Arla Foods Annual Report 2020
Management Review
Our Strategy
Our Brands and Commercial Segments Our Responsibility Our Governance
Our Performance Review Our Consolidated Financial Statements
Our Consolidated Environmental, Social and Governance Data
Funding
4.1 FINANCIAL RISKS
4.1.5 Credit risk
External rating of financial counterparties,
2020
Limited losses
In 2020 the group continued to experience very limited
losses from defaulting counterparties such as customers,
suppliers and financial counterparties.
All major financial counterparties had satisfactory credit
ratings at year-end. The Arla requirement is a credit rating
of at least A-/A-/A3 from either S&P, Fitch or Moody's
either for the financial counterparty or its parent
company. In a small number of geographical locations
which are not serviced by our relationship banks and
where financial counterparties with a satisfying credit
rating do not operate, the group deviated from the rating
requirement.
Further information on trade receivables is provided in
Table 2.1.c.
The maximum exposure to credit risk is approximately
equal to the carrying amount.
The group has, like in previous years, continuously
worked with credit exposure and experienced a very low
level of losses arising from customers.
To manage the financial counterparty risk, the group
uses master netting agreements when entering into
derivative contracts. Table 4.1.5 shows the counterparty
exposure for those agreements covered by entering into
netting agreements that qualifies for netting in case of
default.
603
MILLION EUR
AA-3% ■ A+ 11%
AAA 69%
■A4%
BBB+ 6% ■Below investment grade 7%
Table 4.1.5 External rating of financial counterparties
(EURM)
Counterparty rating
Below
investment
AAA
AA-
A+
A
BBB+
grade
Total
2020
Securities
415
5
420
Cash
10
Derivatives
9
Total
415
19
126
44
22
16
56
23
44
126
10
0
57
66
21
38
44
603
2019
Securities
435
435
Cash
30
78
19
7
37
171
Derivatives
7
7
5
1
20
Total
435
37
85
24
7
38
626
98 ARLA FOODS ANNUAL REPORT 2020
External rating of financial counterparties,
2019
626
MILLION EUR
AAA 69%
■■■BBB+ 1%
AA-6% ■A+ 14% A4%
Below investment grade 6%
Risk
Risk mitigation
Credit risks arise from operating activities and
engagement with financial counterparties. Further-
more, a weak counterparty credit quality can reduce
their ability to support the group going forward, thereby
jeopardising the fulfilment of our group's strategy.
Policy
Counterparties are selected based on a relationship
bank strategy. Financial counterparties must be
approved by the Managing Directors and the CFO upon
recommendation from our Treasury team. A counter-
party (or its parent) in financial contracts and deposits
must as a minimum have a long rating corresponding to
A3 with Moody's, A- with Standard & Poor's or A- with
Fitch. If the Group has only obtained credits from the
counterparty, no rating is required. If the counterparty is
rated by several credit rating agencies, an average is
used, rounded up to the nearest notch. In geographies
which are not properly covered by our relationship
banks, the Treasury team may deviate from the
counterparty requirement in this section.
How we act and operate
The Group has an extensive credit risk policy and uses
credit insurance and other trade financing products
extensively in connection with exports. In certain
emerging markets, it is not always possible to obtain
credit coverage with the required rating, however, the
Group then applies for the best coverage available. The
Group has determined that this is an acceptable risk
given levels of investment in in emerging markets.
If a customer payment is late, internal procedures are
followed to mitigate losses. The group uses a limited
number of financial counterparties where credit ratings
are monitored on an ongoing basis.View entire presentation