Note 35. Disclosures on financial instruments

Carrying amounts, fair values, measurement categories and measurement methods

The following table shows the carrying amounts and fair values of the financial assets and financial liabilities for each class and each IFRS 9 category and reconciles this information to the appropriate line items on the statement of financial position. “Other assets” (non-current and current) and “Other liabilities” (non-current and current) as reported on the statement of financial position include financial instruments as well as non-financial assets and liabilities. Therefore, the “no financial instrument” column allows for a complete reconciliation with the line items on the statement of financial position. Lease liabilities which are to be considered financial liabilities but cannot be allocated to a measurement category in accordance with IFRS 9 are also reported in this column.

Depending on the classification/measurement category, financial instruments are subsequently measured at (amortized) cost or fair value. The Lenzing Group uses the following measurement categories: “at amortized cost”, “at fair value through profit or loss” and “at fair value through other comprehensive income”. The measurement category “at fair value through profit or loss” is solely used for financial assets that are mandatorily measured at fair value.

The Lenzing Group accounts for reclassifications in the fair value hierarchy at the end of the reporting period in which the changes occur. In the 2023 and 2022 financial years, no shifts occurred between the various levels of the fair value hierarchy for financial instruments.

The measurement of financial instruments is monitored and re-viewed by the Lenzing Group. The necessary market data are validated based on the dual control principle.

In light of the varying influencing factors, the fair values presented can only be regarded as indicators of the values that could actually be realized on the market.

Financial assets

Securities are measured at fair value and are recognized directly in equity due to the exercise of the corresponding option. In the 2023 and 2022 financial years, some of the shares in Spinnova OY, Jyväskylä, Finland, and some of the ordinary shares in Oberbank, were divested (see note 22).

The fair value of shares is derived from the current stock exchange prices. These securities are assigned to the category “at fair value through other comprehensive income”.

The fair value of investment funds is derived from the latest calculated value. These securities are assigned to the category “at fair value through profit or loss”.

The other equity investments are classified as “at fair value through other comprehensive income”.

Other financial assets

Other financial assets from earn-out agreements are classified “at fair value through profit or loss”. The fair value of these other financial assets is determined based on an income approach. It is to be categorized in level 3 of the fair value hierarchy. The measurement model is based on the planned EBITDA, the weighted average cost of capital (WACC) after tax and the repayment terms.

Due to the medium-term planning provided and the resultant budgeted EBITDAs, realistically expected changes in the discount rate (WACC) after taxes and the repayment terms do not lead to a positive fair value. For this reason, a sensitivity analysis was not conducted as at December 31, 2023.

A change in significant unobservable input factors would have had the following effect on the measurement of other financial assets as at December 31, 2022:

The sensitivities were determined by conducting the measurements again using the changed parameters.

Puttable non-controlling interests

The Dexco-Group (formerly known as Duratex Group) has a put option and has the right to sell its shares in LD Celulose S.A., Indianópolis, Brazil if a change of control occurs regarding the owner of the Lenzing Group (change of control clause). This obligation is recognized under liabilities from puttable non-controlling interests. The liability from redeemable non-controlling interests is subsequently measured at fair value directly through retained earnings (not in profit or loss). The fair value of these puttable non-controlling interests is determined based on the planned or projected cash flows less cost of disposal and net debt at the measurement date. The budget approved by the Management and Supervisory Boards and the medium-term plans approved by the Management Board are the starting point for the cash flow projections. After the detailed planning period of five years, a 25-year return based on a sustainable EBITDA margin is expected based on the assumptions for the last year. The planning period for the calculation of fair value is contractually limited to a maximum of 30 years. Cash flows are discounted to their present value with a discounted cash flow method. The applied discount rate represents a composite figure (weighted average cost of capital – WACC) that combines the average interest rate for debt and the anticipated return on equity employed. An after-tax WACC of 8.2 percent (December 31, 2022: 8.8 percent) was used at the measurement date. Fair value measurement is classified in full as level 3 of the fair value hierarchy because key input factors (in particular, cash flows) cannot be observed on the market.

The determined fair value would increase (decrease) if the operating margin increased (decreased) or if the after-tax WACC decreased (increased). A change of these unobservable input factors would have the following effects on the measurement of puttable non-controlling interests:

The sensitivities are determined by conducting the measurements again using the changed parameters.

The loan agreements, which were concluded for the construction of the dissolving wood pulp pant in Brazil (see note 28), include, at the company level and group level financial covenants that relate to financial and liquidity ratios or other financial criteria and may trigger an obligation to repay the financial liabilities if the covenants are not met. These financial covenants are regularly monitored by the Global Treasury department and are considered in the determination of distributions by the group companies involved. All financial covenants were met during the reporting year. Lenzing AG and the joint venture partner have committed to a fixed debt/equity ratio of the project company (63/37) and guarantee the financial liabilities of the project company in the amount of their share in the capital. Lenzing AG therefore guarantees 51 percent. Due to the full consolidation, 100 percent of the project company’s financial liabilities are included in the consolidated statement of financial position.

Other financial liabilities

The fair values of the other financial liabilities are determined in accordance with generally accepted valuation methods based on the discounted cash flow method. The most important input factor is the discount rate, which incorporates the available market data (risk-free interest rates) and the credit standing of the Lenzing Group, which is not observable on the market. The fair values of the financial guarantee contracts represent the estimated expected default arising from the maximum possible payment obligation and the expected loss.

The fair value of the contingent consideration is determined by means of option valuation using an arbitrage-free Monte Carlo model approach. The gas price (TTF ICE) is the main input factor in this context. This liability is assigned to the category “at fair value through profit or loss”.

Derivative financial instruments and hedges

Derivatives are measured at fair value. The fair value corresponds to the applicable market value, if available, or is calculated using standard methods based on the market data available at the measurement date (in particular exchange rates and interest rates). Currency and commodity forwards are measured at the respective forward rate or price at the reporting date. These forward rates or prices are based on the spot rates or prices and include forward premiums and discounts. The Group’s own models are used to estimate the measurement. The measurement of derivatives also includes the counterparty risk (credit risk/counterparty risk/non-performance risk) in the form of discounts to the fair value that would be used by a market participant for pricing.

As a matter of principle, the Lenzing Group applies the hedge accounting rules defined by IFRS 9 to the following derivative financial instruments. The retrospective hedging effect or ineffectiveness is evaluated with the dollar-offset method, which compares the accumulated changes in the fair value of the hedged items with the accumulated changes in the fair value of the hedges in line with the compensation method.

The measurement of the hedged item is offset by the hedge and is therefore effective. Risks of ineffectiveness include the credit risk of a counterparty, a significant change in the credit risk of a contractual party in the hedging relationship or the change of time of payment of the hedged item, reduction of the total invoice amount or price of the hedged item. Risks are always hedged in their entirety. The target hedging ratio for the hedged nominal values is about 67 percent.

The critical terms of payment of the hedged items and hedging instruments (in particular, the nominal value and time of payment) are generally identical or offset one another (“critical terms match”). Therefore, when forming a measurement unit, the Managing Board considers the offsetting of value changes of the hedged items and of the hedging instrument resulting from changes of the hedged risk as highly effective.

Cash flow hedge derivatives for currency risks

The Lenzing Group uses derivative financial instruments to hedge currency risks arising from the operating business. These derivative financial instruments serve to balance the variability of cash flows from future transactions. Hedges are determined in advance on the basis of the expected purchases and sales in the relevant foreign currency. In hedging future cash flows in foreign currencies (cash flow hedges), the Lenzing Group typically hedges the risk up to the time of the foreign currency payment. Hedge effectiveness is measured by grouping the hedged items and hedging instruments together in at least quarterly maturity ranges for each hedged risk. Cash flow hedges whose underlying hedged item was already recognized in profit or loss are used to hedge foreign currency receivables/liabilities that were recognized at the reporting date but do not impact cash until a later time.

When forward foreign exchange contracts concluded to hedge the currency risk of highly probable expected capital contributions are realized, the amounts of the changes in value initially recognized in other comprehensive income are reclassified to the foreign currency translation reserve. No reclassification occurred as of December 31, 2023, as the forward foreign exchange transactions concluded to hedge the currency risk were realized in full in the 2022 financial year. As of December 31, 2022, an amount of EUR 1,525 thousand was reclassified to the foreign currency translation reserve.

The nominal values and fair values of the cash flow hedges are as follows as at the reporting date:

The carrying amounts and the ineffectiveness of the hedged items (purchases and sales) designated as hedging instruments as of the balance sheet dates are as follows:

Cash flow hedge derivatives for combined interest rate/currency risks and interest rate risks

The Lenzing Group deploys derivative financial instruments in order to hedge interest rate/currency risks arising from private placements denominated in US dollars. Hedges are utilized to offset the variability of interest and principal payments resulting from the hedged item.

The Lenzing Group uses derivative financial instruments to hedge interest rate risks arising from loans taken out with variable interest rates. These hedges are used to offset the variability of cash flows from future interest payments resulting from the hedged item.

The nominal values and fair values of the cash flow hedge derivatives for combined interest rate/currency risks and interest rate risks are as follows as at the reporting dates:

The carrying amounts and the ineffectiveness of the hedged items (loans) designated as hedging instruments as at the balance sheet dates are as follows:

Cash flow hedge derivatives for commodity price risks

In addition to physical purchase contracts, the Lenzing Group deploys derivative financial instruments in order to hedge against gas price risks. These hedges are used to offset the variability of cash flows from future gas price payments deriving from the hedged item.

The nominal values and fair values of the commodity hedges are as follows as at the reporting dates:

The carrying amounts and the ineffectiveness of the hedged items designated as hedging instruments as at the balance sheet dates are as follows:

Hedging Reserve

The change in the hedging reserve is as follows:

Offsetting financial assets and liabilities

The Lenzing Group has concluded a number of framework netting agreements (in particular, master netting arrangements) with some credit institutions. The amounts owed by each counterparty under such agreements on a single day in the same currency based on the total outstanding transactions are aggregated into a single net amount to be paid by one party to the other.

The following tables present information on offsetting financial assets and liabilities in the consolidated statement of financial position on the basis of framework netting agreements. The (gross) amounts presented in the “Financial assets” and “Financial liabilities” columns correspond to the (net) financial assets and liabilities recognized in the statement of financial position. The column “effect of framework netting agreements” shows the amounts which result from these types of agreements, but which do not meet the criteria for offsetting in the IFRS consolidated statement of financial position.

Transfer of financial assets (sale of receivables/factoring)

Factoring agreements are in place which require the banks to purchase certain trade receivables from the Lenzing Group for a revolving monthly nominal amount. The Lenzing Group is entitled to sell these receivables. The agreements have indefinite terms, whereby each party has the right to cancel the agreements with notice and allow them to expire. Factoring agreements that have been inactive since 2017 were utilized again in the 2022 financial year. As at December 31, 2023 the factoring agreements have a maximum usable nominal volume totaling EUR 80,000 thousand (December 31, 2022: EUR 60,000 thousand), of which USD 33,000 thousand (December 31, 2022: USD 33,000 thousand) in US dollars can be utilized.

The risks relevant to the risk assessment of the receivables sold include credit default risk (del credere risk), foreign currency risk in the case of receivables denominated in foreign currencies, and the risk of late payments. Credit risk-related defaults and, in the case of receivables in foreign currencies, exchange rate fluctuations represent the main opportunities and risks associated with these receivables. The risk of late payments is borne by the Lenzing Group in all factoring agreements and is considered to be negligible.

The Lenzing Group assumes a default liability of 10 percent per payment default. This amount, which cannot be reimbursed by another party, is not advanced by the bank. The remaining credit default risk (90 percent per default) and – in the case of receivables not denominated in the reporting currency – foreign currency risk is assumed by the bank. As a consequence, the main opportunities and risks were divided between the Lenzing Group and the bank; however, the power of disposal over the receivables was transferred to the bank. The Lenzing Group has undertaken to take out credit insurance for the receivables sold and to assume responsibility for debtor management. The banks involved have the right to transfer overdue receivables back to the Lenzing Group for procedural reasons in the event of a legal dispute. However, this does not transfer the credit default risk back to the Lenzing Group and has no effect on the Lenzing Group’s liquidity position.

As at December 31, 2023, receivables under the factoring agreements totaling EUR 77,442 thousand (December 31, 2022: EUR 57,149 thousand) were sold and derecognized from the Lenzing Group’s consolidated statement of financial position. As at December 31, 2023, the unadvanced amount was recognized under other current assets (financial) in the amount of EUR 7,744 thousand (December 31, 2022: EUR 5,715 thousand). The fair values correspond approximately to the stated carrying amounts, as especially the remaining terms of the respective receivables are also categorized as current.

From the Lenzing Group’s perspective, the unadvanced amount stated above corresponds to the theoretical maximum credit-risk-related loss for the assumption of the default liability. The fair value of this default liability amounts to EUR 12 thousand as at December 31, 2023 (December 31, 2022: EUR 34 thousand). An other current liability (financial) equivalent to the fair value of this contingent liability was recognized. For the obligations assumed and risks arising from the factoring agreements, EUR 20 thousand other current liabilities (financial) were recognized as at December 31, 2023 (December 31, 2022: EUR 152 thousand). In the 2023 financial year, service fees amounting to EUR 172 thousand were expensed (2022: EUR 152 thousand) in the other operating expenses. Since the start of the agreement, a cumulative amount of EUR 511 thousand has been expensed. At the time of the transfer of the receivables, a total of EUR 315 thousand was expensed.

Payments received from customers in the period between the last advance and December 31 are deferred in other current liabilities (financial).