Arla Foods Consolidated Annual Report 2021
97
Arla Foods Consolidated Annual Report 2021 / Consolidated Financial Statements / Notes
Funding
4.1 FINANCIAL RISKS
4.1.5 Credit risk
LIMITED LOSSES
In 2021, 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.
As in previous years, the group 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 qualify for netting in case
of default.
Table 4.1.5 External rating of financial counterparties
(EURM)
Counterparty rating
Contents
External rating of financial counterparties,
External rating of financial counterparties,
2021
2020
Below
investment
AAA
AA-
A+
A
BBB+
grade
Total
2021
Securities
402
32
434
Cash
5
17
14
7
24
30
97
Derivatives
1
39
33
0
1
74
Total
407
18
53
40
56
31
605
2020
Securities
415
Cash
10
44
Derivatives
9
Total
415
19
26
22
66
21
562
16
5328
420
44
126
10
0
57
44
603
605
MILLION EUR
603
MILLION EUR
AAA 67%
BBB+ 9%
■AA-3%
■ A+ 9%
Below investment grade 5%
■A7%
■ AAA 69%
BBB+ 6%
■AA-3%
A4%
Below investment grade 7%
A+ 11%
Risk mitigation
III
Risk
Credit risks arise from operating activities and
engagement with financial counterparties. Furthermore,
a weak counterparty credit quality can reduce their
ability to support the group going forward, thereby
jeopardising the fulfilment of our group 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
counterparty (or its parent) to financial contracts and
deposits must as a minimum have a long-term rating
corresponding to A3 from Moody's, A- from S&P or
A- from Fitch. If the group has only obtained credit
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 seeks the best coverage available. The
group has determined that this is an acceptable risk
given the levels of investment 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