[40] 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 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 and cash and cash equivalents – is the key performance measure used in liquidity planning at Group level and amounted to €1,869.9 million as at 31 December 2018 (31 December 2017: €2,095.5 million).

The financial liabilities reported by the KION Group as at 31 December 2018 consisted of liabilities under the syndicated loan agreement (SFA), liabilities under the loan for the financing of the Dematic acquisition (AFA) and promissory notes (see also note [29]). The SFA comprises a floating-rate revolving credit facility of €1,150.0 million maturing in February 2023, of which €101.8 million was drawn down as at 31 December 2018 (31 December 2017: €184.7 million). As at 31 December 2018, the drawdown under the AFA consisted of a floating-rate bullet loan in a nominal amount of €600.0 million (31 December 2017: €1,000.0 million) maturing in October 2021. The nominal amount of the promissory notes issued totalled €1,210.0 million as at 31 December 2018 (31 December 2017: €1,010.0 million).

Taking into account credit facilities that had not yet been utilised, the unrestricted cash and cash equivalents available to the KION Group as at 31 December 2018 amounted to €1,219.8 million (31 December 2017: €1,138.0 million).

Default risk

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 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. 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. Apart from this, the Group does not hold any significant collateral.

Counterparty risks involving our customers are managed by the individual Group companies. To reflect the default risk, valuation allowances are recognised for defaults that have occurred and for expected defaults (see note [25]). Valuation allowances are based on the credit risk associated with the receivables, the level of loss in the event of a default and, taking account of any collateral, the estimated loss given default. This risk is assessed mainly using factors such as customer credit rating and failure to adhere to payment terms.

Financial transactions are only entered into with selected partners that have an investment-grade credit rating. The underlying default risk remains insignificant.

Liquidity risk

Based on the definitions in IFRS 7, a liquidity risk arises if an entity is unable to meet its financial liabilities. In order to ensure financial flexibility and solvency, the KION Group maintains a liquidity reserve in the form of cash and a revolving credit facility agreed with a syndicate of international banks under the SFA. The age structure of financial liabilities is reviewed and optimised continually.

The KION Group is assigned credit ratings by Fitch Ratings and Standard & Poor’s. These credit ratings have not changed since 2017. In January 2017, Fitch Ratings gave the Group an investment-grade long-term issuer rating of BBB– with a stable outlook. The rating awarded by the rating agency Standard & Poor’s for the KION Group has been BB+ with a positive outlook since September 2017.

The following tables show all of the contractually agreed undiscounted payments under recognised financial liabilities as at 31 December 2018 and 2017, including derivative financial instruments with negative fair values. > TABLES 113 – 114

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

In 2018, the KION Group sold financial assets with a total value of €152.3 million (2017: €132.0 million) in factoring transactions. In some cases, the KION Group retains insignificant rights and obligations 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 €3.1 million as at 31 December 2018 (31 December 2017: €2.6 million). The short remaining term of these financial assets means their carrying amount was almost the same as their fair value. The maximum downside risk arising on the transferred financial assets that are to be fully derecognised amounted to €19.9 million as at 31 December 2018 (31 December 2017: €16.2 million).

Risks arising from financial services

The leasing 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 financial services.

The risks identified are immediately taken into account by the Company by recognising impairments or provisions and in the costing of new lease contracts by 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 2018. 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 finances its leasing business in the local currency used in each market.

The counterparty risk inherent in the leasing business continues to be insignificant. The Group also mitigates any losses from defaults by its receipt of the proceeds from the sale of repossessed trucks. Furthermore, receivables management and credit risk management are refined on an ongoing basis. Besides the design of the business processes, it also encompasses the risk management and control processes.

Currency risk

In accordance with its treasury risk policy, the KION Group hedges exchange rate risks 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 company level 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. 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. Some of these hedges are classified as cash flow hedges for accounting purposes in accordance with IFRS 9 (see note [41]).

In addition, foreign-currency forwards are employed to hedge the currency risks arising in the course of internal financing. > TABLE 115 shows an overview of the foreign-currency forwards entered into by the KION Group.

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 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.

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 is shown in > TABLE 116. The table shows the after-tax impact from changes in exchange rates considered to be possible (+10.0 per cent: increase in the value of the euro against the other currencies of 10.0 per cent; –10.0 per cent: fall in the value of the euro against the other currencies of 10.0 per cent).

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 floating-rate and fixed-rate financial liabilities. It has entered into interest-rate swaps in order to hedge interest-rate risk arising on the floating-rate financial liabilities. The majority of these hedges are accounted for as cash flow hedges for accounting purposes in accordance with IFRS 9. An interest-rate swap has also been entered into to hedge the risk of a change in the fair value of a fixed-rate financial liability. This is accounted for as a fair value hedge (see note [41]). > TABLE 117 provides an overview of the interest-rate derivatives used by the KION Group.

A shift in the relevant yield curve of +/– 50 basis points (bps) (2017: +/– 50 bps) was simulated to assess interest-rate risk. The cumulative effect after tax resulted from variable-rate exposures and is shown in > TABLE 118.