AAK Annual Report 2020

AAK Annual Report 2020 77 Note 3 | Financial risk management and hedge accounting Sensitivity analysis – transaction risk 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. As this is considered non-material for AAK, no sensitivity analysis for transaction risk is shown. Sensitivity analysis – translation risk 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 170 million (150) on Group operating profit. Furthermore, a 10 percent change in the exchange rates of all foreign curren- cies relative to SEK would affect Group net sales by SEK 2,700 million (2,800) and Group net working capital by SEK 449 million (510). 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. AAK applies as a general principle cash flow hedging on interest rate swaps. At year-end 2020, the Group’s interest-bearing net debt, including pensions, amounted to SEK 2,738 million (3,117). Effective interest rate on debt to banks and credit institutions at balance sheet date % 2020 2019 SEK 1.0 2.0 DKK 1.5 1.5 USD 1.5 2.5 CNY 2.5 4.5 TRY 10.0 13.5 INR 4.5 6.5 Sensitivity analysis – interest rates At the closing date, the Group had a floating-rate-based net debt of SEK 2,254 million (2,950). A 1 percent change in interest rates would therefore have a full-year effect of SEK 23 million (30) on the Group’s interest costs before tax. Capital management AAK defines its managed capital as the Group’s consolidated equity and net debt. The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern and provide an adequate return for shareholders and benefits for other stakeholders together with maintaining an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may for instance raise new loans, amor- tize existing loans, adjust the dividends paid to shareholders, issue new shares or sell assets to reduce. AAK’s policy on capital structure is to optimize debt financing, though not to a level that would threaten the Company’s position as an investment grade company. When managing the capital, the Group monitors different measures including the following target key ratio which is included as financial covenant under the terms of the major borrowing facilities. This target level is considered relatively conservative and contributes to ensuring that AAK will be able to retain its high credit rating. Target 2020 2019 Net debt/EBITDA < 3.00 0.94 1.10 The Group’s policy is to allocate total net borrowings per subsidiary relative to each subsidi- ary’s share of the Group’s cash flow. This minimizes the currency risk in relation to the Group’s ability to pay interest on and amortize its borrowings, which in turn strengthens the Group’s debt capacity. Total borrowing reported in the balance sheet, per currency at balance sheet date SEK million 2020 2019 SEK 2,600 2,795 DKK 514 535 INR 212 274 CNY 193 216 EUR 100 - RUB 30 - USD 6 - TRY - 35 Other 8 2 Total 3,663 3,857 Liquidity risk Liquidity risk concerns the Group’s ability to meet its financial commitments as they fall due. The following table shows all of the Group’s financial commitments, listed by the earliest contractual maturity date at the balance sheet date. All liabilities to banks and credit institu- tions are based on variable interest rates, which means the year-end carrying value reflects the present value of these liabilities. All liabilities in foreign currency are translated into SEK at year-end closing rates.