32. Financial risks
General
Wärtsilä has a centralised Group Treasury with two main objectives: 1) to arrange adequate funding for the Group’s underlying operations on competitive terms and 2) to identify and evaluate the financial risks within the Group and implement the hedges for the Group companies.
The objective is to hedge against unfavorable changes in the financial markets and to minimise the impact of foreign exchange, interest rate, credit and liquidity risks on the Group’s cash reserves, profits and equity.
The Financial Risk Policy is approved by the Board of Directors. The Treasury employs only such instruments whose market value and risk profile can be reliably monitored.
Foreign exchange risk
Foreign exchange exposures are monitored at the Business level and then netted and hedged at Group level. All fixed sales and purchase contracts are hedged. The estimated future commercial exposures are evaluated by the Businesses, and the level of hedging is decided by the Board of Management. Hedge accounting in accordance with IFRS is applied to most of the hedges of these exposures. The hedges cover such time periods that both the prices and costs can be adjusted to new exchange rates. These periods vary among Group companies from one month to two years. The Group also hedges its position of the statement of financial position, which includes receivables and payables denominated in foreign currencies. The Group does not expect significant losses from foreign exchange rate changes in 2013. The cancellation of orders could lead to ineffective currency hedge. Approximately 59% of sales and 56% of operating costs in 2012 were denominated in euros. The Group’s profits and competitiveness are also indirectly affected by the home currencies of its main competitors: USD, GBP, JPY and KRW.
The instruments, their nominal values and currency distribution used to hedge the Group’s foreign exchange exposures are listed in Note 26. Derivative financial instruments.
Some Group companies in countries whose currencies are not fully convertible like Brazil and China have unhedged, intercompany loans nominated either in EUR or USD. Total amount of the loans is EUR 49 million (48).
Since Wärtsilä has subsidiaries and joint ventures outside the euro zone, the Group’s equity, goodwill and purchase price allocations are sensitive to exchange rate fluctuations. At the end of 2012, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 769 million (472). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 596 million (178). Wärtsilä decided to discontinue hedging the net assets in its foreign subsidiaries and joint ventures in June 2012. Until that, the changes in the fair values of instruments determined as equity hedging were recognised in other comprehensive income, provided that the hedging was effective, and the ineffective portion of the change in the fair value of the hedge and the interest rate difference were immediately recognised in the statement of income in the financial items.
IFRS hedge accounting has been applied to EUR 733 million (1,111) currency forwards. 10% change in the exhange rates would cause from these currency forwards an approximately EUR 55 million (82) net of tax impact on the equity. In 2012, EUR 7 million (-12) fair value adjustments related to cash flow hedges were recognised in equity. EUR -7 million (11) of the fair value adjustments were transferred from equity to the statement of income as net sales or operating expenses during 2012. In 2012, the result from ineffective portion of the cash flow hedges was not significant. In 2011, EUR -2 million was recognised in financial items.
Currency distribution 2012
% Net sales Operating
costs
Trade
receivables
Trade
payables
EUR 59 56 71 74
USD 21 6 14 4
NOK 3 10 3 4
GBP 2 2 3 4
CHF 1 2 2 3
Other EU currencies 1 3 2
SGD 2 3 1 1
SAR 2 2
BRL 1 1 1
INR 1 1 2 1
CNY 1 3 1 1
JPY 1 2
Other currencies 6 9 3 3
Total 100 100 100 100
Interest rate risk
Wärtsilä is exposed to interest rate risk primarily through market value changes to the net debt portfolio (price risk) and also through changes in interest rates (re-fixing on rollovers). Wärtsilä hedges interest rate exposure by using derivative instruments such as interest rate swaps, futures and options. Changes in the market value of these derivatives are recognised directly in the statement of income. Interest rate risk is managed by constantly monitoring the market value of the financial instruments and by using sensitivity analysis.
Interest-bearing loan capital at the end of 2012 totalled EUR 794 million (652). The average interest rate was 2.0% (2.7) and the average re-fixing time 21 months (16). At the end of 2012, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 14 million (8) increase/decrease in the value of the net debt portfolio, including derivatives.
Wärtsilä spreads its interest rate risk exposure by taking both fixed and floating rate loans. The share of floating rate loans as a proportion of the total debt can vary between 30–70%. At the end of 2012 the floating rate portion of total loans was 49% (44) after adjustment for interest rate derivatives. A one percentage point change in the interest level would cause a EUR 4 million (3) change in the following year’s interest expenses of the debt portfolio, including derivatives.
Additional information related to loans can be found in Note 17. Financial assets and liabilities by measurement category and Note 24. Financial liabilities.
Liquidity and refinancing risk
Wärtsilä ensures sufficient liquidity by efficient cash management and by maintaining sufficient committed and uncommitted credit lines available.
The existing funding programmes include:
• Committed Revolving Credit Facilities totalling EUR 554 million (494).
• Finnish Commercial Paper programmes totalling EUR 700 million (700).
The average maturity of the long-term debt is 44 months (40) and the average maturity of the confirmed credit lines is 29 months (34). Additional information in Note 24. Financial liabilities.
Wärtsilä Group had cash and cash equivalents totalling EUR 225 million (592) at the year end as well as EUR 554 million (494) non-utilised committed credit facilities. Commercial Paper programme utilisation amounted to EUR 141 million (70). Wärtsilä minimises its refinancing risk by having a balanced and sufficiently long loan portfolio.
Revolving credit facilities
MEUR
Year Maturing Available
(end of
period)
2012 554
2013 165 389
2014 30 359
2015 160 199
2016 99 100
2017 100
Credit risk
The responsibility for managing the credit risks associated with ordinary commercial activities lies with the Businesses and the Group companies. Major trade and project finance credit risks are minimised by transferring risks to banks, insurance companies and export credit organisations. The company did not have long-term suppliers’ credits at the end of 2012. No losses were recorded on suppliers’ credits.
The credit risks related to the placement of liquid funds and to trading in financial instruments are minimised by setting explicit limits for the counterparties and by making agreements only with the most reputable domestic and international banks and financial institutions.
The Group companies deposit the maximum amount of their liquid financial assets with the centralised treasury (Wärtsilä Group Treasury) when local laws and central bank regulations allow it. The Group’s funds are placed in instruments with sufficient liquidity (short-term bank deposits or Finnish Commercial Papers) and rating (at least single-A rated instruments or other instruments approved by the Group’s CFO). These placements are constantly monitored by Wärtsilä Group Treasury and Wärtsilä does not expect any future defaults from the placements.
Aging of trade receivables
2012 2011
MEUR Trade
receivables
of which
impaired
Trade
receivables
of which
impaired
Not past due 746 560
Past due 1–30 days 135 125
Past due 31–180 days 165 2 115 1
Past due 181–360 days 73 5 44 5
Past due 1 year 70 53 91 52
Total 1 189 60 935 58
In 2012, EUR 8 million (18) provisions for doubtful receivables have been recognised in the consolidated statement of income.
The Group sells trade receivables in an amount that is currently not significant compared to the total trade receivables. Sold receivables have been de-recognised in the consolidated statement of financial position.
Equity price risk
Wärtsilä has investments in publicly quoted shares, see Note 15. Available-for-sale financial assets. The market value of these shares at the end of 2012 was EUR 2 million (2). A 10% strengthening or weakening in share price does not have any significant impact on the Group’s equity net of taxes.
Wärtsilä has also equity investments totalling EUR 11 million (12) in power plant companies, most of which are located in developing countries and performing well according to expectations.
Capital risk management
Wärtsilä’s policy is to secure a strong capital base to keep the confidence of investors and creditors and for the future development of the business. The capital is defined as total equity including non-controlling interests and net interest-bearing debt. The target for Wärtsilä is to maintain gearing below 0.50 and to pay a dividend equivalent to 50% of operational earnings per share.
MEUR 31.12.2012 31.12.2011
Interest-bearing liabilities, non-current 545 485
Interest-bearing liabilities, current 249 167
Cash and cash equivalents -225 -592
569 60
Loan receivables -2 -2
Net interest-bearing loan capital 567 58
Total equity 1 824 1 666
Gearing 0.31 0.04
In the capital management Wärtsilä also follows the solvency development:
Equity and liabilities 5 038 4 600
Advances received -695 -563
4 343 4 037
Solvency ratio, % 42.0 41.3

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