Updated 15.2.2024
For a detailed description about Wärtsilä's Financial risks, please refer to the Annual report 2023.
General
Wärtsilä has a centralised Group Treasury, which has 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 unfavourable 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 shareholder equity.
The Financial Risk Policy is approved by the Board of Directors. The Group Treasury employs only such instruments whose market value and risk profile it can reliably monitor.
Foreign exchange risk
Foreign exchange exposures are monitored on business level, hedged on a subsidiary level against the Group Treasury, and then netted and covered externally on Group level by the Group Treasury. All material sales and purchase contracts with fixed foreign currency amounts, including both future cash flows and related accounts receivable and payable, 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 9 is applied to most of the hedges of these exposures. The hedges cover such time periods that both the sales prices and purchase costs can be adjusted to new relevant 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 cash balances, loans/deposits, as well as other receivables and payables denominated in foreign currencies.
As field service work is invoiced in local currencies, there is some foreign exchange change related volatility in the consolidated net sales. However, the effect on the profitability is limited as the related costs are in the same currency. Spare part sales are based on a euro price list and related purchases in non-euro currencies are hedged, so the effect from foreign currency rate changes on spare part sales is minimal. As project/hardware sales/purchases, as well as estimated currency exposures from long-term agreements, are hedged, the Group does not expect significant gains/losses from foreign exchange rate changes in 2024 related to its operations, excluding internal financing.
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 2023, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 989 million (998). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 785 million (845). In 2023, the translation differences recognised in other comprehensive income mainly come from changes in the GBP exchange rate.
Approximately 57% (44) of sales and 52% (50) of operating costs were denominated in euros, and approximately 28% (40) of sales and 24% (24) of operating costs were denominated in US dollars. The remainder were split between several currencies. The Group’s profits and competitiveness are also indirectly affected by the home currencies (USD, GBP, JPY and KRW) of its main competitors.
As Wärtsilä's operations are global, they often involve currency risks. The largest operative currency positions (excluding financing) open as of 31 December 2023 by currency pair are listed below.
Wärtsilä does not hedge translation risk.
Interest rate risk
Wärtsilä is exposed to interest rate risk primarily through market value changes to the net debt portfolio (price risk), as well as through changes in interest rates (re-fixing on rollovers). 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 2023 totalled EUR 590 million (683). The average interest rate was 3.0% (1.4) and the average re-fixing time 7 months (12).
Wärtsilä spreads its interest rate risk exposure by taking both fixed and floating rate loans. The share of fixed rate loans as a proportion of the total debt can vary between 30 and 70%. Wärtsilä hedges its loan portfolio by using derivative instruments, such as interest rate swaps, futures and options.
At the end of 2023, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 5 million (10) increase/decrease in the value of the net debt portfolio, including 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 from the debt portfolio, including derivatives. In both analyses, the debt portfolio as of 31 December 2023 is used.
As the main funding currency of the Group is Euro, the IBOR reform does not have a significant impact on the Group’s financial arrangements. Due to the reform, the reference interest rate of long-term JPY loans and the related cross currency swaps have been amended, and the reference rates for the Group’s cash pool bank accounts have been changed in cases where a rate would have been discontinued
Liquidity and refinancing risk
Wärtsilä ensures sufficient liquidity at all times by efficient cash management and by maintaining sufficient available committed and uncommitted credit lines. Refinancing risk is managed by having a balanced and sufficiently long loan portfolio.
The existing loan facilities include:
The average maturity of the non-current debt is 37 months (28) and the average maturity of the confirmed credit lines is 31 months (24). Additional information in Note 5.6. Maturity analysis of financial liabilities.
At year-end, the Group had cash and cash equivalents totalling EUR 819 million (461). The Group also had EUR 644 million (650) of non-utilised committed credit facilities, as well as cash and cash equivalents of EUR 3 million related to assets held for sale in 2022. Commercial Paper Programmes were not utilised on 31 December 2023 nor on 31 December 2022.
Committed Revolving Credit Facilities, as well as the parent company's long-term loans, include a financial covenant (solvency ratio). The solvency ratio is expected to remain clearly over the covenant level for the foreseeable future.
Credit risk
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 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. As only high credit quality (A- minimum rating requirement) counterparties are utilised for derivative financial instruments, and the transactions are made under ISDA Master Agreements, no credit losses are expected from these instruments.
The Group companies deposit the maximum amount of their liquid financial assets with the centralised treasury when local laws and central bank regulations allow it. The Group’s funds are placed in instruments with sufficient liquidity (current 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 the Group Treasury, and Wärtsilä does not expect any future defaults from the placements.
The expected credit losses associated with investments carried at amortised cost are assessed on a forwardlooking basis based on investment maturity dates, and counterparty credit risk on a quarterly basis. As of 31 December 2023, the expected credit loss was not material.
Equity price risk
Wärtsilä has equity investments totalling EUR 12 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, both to maintain 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 of at least 50% of earnings over the cycle.