AAK Annual Report 2018

74 3 Note Financial risk management and hedge accounting Effective interest rate on debt to banks and credit institutions at balance sheet date 2018 2017 SEK 1.50 0.80 DKK 1.50 0.70 USD 3.30 2.30 CNY 5.00 4.60 TRY 27.00 15.00 BRL 8.00 11.00 INR 7.00 6.50 Sensitivity analysis – Interest rates At the closing date, the Group had a floating-rate-based net debt of SEK 2,274 million (3,191). A 1 percent change in interest rates would therefore have a full-year effect of SEK 23 million (32) on the Group’s interest costs before tax. Loans and capital structure AAK’s policy on capital structure is to maximize debt financing, though not to a level that would threaten the Company’s position as an investment grade company. AAK’s target key ratios are as follows: Target 2018 2017 Net interest-bearing debt/EBITDA < 3.0 1.06 1.17 This target level is considered to be relatively conservative and contributes to ensuring that AAK will be able to retain its high credit rating. The Group’s policy is to allocate total net borrowings per subsidiary relative to each subsidiary’s share of the Group’s free cash flow. This minimizes the currency risk in relation to the Group’s ability to pay interest on and amortize its borrow- ings, which in turn strengthens the Group’s debt capacity. Total borrowing reported in the balance sheet, per currency at balance sheet date SEK million 2018 2017 SEK 1,182 350 DKK 780 502 USD 399 1,145 CNY 176 244 TRY 270 315 BRL 121 240 INR 241 140 Other 41 46 Total 3,212 2,982 Sensitivity analysis – Currency With all foreign currency transaction risk hedged by currency hedge contracts, leaving a very limited net exposure, changes in foreign currencies will have an insignificant effect on each subsidiary’s profit margin. However, changes in foreign currencies relative to SEK do affect Group profit when the profit of each foreign subsidiary is translated into SEK. A 10 percent change in the exchange rates of all foreign currencies relative to SEK would have an effect of ± SEK 120 million (140) on Group operating profit. Furthermore, a 10 percent change in the exchange rates of all foreign currencies relative to SEK would affect Group net sales by SEK 2,100 million (2,000) and Group net working capital by SEK 390 million (350). Interest rate risk AAK’s policy on interest rate risk management is to minimize volatility in cash flow and net profit caused by fluctuations in interest rates. However, during abnormal market conditions – e.g. a financial crisis – short-term interest rates can rise to extreme levels. In order to protect the Group’s interest costs against such abnormal scenarios, the interest rate on part of the Group’s net interest-bearing debt can be fixed or capped. At year-end 2018, the Group’s interest-bearing net debt, including pensions, amounted to SEK 2,667 million (2,666).