Note 37. 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 receivables (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.

Cash and cash equivalents include money market funds in the amount of EUR 343,515 thousand (December 31, 2020: EUR 0 thousand). In assessing the classification of money market funds as cash equivalents, an assessment is undertaken to determine whether the fund meets the definition of cash equivalents. In particular, Lenzing AG examines whether regular and early callability may occur and whether the credit risk and interest rate risk are low. With regard to credit risk, the creditworthiness of the fund itself and of the instruments it contains is assessed. Interest rate risk is examined, in particular, using the fund’s Weighted Average Maturity (WAM). Money market funds are allocated to the category “at fair value through profit or loss”. The fair value is derived from the latest calculated value and is to be categorized in level 1 of the fair value hierarchy.

In the financial year under review, a reclassification was realized from equity instruments measured at fair value through other comprehensive income (level 3) to current securities (level 1). The reason for the reclassification is the initial public offering of the company Spinnova OY, Jyväskylä, Finland, on June 24, 2021. The interest held by Lenzing AG was converted into shares. As a consequence of the issue of the new shares, the previous interest of 6.8 percent was diluted and now amounts to 4.67 percent. The securities are measured at fair value and recognized directly in other comprehensive income due to the exercise of the corresponding option. This leads to an adjustment of the carrying amount of EUR 31,732 thousand.

The Lenzing Group accounts for reclassifications in the fair value hierarchy at the end of the reporting period in which the changes occur.

The measurement of financial instruments is monitored and reviewed 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.

The fair value of purchased bonds is derived from the respective current market prices and fluctuates, in particular, with changes in market interest rates and the credit standing of the issuers. 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 measurement of equity investments including derivatives designated as a hedge (fair value hedge) is classified “at fair value through other comprehensive income”. The fair value is determined on the basis of a market approach and is to be categorized in level 3 of the fair value hierarchy. The determined fair value of the equity investment would increase (decrease) in particular if the planned EBITDA increased (decreased). The determined fair value of the derivative has an inverse correlation to the abovementioned parameters.

The nominal value of fair value hedge derivatives amounts to EUR 14,120 thousand as at December 31, 2021 (December 31, 2020 : EUR 11,723 thousand). The change in value for the hedged item and the hedge, which was used to calculate ineffectiveness, amounts to EUR 0 thousand as at December 31, 2021 (December 31, 2020: EUR minus 5,547 thousand). No ineffectiveness was recognized through profit or loss in the current financial year or in the previous year. The risk management goal is to hedge the value of the investment against value fluctuations. The economic relationship for fair value hedge derivatives is ensured by the fact that the change in the value of the hedged item is offset by the change in the value of the hedge. A put/call option is used as a hedge. The hedge ratio is determined based on the nominal value. The hedging instruments run until December 31, 2021 and December 31, 2022.

The following tables show the development of the fair values of the equity investments and the associated derivatives of level 3:

A change in key input factors which cannot be observed on the market would have the following effects on the measurement of the equity instruments and the associated derivatives:

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.

The determined fair value would increase (decrease) in particular if EBITDA increased (decreased). The determined fair value would decrease (increase) if the WACC after tax increased (decreased). The determined fair value would increase if the repayment were to be made two years earlier.

A change in key input factors which cannot be observed on the market would have the following effects on other financial assets:

The sensitivities are 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 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. Puttable non-controlling interests are allocated to the category “at fair value through other comprehensive income”. 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 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 last year’s assumptions. 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 is calculated on an individual basis using the capital asset pricing model (CAPM) and 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 8,1 percent (December 31, 2020: 8.0 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 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 30), include, at the project company level, financial covenants which refer in particular to the ratio of net financial debt to EBITDA and may trigger an obligation to repay the financial liabilities if the covenants are not met. At the Lenzing Group level, market restrictive covenants are in place. These financial covenants are regularly monitored by the Global Treasury department and are considered in the determination of distributions by the group companies involved. 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.

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.

Derivative financial instruments and hedges

Derivatives are measured at fair value. Their 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 hedging ratio for the hedged nominal values is 100 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, the Managing Board considers the offsetting of value changes of the hedged items and hedging instrument resulting from changes in the exchange rate when forming a measurement unit as highly effective.

Cash flow hedge derivatives for currency risks

The Lenzing Group uses derivative financial instruments to hedge currency risks arising from investments and 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.

Cash flow hedges were concluded during the 2020 financial year to hedge against the currency risk of highly probable additional capital contributions in a subsidiary. With the realization of the forward foreign exchange contracts, the amounts of the changes in value initially recognized in other comprehensive income were reclassified to the foreign currency translation reserves. As at December 31, 2021, EUR 850 thousand (December 31, 2020 EUR 24,018 thousand) were 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 dates:

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

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 nominal values of the cash flow hedge derivatives as at December 31, 2021 amount to EUR 39,704 thousand and EUR 17,646 thousand (December 31 2020: EUR 40,861 thousand and EUR 18,160 thousand). The fair value of the cash flow hedge derivatives as at December 31, 2021 amounts to EUR minus 1,442 thousand (December 31, 2020: EUR minus 6,279 thousand). The contracts of the hedging instruments and the underlying hedged items are linked to the USD-LIBOR reference interest rate as of the balance sheet date and have not yet been switched to an alternative reference interest rate.

The change in fair value used to calculate ineffectiveness amounts to EUR minus 911 thousand (for the tranche of USD 20 mn) (December 31, 2020: EUR minus 1,890 thousand) and EUR minus 1,311 thousand (for the tranche of USD 45 mn) (December 31, 2020: EUR minus 4,258 thousand). The ineffective portion as at December 31, 2020 amounts to EUR 0 thousand (December 31, 2020: EUR 0 thousand). Over the term, the average fixed interest rate amounts to 0.75 percent and the average hedging rate amounts to 1.10 USD/EUR. The hedge expires in December 2024.

Cash flow hedge derivatives for interest rate risks

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 of the cash flow hedge derivatives as at December 31, 2021 amount to EUR 418,211 thousand (December 31, 2020: EUR 0 thousand). The fair value of the hedge derivatives as at December 31 2021 amounts to EUR minus 1,937 thousand (December 31, 2020: EUR 0 thousand). The contracts of the hedging instruments and the underlying hedged items are linked to the USD-LIBOR reference interest rate as of the balance sheet date and have not yet been switched to an alternative reference interest rate.

The change in fair value used to calculate the ineffectiveness amounts to EUR minus 1,937 thousand (December 31, 2020: EUR 0 thousand). The ineffective portion as at December 31, 2021 amounts to EUR 0 thousand. The average fixed interest rate amounts to 1.83 percent over the term. The hedge expires in June 2029.

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). 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. 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. The factoring agreements had a maximum usable nominal volume of EUR 73,235 thousand as at December 31, 2021 (December 31, 2020 EUR 72,214 thousand). They have been suspended since the 2017 financial year.