as well as to act as an advisor in financial matters. The function conducts internal banking operations and is based at the head office in Stockholm. It is also responsible for the Group’s bank account set-up.
In addition, Group Treasury conducts operations for payment advisory and trade finance, and is responsible for the Group’s global policy for granting credit to customers in conjunction with sales. The customer finance activity is carried out through the Business Area Sandvik Mining and Rock Technology through some selected locations worldwide.
Finally, Group Treasury also manages the financial risks associated with the company’s defined-benefit pension plans.
Only institutions with a solid financial position and solid credit ratings are accepted as Sandvik’s counterparties in financial transactions.
The presentations comply with the reporting requirements stated in IFRS under IFRS 7, IFRS 9, and IAS 39 for Hedge Accounting.
Currency risk – Transaction exposure
Risk
Transaction exposure occurs when sales and purchases are made in different currencies which affect profit for the year.
Sandvik’s annual transaction exposure, meaning the Group’s net flow of currencies, after full offsetting of the countervalue in the exporting companies’ local currencies, and measured at the average exchange rate, amounted to 19,468 million SEK (14,852) in 2018. The most important currencies for one year of exposure are shown in the following diagram.
Exposure
Comments
Sandvik generally offers customers the possibility to pay in their own currencies through the global sales organization. As a result, the Group is continuously exposed to currency risks associated with account receivables denominated in foreign currency and with future sales to foreign customers. Since a large percentage of production is concentrated to a few countries, while sales occur in many countries, Sandvik is exposed to a large net inflow of foreign currencies.
In order to mitigate the currency risk, pricing is adjusted against both customers and suppliers in circumstances where Sandvik is affected negatively by currency movements. To further reduce exposure to foreign currencies, currencies received are used to pay for purchases in the same currency via a netting structure.
A certain portion of the anticipated net flow of sales and purchases is hedged through financial instruments and bank account balances in accordance with guidelines set in the Group’s finance policy. In addition, major project orders are currency hedged to safeguard the gross margin. Under the finance policy, the CFO has a mandate to hedge the annual transaction exposure. At year-end, the total hedged amount was 2,521 million SEK (1,324). The average duration for the hedged volume of foreign currency was 2 months (3). Unrealized gains from outstanding currency contracts for hedging of future net flows amounted to 0.2 million SEK (76) at year-end. This amount consists of –9.6 million SEK in losses related to contracts maturing in 2019 and 9.4 million SEK in gains related to contracts maturing in 2020 or later. For a more detailed breakdown of the quarterly effects on cash flow of the transactions that have been recognized in the hedge reserve, see the table at the end of Note 27.
If all exchange rates for the exposure currencies were to change by 5% in an unfavorable direction, total operating profit over a 12-month period would change by approximately –1,126 million SEK (–1,174), assuming that the composition is the same as it was at year-end.
AUD |
CAD |
CHF |
CNY |
EUR |
USD |
ZAR |
Other |
Total |
–129 |
–82 |
–22 |
–124 |
–27 |
–482 |
–57 |
–203 |
–1,126 |
Currency risk – Translation exposure
Risk
Translation exposure occurs when assets and liabilities are denominated in different currencies.
Since the Swedish krona (SEK) is Sandvik’s base currency, a translation risk related to the valuation of the net assets in foreign subsidiaries and the profit/loss in foreign currency achieved during the period occurs. The net assets, which usually consist of the foreign subsidiaries’ shareholders equity, are translated to SEK at the rates applied at the balance sheet date. At 31 December, the Group’s net assets in subsidiaries in local currencies amounted to 58,324 million SEK (52,025).
Exposure
Comments
To avoid translation risk in the balance sheets of subsidiaries, they are financed in their local currency through the internal bank. External borrowing often takes place in a specific currency, as shown in the first diagram. The currency risk that arises in the internal bank as a result of this is managed using various derivatives to minimize the translation risk.
Sandvik has chosen not to hedge future profits in foreign subsidiaries. Net assets are also not hedged, but the differences that arise due to changes in exchange rates since the preceding quarter are recognized directly in other comprehensive income. The second diagram shows the distribution of net assets among various currencies.
If exchange rates were to change by 5% in an unfavorable direction the net effect on other comprehensive income would be approximately –2,921 million SEK (–2,605). This net effect primarily comprises translation exposure in equity.
AUD |
CHF |
CNY |
EUR |
GBP |
INR |
USD |
Other |
Total |
–99 |
–126 |
–112 |
–981 |
–194 |
–130 |
–773 |
–505 |
–2,921 |
Interest rate risk
Risk
Interest-rate risk is defined as the risk that changes in market interest rates will have on the Group’s net interest items. The impact on net interest items of a change in interest rates depends on the interest terms of assets and liabilities. Sandvik measures interest-rate risk as the change over the forthcoming 12 months given a 1 percentage point change in interest rates.
Interest-rate risk arises in two ways:
- The company may have invested in interest-bearing assets, the value of which changes when the interest rate changes.
- The cost of the company’s borrowing fluctuates when the general interest-rate situation changes.
Exposure
If market rates were to rise by 1 percentage point across all terms, in relation to loans for which the interest rate will be reset during the coming year, interest costs would be impacted by –38 million SEK.
An interest-rate sensitivity analysis of interest-rate swap agreements valid at year-end, and to which hedge accounting was applied, shows that other comprehensive income would change by 65 million SEK as a result of a 1 percentage point increase of the interest-rate curve.
Including effects of interest-rate derivatives |
Effective rate of interest, % |
Fixed-interest term, months |
Recognized liability, MSEK |
Bond loans, Swedish MTN |
2.6 |
17 |
5,652 |
Bond loans, European MTN |
3.6 |
78 |
11,314 |
Private placements |
4.1 |
21 |
5,133 |
Commercial papers |
0 |
0 |
0 |
Other loans from banks |
2.7 |
23 |
1,830 |
Total loans |
3.4 |
47 |
23,928 |
|
|
|
|
Interest effect of currency derivatives |
0.4 |
|
|
Total incl. currency derivatives |
3.8 |
|
|
Comments
The Group’s interest-rate risk arises mainly in connection with borrowing. Interest-rate swap agreements are sometimes used to achieve the desired fixed-interest term. The Group CFO has a mandate to vary the average fixed-interest term of the Group’s debt portfolio, provided that it does not exceed 60 months. The average fixed-interest term on Sandvik’s borrowing was 47 months (54) at year-end, with consideration given to interest-rate swap agreements entered into.
In line with the Group’s finance policy, internal lending to foreign subsidiaries is hedged. Consequently, there is an interest-rate effect in currency derivatives of 0.4% between the currencies the Group borrows and the currencies the Group lends. The Group’s average interest expense, including other loans and effects of various derivatives, was 3.8% (4.0).
Hedge accounting is applied when an effective link exists between hedged loans and interest-rate swaps. Accordingly, changed market interest rates could also impact other comprehensive income, since the Group has interest-rate swap agreements that are 100% effective and with a notional amount of 1,500 million SEK, to which it applies cash-flow hedging. This means that changes in the market values of these swaps are recognized directly in other comprehensive income instead of in profit for the year. A presentation of all interest-rate swap agreements entered into, and information regarding their duration, can be found at the end of Note 27.
Sandvik’s loan conditions do not currently entail financial covenants linked to key figures. Only under exceptional circumstances are assets pledged in connection with the raising of loans. Such pledging is disclosed in Note 26.
In the event that Sandvik has surplus liquidity, it is placed in bank deposits or in short-term money market instruments (durations of up to 90 days), which means that the interest-rate risk (the risk of a change in value) is low.
Liquidity and refinancing risk
Risk
Liquidity and refinancing risk is defined as the risk that financing possibilities will be limited when loans must be refinanced, and that payment commitments cannot be met as a result of insufficient liquidity.
Exposure
|
Currency |
Recognized liability, MSEK |
Size of programs, MSEK |
Average remaining credit period, years |
Bond loans, Swedish MTN |
SEK |
5,652 |
15,000 |
2.3 |
Bond loans, European MTN |
EUR |
11,314 |
30,901 |
7.5 |
Private placements |
USD |
5,133 |
— |
1.8 |
Commercial papers |
EUR, SEK |
0 |
17,725 |
0.0 |
Other loans |
EUR, SEK |
1,830 |
— |
3.1 |
Total borrowing |
|
23,928 |
63,626 |
4.7 |
Comments
According to the finance policy, the Group’s capital employed excluding cash and cash equivalents should be financed on a long-term basis. At year-end, the Group’s capital employed, excluding cash and cash equivalents, was 70,450 million SEK and long-term financing, including share capital, pension liabilities, long-term tax liabilities, long-term provisions and the guaranteed long-term credit facility, amounted to 95,406 million SEK. The short-term liquidity reserve, comprising committed credit facilities and accessible cash and cash equivalents was 24,256 million SEK. This reserve should at a minimum correspond to loans that mature for payment over the next six months and two weeks operating expenses, calculated to 4,906 million SEK.
Sandvik has a credit facility totaling 9,000 million SEK maturing in year 2023. The facility, which is the Group’s primary liquidity reserve, was unutilized at year-end.
The aim of Sandvik’s financing strategy is to achieve a well-balanced maturity profile for liabilities to thereby reduce the refinancing risk. The share of long-term loans in relation to total borrowing was 90% at year-end 2018 compared with 96% one year earlier. The maturity structure for the Group’s financial liabilities and derivatives is presented further down in Note 27.
At year-end, Standard & Poor’s, the international credit rating agency, had assigned a BBB+ credit rating to Sandvik’s long-term borrowing and A–2 for its short-term borrowing. For a continuous update on Sandvik’s credit rating, refer to home.sandvik.
Credit risk
Risk
The Group’s commercial and financial transactions give rise to credit risk in relation to Sandvik’s counterparties. Credit risk or counterparty risk is defined as the risk for losses if the counterparty does not fulfill its commitments.
The credit risk to which Sandvik is exposed to can be divided into three categories:
- Financial credit risk
- Credit risk in trade receivables
- Credit risk in customer financing
Total credit risk, MSEK |
2017 |
2018 |
Trade receivables |
13,928 |
15,378 |
Cash and cash equivalents |
12,724 |
18,089 |
Unrealized net gains on derivatives |
595 |
554 |
Other receivables |
407 |
277 |
Outstanding credits |
2,623 |
3,244 |
Total |
30,277 |
37,542 |
Comments
Sandvik has entered into agreements with the banks that are most important to the company covering such matters as the right to offset assets and liabilities that arise from financial derivative transactions, so-called ISDA agreements. This means that the company’s counterparty exposure to the financial sector is limited to the unrealized net gains that arise in derivative agreements, and investments and bank balances. At 31 December 2018, the value of these amounted to 18,643 million SEK (13,319).
Sandvik companies are exposed to the credit risk associated with outstanding trade receivables from ongoing sales. Credit risk is spread over a large number of customers in all business areas and reflects the spread of sales. In 2018, Sandvik’s bad debts written off amounted to –78 million SEK (–111), corresponding to 0,08% of sales. The total gross value of outstanding trade receivables was 16,129 million SEK (14,617) at 31 December. Total impairment of these was –751 million SEK (–690). Age analysis of trade receivables at 31 December is presented in Note 18.
Sandvik offers short- and long-term customer financing through its own financing companies and in partnership with financial institutions and banks. At year-end, the value of outstanding credits was 3,310 million SEK (2,668), of which –66 million SEK (–45) was reserved for doubtful receivables.
In addition to the traditional financing of equipment, Sandvik also offers short-lease machinery. At year-end, the net carrying amount of this short-lease machinery was 370 million SEK (390).
Raw materials price risk
Risk
Sandvik’s financial risks related to raw materials are primarily concentrated to nickel and electricity. The price risks associated with these are partially hedged through the signing of financial contracts. A change in the electricity price of 0.1 SEK per kWh is estimated to affect Sandvik’s operating profit by plus or minus 85 million SEK on an annual basis, based on the prevailing conditions at year-end 2018.
Exposure
When Sandvik Materials Technology obtains a customer order at a fixed price for nickel, molybdenum or copper, the prices of these materials are hedged by signing financial contracts. This means that Sandvik’s operating profit is not impacted by movements in the price of these raw materials, relating to the aforementioned orders at a fixed price.
The Group applies a hedging strategy in order to minimize the metal price risk in connection with transactions conducted at a variable metal price. The measurement of inventory is not affected by hedging.
Changes in metal prices affect the result as a consequence of the rules regarding revaluation of inventory. The net effect is presented in the “Development in business areas” section.
For Sandvik’s large production units in Sweden and Finland, the electricity price is continuously hedged through derivatives. Electricity consumption at these units normally totals around 850 GWh. The hedging horizon at year-end was about 18 months’ (17) expected consumption.
Comments
Net total consumption of nickel amounted to about 17,000 metric tons during the year.
At year-end, the volume of hedged nickel inventory was 1,626 metric tons (2,068). The market value of commodity derivatives entered into was –26 million SEK (21).
The volume of electricity hedged with derivatives was 1,292 GWh (1,204) at year-end. The market value of these derivative contracts amounted to 202 million SEK (42).
For a more detailed breakdown of the quarterly effects on cash flow of the transactions that have been recognized in the hedge reserve, see the table at the end of Note 27.
Pension commitments
Risk
Sandvik has comprehensive pension obligations in the countries in which it operates. The pension solutions and funding requirements vary depending on legislation and local agreements. The largest funded pension plans are found in the US, UK, Finland, Sweden, Germany, and Canada. Three main risks are associated with Sandvik’s pension obligations; interest rate fluctuations, capital market volatility and changes in life expectancy.
Exposure
The group funded pension liability has an average duration of 17.2 years. The average duration of the group’s interest-bearing assets in the pension portfolio is 14.1 years. The allocation to interest bearing assets is 49% of the pension portfolio. Due to the asset allocation and differences in duration between the interest-bearing assets and the liability, Sandvik is exposed to interest rate fluctuations, both when discounting the liability but also as market values change in the bond portfolio. Based on a 95% (once every 20 years) approach under the Solvency II framework, the potential net impact in relation to such interest rate fluctuations is 2,243 million SEK.
27% of the pension portfolio is invested in equities. A 20% movement in the equity portfolio would result in a change in market value of 1,052 million SEK. If the life expectancy assumptions increase by one year, the pension liability would rise by 3% which corresponds to 739 million SEK. The calculated total loss potential for one year (Pension risk), based on stress tests according to the Solvency II framework, is on aggregate 4,462 million SEK.
Comments
In 2018, the pension assets totaled 21,544 million SEK (21,415) and the corresponding pension liability amounted to 25,136 million SEK (24,255), which is equal to a funding level of 86% (88). The return on Sandvik’s pension assets was –2.0% during the year (10.6). In addition, Sandvik has unfunded pension commitments of 1,900 million SEK (1,872).
The pension plans are governed through Sandvik’s Pension Supervisory Board (PSB). PSB is responsible for implementing policies and directives, approving new plans or material changes and closure of existing plans. The pension plans and governance are further described in Note 20.
Disclosure regarding financial instruments measured at fair value in the balance sheet
Under the IFRS 13 disclosure requirements, the method applied to the valuation of assets and liabilities measured at fair value in the balance sheet is presented below. The valuation is divided into three levels:
- Level 1: Fair value is determined according to prices listed on an active market for the same instrument.
- Level 2: Fair value is determined based on either directly (as a price) or indirectly (derived from prices) observable market data that is not included in level 1.
- Level 3: Fair value is determined based on input data that is not observable in the market.
All of Sandvik’s financial instruments measured at fair value are measured according to Level 2.
Measurements of fair value
The following is a summary of the methods and assumptions primarily applied to determine the fair value of the financial instruments presented on the following page.
The fair value of foreign exchange contracts is determined based on observable market prices. The fair value of interest-rate swaps is based on discounting estimated future cash flows under the contractual terms and conditions and maturity dates and based on the market interest rate for similar instruments on the balance sheet date. Where discounted cash flows are used, the future cash flows are calculated on the best assessments of company management. The discount rate applied is the market-based interest rate of similar instruments at the balance sheet date.
All valuation techniques applied are accepted in the market and take into account all parameters that the market would consider in its pricing. These techniques are reviewed regularly so as to ensure their reliability. Applied assumptions are compared against actual outcomes to identify any needs for adjusting the measurement or forecasting tools.
For means of payment, receivables and payables with variable interest and current receivables and payables (for example, trade receivables and accounts payable), the fair value has been considered to correspond to the carrying amount.
Financial instruments measured at fair value |
2017 |
2018 |
|
Financial assets |
|
||
Derivatives |
Foreign exchange contracts |
509 |
324 |
|
Foreign currency options |
— |
— |
|
Interest-rate swaps |
8 |
0 |
|
Commodity and electricity derivatives |
78 |
230 |
|
Total |
595 |
554 |
|
|
|
|
Financial liabilities |
|
||
Derivatives |
Foreign exchange contracts |
323 |
230 |
|
Foreign currency options |
— |
— |
|
Interest-rate swaps |
261 |
212 |
|
Commodity and electricity derivatives |
12 |
54 |
|
Total |
595 |
496 |
Financial assets and liabilities are not offset in the balance sheet. Derivative contracts are subject to framework agreements governing offsetting, and the carrying amounts of assets not offset in the balance sheet amounted to 554 million SEK. The carrying amount of corresponding liabilities was –496 million SEK. No collateral has been received or pledged. In the event of a default by a derivative counterparty, assets and liabilities for a total value of 150 million SEK would be offset in accordance with the framework agreement governing offsetting.
Financial assets and liabilities, except financial derivatives, are measured at amortized cost. Calculation at fair value would increase the Group’s non-current borrowings by 1,778 million SEK (2,117). When measuring interest-bearing liabilities, the company’s Swedish and European bond loans have been remeasured using observable market prices for identical securities to value the Group’s marketable debt instruments. Other non-current debt has been remeasured in accordance with the principles described above. For short-term loans and deposits, no remeasurement was carried out, given that the carrying amount is considered to represent a good approximation of the fair value due to the short duration.
The table below shows the fair value of financial assets and liabilities compared with their carrying amounts. Fair value is the amount at which an asset or liability can be sold between well-informed partners who are independent in relation to each other and who have a vested interest in completing the transaction.
|
Assets at fair value through profit and loss |
|||||||||||||||||||||||||
Balance sheet items |
Derivatives for hedge accounting1) |
Derivatives held for trading2) |
Available-for-sale financial assets |
Loans and receivables |
Total carrying amount |
Fair value |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
||||||||||||||||||||||||||
Financial assets |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
||||||||||||||
Financial investments |
–– |
— |
— |
— |
83 |
119 |
— |
— |
83 |
119 |
83 |
119 |
||||||||||||||
Trade receivables |
–– |
— |
— |
— |
— |
— |
13,928 |
15,378 |
13,928 |
15,378 |
13,928 |
15,378 |
||||||||||||||
Other receivables3) |
–– |
— |
— |
— |
— |
— |
2,487 |
2,997 |
2,487 |
2,997 |
2,487 |
2,997 |
||||||||||||||
Derivatives4) |
28 |
4 |
567 |
550 |
— |
— |
— |
— |
595 |
554 |
595 |
554 |
||||||||||||||
Cash and cash equivalents |
–– |
— |
— |
— |
— |
— |
12,724 |
18,089 |
12,724 |
18,089 |
12,724 |
18,089 |
||||||||||||||
Total financial assets |
28 |
4 |
567 |
550 |
83 |
119 |
29,139 |
36,463 |
29,816 |
37,136 |
29,816 |
37,136 |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Liabilities at fair value through profit and loss |
|||||||||||||||||||||||||
|
Derivatives for hedge accounting1) |
Derivatives held for trading2) |
Other financial liabilities |
|
Total carrying amount |
Fair value |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Financial liabilities |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
|
|
2017 |
2018 |
2017 |
2018 |
||||||||||||||
Borrowings5) |
— |
— |
— |
— |
23,828 |
23,928 |
|
|
23,828 |
23,928 |
25,945 |
25,707 |
||||||||||||||
Derivatives6) |
197 |
163 |
398 |
333 |
— |
— |
|
|
595 |
496 |
595 |
496 |
||||||||||||||
Accounts payable |
— |
— |
— |
— |
7,645 |
7,914 |
|
|
7,645 |
7,914 |
7,645 |
7,914 |
||||||||||||||
Due to associates |
— |
— |
— |
— |
3 |
1 |
|
|
3 |
1 |
3 |
1 |
||||||||||||||
Other liabilities7) |
— |
— |
— |
— |
456 |
451 |
|
|
456 |
451 |
456 |
451 |
||||||||||||||
Total financial liabilities |
197 |
163 |
398 |
333 |
31,932 |
32,294 |
|
|
32,527 |
32,790 |
34,644 |
34,569 |
Net result per valuation category
In addition to fair value adjustment, interest and currency movement effects are included.
|
2017 |
2018 |
Assets and liabilities at fair value (Derivatives) |
330 |
–923 |
Loans and accounts receivables |
–162 |
867 |
Available-for-sale financial assets |
25 |
15 |
Financial liabilities |
–1,239 |
–985 |
The company’s financial liabilities amounted to 32,790 million SEK (32,527) at year-end.
|
|
2017 |
2018 |
||||||
|
|
<6 months |
6–12 months |
1–5 years |
>5 years |
<6 months |
6–12 months |
1–5 years |
>5 years |
Bank loans |
SEK |
–59 |
–362 |
–1,689 |
— |
–147 |
–478 |
–1,296 |
— |
Commercial papers |
SEK |
— |
— |
— |
— |
— |
— |
— |
— |
Medium Term Notes |
SEK |
–317 |
–372 |
–4,916 |
–1,030 |
–66 |
–37 |
–5,363 |
–504 |
European Medium Term Notes |
EUR |
–263 |
–127 |
–3,702 |
–10,339 |
–275 |
–133 |
–4,501 |
–9,764 |
Private placements |
USD |
–133 |
–133 |
–5,092 |
— |
–1,921 |
–91 |
–3,539 |
— |
Derivatives |
|
|
|
|
|
|
|
|
|
– Currency derivatives |
|
113 |
4 |
51 |
— |
73 |
— |
–11 |
–3 |
– Interest-rate derivatives |
|
–46 |
8 |
–210 |
–70 |
–44 |
–5 |
–183 |
–34 |
– Commodity and electricity derivatives |
|
16 |
25 |
22 |
— |
–3 |
120 |
60 |
— |
Finance leases |
|
–1 |
–2 |
–50 |
— |
–2 |
–2 |
–42 |
— |
Accounts payable |
|
–7,907 |
— |
— |
— |
–7,914 |
— |
— |
— |
Total |
|
–8,597 |
–959 |
–15,586 |
–11,439 |
–10,299 |
–626 |
–14,875 |
–10,305 |
|
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
Q3 2020 |
Q4 2020 |
2021 and later |
Currency derivatives |
— |
— |
— |
— |
— |
0 |
— |
— |
— |
Interest derivatives |
— |
— |
— |
— |
— |
— |
— |
— |
–161 |
Commodity and electricity derivatives |
0 |
— |
0 |
2 |
— |
0 |
0 |
— |
— |
Total |
0 |
— |
0 |
2 |
— |
0 |
0 |
— |
–161 |