[41] Financial risk reporting
Capital management
One of the prime objectives of capital management is to ensure liquidity at all times. Measures aimed at achieving these objectives include the optimization of the capital structure and ongoing Group cash flow planning and management. Close cooperation between the individual companies and the Corporate Finance division 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 a key performance measure used in liquidity planning at Group level and amounted to €1,670.5 million as at December 31, 2022 (December 31, 2021: €567.6 million).
Default risk
In certain operating and finance 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 defined as the risk that a counterparty will default, and hence is limited to a maximum of the carrying amount. Default 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. The potential default risk attaching to financial assets is also mitigated by secured forms of lending such as reservation of title, credit insurance and guarantees, and potential netting agreements.
Counterparty risks involving our customers are managed by the individual Group companies. To reflect the default risk, valuation allowances are recognized for defaults that have occurred and for expected defaults (see note [25]).
Financial transactions are only entered into with selected business partners that have an investment-grade credit rating. The KION Group’s default risk remains insignificant.
Liquidity risk
The KION Group maintains a liquidity reserve in the form of a revolving credit facility and cash in order to ensure financial flexibility and solvency. Taking into account the credit facility that was still freely available, the unrestricted cash and cash equivalents available to the KION Group as at the reporting date amounted to €1,577.3 million (December 31, 2021: €1,473.7 million). The age structure of financial liabilities is reviewed and optimized continually.
The credit ratings awarded to the KION Group by the two rating agencies remained essentially unchanged in the year under review. In October 2022, Fitch Ratings confirmed the Group’s long-term issuer default rating of BBB with a stable outlook. Fitch Ratings had already confirmed the short-term issuer default rating of F2 in September of the reporting year. Standard & Poor’s kept the issuer rating at BBB–, but put the outlook on CreditWatch Negative.
In 2022, the KION Group sold financial assets with a total value of €102.9 million (2021: €95.6 million) in factoring transactions. In some cases, the KION Group retains insignificant rights and obligations in connection with financial assets that are to be fully derecognized. The figure for maximum downside risk arising on the financial assets that were sold and are to be fully derecognized was unchanged at €4.7 million as at December 31, 2022 (December 31, 2021: €4.7 million).
The following tables show all of the contractually agreed undiscounted payments under recognized financial liabilities as at December 31, 2022 and 2021, including derivative financial instruments with negative fair values.
in € million |
Carrying amount Dec. 31, 2022 |
Cash flow |
Cash flow |
Cash flow |
|---|---|---|---|---|
Primary financial liabilities |
|
|
|
|
Promissory notes |
319.2 |
–9.3 |
–343.8 |
– |
Bonds |
496.8 |
–8.2 |
–516.5 |
– |
Liabilities to banks |
819.3 |
–332.5 |
–562.3 |
– |
Other financial liabilities |
353.3 |
–324.8 |
–31.2 |
– |
Liabilities from lease business |
3,214.6 |
–996.5 |
–2,372.4 |
–104.7 |
Liabilities from short-term rental business |
544.2 |
–205.0 |
–357.4 |
–21.7 |
Trade payables |
1,124.3 |
–1,124.3 |
– |
– |
Other financial liabilities (excluding derivatives) |
676.8 |
–214.9 |
–302.0 |
–264.8 |
|
|
|
|
|
Derivative financial liabilities |
|
|
|
|
Derivatives with negative fair value |
16.9 |
|
|
|
+ Cash in |
|
554.6 |
28.9 |
0.1 |
– Cash out |
|
–567.5 |
–33.4 |
–0.2 |
in € million |
Carrying amount Dec. 31, 2021 |
Cash flow |
Cash flow |
Cash flow |
|---|---|---|---|---|
Primary financial liabilities |
|
|
|
|
Promissory notes |
418.5 |
–98.0 |
–309.4 |
–27.9 |
Bonds |
495.6 |
–8.2 |
–524.7 |
– |
Liabilities to banks |
104.0 |
–62.4 |
–61.5 |
– |
Other financial liabilities |
32.4 |
2.6 |
–30.8 |
–0.1 |
Liabilities from lease business |
3,070.8 |
–1,311.3 |
–1,759.8 |
–87.2 |
Liabilities from short-term rental business |
488.9 |
–177.1 |
–323.4 |
–12.4 |
Trade payables |
1,443.7 |
–1,443.7 |
– |
– |
Other financial liabilities (excluding derivatives) |
635.3 |
–209.8 |
–280.5 |
–211.4 |
|
|
|
|
|
Derivative financial liabilities |
|
|
|
|
Derivatives with negative fair value |
16.6 |
|
|
|
+ Cash in |
|
831.0 |
51.7 |
0.0 |
– Cash out |
|
–848.6 |
–52.4 |
–0.0 |
Currency risk
The KION Group hedges currency risk 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.
In the Industrial Trucks & Services segment, hedges are entered into at individual company level for highly probable future transactions on the basis of rolling 15-month forecasts, as well as for firm commitments not reported in the statement of financial position. Currency risk arising from customer-specific project business contracts in the Supply Chain Solutions segment is hedged on a project-specific basis at individual company level. As a result, these hedges are classified as cash flow hedges for accounting purposes in accordance with IFRS 9 (see note [42]). In addition, foreign-currency forwards are employed to hedge the currency risks arising in the course of internal financing.
Significant currency risk arising from financial instruments is measured using a currency sensitivity method. 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 Group company concerned. This means that currency risks resulting from the translation of the separate financial statements of subsidiaries into the Group presentation currency, i.e. currency translation risks, are not included.
Currency risk relevant to currency sensitivity 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 the relevant currencies (after tax) is shown in the following table:
|
|
Impact on net income |
Impact on other comprehensive loss |
||
|---|---|---|---|---|---|
|
|
Increase in the value |
Fall in the value |
Increase in the value |
Fall in the value |
in € million |
2022 |
|
|
|
|
GBP |
|
–0.5 |
0.5 |
6.3 |
–11.2 |
USD |
|
2.2 |
–3.0 |
3.4 |
–6.0 |
|
|
|
|
|
|
in € million |
2021 |
|
|
|
|
GBP |
|
–0.4 |
0.4 |
10.1 |
–12.3 |
USD |
|
0.7 |
–0.9 |
6.5 |
–7.9 |
Interest-rate risk
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.
The Group’s financing takes the form of variable-rate and fixed-rate financial liabilities. The risk of a change in the fair value of a fixed-rate financial liability is hedged using an interest-rate swap. In addition, the fair value of certain lease receivables is hedged at portfolio level using amortizing payer interest-rate swaps. Overall, this results in a variable interest rate for the lease portfolio that is in line with the benchmark rate for the currency area in question; the variable interest rate thus equates to the variable rate used for the financing of the lease portfolio from an economic perspective. These hedges are accounted for as portfolio fair value hedges in accordance with IAS 39 (see note [42]).
The shift in the relevant yield curves was simulated to assess interest-rate risk. The effects after tax shown below resulted from the marking-to-market of interest-rate swaps and from variable-rate financial debt:
|
+50 bps |
–50 bps |
||
|---|---|---|---|---|
in € million |
2022 |
2021 |
2022 |
2021 |
Net income |
–21.4 |
4.5 |
21.5 |
–4.8 |
Other comprehensive loss |
– |
– |
– |
– |
Risks arising from lease business
The lease 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-rented. 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 the lease business.
The risks identified are taken into account by the Company in the costing of new leases by recognizing write-downs or provisions and, if necessary, adjusting the residual values. Groupwide standards to ensure that residual values are calculated appropriately, 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 the lease business 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 arranged on a fixed-interest basis. If they are financed using variable-rate instruments, interest-rate derivatives are entered into in order to hedge the interest-rate risk, where it makes commercial sense to do so.
As a rule, the KION Group finances its lease business in the same currency as the lease with the end customer in order to exclude currency risks.
The counterparty risk inherent in the lease business continues to be insignificant. The Group also mitigates any losses from defaults by its receipt of the proceeds from the sale of repossessed industrial trucks. Furthermore, receivables management and credit risk management are refined on an ongoing basis.