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 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 shareholders’ 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 at the Business level, hedged at company level against the Group Treasury, and then netted and covered externally at Group level by the Group Treasury. All material fixed sales and purchase contracts, 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 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 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 2021 related to its operations, excluding internal financing.

The instruments, and their nominal values, used to hedge the Group’s foreign exchange exposures are listed in Note 5.7. Derivative financial instruments of the Annual report.

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 2020, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 956 million (1,041). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 865 million (926). In 2020, the translation differences recognised in other comprehensive income mainly come from changes in the GBP exchange rate.

Approximately 65% (67) of sales and 61% (59) of operating costs were denominated in euros, and approximately 20% (20) of sales and 11% (10) of operating costs were denominated in US dollars. The remainder was 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 2020 by currency pair are listed below.

Statement of financial position

Estimated cash flows

MEUR

Base
currency
received

Base
currency
paid

Base
currency
received

Base
currency
paid

Net

EUR/USD

42

53

147

303

167

EUR/NOK

61

30

281

1

310

USD/NOK

30

 

231

3

259

EUR/CNY

13

20

65

4

63

EUR/GBP

18

20

89

 

88

EUR/SGD
  16 11 20   26

EUR/JPY

13

6

18

3

22


As the main funding currency for the Group, including the Group Treasury, is the euro and since
the subsidiaries are normally funded in their home currencies by the Group Treasury, the Group
Treasury had the following related open currency positions as of 31 December 2020.

MEUR

Loans

Deposits

Net

Intragroup loans/deposits

USD

15

282

266

GBP

68

60

9

CHF

61

61

AUD

49

49

NOK

1

1

SGD

 

19

19

CNY

12

12

CAD

11

11

Other currencies*

6

1

7

External loans/deposits

JPY

237**

237

USD   20 20 

Total

388

455

692

* The other currencies do not net as they are of different currencies.

** External JPY loans are fully hedged with cross currency swaps.


Some Group companies in countries whose currencies are not fully convertible, such as Argentina, Brazil, and Indonesia, have unhedged, intercompany loans nominated either in EUR or USD, which may result in some foreign exchange differences. The total amount of these loans is EUR 66 million (192).

Wärtsilä does not hedge translation risk. The most significant currencies for Wärtsilä are presented in Note 6.6. Exchange rates in the Annual report. 
 
 
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 2020 totalled EUR 1,161 million (908). The average interest rate was 0.8% (0.9) and the average re-fixing time 13 months (21).

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%. The Board of Directors has given authorisation to temporarily increase the share of fixed loans up to 100%, and the authorisation is valid until January 2022. Wärtsilä hedges its loan portfolio by using derivative instruments, such as interest rate swaps, futures and options.

MEUR

2020

2019

Fixed rate loans

366

406

Floating rate loans

796

503

Derivatives

424

424

Share of fixed rate loans of total loans (including derivatives), %

68

91


 
At the end of 2020, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 26 million (28) 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 (1) change in the following year’s interest expenses from the debt portfolio, including derivatives.

Additional information related to loans can be found in Note 5.2. Financial assets and liabilities by measurement category and Note 5.6. Maturity analysis of financial liabilities in the Annual report. Information on interest rate derivatives is presented in Note 5.7. Derivative financial instruments.

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.

Due to the COVID-19 pandemic, the liquidity reserves of the Group have been strengthened. The Revolving Credit Facilities (RCF) having maturity dates in 2020 were extended until the end of 2021, and their total amount was increased by EUR 20 million. The total amount of available RCFs, EUR 660 million, is fully unutilised. Other COVID-19 related funding arrangements resulted in disbursement of new long-term loans totalling EUR 190 million. As of 31 December 2020, the Group’s liquidity reserves were at high level and the liquidity position is expected to remain strong during 2021.

The existing loan facilities include:
• Committed Revolving Credit Facilities totalling EUR 660 million (640).
• Finnish Commercial Paper programmes totalling EUR 850 million (800).

The average maturity of the non-current debt is 36 months (46) and the average maturity of the confirmed credit lines is 21 months (30). Additional information in Note 5.6. Maturity analysis of financial liabilities.

At year-end, the Group had cash and cash equivalents totalling EUR 932 million (369), of which EUR 14 million (11) is related to assets held for sale, as well as EUR 660 million (640) of nonutilised committed credit facilities. Commercial Paper Programmes were not utilised on 31 December 2020 nor on 31 December 2019.

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.


Revolving credit facilities

MEUR

Year

Maturing

Available
(end of
period)

2019

-

 -

2020

 

660

2021

280

380

2022

90

290

2023

160

130

2024

130


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 forward-looking basis based on investment maturity dates, and counterparty credit risk on a quarterly basis. As of 31 December 2020, the expected credit loss was not material.

The expected credit losses are presented in Note 4.2. Trade receivables and contract assets and liabilities of the Annual report.               

Equity price risk 

Wärtsilä has equity investments totalling EUR 12 million (14) in power plant companies, most of which are located in developing countries and performing well according to expectations. Additional information is given in Note 5.2. Financial assets and liabilities by measurement category.      

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.

MEUR

2020

2019

Interest-bearing debt, non-current

1 005

851

Lease liabilities, non-current

124

146

Interest-bearing debt, current

156

58

Lease liabilities, current

42

42

Total interest-bearing liabilities

1 327

1 096

Interest-bearing receivables

-1

-1

Cash and cash equivalents

-919

-358

Cash and cash equivalents pertaining to assets held for sale

-14

-11

Total interest-bearing assets

-933

-370

Total net interest-bearing debt

394

726

Total equity

2 188

2 410

Gearing

0.18

0.30

In the capital management Wärtsilä also follows the solvency development:

Equity and liabilities

6 232

6 398

Advances received

-452

-452

Solvency ratio, %

38.1

40.8

 

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