23. Financial instruments

General information

The principal financial instruments used by the voestalpine Group consist of bank loans, bonds, borrower’s notes, and trade payables. The primary aim of the financial instruments is to finance the business activities of the Group. The Group holds various financial assets, such as trade receivables, short-term deposits, and non-current investments, which result directly from the Group’s business activities.

The Group also uses derivative financial instruments. These instruments mainly include interest rate swaps, forward exchange transactions, and commodity swaps. These derivative financial instruments are used to hedge interest rate and currency risks and risks from fluctuations in raw materials prices, which result from the business activities of the Group and its sources of financing.

Capital management

In addition to ensuring availability of the liquidity necessary to support business activities and maximizing shareholder value, the primary objective of the Group’s capital management is to ensure appropriate creditworthiness and a satisfactory equity ratio.

Capital management in the voestalpine Group is performed using the net financial debt to EBITDA ratio and the gearing ratio, i.e., the net financial debt to equity ratio. Net financial debt consists of interest-bearing loans less financing receivables and other loan receivables, securities, cash, and cash equivalents. Equity includes non-controlling interests in Group companies and the hybrid capital.

The target amount for the gearing ratio is 50% and may only be exceeded up to a maximum of 75% for a limited period of time. The net financial debt to EBITDA ratio may not exceed 3.0. All growth measures and capital market transactions are based on these ratios.

The following table shows these two ratios for the reporting period:

Financial risk management—Corporate finance organization

Financial risk management also includes the area of raw material risk management. Financial risk management is organized centrally with respect to policy-making power, strategy determination, and target definition. The existing policies include targets, principles, duties, and responsibilities for both the Group Treasury and individual Group companies. In addition, they govern the areas of pooling, money market, credit and securities management, currency, interest rate, liquidity, and commodity price risk, and reporting. The Group Treasury, acting as a service center, is responsible for implementation. Three organizationally separate units are responsible for closing, processing, and recording transactions, which guarantees a six-eyes principle. Policies, policy compliance, and the ICS conformity of business processes are additionally audited at regular intervals by an external auditor.

It is part of the voestalpine Group’s corporate policy to continuously monitor, quantify, and, where reasonable, hedge financial risks. The Group’s willingness to accept risk is relatively low. The strategy aims at achieving natural hedges and reducing fluctuations in cash flows and income. Market risks are largely hedged by means of derivative financial instruments.

To quantify interest rate risk, voestalpine AG uses interest rate exposure and fair value risk as indicators. Interest rate exposure quantifies the impact of a 1% change in the market interest rate on interest income and interest expenses. Fair value risk means the change in the fair value of an interest rate-sensitive item with a 1% parallel shift of the interest yield curve.

voestalpine AG uses the “@risk” concept to quantify currency risk. The maximum loss within one year is determined with 95% certainty. Risk is calculated for the open position, which is defined as the budgeted quantity for the next twelve months less the quantity that has already been hedged. The variance-covariance approach is used to evaluate foreign currency risk.

Liquidity risk—Financing

Liquidity risk refers to the risk of not being able to fulfill payment obligations due to insufficient means of payment.

The primary instrument for controlling liquidity risk is a precise financial plan that is submitted quarterly by the operating entities directly to the Group Treasury of voestalpine AG. The funding requirements with regard to financing and bank credit lines are determined based on the consolidated results.

Working capital is financed by the Group Treasury. A central clearing system performs intra-group netting daily. Entities with liquidity surpluses indirectly put these funds at the disposal of entities requiring liquidity. The Group Treasury places any residual liquidity with their principal banks. This allows the volume of outside borrowing to be decreased and net interest income to be optimized.

Financing is carried out in the local currency of the borrower in order to avoid exchange rate risk or is currency-hedged using cross-currency swaps.

voestalpine AG holds securities and current investments as a liquidity reserve. As of March 31, 2017, non-restricted securities amounted to EUR 348.3 million (March 31, 2016: EUR 334.3 million). Furthermore, cash and cash equivalents in the amount of EUR 503.3 million (March 31, 2016: EUR 774.8 million) are reported in the consolidated financial statements.

Additionally, adequate credit lines that are callable at any time exist with domestic and foreign banks. These credit lines have not been drawn. In addition to the possibility of exhausting these financing arrangements, contractually guaranteed credit lines of EUR 710 million (2015/16: EUR 711 million) are available to bridge any economic downturns.

The sources of financing are managed on the basis of the principle of bank independence. Financing is currently being provided by approximately 20 different domestic and foreign banks. Covenants agreed for a minor part of the total credit volume with a single bank are adhered to. The capital market is also used as a source of financing. No capital market transactions were performed in the business year 2015/16. No new debt was raised through capital market transactions in the business year 2016/17. The capital increase decided by the Management Board on March 6, 2017, and approved by the Supervisory Board on March 23, 2017, in the amount of 1.4 million shares was entered into the Commercial Register on March 30, 2017, and is therefore effective as of this date.

A maturity analysis of all liabilities existing as of the reporting date is presented below:

As estimated as of the reporting date, the following (prospective) interest charges correspond to these existing liabilities:

As of March 31, 2016, the maturity structure of the loan portfolio has the following repayment profile for the next several years:

As of March 31, 2017, the maturity structure of the loan portfolio has the following repayment profile for the next several years:

Credit risk

Credit risk refers to financial losses that may occur through non-fulfillment of contractual obligations by business partners.

The credit risk of the underlying transactions is kept low by precise management of receivables. A high percentage of delivery transactions is covered by credit insurance. Bankable security is also provided, such as guarantees and letters of credit.

As of the reporting date, there were receivables that are neither past due nor impaired in the amount of EUR 1,357.9 million. The age structure of receivables that are past due but not impaired is presented below:

The following impairment was recorded for receivables of voestalpine AG during the reporting period:

Impaired receivables amounted to EUR 159.2 million gross as of March 31, 2017.

As most of the receivables are insured, the risk of bad debt losses is limited. The maximum loss, which is theoretically possible, equals the amount at which the receivables are stated in the statement of financial position.

The management of credit risk from investment and derivative transactions is governed by internal guidelines. All investment and derivative transactions are limited for each counterparty, with the size of the limit dependent on the rating of the bank.

The credit risk for derivative financial instruments is limited to transactions with a positive market value and to the replacement cost of such transactions. Therefore, derivative transactions are only valued at their positive market value up to this limit. Derivative transactions are exclusively based on standardized master agreements for financial forward transactions.

Currency risk

The largest currency position in the Group arises from raw materials purchases in USD; however, the global business activities of the voestalpine Group also give rise to currency exposures in various other currencies.

Cash inflows and outflows in the respective currencies are offset thanks to the implementation of rolling multi-currency netting. The natural hedge created in this way mitigates risk. The use of derivative hedging instruments is another possibility. voestalpine AG hedges budgeted foreign currency payments over the next twelve months. Longer-term hedging occurs only for contracted projects. The hedging ratio is between 25% and 100%. The further in the future the cash flow lies, the lower the hedging ratio.

The net requirement for USD in the voestalpine Group was USD 582.0 million in the business year 2016/17. The increase compared to the previous year (USD 530.9) was due primarily to the increase in prices of raw materials purchased. The remaining foreign currency exposure, resulting primarily from exports to the “non-euro area” and raw material purchases, is significantly lower than the USD risk.

Based on the Value-at-Risk calculation, as of March 31, 2017, the risks for all open positions for the upcoming business year are as follows:

Taking into account the correlation between the different currencies, the resulting portfolio risk is EUR 65.0 million (March 31, 2016: EUR 17.5 million) for the voestalpine Group.

Interest rate risk

voestalpine AG differentiates between cash flow risk (the risk that interest expenses or interest income will undergo a detrimental change) for variable-interest financial instruments and present value risk for fixed-interest financial instruments. The positions shown include all interest rate-sensitive financial instruments (loans, money market, issued and purchased securities, as well as interest rate derivatives).

The primary objective of interest rate management is to optimize interest expenses while taking the risk into consideration. In order to achieve a natural hedge for interest-bearing positions, the modified duration of assets is closely linked to the modified duration of the liabilities.

The variable-interest positions on the liabilities side significantly exceed the positions on the assets side so that a 1% increase in the money market rate increases the interest expense by EUR 13.1 million (2015/16: EUR 8.6 million).

The weighted average interest rate for asset positions is 0.50% (2015/16: 0.66%) with a duration of 0.86 years (2015/16: 0.98 years)—including money market investments—and 2.03% (2015/16: 2.26%) for liability positions with a duration of 1.15 years (2015/16: 1.95 years).

The present value risk determined using the Value-at-Risk calculation for March 31, 2017, is equal to EUR 1.0 million (March 31, 2016: EUR 8.6 million) for positions on the assets side given a 1% change in the interest rate and EUR 34.7 million (March 31, 2016: EUR 130.8 million) for positions on the liabilities side. Therefore, in the event of a 1% drop in the interest rate, voestalpine AG would have an imputed (unrecognized) net present value loss of EUR 36.4 million (March 31, 2016: EUR 122.2 million).

The asset positions include EUR 343.3 million (previous year: EUR 409.0 million) of investments in the V54 fund of funds. 100% of the fund assets are invested in bonds and money market securities in euros or in cash in the two sub-funds V101 and V103 and in various special funds as follows:

In addition to the investment fund, there are also securities exposures in the amount of EUR 46.2 million (March 31, 2016: EUR 7.4 million).

In the business year 2016/17, gains in the amount of 1.19% (2015/16: 0.47%) were recorded in the V54 fund of funds.

Securities are measured at fair value. For the determination of the fair value, quoted prices for identical assets or liabilities in active markets (unadjusted) are used. Net profit amounting to EUR 22.7 million (2015/16: EUR 1.3 million) is recognized at fair value through profit or loss for financial instruments that are measured using the fair value option.

Derivative financial instruments

Portfolio of derivative financial instruments:

The derivative transactions are marked to market daily by determining the value that would be realized if the hedging position were closed out (liquidation method). Input for the calculation of market values are observable currency exchange rates and raw materials prices as well as interest rates. Based on the input, the market value is calculated using generally accepted actuarial formulas.

Unrealized profits or losses from hedged transactions are accounted for as follows:

• If the hedged asset or liability is already recognized in the statement of financial position or an obligation not recorded in the statement of financial position is hedged, the unrealized profits and losses from the hedged transaction are recognized through profit and loss. At the same time, the hedged item is reported at fair value, regardless of its initial valuation method. The resulting unrealized profits and losses are offset with the unrealized results of the hedged transaction in the income statement, so that in total, only the ineffective portion of the hedged transaction is reported in profit or loss for the period (fair value hedges).
• If a future transaction is hedged, the effective portion of the unrealized profits and losses accumulated up to the reporting date is recognized in other comprehensive income. The ineffective portion is recognized through profit and loss. When the transaction that is hedged results in the recognition of a non-financial asset or a liability in the statement of financial position, the amount recognized in other comprehensive income is taken into account when the carrying amount of this item is determined. Otherwise, the amount reported in other comprehensive income is recognized through profit or loss in accordance with the income effectiveness of the future transaction or the existing obligation (cash flow hedges).

In the business year 2016/17, hedge accounting in accordance with IAS 39 was used for hedging foreign currency cash flows, interest-bearing receivables and liabilities, and raw materials purchase agreements. The hedges are mainly cash flow hedges, while only a small proportion—largely raw material hedges—are designated as fair value hedges. Hedge accounting is only applied to a part of any completed hedge transactions.

Net losses of foreign currency, raw material, and interest rate derivatives amounting to EUR 27.3 million (2015/16: net gains amounting to EUR 10.3 million) were recognized through profit and loss in the reporting period.

Losses amounting to EUR 1.5 million (2015/16: gains amounting to EUR 2.3 million) on raw material hedges, which are designated as fair value hedges, were recognized through profit and loss. Gains for the corresponding underlying transactions amounting to EUR 1.5 million (2015/16: losses amounting to EUR 2.3 million) were also recognized through profit and loss.

In the business year 2016/17, ineffective hedging amounting to EUR 0.4 million (2015/16: EUR 0.0 million) was recorded in profit or loss.

Negative market values amounting to EUR 2.7 million (2015/16: positive market values amounting to EUR 37.4 million) previously recorded in the reserve for foreign exchange hedges were recognized through profit and loss in cost of materials during the reporting period; negative market values amounting to EUR 0.9 million (2015/16: negative market values amounting to EUR 2.7 million) were allocated to the reserve. In the business year 2016/17, the reserve for interest rate hedges was increased by EUR 2.0 million (2015/16: decreased by EUR 0.1 million) due to changes in the fair values. The commodity hedge reserve was increased by EUR 5.6 million (2015/16: EUR 0.0 million) as a result of redesignation and changes in fair value. There were no additional changes and no amounts were withdrawn or reclassified.

Derivatives designated as cash flow hedges have the following effects on cash flows and profit or loss for the period:

The carrying amount of the financial assets represents a reasonable approximation of fair value.

The item “Other” in the category “Financial assets measured at fair value through profit or loss” contains securities measured using the fair value option.

Subsidiaries, joint ventures, and investments in associates that are not fully consolidated in these consolidated financial statements or are included using the equity method are held as “available for sale at cost” and measured at cost because these investments do not have a price quoted in an active market, and their fair value cannot be reliably determined. Only the non-consolidated investment in Energie AG Oberösterreich is measured at fair value as “available for sale at fair value” because the fair value of this company as a whole can be reliably determined based on the valuation report performed once a year for Energie AG Oberösterreich taking into account all relevant information.

The financial liabilities measured at amortized cost, excluding bonds issued, fall under Level 2. Valuation is performed according to the mark-to-market method, whereby the input parameters for the calculation of the market values are the foreign exchange rates, interest rates, and credit spreads observable on the market. Based on the input parameters, fair values are calculated by discounting estimated future cash flows at typical market interest rates.

Bonds issued are measured using Level 1 inputs according to the quoted price as of the reporting date.

The carrying amounts of trade and other payables are an appropriate approximation of fair value.

The table below analyzes financial assets and financial liabilities that are measured at fair value on a recurring basis. These measurements are based on a fair value hierarchy that categorizes the inputs for the valuation methods used to measure fair value into three levels. The three levels are defined as follows:

The underlying assets of the fund of funds are reported as part of the “fair value option.” The designation of fair value was selected to convey more useful information because this group of financial assets is managed according to their fair value, as documented in the risk management and investment strategy, and performance is observed and reported by means of fair value.

The derivative transactions (Level 2) are marked to market by determining the value that would be realized if the hedging position were closed out (liquidation method). The observable currency exchange rates and raw materials prices as well as the interest rates are the input for the calculation of fair values. Fair values are calculated based on the inputs by discounting expected future cash flows at typical market interest rates.

The voestalpine Group recognizes reclassifications between different levels of the fair value hierarchy as of the end of the reporting period in which the change occurred. As of March 31, 2017, own bonds with a carrying amount of EUR 1,313.3 million were transferred from Level 2 to Level 1 since the quoted prices on the German stock exchange as the principal market now represent the more appropriate basis of observation for calculating fair value. Apart from this reclassification, there were no other reclassifications in the business years 2015/16 or 2016/17.

The reconciliation of Level 3 financial assets measured at fair value from the opening balance to the closing balance is depicted as follows:

Level 3 includes the non-consolidated investment in Energie AG Oberösterreich that is measured at fair value as “available for sale at fair value.” The fair value of this company can be reliably determined based on the valuation report performed once a year for Energie AG Oberösterreich as a whole and taking into account all relevant information.

Significant sensitivities in the determination of fair values can result from changes in the underlying market data of comparable entities and the input factors used to determine net present value (in particular discount rates, long-term forecasts, plan data, etc.).

The table below shows net gains and losses on financial instruments, broken down by category:

Total interest income and total interest expense for financial assets and financial liabilities that were not measured at fair value through profit or loss were recorded as follows:

The impairment loss on financial instruments measured at amortized cost amounts to EUR 11.9 million (2015/16: EUR 16.7 million).