lenzing.com

Note 39. Financial risk management

As an international company, the Lenzing Group is exposed to financial and other market risks. A company-wide risk management system, which is regulated comprehensively in guidelines, has been implemented to identify and assess potential risks at an early stage. This system is designed to achieve maximum risk transparency and provide high-quality information by quantifying all risk categories, with a particular emphasis on risk concentration. The efficiency of group-wide risk management is evaluated and monitored on an ongoing basis by both the internal control system (ICS) and the internal audit department.

The financial risks arising from financial instruments – credit risk, liquidity risk, currency risk (above all with regard to the BRL, CNY, CZK, HKD, IDR, THB and USD), commodity price risk and interest rate risk – are classified as relevant risks for the Lenzing Group. Corresponding hedging measures are used to minimize these risks wherever possible. Acquired shares in external companies are considered long-term investments and, therefore, are not viewed as a relevant market price risk over the short- to medium-term.

Credit risk

Credit risk represents the risk of asset losses that may result from the failure of individual business partners to meet their contractual obligations. The credit risk from transactions involving the provision of goods and services (in particular, trade receivables) is secured to a substantial extent by credit insurance and bank security (guarantees, letters of credit, bills of exchange etc.). Outstanding receivables and customer limits are monitored on an ongoing basis. The credit risk from investments with banks (above all, cash and cash equivalents) and derivatives with a positive market value is reduced by only concluding transactions with counterparties that can demonstrate a sound credit rating.

Receivables are measured individually. Individual bad debt provisions are recognized for receivables if there are indications of credit impairment (individual measurement) and if they are not expected to be collectible in full. This applies especially when the debtor has significant financial difficulties, is in default or has delayed payments or when there is an increased probability that the debtor will enter bankruptcy and the involved receivable is not sufficiently collateralized. The expected loss is low because of the Lenzing Group’s comprehensive receivables management (extensive collateralization with credit insurance and bankable security as well as continuous monitoring of accounts receivable and customer limits).

To determine the required impairment for trade receivables for which no individual bad debt provisions were recognized, the defaults of the past years were evaluated in the Lenzing Group. The analysis has shown that there is only an immaterial risk for receivables overdue for a certain period.

The loss ratios are based on historical default rates of the last nine years and are distinguished by companies and periods overdue. The COVID-19 crisis did not result in any significant changes in default rates during the financial year. The relevant development is continuously monitored by the management.

For non-current debt instruments assigned to the category “at fair value through other comprehensive income”, originated loans and other financial assets (current and non-current), which are measured at amortized cost, as well as cash and cash equivalents, the calculation of impairment is based on the average default rates. The impairment is based on the default rate per rating for the respective financial instrument. A significant change in credit risk is identified based on the rating and default of payment. Regarding instruments with a low credit risk, the Lenzing Group assumes that the credit risk has not increased significantly since the first recognition. Consequently, the twelve month credit loss is always recognized for such instruments. Since the expected impairment is immaterial, no expected credit loss is recorded for these financial assets.

The reduced earning power and uncertainties, in particular due to a fire at a plant of the buyer of EFB in 2018 (including its subsidiaries), result in a higher default risk for the receivables from these companies. Therefore, the calculation of bad debt provisions for these originated loans was changed from the expected twelve month credit loss to lifetime expected credit loss in 2018. The lifetime expected credit loss was determined based on the difference between the contractual payments and all payments expected by the management in the future.

Trade receivables are considered defaulted when they are overdue for more than 270 days or when it is unlikely that the debtor can meet the obligations without the realization of collateral. This long period of time results from the fact that about 90 percent of trade receivables are insured by credit insurance.

Financial assets are only derecognized directly if the contractual rights to payments cease to exist (particularly in the event of bankruptcy). An impairment loss is reversed up to amortized cost if the reasons for its recognition no longer exist.

The Group considers the risk concentration in trade receivables to be rather low because its customers are based in various countries, operate in different sectors and are active on largely independent markets. A rather small amount of the receivables is overdue and not individually impaired (see table “aging of receivables” below). Important effects for a change in bad debt provisions include possible default of payment by major customers or a general increase of receivables at the reporting date. During the financial year there was no significant increase in defaults. Trade receivables increased as at December 31, 2021.

The bad debt provisions developed as follows:

Development and reconciliation of bad debt provisions
EUR '000

 

Lifetime expected credit loss (portfolio measurement)

Lifetime expected credit loss (individual measurement)

Trade receivables

 

 

Bad debt provisions as at 01/01/2021

468

8,469

Transfer to “Lifetime expected credit loss”

0

(213)

Reversal

(98)

(224)

Addition

368

1,196

Currency translation adjustment

15

532

Bad debt provisions as at 31/12/2021

753

9,760

Development and reconciliation of bad debt provisions (previous year)
EUR '000

 

Lifetime expected credit loss (portfolio measurement)

Lifetime expected credit loss (individual measurement)

Trade receivables

 

 

Bad debt provisions as at 01/01/2020

439

10,729

Transfer to “Lifetime expected credit loss”

0

(57)

Reversal

(240)

(2,114)

Addition

283

70

Currency translation adjustment

(14)

(158)

Bad debt provisions as at 31/12/2020

468

8,469

Lifetime expected credit loss (individual measurement)
EUR '000

 

2021

2020

Originated loans at amortized cost

 

 

Bad debt provisions as at 01/01

6,145

4,755

Utilization

 

 

Reversal

(601)

0

Addition

14

1,400

Currency translation adjustment

42

(10)

Bad debt provisions as at 31/12

5,600

6,145

 

 

 

Other financial assets (non-current and current)

 

 

Bad debt provisions as at 01/01

648

581

Utilization

0

0

Addition

66

66

Bad debt provisions as at 31/12

713

648

The bad debt provisions for trade receivables include bad debt provisions of EUR 1,810 thousand (2020: EUR 650 thousand) for companies accounted for using the equity method.

The bad debt provisions for trade receivables are related primarily to bad debt provisions for overdue, uninsured receivables.

The carrying amount of the impaired receivables is as follows:

Aging and expected credit loss for trade receivables
EUR '000

31/12/2021

Gross carrying amount

Expected credit loss

Not overdue

287,584

439

Overdue up to 30 days

29,249

167

Overdue for 31 to 90 days

5,541

56

Overdue for 91 to 365 days

418

58

Overdue for more than one year

32

32

Credit impaired receivables (individual measurement)

12,860

0

Total

335,685

753

Aging and expected credit loss for trade receivables (previous year)
EUR '000

31/12/2020

Gross carrying amount

Expected credit loss

Not overdue

231,900

303

Overdue up to 30 days

15,338

102

Overdue for 31 to 90 days

1,435

15

Overdue for 91 to 365 days

248

13

Overdue for more than one year

35

35

Credit impaired receivables (individual measurement)

9,643

0

Total

258,598

468

Development of expected credit loss not including credit impaired financial assets
EUR '000

As at 01/01/2020

439

Change

29

As at 31/12/2020 = 01/01/2021

468

Change

286

As at 31/12/2021

753

Aging of financial receivables
EUR '000

 

Originated loans

Other financial receivables (current and non-current)

Gross carrying amount as at 31/12/2021

17,948

20,239

Thereof at the reporting date:

 

 

Not overdue

6,670

19,404

Thereof impaired

11,278

834

Aging of financial receivables (previous year)
EUR '000

 

Originated loans

Other financial receivables (current and non-current)

Gross carrying amount as at 31/12/2020

17,736

35,505

Thereof at the reporting date:

 

 

Not overdue

5,913

30,366

Thereof impaired

11,823

5,139

Securities in the scope of the impairment provisions of IFRS 9 as well as cash and cash equivalents have a rating between AAA and BBB.

There are currently no doubts concerning the collectability of financial assets that are neither past due nor impaired.

The maximum exposure to credit risk from recognized financial assets is as follows:

Maximum exposure to credit risk from recognized financial assets
EUR '000

 

31/12/2021

31/12/2020

Carrying amount of asset financial instruments (see note 37)

1,529,076

1,394,910

Less risk reduction in relation to receivables due to

 

 

Credit insurance received for trade receivables (not including deductibles)

(104,674)

(105,803)

Guarantees received for trade receivables

(35,600)

(4,597)

Total

1,388,802

1,284,510

The maximum exposure to credit risk from financial guarantee contracts and contingent liabilities is shown in note 42.

Liquidity risk

Liquidity risk represents the risk of not being able to obtain sufficient funds to settle incurred liabilities at all times. The management of liquidity risk has a high priority in the Lenzing Group. Corporate guidelines require uniform, proactive liquidity forecasts and medium-term planning throughout the entire Group. The Lenzing Group continuously monitors the risk of a possible liquidity shortage.

The Lenzing Group had liquid assets totaling EUR 1,124,120 thousand (December 31, 2020: EUR 1,081,122 thousand) in the form of cash and cash equivalents including money market funds and liquid bills of exchange (see note 36). Unused credit facilities of EUR 454,471 thousand were available as at December 31, 2021 (December 31, 2020: EUR 1,031,364 thousand) to finance necessary working capital and to cover any shortfalls caused by economic cycles. The medium- and long-term financing for the Lenzing Group is provided by equity and financial liabilities, in particular bonds, private placements and bank loans. Current financial liabilities can regularly be extended or refinanced with other lenders. Trade payables provide short-term financing for the goods and services purchased. The liabilities covered by reverse factoring agreements are settled in line with their agreed maturity, whereby the related cash outflows are included in liquidity planning. For this reason, the Group considers the concentration of risk with regard to sufficient financing sources as rather low.

The contractually agreed (undiscounted) interest and principal payments for primary financial liabilities (including financial guarantee contracts) are shown below:

Maturity analysis of non-derivative financial liabilities
EUR '000

 

Carrying amount as at 31/12/2021

Cash flows 2022

Cash flows 2023 to 2026

Cash flows from 2027

Private placements

637,841

80,641

550,691

29,234

Bank loans

1,342,661

63,715

1,052,698

379,378

Loans from other lenders

57,183

6,539

34,542

19,969

Lease liabilities

63,475

12,781

34,425

123,548

Trade payables

414,768

414,768

0

0

Puttable non-controlling interests

234,409

0

0

234,409

Other financial liabities1

40,442

40,442

0

0

Total

2,790,781

618,886

1,672,357

786,539

Thereof:

 

 

 

 

Fixed interest

 

17,985

50,020

85,306

Fixed and floating rate interest

 

179

616

299

Floating rate interest

 

24,480

59,376

9,442

Repayment

 

576,243

1,562,345

691,492

1)

The above includes the maximum possible payment obligations from financial guarantee contracts. The amounts are assumed to be due in the first year.

Maturity analysis of non-derivative financial liabilities (previous year)
EUR '000

 

Carrying amount as at 31/12/2020

Cash flows 2021

Cash flows 2022 to 2025

Cash flows from 2026

Private placements

689,114

8,585

448,508

274,658

Bank loans

733,188

103,352

640,482

57,643

Loans from other lenders

69,300

6,887

39,767

25,771

Lease liabilities

60,890

13,267

29,807

125,992

Trade payables

195,200

195,200

0

0

Puttable non-controlling interests

140,341

0

0

140,341

Other financial liabities1

30,548

30,548

0

0

Total

1,918,581

357,839

1,158,564

624,404

Thereof:

 

 

 

 

Fixed interest

 

14,608

45,437

86,785

Fixed and floating rate interest

 

212

614

481

Floating rate interest

 

11,655

28,202

4,883

Repayment

 

331,365

1,084,311

532,255

1)

The above includes the maximum possible payment obligations from financial guarantee contracts. The amounts are assumed to be due in the first year.

The above tables include all primary financial liabilities held at the reporting date, but exclude estimated future liabilities. Foreign currency amounts were translated with the spot exchange rate in effect at the reporting date. Floating rate interest payments were calculated according to the last interest rates set before the reporting date. Financial liabilities that are repayable at any time are always assigned to the earliest time period.

The contractually agreed (undiscounted) interest and principal payments for derivative financial instruments are as follows:

Maturity analysis of derivative financial instruments
EUR '000

 

Carrying amount as at 31/12/2021

Cash flows 2022

Cash flows 2023 to 2026

Cash flows from 2027

Currency, combined interest rate/currency and interest rate derivatives

 

 

 

 

Derivatives with a positive fair value (cash flow hedges)

1,841

1,841

0

0

Derivatives with a positive fair value (cash flow hedges with the underlying already recognized in profit or loss)

109

109

0

0

Positive fair value

1,950

1,950

0

0

 

 

 

 

 

Derivatives with a negative fair value (cash flow hedges)

(22,607)

(19,228)

(1,442)

(1,937)

Derivatives with a negative fair value (cash flow hedges with the underlying already recognized in profit or loss)

(5,799)

(5,799)

0

0

Negative fair value

(28,406)

(25,027)

(1,442)

(1,937)

Total

(26,456)

(23,077)

(1,442)

(1,937)

Cash flows consist solely of principal and do not include any interest components.

Fair value: + = receivable, - = liability from the Lenzing Group’s perspective

Maturity analysis of derivative financial instruments (previous year)
EUR '000

 

Carrying amount as at 31/12/2020

Cash flows 2021

Cash flows 2022 to 2025

Cash flows from 2026

Currency, combined interest rate/currency and interest rate derivatives

 

 

 

 

Derivatives with a positive fair value (cash flow hedges)

11,340

10,876

465

0

Derivatives with a positive fair value (cash flow hedges with the underlying already recognized in profit or loss)

1,838

1,838

0

0

Positive fair value

13,178

12,714

465

0

 

 

 

 

 

Derivatives with a negative fair value (cash flow hedges)

(61,353)

(42,660)

(18,693)

0

Derivatives with a negative fair value (cash flow hedges with the underlying already recognized in profit or loss)

(1,358)

(1,358)

0

0

Negative fair value

(62,711)

(44,018)

(18,693)

0

Total

(49,532)

(31,304)

(18,228)

0

Cash flows consist solely of principal and do not include any interest components.

Fair value: + = receivable, - = liability from the Lenzing Group’s perspective

Currency risk

Cash flows from capital expenditures and the operating business as well as investments and financing in foreign currencies expose the member companies of the Lenzing Group to currency risks. Risks from foreign currencies are hedged as far as possible if they influence the Group’s cash flows. In the operating business, the individual group companies are exposed to currency risk in connection with planned incoming and outgoing payments outside their functional currency. Forward foreign exchange contracts, which are recognized at fair value, are used to hedge the exchange rate risk from foreign currency positions arising from expected future transactions in foreign currencies by group companies.

For companies with the same functional currency, the respective net foreign currency exposures are calculated for the following sales year as part of the budgeting process. Foreign currency purchases and sales are aggregated into separate groups for each currency. Approximately 62 percent of the budgeted net exposure for the following financial year was hedged for EUR/USD, the dominant currency pair in the Lenzing Group, as at December 31, 2021 (December 31, 2020: approximately 73 percent). The CNY also plays an important role. The resulting risk concentration at the reporting date can be seen in the following tables (especially the tables on “sensitivity analysis and risk exposure for foreign currency risks”).

Translation risk is also regularly assessed and monitored at the Group level. Translation risk represents the risk arising from the consolidation of foreign investments whose functional currency is not the euro. The greatest risk exposure here is in relation to the US dollar.

Commodity risk

The gas price risk is hedged physically through supply contracts. The group is also subject to the usual market price risks in connection with its business activities (especially relating to wood, chemicals, pulp and energy) which are not hedged with derivatives or financial instruments, but protected through other measures (above all, long-term and short-term supply contracts with various suppliers).

Interest rate risk

The Lenzing Group is exposed to interest rate risk through its business-related financing and investing activities. Interest rate risks arise through potential changes in the market interest rate. They can lead to a change in the fair value of fixed rate financial instruments and to fluctuations in the cash flows from interest payments for floating rate financial instruments. Interest rate risks and the resulting risk concentrations are managed by monitoring and adjusting the composition of fixed rate and floating rate primary financial instruments on an ongoing basis and by the selective use of derivative financial instruments. The level of the resulting risk concentration as of the balance sheet date is presented in the following tables (see section “Sensitivity analysis and exposure for interest rate risks”).

Sensitivity analysis and exposure for currency risks

The Lenzing Group uses the following assumptions for its sensitivity analysis:

  • The sensitivity of profit or loss is based on the receivables and liabilities recognized by the group companies which are denominated in a currency other than the functional currency of the relevant company and the open derivatives from cash flow hedges for currency risks in cases where the hedged item was already recognized in profit or loss as at the reporting date. The carrying amounts of the receivables and liabilities, respectively the nominal values of the derivatives, correspond to the exposure. The individual exposures are presented consistently in relation to the US dollar and euro for the aggregation to the Group’s exposure.
  • The sensitivity of other comprehensive income as at the reporting date is based on the open derivatives from cash flow hedges for currency risks in cases where the hedged item has not yet been recognized in profit or loss. The nominal value of the open derivatives corresponds to the exposure.

The following tables show the sensitivities and exposure for currency risk as at the reporting dates:

Sensitivity analysis and risk exposure for foreign currency risks (EUR)
EUR '000

 

31/12/2021

31/12/2020

 

Group exposure in relation to EUR

Sensitivity to 10 % devaluation of the EUR

Sensitivity to 10 % revaluation of the EUR

Group exposure in relation to EUR

Sensitivity to 10 % devaluation of the EUR

Sensitivity to 10 % revaluation of the EUR

EUR-USD

380,790

31,589

(25,846)

326,704

25,842

(21,144)

EUR-GBP

1,533

136

(111)

(2,918)

(243)

199

EUR-CNY/CNH

65,576

5,465

(4,471)

9,222

769

(629)

EUR-CZK

(2,826)

(243)

199

(3,625)

(322)

264

EUR-HKD

(5,814)

(480)

393

(2,962)

(242)

198

Sensitivity of net profit or loss after tax (through receivables and payables)

439,259

36,466

(29,836)

 

25,804

(21,112)

 

 

 

 

 

 

 

Sensitivity of other comprehensive income after tax (through cash flow hedge derivatives)

 

(15,690)

12,843

 

(1,368)

1,120

Sensitivity of equity

 

20,776

(16,993)

 

24,435

(19,993)

Group exposure: + receivable, – liability; sensitivity: + increase in profit/other comprehensive income, - decrease in profit/other comprehensive income

Sensitivity analysis and risk exposure for foreign currency risks (USD/GBP)
EUR '000

 

31/12/2021

31/12/2020

 

Group exposure in relation to USD/GBP

Sensitivity to 10 % devaluation of the USD/GBP

Sensitivity to 10 % revaluation of the USD/GBP

Group exposure in relation to USD/GBP

Sensitivity to 10 % devaluation of the USD/GBP

Sensitivity to 10 % revaluation of the USD/GBP

USD-IDR

(13,177)

(1,142)

934

(5,104)

(442)

362

USD-GBP

(3,926)

(353)

289

(3,668)

(295)

242

USD-CNY/CNH

17,766

1,481

(1,212)

7,224

724

(593)

USD-CZK

(14,914)

(1,342)

1,098

(4,942)

(445)

364

USD-THB

809

72

(59)

(207,766)

(18,468)

15,110

USD-BRL

61,525

4,512

(3,692)

(53,303)

(3,909)

3,198

GBP-CNY/CNH

6,081

547

(448)

9,594

1,062

(869)

Sensitivity of net profit or loss after tax (through receivables and payables)

54,164

3,775

(3,088)

 

(21,773)

17,815

 

 

 

 

 

 

 

Sensitivity of other comprehensive income after tax (through cash flow hedge derivatives)

 

(12,202)

11,947

 

9,938

(8,085)

Sensitivity of equity

 

(8,427)

8,858

 

(11,835)

9,730

Group exposure: + receivable, – liability; sensitivity: + increase in profit/other comprehensive income, - decrease in profit/other comprehensive income

Sensitivity analysis and exposure for interest rate risks

The following tables show the exposure for interest rate risks at the reporting dates in the form of the carrying amounts of interest-bearing primary financial instruments:

Risk exposure for interest rate risks
EUR '000

 

31/12/2021

 

Fixed interest

Fixed and floating rate interest

Floating rate interest

No interest

Total

Cash and cash equivalents

0

0

1,113,279

0

1,113,279

Financial assets

42

0

11,278

59,780

71,101

Financial liabilities

(932,158)

(33,813)

(1,135,190)

0

(2,101,161)

Net risk position

(932,116)

(33,813)

(10,633)

59,780

(916,782)

Effects from derivative instruments (hedging)

(57,350)

0

57,350

0

0

Net risk position after hedging effect

(989,465)

(33,813)

46,717

59,780

(916,782)

+ Receivables, - Liabilities

Risk exposure for interest rate risks (previous year)
EUR '000

 

31/12/2020

 

Fixed interest

Fixed and floating rate interest

Floating rate interest

No interest

Total

Cash and cash equivalents

0

0

1,069,998

0

1,069,998

Financial assets1

46

0

10,678

30,166

40,890

Financial liabilities

(785,884)

(38,572)

(728,037)

0

(1,552,492)

Net risk position

(785,838)

(38,572)

352,640

30,166

(441,604)

Effects from derivative instruments (hedging)

(52,927)

0

52,927

0

0

Net risk position after hedging effect

(838,765)

(38,572)

405,567

30,166

(441,604)

+ Receivables, - Liabilities

1)

Includes, among others, the GF 82 wholesale fund whose income is distributed or reinvested.

Sensitivity analyses are performed for the interest rate risks arising from floating rate financial instruments and from the fluctuation in the market values of cash flow hedge derivatives. They show the effects of hypothetical changes in interest rates on profit or loss, other comprehensive income and equity.

The Lenzing Group uses the following assumptions in its analysis of the interest rate risk arising from floating rate financial instruments:

  • The sensitivity analysis includes all floating rate primary and derivative financial instruments as at the reporting date.
  • The exposure corresponds to the carrying amount of the floating rate financial instruments.

The sensitivities and exposure for the interest rate risks arising from floating rate financial instruments are as follows as at the reporting dates:

Sensitivity analysis for interest rate risks from variable-rate primary and derivative financial instruments
EUR '000

31/12/2021

Net risk position after hedging effect

Sensitivity to a 100 bp increase in the interest rate level

Sensitivity to a 100 bp decrease in the interest rate level1

Sensitivity of net profit or loss after tax

46,717

(5,331)

3,6892

 

 

 

 

 

 

 

 

31/12/2020

Net risk position after hedging effect

Sensitivity to a 100 bp increase in the interest rate level

Sensitivity to a 100 bp decrease in the interest rate level1

Sensitivity of net profit or loss after tax

405,567

2,980

(5,043)2

1)

A reduction in the basis points results in a proportional decrease in the sensitivity.

2)

The evaluation is based on the assumption that negative interest rates are paid on cash and cash equivalents. The evaluation does not include liabilities for which no negative interest is calculated.

The Lenzing Group bases the sensitivity analysis for the interest rate risk from the fluctuation in market values of cash flow hedge derivatives for interest rate risks on the following assumptions:

  • The sensitivity of other comprehensive income as at the reporting date is based on the open derivative from cash flow hedges for interest rate risks in cases where the hedged item has not yet been recognized in profit or loss.
  • The exposure corresponds to the nominal value of the derivative amount of EUR 418,211 thousand (December 31, 2020: EUR 0 thousand).

An increase in the interest rate level by 1 percentage point would lead to an increase in other comprehensive income (after taxes) of EUR 9,543 thousand (December 31, 2020: EUR 0 thousand). A decrease in the interest rate level by 1 percentage point would lead to a reduction in other comprehensive income (after taxes) of EUR 9,532 thousand (December 31, 2020: EUR 0 thousand). The interest rate sensitivity has no effect on profit or loss, as the measurement of interest rate derivatives is recognized in the hedging reserve with no effect on profit or loss.

The Lenzing Group holds financial instruments that are linked to an IBOR reference interest rate and must be replaced as part of the IBOR reform. Until December 31, 2021, the previous reference interest rate, the Euro Overnight Index Average (EONIA), relating to affected financial liabilities was adjusted to the Euro Short-Term Rate (€STR) reference interest rate. The changeover of the USD-LIBOR reference interest rate relating to affected financial liabilities and corresponding cash flow hedge derivatives for combined interest rate/currency risks and for interest rate risks to an alternative reference interest rate has already begun. The Lenzing Group is monitoring the transition to alternative reference interest rates and is managing the resultant risks.

Additional information on financial risk management and financial instruments is provided in the risk report of the Lenzing Group’s management report as at December 31, 2021.

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