[39] Financial risk reporting

One of the prime objectives of capital management is to ensure liquidity at all times. Measures aimed at achieving these objectives include the optimisation of the capital structure, the reduction of liabilities and ongoing Group cash flow planning and management. Close cooperation between local units and the Group head office ensures that the local legal and regulatory requirements faced by foreign group companies are taken into account in capital management.

Net financial debt – defined as the difference between financial liabilities and cash and cash equivalents – is the key performance measure used in liquidity planning at Group level (see note [30]) and amounted to €2,903.4 million as at 31 December 2016 (31 December 2015: €573.5 million).

On 15 February 2016, the KION Group repaid the corporate bond of €450.0 million that was still outstanding and all other remaining liabilities under the syndicated loan of 23 December 2006. The associated repayment was made using funds drawn down under a new senior facilities agreement (SFA). The SFA comprises a revolving credit facility of €1,150.0 million maturing in February 2021 and a fixed-term tranche of €350.0 million maturing in February 2019 that has been fully drawn down (see note [30]).

On 4 July 2016, KION GROUP AG reached an agreement with a group of banks for a bridge loan to finance the acquisition of Dematic. KION GROUP AG also implemented a capital increase in July 2016 that generated gross proceeds of €459.3 million (see note [28]). As at 31 December 2016, the drawdown of the bridge loan comprised a total of three fixed-term, variable-rate tranches: tranche A2 has a value of €343.2 million maturing in February 2018 and tranche B a value of €1,200.0 million maturing in November 2018; the third tranche is a further loan of €1,000.0 million maturing in November 2021 (see also note [30]).

Taking into account credit facilities that had not yet been utilised, the unrestricted cash and cash equivalents available to the KION Group as at 31 December 2016 amounted to €1,200.8 million (31 December 2015: €1,193.6 million).

The KION Group works continuously to optimise the financing of the Group (see note [50]).

In certain finance and operating activities, the KION Group is subject to credit risk, i.e. the risk that partners will fail to meet their contractual obligations. This risk is limited by diversifying business partners based on certain credit ratings. The Group only enters into transactions with business partners and banks holding a good credit rating and subject to fixed limits. Counterparty risks involving our customers are managed by the individual Group companies.

> TABLE 111 shows the age structure of receivables as at the reporting date.

Valuation allowances are based on the credit risk associated with the receivables, the risk being assessed mainly using factors such as customer credit rating and failure to adhere to payment terms.

Some of the receivables that were overdue as at the reporting date, but for which no valuation allowances had been recognised, were offset by corresponding trade payables. Apart from this item, the Group did not hold any significant collateral.

Based on IFRS 7, a liquidity risk arises if an entity is unable to meet its financial liabilities. The KION Group maintains a liquidity reserve in the form of lines of credit and cash in order to ensure financial flexibility and solvency. The age structure of financial liabilities is reviewed continually. Since the announcement of the Dematic acquisition in June 2016, Standard & Poor’s has rated the KION Group as BB+ with a negative outlook (2015: stable outlook). Moody’s has rated the KION Group at Ba1 with a negative outlook (2015: Ba2 with a positive outlook).

The following tables show all of the contractually agreed payments under recognised financial liabilities as at 31 December 2016 and 2015, including derivative financial instruments with negative fair values. > TABLES 112 – 113

The calculation of future cash flows for derivative financial liabilities includes all currency forwards that have negative fair values as at the reporting date.

In 2016, KION Group sold financial assets with a total value of €101.3 million (2015: €75.1 million) in factoring transactions. In some cases, the KION Group retains insignificant rights and duties in connection with fully derecognised financial assets, primarily the provision of limited reserves for defaults. The recognised assets that serve as reserves for defaults and are reported under other current financial assets stood at €1.4 million as at 31 December 2016 (31 December 2015: €1.0 million). The short residual maturity of these financial assets means their carrying amount was almost the same as their fair value. The maximum downside risk arising on the transferred and fully derecognised financial assets amounted to €7.4 million as at 31 December 2016 (31 December 2015: €5.0 million).

For financial assets, default risk is defined as the risk that a counterparty will default, and hence is limited to a maximum of the carrying amount of the assets relating to the counterparty involved. The potential default risk attaching to financial assets is mitigated by secured forms of lending such as reservation of title, credit insurance and guarantees, and potential netting agreements.

Specific valuation allowances for defaults are recognised to reflect the risk arising from primary financial instruments. Financial transactions are only entered into with selected partners holding good credit ratings. Investments in interest-bearing securities are limited to securities with an investment-grade credit rating.

The leasing activities of the Industrial Trucks & Services segment mean that the KION Group may be exposed to residual value risks from the marketing of trucks that are returned by the lessee at the end of a long-term lease and subsequently sold or re-leased. Residual values in the markets for used trucks are therefore constantly monitored and forecast. The KION Group regularly assesses its aggregate risk position arising from financial services.

The risks identified are immediately taken into account by the Company in the costing of new leases by recognising writedowns or valuation allowances and adjusting the residual values. Risk-mitigating factors include the demand for used trucks, which stabilises the residual values of the KION Group’s industrial trucks. The majority of the residual values have underlying remarketing agreements that transfer any residual-value risk to the leasing company. This had a positive impact on the financial results in 2016. Groupwide standards to ensure that residual values are calculated conservatively, combined with an IT system for residual-value risk management, reduce risk and provide the basis on which to create the transparency required.

The KION Group mitigates its liquidity risk and interest-rate risk attaching to financial services by ensuring that most of its transactions and funding loans have matching maturities and by constantly updating its liquidity planning. Long-term leases are primarily based on fixed-interest agreements. The credit facilities provided by various banks and an effective dunning process ensure that the Group has sufficient liquidity.

In order to exclude currency risk, the KION Group generally funds its leasing business in the local currency used in each market.

Because of low default rates, counterparty risk has not been significant to date in the Group. The KION Group has not identified any material changes between 2015 and 2016. The Group also mitigates any losses from defaults by its receipt of the proceeds from the sale of repossessed trucks. In addition, receivables management has been improved by enhancing the dunning process. The credit portfolio management system was updated during 2016. Besides the design of the business processes, it also encompassed the risk management and control processes.

Moreover, the KION Group offers the majority of financial services indirectly via selected financing partners that bear the risks of the finance transaction. As far as these financial services are concerned, the KION Group bore the counterparty risk in under 3 per cent of cases (2015: 3 per cent).

In accordance with its treasury risk policy, the KION Group hedges exchange rate risks both locally at the level of the individual companies and centrally via KION GROUP AG using prescribed hedging ratios.

The main hedging instruments employed are foreign-currency forwards, provided that there are no country-specific restrictions on their use.

At company level, hedges are entered into for highly probable future transactions on the basis of rolling 15-month forecasts, as well as for firm obligations not reported in the statement of financial position. Currency risk arising from customer-specific construction contracts is hedged at individual company level on a project basis. Some of these hedges are classified as cash flow hedges for accounting purposes in accordance with IAS 39 (see note [40]).

The currency risk arising on translation of a foreign subsidiary’s financial statements into the Group’s reporting currency is also eliminated using a foreign-currency forward. In accordance with IAS 39, this hedge is classified as a net investment hedge for accounting purposes (see note [40]).

Foreign-currency forwards are also employed to hedge the currency risks arising in the course of internal financing.

> TABLE 114 shows an overview of the foreign-currency forwards entered into by the KION Group. As at the reporting date, significant currency risk arising from financial instruments was measured for the first time using a currency sensitivity method because the value-at-risk method previously used in the risk management system is no longer being applied as a result of the new organisational and strategic focus in the KION Group. The prior-year figures have been restated accordingly.

Currency risks from financial instruments as defined by IFRS 7 are only included in calculating currency sensitivity if the financial instruments are denominated in a currency other than the functional currency of the reporting entity concerned. This means that currency risks resulting from the translation of the separate financial statements of subsidiaries into the Group reporting currency, i.e. currency translation risks, are not included.

Currency risk in the KION Group arises mainly in connection with derivative financial instruments, trade receivables and trade payables. It is assumed that the portfolio of financial instruments as at the reporting date is representative of the portfolio over the whole of the year.

The sensitivity analysis for currencies that give rise to significant risk in the view of the KION Group is shown in > TABLE 115.

The table shows the after-tax impact from changes in exchange rates considered to be possible (+10 per cent: increase in the value of the euro against the other currencies of 10.0 per cent; –10 per cent: fall in the value of the euro against the other currencies of 10.0 per cent).

Interest-rate risk within the KION Group is managed centrally. The basis for decision-making includes sensitivity analyses of interest-rate risk positions in key currencies.

A shift in the relevant yield curve of +/– 50 basis points (bps) (2015: +/– 100 bps) was simulated to assess interest-rate risk. The cumulative effect after tax resulted from variable-rate exposures and is shown in > TABLE 116.