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
4.1.3 Interest rate risk
Risk mitigation
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 0.2 to 2.6. The
duration is increased due to new interest rate hedges
partly offset by a reduction in time to maturity on the
remaining hedges.
Table 4.1.3 Sensitivity based on a 1 percentage point increase in interest rate
(EURM)
Potential
accounting impact
Income
statement
Other
comprehen-
sive income
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 within
comprehensive income. Profit exposure relates to net
potential impairment of non-current assets. Exposure
other comprehensive income relates to revaluation of
net pension liabilities and interest hedging of future
cash flow.
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 adverse 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 on the
31 December 2020. 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.
Carrying value
Sensitivity
2020
Financial assets
-550
1%
Derivatives
1%
65
Financial liabilities
2,730
1%
-13
Net interest-bearing debt
excluding pension liabilities
2,180
2019
Financial assets
-627
Derivatives
Financial liabilities
2,740
Net interest-bearing debt
excluding pension liabilities
2,113
96 ARLA FOODS ANNUAL REPORT 2020
-1
42
-2
41
1%
do de de
1%
1%
54
-23
-2
31
-14
29
Duration
Policy
2020
2019
Minimum
Maximum
2.6
2.4
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 derivative financial instruments
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. Thereby, the group can 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, like
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