[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 (excluding lease liabilities) and cash and cash equivalents – is the key performance measure used in liquidity planning at Group level (see note [30]) and amounted to €573.5 million at 31 December 2015 (31 December 2014: €810.7 million).

The KION Group had made further improvements to its funding structure and funding conditions in 2014 by repaying two corporate bonds ahead of schedule. The funds used for the repayment mainly originated from a revolving credit facility, which has far lower interest rates than the two corporate bonds.

On 15 February 2016, the KION Group redeemed the corporate bond of €450.0 million that was still outstanding and all other remaining liabilities under the existing syndicated loan of 23 December 2006. The restructuring of the KION Group’s funding was decided upon in a resolution of the Executive Board of KION GROUP AG on 25 January 2016. The repayment resulting from this restructuring of the funding was made from funds drawn down under a new senior facilities agreement concluded on 28 October 2015 (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.

The > TABLE 105 shows the age structure of receivables as at the reporting date.

Impairment losses 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 impairment losses had been reported, 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. The KION Group’s credit rating maintained its positive trajectory in the year under review. In April 2015, Moody’s upgraded its corporate family rating for the KION Group from Ba2 with a stable outlook to Ba2 with a positive outlook, while Standard & Poor’s also improved its rating, from BB / positive to BB + / stable.

The following tables show all of the contractually agreed payments under recognised financial liabilities as at 31 December 2015 and 2014, including derivative financial instruments with negative fair values. > TABLES 106 – 107

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

Bank guarantee lines (e.g. sureties, performance bonds) had been issued under the ancillary facility agreements for a total amount in the single-digit millions as at 31 December 2015 (31 December 2014: single-digit millions). They included guarantees payable ‘on first demand’. As was the case in the previous year, no guarantees were utilised in 2015. 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 €1.0 million as at 31 December 2015 (31 December 2014: €1.0 million). However, the short residual maturity of these financial assets meant 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 €5.0 million as at 31 December 2015 (31 December 2014: €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 KION Group’s leasing activities mean that it 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 overall 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 2015. 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 2014 and 2015. 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 2015. 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 (2014: 5 per cent).

In accordance with its treasury risk policy, the KION Group hedges currency risks both locally at the level of the individual companies and centrally via KION Material Handling GmbH in order to meet the prescribed minimum 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. In accordance with IAS 39, these hedges are generally classified as cash flow hedges for accounting purposes (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.

The > TABLE 108 shows an overview of the foreign-currency forwards entered into by the KION Group.

Significant currency risks from financial instruments are measured on the basis of value at risk (VaR). VaR figures are calculated using a historical variance-covariance matrix. Currency risks from financial instruments as defined by IFRS 7 are only included in calculating value at risk 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. > TABLE 109

The value at risk in respect of currency risk as at 31 December 2015 was €28.8 million (31 December 2014: €19.7 million). Value at risk is the loss that is not expected to be exceeded over a holding period of one year with a confidence level of 97.7 per cent (2014: 97.7 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.

The cumulative effect of a rise or fall of 100 basis points (bps) in the relevant interest-rate curves results from floating-rate positions and is shown in the following table: > TABLE 110

In the previous year, interest-rate derivatives (mainly interest-rate swaps) had been used on an insignificant scale to hedge the interest-rate risk. The interest-rate swaps expired in 2015, which meant the KION Group no longer had any interest-rate hedging instruments as at 31 December 2015. At the end of 2014, the fair value of the interest-rate swaps was €0.2 million, while their notional amount totalled €11.0 million.