43. Management of financial risks

The treasury of METRO AG manages the financial risks of METRO GROUP. These include, in particular

  • price risks,
  • liquidity risks,
  • creditworthiness risks and
  • cash flow risks.

Further details on the risk management system are included in the combined management report in chapter 5 Financial and asset position.

Price risks

For METRO GROUP, price risks result from the impact of changes in market interest rates, foreign currency exchange rates, share price fluctuations or changes in commodity prices on the value of financial instruments.

Interest rate risks are caused by changes in interest rate levels. Interest rate swaps are used to cap these risks.

METRO GROUP’s remaining interest rate risk is assessed in accordance with IFRS 7 using a sensitivity analysis. In the process, the following assumptions are applied in the consideration of changes in interest rates:

  • The total impact determined by the sensitivity analysis relates to the actual balance as of the closing date and reflects the impact for one year.
  • Primary floating-rate financial instruments whose interest payments are not designated as the underlying transaction in a cash flow hedge against changes in interest rates are recognised in net interest result in the sensitivity analysis. The sensitivity for a change of 10 basis points is determined due to the currently low level of interest rates.
  • Primary fixed-interest financial instruments generally are not recognised in net interest result. They are only recognised in other financial result if they are designated as the underlying transaction within a fair value hedge and measured at their fair value. In this case, however, the interest-related change in the value of the underlying transaction is offset by the change in the value of the hedging transaction upon full effectiveness of the hedging transaction. The variable interest flows within the group that result from a fair value hedge are recognised in net interest result.
  • Financial instruments designated as the hedging transaction within a cash flow hedge to hedge against variable interest flows will only be recognised in net interest result when the payment flows have actually been initiated. However, the measurement of the hedging transaction at fair value is recognised in reserves retained from earnings outside of profit or loss.
  • Interest rate derivatives that are not part of a qualified hedging transaction under IAS 39 are recognised at fair value in other financial result and, through resulting interest flows, in net interest result.

At the closing date, the remaining interest rate risk of METRO GROUP results essentially from variable interest receivables and liabilities to banks with a total investment balance after consideration of hedging transactions in the amount of €2,089 million (30/9/2012: €1,474 million; 31/12/2012: €4,852 million).

Given this total balance, an interest rate rise of 10 basis points would result in €2 million (9M 2012: €1 million; 12M 2012: €5 million) higher earnings in net interest result per year. An interest rate reduction of ten basis points would have a corresponding opposite effect in the amount of €–2 million (9M 2012: €–1 million; 12M 2012: €–5 million).

In the event of an interest rate rise of 100 basis points, the measurement of interest rate swaps and interest rate/currency swaps with a nominal volume of €310 million (30/9/2012: €312 million; 31/12/2012: €312 million), which are part of a cash flow hedge, would result in an increase in equity in the amount of €5 million (9M 2012: €9 million; 12M 2012: €8 million). A drop in interest rates would result in a decrease in equity of €6 million (9M 2012: €9 million; 12M 2012: €8 million).

METRO GROUP faces currency risks in its international procurement of merchandise and because of costs and financings that are incurred in a currency other than the relevant local currency or are pegged to the price of another currency. In accordance with the group guideline “Foreign Currency Transactions”, resulting foreign currency positions must be hedged. Exceptions from this hedging requirement exist where hedging is not economically reasonable and in the case of legal and regulatory restrictions in the respective countries. Forex futures as well as interest rate swaps and currency swaps are used to limit currency risks.

In line with IFRS 7, the presentation of the currency risk resulting from the exceptions is also based on a sensitivity analysis. In the process, the following assumptions are made in the consideration of a devaluation or revaluation of the euro vis-à-vis other currencies:

In terms of its amount and result characteristic, the total effect presented by the sensitivity analysis relates to the amounts of foreign currency held within the consolidated subsidiaries of METRO GROUP and states the effect of a devaluation or revaluation of the euro.

A devaluation of the euro will result in a positive effect if a foreign currency receivable exists at a subsidiary which uses the euro as its functional currency and if a liability in euros exists at a subsidiary which does not use the euro as its functional currency. A devaluation of the euro will result in a negative effect if a receivable in euros exists at a subsidiary which does not use the euro as its functional currency and if a liability in euros exists at a subsidiary which uses the euro as its functional currency. Conversely, any appreciation of the euro will have the opposite effect.

In the sensitivity analysis, the effects of the measurement of non-equity foreign currency positions that are calculated based on the closing date price in line with IAS 21 are recognised in the income statement. In the case of net investments in a foreign operation, the effects of the closing date measurement are recognised in equity (other comprehensive income) outside of profit or loss.

Foreign currency futures/options and interest rate and currency swaps that are not part of a qualified hedge under IAS 39 are recognised through the fair value measurement in the income statement. In fully effective hedging transactions, this effect is offset by the effect from the measurement of the underlying foreign currency transaction.

Foreign currency futures/options and interest rate and currency swaps that are designated as the hedging transaction within a cash flow hedge to hedge against payment flows in foreign currency will only be recognised in the income statement when the payment flows are actually initiated. The measurement of the hedging transaction at its fair value, however, is recognised in reserves retained from earnings outside of profit or loss.

Effects from the currency translation of financial statements whose functional currency is not the reporting currency of METRO GROUP do not affect cash flows in local currency and are therefore not part of the sensitivity analysis.

As of the closing date, the remaining currency risk of METRO GROUP was as follows:

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Impact of devaluation/appreciation of euro by 10%

 

 

 

 

 

 

 

 

€ million

Currency pair

Volume

31/12/2012

Volume

30/9/2012

Volume

30/9/2013

Profit or loss for the period

 

 

 

 

 

 

 

CNY/EUR

–16

+/–2

–14

+/–1

–1

+/–0

 

CZK/EUR

–124

+/–12

–138

+/–14

–131

+/–13

 

EGP/EUR

–39

+/–4

–45

+/–4

–52

+/–5

 

HUF/EUR

–1

+/–0

–10

+/–1

2

–/+0

 

JPY/EUR

14

+/–1

44

+/–4

60

+/–6

 

KZT/EUR

–222

+/–22

–221

+/–22

–228

+/–23

 

MAD/EUR

0

+/–0

20

+/–2

0

+/–0

 

MDL/EUR

–39

+/–4

–41

+/–4

–38

+/–4

 

PLN/EUR

–118

+/–12

–113

+/–11

–100

+/–10

 

RON/EUR

–189

+/–19

–194

+/–19

–86

+/–9

 

RSD/EUR

–27

+/–3

–30

+/–3

–27

+/–3

 

RUB/EUR

–293

+/–29

–81

+/–8

–121

+/–12

 

SEK/EUR

0

+/–0

–6

+/–1

–2

+/–0

 

TRY/EUR

–24

+/–2

–35

+/–3

–46

+/–5

 

UAH/EUR

–15

+/–2

–7

+/–1

–10

+/–1

 

USD/EUR

19

+/–2

0

+/–0

18

+/–2

 

VND/EUR

–4

+/–0

–6

+/–1

–4

+/–0

 

 

 

+/–114

 

+/–99

 

+/–93

Equity

 

 

 

 

 

 

 

GBP/EUR

183

+/–18

179

+/–18

253

+/–25

 

CNY/EUR

56

+/–6

56

+/–6

54

+/–5

 

PLN/EUR

75

+/–8

74

+/–7

72

+/–7

 

RUB/EUR

–120

+/–12

–340

+/–34

–120

+/–12

 

SEK/EUR

–52

+/–5

–52

+/–5

0

+/–0

 

TRY/EUR

–32

+/–3

–32

+/–3

0

+/–0

 

UAH/EUR

–242

+/–24

–248

+/–25

–242

+/–24

 

USD/EUR

252

+/–25

277

+/–28

242

+/–24

 

 

 

+/–101

 

+/–126

 

+/–97

 

 

 

 

 

 

 

 

 

 

 

+/–215

 

+/–225

 

+/–190

In addition, currency risks for the currency pairs USD / KZT, USD / VND with an effect of €–/+18 million (30/9/2012: €–/+19 million; 31/12/2012: €–/+18 million for the currency pairs USD / CNY, USD / HKD, USD / KZT, USD / RUB, USD / TRY, USD / VND, USD / UAH) exist in the case of a devaluation or appreciation of the USD by 10 per cent as well as the currency pair CNY / HKD of €–/+2 million (30/9/2012: €–/+2 million; 31/12/2012: €–/+2 million) and RUB / KZT of €–/+2 million (30/9/2012: €+/–0 million; 31/12/2012: €+/–1 million).

Share price risks result from share-based payment to METRO GROUP executives. The remuneration (monetary bonus) is essentially based on the price development of the METRO ordinary share as well as the ordinary share’s relative performance in relation to defined indices.

To date, the share price risk from the performance share plan has not been limited.

Price risks related to equity instruments result from holdings in other companies. In the event of a value gain of 10 per cent, the measurement of these holdings with a carrying amount of €253 million (30/9/2012: €183 million; 31/12/2012: €187 million) would result in an increase in equity in the amount of €25 million (9M 2012: €18 million; 12M 2012: €19 million). An impairment would result in a decrease in equity of €25 million (9M 2012: €18 million; 12M 2012: €19 million).

Electricity prices affect the fair value of electricity derivatives. Fluctuations in value impact the other financial result.

The portfolio expires on 31 December 2013. Due to the marginal value of the portfolio as of 30 September 2013 no material effects on other financial result are expected. For this reason, the company has refrained from a value-at-risk valuation.

As of 30 September 2012, the value of the portfolio with a delivery in 2013 amounted to €23.0 million (31/12/2012: €20.9 million). The portfolio value refers to the value of procurement volumes as of the closing date.

Based on the determination of the value at risk as of 30 September 2012, with a confidence level of 99 per cent and a holding period of 20 days, a maximum gain of €1.7 million (12M 2012: €1.6 million) and a maximum loss of €1.7 million (12M 2012: €1.6 million) was calculated for the portfolio with a delivery in 2013. The value-at-risk model is based on a historical simulation of market prices for the preceding 500 trading days.

Interest rate and currency risks are substantially reduced and limited by the principles laid down in the internal treasury guidelines of METRO GROUP. These include a regulation that is applicable throughout the group whereby all hedging operations must adhere to predefined limits and may by no means lead to increased risk exposure. METRO GROUP is aware that this severely limits the opportunities to exploit current or expected interest rate and exchange rate movements to optimise results.

In addition, hedging may be carried out only with standard financial derivatives whose correct actuarial and accounting mapping and valuation in the treasury system are guaranteed.

As of the closing date, the following financial instruments were being used for risk reduction:

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31/12/2012

30/9/2012

30/9/2013

 

 

 

 

 

 

 

 

 

 

 

 

Fair values

 

Fair values

 

Fair values

 

 

 

 

 

 

 

 

 

 

€ million

Nominal volume

Financial assets

Financial liabilities

Nominal volume

Financial assets

Financial liabilities

Nominal volume

Financial assets

Financial liabilities

Interest rate transactions

 

 

 

 

 

 

 

 

 

Interest rate swaps

126

0

8

126

0

8

126

0

5

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(126)

(0)

(8)

(126)

(0)

(8)

(126)

(0)

(5)

thereof not part of hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

Currency transactions

 

 

 

 

 

 

 

 

 

Currency futures/options

801

8

23

368

10

23

–76

17

13

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(304)

(0)

(11)

(329)

(3)

(8)

(295)

(0)

(7)

thereof not part of hedges

(497)

(7)

(12)

(39)

(7)

(15)

(–371)

(17)

(6)

Interest rate/currency swaps

186

0

8

186

0

10

184

0

8

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(186)

(0)

(8)

(186)

(0)

(10)

(184)

(0)

(8)

thereof not part of hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

 

988

8

31

554

10

33

108

17

21

Commodity transactions

 

 

 

 

 

 

 

 

 

Forex futures

7,000 t 468 GWh

3

4

8,000 t 647 GWh

3

3

3,000 t 114 GWh

2

1

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof not part of hedges

(7,000 t 468 GWh)

(3)

(4)

(8,000 t 647 GWh)

(3)

(3)

(3,000 t 114 GWh)

(2)

(1)

 

n/a

11

43

n/a

13

44

n/a

18

27

The nominal volume of forex futures/options and interest limitation agreements results from the net position of the buying and selling values in foreign currency underlying the individual transactions translated at the relevant exchange rate on the closing date. The nominal volume of interest rate swaps or interest rate/currency swaps and interest rate hedging agreements is shown. The nominal volume of commodity futures refers to diesel derivatives in metric tons (t), which corresponds to about 1,183 litres, and to electricity derivatives in gigawatt hours (GWh).

All fair values represent the theoretical value of these instruments upon dissolution of the transaction at the end of the period. Under the premise that instruments are held until the end of their term, these are unrealised gains and losses that, by the end of the term, will be fully set off by gains and losses from the underlying transactions in the case of fully effective hedging transactions.

  • For the purpose of showing this reconciliation appropriately for the period, relationships are created between hedging transactions and underlying transactions and recognised as follows:
  • Within a fair value hedge, both the hedging transaction and the hedged risk of the underlying transaction are recognised at their fair value. The value fluctuations of both trades are shown in the income statement, where they will be fully set off against each other in the case of full effectiveness.
  • Within a cash flow hedge, the hedging transactions are also principally recognised at their fair value. In the case of full effectiveness of the hedging transaction, the value changes will be recognised in equity until the hedged payment flows or expected transactions impact the result. Only then will they be recognised in the income statement.
  • Hedging transactions that, according to IAS 39, are not part of a hedge are recognised at their fair value. Value changes are recognised directly in the income statement. Even if no formal hedging relationship was created, these are hedging transactions that are closely connected to the underlying business and whose impact on earnings will be netted by the underlying transaction (natural hedge).

The currency derivatives are used primarily for pound sterling, Chinese renminbi, Danish krone, Japanese yen, Polish złoty, Romanian leu, Russian rouble, Swiss franc, Czech koruna, Turkish lira, Hungarian forint as well as US dollar.

The derivative financial instruments have the following maturities:

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31/12/2012 Fair values

30/9/2012 Fair values

30/9/2013 Fair values

 

 

 

 

 

 

 

 

 

 

 

Maturities

Maturities

Maturities

 

 

 

 

 

 

 

 

 

 

€ million

up to
1 year

1 to
5 years

over
5 years

up to
1 year

1 to
5 years

over
5 years

up to
1 year

1 to
5 years

over
5 years

Interest rate transactions

 

 

 

 

 

 

 

 

 

Interest rate swaps

0

–8

0

0

–8

0

–5

0

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(0)

(–8)

(0)

(0)

(–8)

(0)

(–5)

(0)

(0)

thereof not part of hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

Currency transactions

 

 

 

 

 

 

 

 

 

Currency futures/options

–16

0

0

–13

0

0

4

0

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(–10)

(0)

(0)

(–4)

(0)

(0)

(–7)

(0)

(0)

thereof not part of hedges

(–5)

(0)

(0)

(–9)

(0)

(0)

(11)

(0)

(0)

Interest rate/currency swaps

0

–8

0

0

–10

0

0

–8

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(0)

(–8)

(0)

(0)

(–10)

(0)

(0)

(–8)

(0)

thereof not part of hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

 

–16

–8

0

–13

–10

0

4

–8

0

Commodity transactions

 

 

 

 

 

 

 

 

 

Forex futures

–2

1

0

–2

2

0

0

0

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

thereof not part of hedges

(–2)

(1)

(0)

(–2)

(2)

(0)

(0)

(0)

(0)

 

–18

–15

0

–15

–16

0

–1

–8

0

Listed below the maturities are the fair values of the financial assets and liabilities that fall due during these periods.

The repricing dates for variable interest rates are less than one year.

Liquidity risks

Liquidity risk describes the risk of being unable to procure or provide funding or being able to only procure or provide funding at a higher cost. Liquidity risks may arise, for example, as a result of temporary capital market disruptions, creditor defaults, insufficient credit lines or the absence of budgeted payment flows. METRO AG acts as financial coordinator for METRO GROUP companies to ensure that they are provided with the necessary financing to fund their operating and investing activities at all times and in the most cost-efficient manner possible. The necessary information is provided by means of a group financial plan, which is updated monthly and checked monthly for deviations. This financial plan is complemented by a weekly rolling 14-day liquidity plan.

Instruments used for financing purposes include money and capital market products (time deposits, call money, promissory note loans, commercial papers and listed bonds sold as part of ongoing issue programmes) as well as bilateral and syndicated loans. METRO GROUP has a sufficient liquidity reserve so that there is no danger of liquidity risks even if an unexpected event has a negative financial impact on the company’s liquidity situation. Further details on instruments used for financing purposes and credit lines are provided by the explanatory notes to the respective balance sheet items.

Further details are provided in no. 29 “Cash and cash equivalents” as well as no. 36 “Financial liabilities”.

Intra-group cash pooling reduces the amount of debt and optimises the money market and capital market investments of METRO GROUP, which has a positive effect on net interest result. Cash pooling allows the surplus liquidity of individual group companies to be used to fund other group companies internally.

In addition, METRO AG draws on all the financial expertise pooled in the treasury of METRO AG to advise the group companies in all relevant financial matters and provide support. This ranges from the elaboration of investment financing concepts to supporting the responsible financial officers of the individual group companies in their negotiations with local banks and financial service providers. This ensures, on the one hand, that the financial resources of METRO GROUP are optimally employed, and, on the other hand, that all group companies benefit from the strength and credit standing of METRO GROUP in negotiating their financing terms.

Creditworthiness risks

Creditworthiness risks arise from the total or partial loss of a counterparty, for example through bankruptcy or in connection with monetary investments and derivative financial instruments with positive market values. METRO GROUP’s maximum default exposure as of the closing date is reflected by the carrying amount of financial assets totalling €5,500 million (30/9/2012: €5,163 million; 31/12/2012: €8,640 million).

Further details on the size of the respective carrying amounts are listed in no. 40 “Carrying amounts and fair values according to measurement category”.

Cash on hand considered in cash and cash equivalents totalling €105 million (30/9/2012: €137 million; 31/12/2012: €138 million) is not exposed to any default risk.

In the course of the risk management of monetary investments totalling €2,308 million (30/9/2012: €1,722 million; 31/12/2012: €4,765 million) and derivative financial instruments totalling €18 million (30/9/2012: €13 million; 31/12/2012: €11 million), minimum creditworthiness requirements and maximum exposure limits have been defined for all business partners of METRO GROUP. Cheques and money in circulation are not considered in the determination of creditworthiness risks. This is based on a system of limits laid down in the treasury guidelines, which are based mainly on the ratings of international rating agencies, developments of credit default swaps or internal credit assessments. An individual limit is allocated to every counterparty of METRO GROUP; compliance is constantly monitored by the treasury systems.

The following table shows a breakdown of counterparties by credit rating:

Rating classes

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Volume in %

 

 

 

 

 

 

 

 

 

 

 

 

Monetary investments

 

 

 

 

 

 

 

 

 

 

 

Grade

Moody’s

Standard & Poor’s

Germany

Western Europe
excl. Germany

Eastern Europe

Asia and others

Derivatives with positive market values

Total

Investment grade

Aaa

AAA

0.00

0.00

0.00

0.00

0.00

96.00

 

Aa1 to Aa3

AA+ to AA-

0.20

1.10

2.30

1.00

0.10

 

 

A1 to A3

A+ to A-

28.20

27.80

4.90

8.10

0.70

 

 

Baa1 to Baa3

BBB+ to BBB-

12.70

6.60

1.70

0.60

0.00

 

Non-investment grade

Ba1 to Ba3

BB+ to BB-

0.00

1.30

2.10

0.00

0.00

 

 

B1 to B3

B+ to B-

0.00

0.00

0.00

0.10

0.00

 

 

C

C

0.00

0.00

0.30

0.00

0.00

3.80

No rating

 

 

0.20

0.00

0.00

0.00

0.00

0.20

 

 

 

41.30

36.80

11.30

9.80

0.80

100.00

The table shows that, as of the closing date, about 96 per cent of the capital investment volume, including the positive market value of derivatives, had been placed with investment-grade counterparties, in other words, those with good or very good credit ratings. Most of the counterparties that do not yet have an internationally accepted rating are respected financial institutions whose creditworthiness can be considered flawless based on analyses. METRO GROUP also operates in countries where local financial institutions do not have investment-grade ratings due to the rating of their country. For country-specific reasons as well as cost and efficiency considerations, cooperation with these institutions is unavoidable. These institutions account for about 4 per cent of the total volume.

To manage creditworthiness risks related to long-term derivatives, METRO AG concludes Credit Support Annexes (CSA) with banks. The balance sheet item “other financial and non-financial assets” includes €10 million (30/9/2012: €6 million; 31/12/2012: €6 million) in receivables from these contracts. The size of the coverage payment depends on the market values and covers the payment obligations of these interest rate/currency swaps.

METRO GROUP’s level of exposure to creditworthiness risks is thus very low.

Cash flow risks

A future change in interest rates may cause cash flow from variable interest rate asset and liability items to fluctuate. Part of the variable interest rate debt has been hedged with derivative financial instruments. Stress tests are used to determine the potential impact interest rate changes may have on cash flow.