Financial risks relate to unrecoverable receivables, currency, raw materials and interest rate risks and liquidity risk. Risk exposure may also arise from the investment strategy and the availability of loan finance.
Default on receivables
Receivables from customers or other parties may become unrecoverable. This risk rises at times of economic crisis or when extreme swings in the price of raw materials put pressure on customers.
To address these risks, Nordzucker establishes a customer’s credit standing before signing a contract and generally takes out trade insurance. The sales team maintains close contact with the customer and defaults are limited by active receivables management.
Currency, raw materials and interest rate risks
The increasing volatility of interest rates and exchange rates and fluctuations in the price of raw materials give rise to operating risks, which are pooled by the Group treasury department.
To limit these risks, they are analysed thoroughly before contracts are signed. Standard financial instruments available from banks and exchanges are used if Nordzucker has to assume risks. Financial derivatives such as forward contracts, swaps and futures are used to hedge the Group’s open risk positions.
This exposes the Nordzucker Group to a normal measure of counterparty risk, in the sense that a partner to a contract may not perform their obligations. To minimise this counterparty risk, financial derivatives are only transacted with first-class international financial institutions, whose economic performance is monitored regularly, partly by analysing the financial ratings issued by international rating agencies. Dependence on individual institutions is also limited by spreading transactions over various counterparties.
All the financial derivatives used serve solely to hedge operating sales and purchase transactions and to hedge exchange rates for financial transactions.
The margins required for exchange-traded derivatives are also held exclusively on separate margin accounts with first-class international financial institutions.
As of 28 February 2014, the Nordzucker Group had exchange rate derivatives with a notional net volume of EUR 90.8 million. At the end of the financial year, derivative transactions with a notional net volume of EUR 18.2 million were open to hedge against price movements for raw materials, and derivatives with a notional net volume of EUR 2.2 million were open to hedge the price of CO2 certificates.
These existing hedges generally run for less than one year (excluding hedges of CO2 certificates) and match the maturity profile of the hedged transactions.
The seasonality of the Group’s business means that its capital requirements vary widely over the course of a financial year. The quality of the harvest and developments in market prices also have a considerable effect on the company’s funding requirements. If the company cannot draw on sufficient liquidity – either if there is a default on its investments or if borrowing is not available – its continued existence could be at risk.
Short and medium-term liquidity forecasts for the subsidiaries and the entire Group are therefore regularly drawn up on the basis of a standardised process. Financing strategies are then prepared and implemented on the basis of these forecasts.
Availability of credit
No negative effects on the Nordzucker Group’s access to liquidity have been felt to date, despite the ongoing economic crisis in the EU and the evolving situation on lending markets due to the increasing regulation of banks. One important reason for this is the Group’s good credit rating.
The Group’s main source of financing is the syndicated loan originally maturing on 17 June 2016, which the company obtained from 14 banks in 2011. In March 2014, this loan was replaced by a new syndicated loan with a smaller group of banks on improved terms. This loan has a minimum term of five years, and thereby extends well beyond the end of the sugar market regime. All the syndicate banks have very good credit ratings and are very dependable. In the opinion of the company management, this medium-term syndicated loan to finance its operating business, together with its available liquidity, covers the company’s capital needs. From a current perspective, its cash reserves and unused lines of credit enable Nordzucker to meet its payment obligations at all times. Based on current assessments, sufficient funds are also available to ensure the financing of solid growth. On the basis of existing corporate planning for the Group, the company assumes that the terms of the loan agreement will be met in subsequent years as well.
The guarantees needed for current operations can also be provided at any time as needed by means of the syndicated loan and bilateral lines of credit. The Group is not directly dependent on individual lenders.
Errors in investment strategy can result in the loss of financial assets. Nordzucker has a conservative investment policy. The Group’s free liquidity is only invested in money-market products with first-class European financial institutions. Investment amounts are limited to ensure that the deposits are covered by the applicable deposit insurance mechanisms.
Potential default risks are also addressed by spreading the investment across various counterparties.