24. 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 fund the business activities of the Group. The Group holds various financial assets, such as trade receivables, current deposits, and non-current investments, which arise directly from its business activities.

The Group also uses derivative financial instruments. They mainly include interest rate swaps, forward exchange transactions, and commodity swaps. These derivative financial instruments serve to hedge interest rate and currency risks as well as 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 the availability of the liquidity necessary for supporting the Group’s business activities and maximizing shareholder value, the primary objective of its capital management is to ensure an adequate credit rating and a satisfactory equity ratio.

The voestalpine Group manages its capital using the net financial debt to EBITDA ratio as well as the gearing ratio, i.e., the net financial debt to equity ratio. Net financial debt consists of interest-bearing loans less financing receivables, loan receivables, securities as well as cash and cash equivalents. Equity includes non-controlling interests in Group companies.

The target 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/EBITDA ratio shall not exceed 3.0 and, if it does, only for a limited time. All growth measures and capital market transactions are aligned with these ratios.

These two ratios developed as follows in the reporting period:

Financial risk management – Corporate finance organization

Financial risk management also includes raw material risk management. Financial risk management is organized centrally with respect to policy-making power, strategy determination, and target definition. The existent policies include targets, principles, duties, and responsibilities for both Group Treasury and individual Group companies. In addition, they govern matters related to pooling; money markets; credit and securities management; currency, interest rate, liquidity, and commodity price risks; and the reporting system. Group Treasury, acting as a service center, is responsible for implementation. Three organizationally separate units are responsible for closing, processing, and recording trans­actions, which makes sure that a six-eyes principle is followed. Policies, policy compliance, and the conformity of the business processes with the internal control system (ICS) are additionally reviewed 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 risk appetite is more on the low side. The strategy is aimed at achieving natural hedges and reducing fluctuations in cash flows and earnings. Market risks are also hedged by means of derivative financial instruments.

To quantify interest rate risks, voestalpine AG uses the interest rate exposure as an indicator. The interest rate exposure quantifies the impact of a one-percentage-point change in the market rate on interest income and/or interest expense.

Putting in place a netting process aggregates and balances the Group’s foreign currency cash flows. This creates a natural hedge.

A sensitivity analysis is carried out to quantify the currency risk based on a potential strengthening (weakening) of the euro relative to the other currencies by 10% as of March 31. The analysis posits that all other influencing factors are constant.

Liquidity risk – Financing

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

The primary instrument for controlling liquidity risks is a precise financial plan that is submitted quarterly on a revolving basis by the operating entities directly to Group Treasury of voestalpine AG. Group Treasury conducted additional reviews in order to take current conditions resulting from the COVID-19 crisis into account. The need for funds and bank credit lines is determined based on the consolidated results. The planned liquidity needs for the next 12 months are to be covered by a liquidity reserve.

Working capital is financed by 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. Group Treasury deposits any residual liquidity with its principal banks. This makes it possible to lower the borrowing volume and optimize net interest income.

Financing is either carried out in the given borrower’s local currency in order to avoid exchange rate risks or is currency hedged using currency swaps.

voestalpine AG carries contractually guaranteed credit lines of EUR 1,080.0 million (2019/20: EUR 780.0 million) as a capitalized liquidity reserve. In addition, an item in current assets comprises securities and short-term investments that are used to cover any unexpected need for liquidity. As of March 31, 2021, freely disposable securities were EUR 145.3 million (March 31, 2020: EUR 55.4 million). These encompass repo transactions entailing CO₂ repos (purchases of CO₂ allowances subject to simultaneous repurchase agreements) in the amount of EUR 84.2 million (March 31, 2020: EUR 0.0 million). Furthermore, cash and cash equivalents in the amount of EUR 1,159.7 million (March 31, 2020: EUR 794.7 million) are reported in the Consolidated Financial Statements.

The voestalpine Group’s payable bills of exchange may lead to a concentration of risk because liabilities previously distributed among diverse creditors are now concentrated in the financial insti­tutions involved. Any unilateral withdrawal by one or more banks of the arrangements regarding future transactions would lead to short-term liquidity needs. The voestalpine Group manages the concentration of risk by broadly diversifying the relevant financial instruments among different banks. In addition, the risk is mitigated by way of the existent liquidity reserve as well as cash and cash equivalents in the amount of EUR 2,239.7 million (previous year: EUR 1,574.7 million). As far as the payable bills of exchange are concerned, the largest of the nine creditors accounts for a mere EUR 279.1 million, i.e., 12.5%, when compared with the liquidity reserve and the cash and cash equivalents. The liquidity risk from reverse factoring liabilities is of minor significance because of the low volume of such liabilities.

The sources of financing are managed pursuant to the principle that the Group must remain in­dependent of banks. Hence financing is currently provided by approximately 20 different domestic and foreign banks. The capital market is also used as a source of financing.

The following capital market transactions were effected in the business year 2019/20:

In the business year 2020/2021, no capital transactions were effected.

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

As estimated as of the reporting date, the following (prospective) interest expense corresponds to these existent liabilities:

Credit risk

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

The management of credit risks 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 being contingent on the bank’s rating.

For the most part, cash and cash equivalents are deposited with banks whose credit ratings are good. They are generally invested for the short term. The associated credit risk thus is secondary.

The credit risk associated with derivative financial instruments is limited to transactions with a positive fair value and, in this case, to the amount of the fair value. As a result, solely the positive fair value of the derivative transactions is counted against the limit. Derivatives are closed exclusively based on standardized master agreements for financial futures transactions.

The credit risk of the underlying transactions is minimized to a large degree through a large number of credit insurances and bankable securities (guarantees, letters of credit). The default risk related to the Group’s remaining own risk is managed by way of defined credit assessment, risk evaluation, risk classification, and credit monitoring processes. The credit risk of the counterparties to financial contracts is managed by monitoring the given counterparties’ credit ratings and changes in their credit default swap (CDS) levels on a regular basis.

Depending on both the customer structure and the line of business, in most cases financial assets are deemed to have been defaulted when they are more than 180 days past due or when it is no longer certain that they will be paid in full absent collateral sales.

Receivables are classified as financial assets with impaired credit ratings when specific indicators of impairment are present (in particular, substantial financial difficulties on the part of the debtor, default or late payments, heightened risk of insolvency). Receivables are written off (derecognized) when they become uncollectible (especially when the counterparty becomes insolvent). A write-up to the amortized cost is made if the reasons for the write-down no longer exist.

The maximum theoretical default risk equals the amount at which the receivables are recognized in the statement of financial position.

The expected loss rates are determined based on historical default rates in the past five years.

As most of the receivables are insured, the risk of bad debt losses may be considered minor. There is no concentration of default risks because the customer portfolio is well diversified.

The gross carrying amounts and allowances for trade receivables and contract assets are as follows:

The loss allowances for trade receivables and contract assets that are credit-impaired have de­veloped as follows:

In the business year 2020/21, the portfolio value adjustments were not affected by any significant individual loss allowances.

voestalpine has analyzed the effects of the COVID-19 pandemic on expected credit losses as of the reporting date using information external and internal to the Group and has assessed based thereon whether its prior estimates of credit losses must be adjusted. In particular, currently available infor­mation regarding changes in probabilities of default (PDs) owing to the pandemic as well as internal assessments of counterparties’ payment history and related non-payment risks served as the basis for these assessments. Given that non-payment risks are deemed very low at this time, voestalpine expects any increase in default risks due to the COVID-19 pandemic to have a negligible impact on the Group’s earnings.

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 option. voestalpine AG hedges budgeted foreign currency payments at most over the next 12 months. Longer-term hedging occurs only for contracted projects. The hedging ratio is between 25% and 100%. The further in the future the cash flows, the lower the hedging ratio.

In the business year 2020/21, the net need for US dollars in the voestalpine Group was EUR 434.7 million. In particular, the decrease compared with the previous year (EUR 492.5 million) is due to the reduced need for raw materials purchases. The remaining foreign currency exposure, resulting primarily from exports to “non-eurozone countries” and raw material purchases, is significantly lower than the USD risk.

FOREIGN CURRENCY PORTFOLIO 2020/21

Based on the sensitivity analysis, as of March 31, 2021, the risks of all open positions relative to the Group currency for the upcoming business year are as follows:

Interest rate risks

voestalpine AG is primarily subject to cash flow risks (the risk that interest expenses or interest income will undergo a detrimental change) in connection with variable-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 the interest expense subject to risk considerations.

The variable-interest positions on the liabilities side significantly exceed the positions on the asset side, so that a one-percentage-point increase in the money market rate increases the net interest expense by EUR 3.0 million (2019/20: EUR 10.9 million). A decrease in the interest rate by one-percentage-point decreases the net interest expense by EUR –1.6 million (2019/20: EUR –7.0 million).

The weighted average interest rate for asset positions is –0.29% (2019/20: –0.07%) with a duration of 0.00 years (2019/20: 0.00 years)—including money market investments—and 1.27% (2019/20: 1.42%) for liability positions with a duration of 2.09 years (2019/20: 2.40 years).

Derivative financial instruments

In the business year 2020/21, hedge accounting in accordance with IFRS 9 was used to hedge foreign currency cash flows, interest-bearing receivables and liabilities, and raw materials purchase agreements. In this connection, all transactions related to foreign currency and interest rate hedges are hedged in total. Solely the commodity index component is hedged in connection with raw materials procurement contracts. A hedging ratio of 100% is stipulated in this connection. The hedges are cash flow hedges. Hedge accounting is only applied to a portion of the completed hedge transactions.

The following derivative financial instruments are classified as cash flow hedges:

The hedging volume of key foreign currency hedges is as follows:

The following underlying transactions were hedged:

The cash flow hedge reserve developed as follows:

The following derivative financial instruments are measured at fair value. The associated gains/losses are posted in the income statement:

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

The nominal amounts are allocated to the aforementioned maturity buckets as follows:

Categories of financial instruments

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

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

The table below analyzes regular fair value measurements of financial assets and financial liabilities. These measurements are based on a fair value hierarchy that categorizes the inputs included in the valuation methods used to measure fair value into three levels. The three levels are defined as follows:

The derivative transactions (Level 2) are measured using the discounted cash flow method 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 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 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. There were no reclassifications in the business years 2019/20 or 2020/21.

The table below presents the reconciliation of Level 3 financial assets measured at fair value between the opening balance and the closing balance, as follows:

Level 3 includes the equity investment in Energie AG Oberösterreich that is measured at fair value. The fair value of this entity can be reliably determined based on the valuation report that is prepared once a year for Energie AG Oberösterreich as a whole, taking into account all relevant information.

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

The receivables in this portfolio are sold monthly on a rolling basis as part of the Group’s factoring programs. The measurement gains or losses allocable to this portfolio are of secondary significance.

The credit risk associated with a particular debtor is the most important factor in the fair value determination of the portfolio entitled, “Trade and other receivables held for factoring.” Any increase/decrease by 1% in the established default rates thus would change the fair value of this portfolio at most in the same amount; as a rule, however, the fair value change is disproportionately low, because credit insurance has been purchased for significant portions of the portfolio.

The table below shows the net gains and losses on financial instruments, broken down by measurement 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 are as follows:

The impairment loss on financial instruments measured at AC is EUR 13.4 million (2019/20: EUR 8.8 million), and the reversals of loss allowances are EUR 2.8 million (2019/20: EUR 5.4 million).