Arla Foods Consolidated Annual Report 2021
95
Arla Foods Consolidated Annual Report 2021 / Consolidated Financial Statements / Notes
Funding
4.1 FINANCIAL RISKS
4.1.3 Interest rate risk
Risk mitigation
Contents
III
LIMITED HEDGING ACTIVITIES DUE TO DECREASED DEBT LEVELS
The average duration of the group's interest on
interest-bearing debt, including derivatives but
excluding pension liabilities, has increased by 1.0 to 3.6.
The duration increased due to new interest rate hedges
partly offset by a reduction in time to maturity of the
remaining hedges.
Table 4.1.3 Sensitivity based on a 1 percentage point increase in interest rates
(EURM)
Potential
accounting impact
Carrying
amount
Sensitivity
Income
statement
Other
comprehen-
sive income
2021
Financial assets
-536
1%
5
-1
Derivatives
1%
6
56
Financial liabilities
2,757
1%
-12
Net interest-bearing debt
excluding pension liabilities
2,221
-1
55
Risk
The group is exposed to interest rate risk on interest-
bearing borrowings, pension liabilities, interest-bearing
assets and on the value of non-current assets where an
impairment test is performed. The risk is divided between
profit exposure and exposure in comprehensive income.
Profit exposure relates to net potential impairment
of non-current assets. Other comprehensive income
exposure relates to revaluation of net pension liabilities
and interest hedging of future cash flows.
Fair value sensitivity
A change in interest rates will impact the fair value of
the group's interest-bearing assets, interest rate
derivative instruments and debt instruments measured
on a 1 per cent increase in interest rates. A decrease in
the interest rate would have the opposite effect.
Cash flow sensitivity
A change in interest rates will impact interest rate
payments on the group's unhedged floating rate debt.
Table 4.1.3 shows the one-year cash flow sensitivity,
depicting a 1 per cent increase in interest rates at
31 December 2021. A decrease in the interest rate
would have the opposite effect.
Policy
Interest rate risk must be managed according to
the treasury and funding policy. Interest rate risk
is measured as the duration of the debt portfolio,
including hedging instruments, but excluding pension
liabilities.
Policy
2021
2020
Minimum
Maximum
2020
Financial assets
-550
Derivatives
Financial liabilities
2,730
Net interest-bearing debt
excluding pension liabilities
2,180
1%
do do do
1%
1%
-13
653
-1
42
-2
41
Duration
3.6
2.6
1
7
How we act and operate
The purpose of interest rate hedging is to mitigate risk
and secure relatively stable and predictable financing
costs. The interest rate risk from net borrowing is
managed by having an appropriate split between fixed
and floating interest rates.
The group actively uses derivatives to reduce risks
related to fluctuations in the interest rate, and to
manage the interest profile of the interest-bearing debt.
By having a portfolio approach and using derivatives, the
group can independently manage and optimise interest
rate risk, as the interest rate profile can be changed
without having to change the funding itself. This allows
the group to operate in a fast, flexible and cost-efficient
manner without changing underlying loan agreements.
The mandate from the Board of Directors provides
the group with the opportunity to use derivatives,
such as interest rate swaps and options, in addition to
interest conditions embedded in the loan agreements.
During the year, the group has not traded in any
options contracts.View entire presentation