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 unfavorable 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 Treasury employs only such instruments whose market value and risk profile can be reliably monitored. 

Foreign exchange risk 

Foreign exchange exposures are monitored at the Business level and then netted and hedged at Group level. All material fixed sales and purchase contracts 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 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 receivables and payables denominated in foreign currencies. The Group does not expect significant losses from foreign exchange rate changes in 2017. The cancellation of orders could lead to ineffective currency hedge. Approximately 69% (67) of sales and 63% (59) of operating costs in 2017 were denominated in euros, and approximately 18% (20) of sales and 7% (8) 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 of its main competitors: USD, GBP, JPY and KRW. 

Usually fixed sales and purchase contracts are hedged by using foreign exchange forwards to offset currency rate related changes to the value of the underlying cash flows. As the aim is to hedge and apply hedge accounting (cash flow hedging) only to the foreign exchange risk all interest rate/hedge timing related gains/losses are booked directly into the financial items. As the underlying cash flows can have long maturities, the related hedges can be done with shorter maturities and they can be rolled over when needed, so that at the maturity the total currency rate related gains/losses from these hedges are expected to fully offset the related gains/losses from the underlying cash flows. A cancellation or reduction of sales/purchase value of an order can cause the related hedge to be (partially) ineffective. Any ineffectiveness will be immediately recognised and booked into the financial items. 

As hedges are typically done on short maturities (up to 1 year) and only high credit quality (A- minimum rating requirement) counterparties are utilised, counterparty credit risk is expected to have minimal effect on hedge valuations. Due to some underlying hedged cash flows having longer maturities than related hedges the change in present value of the hedge and underlying cash flow does not always fully offset each other during the lifetime of a hedge. This ineffectiveness is calculated on quarterly basis and will be booked on Group level in financial items. 

The instruments, and their nominal values, used to hedge the Group’s foreign exchange exposures are listed in Note 26. Derivative financial instruments

Some Group companies in countries whose currencies are not fully convertible like Brazil have unhedged, intercompany loans nominated either in EUR or USD. Total amount of the loans is EUR 132 million (109). 

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 2017, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 1,011 million (1,071). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 825 million (613). In 2017, the translation differences recognised in OCI mainly come from changes in GBP exchange rate. 

In 2017, EUR 1 million (-16) fair value adjustments related to cash flow hedges were recognised in equity. EUR -36 million (-58) of the fair value adjustments were transferred from equity to the statement of income as net sales or operating expenses during 2017. In 2017, the result from ineffective portion of the cash flow hedges was EUR -15 million (-8), which was booked in financial items and specified in Note 10. Financial income and expenses

Currency forwards 

MEUR Fixed sales and purchase contracts Net loans
Currency forwards
USD 530 241
NOK 760 12
CHF 27 58
CNY 50
JPY 8
SGD 2
DKK 4 6
GBP 11 53
Other* 15 33
Total 1 397 413
* Other does not include any material single currencies. 
                
IFRS hedge accounting has been applied to EUR 1,962 million (1,468) currency forwards. A 5% change in the exhange rates would cause from these currency forwards an approximately EUR 38 million (55) impact on the equity. As all material fixed sales and purchase contracts are hedged, the profit and loss sensitivity of foreign exchange is considered immaterial. 

MEUR Gross amount Net amount Equity impact
Currency forwards under hedge accounting*
USD 899 340 17
NOK 875 294 15
CNY 56 53 3
JPY 38 3
GBP 35 26 1
CHF 29 18 1
Other 29 28 1
Total 1 962 762 38
* Intragroup transactions, on which the actual hedge accounting bookings are based.

MEUR
Currency forwards, under hedge accounting
31 December 2017 1 962
Hedged highly probable forecasted cash flows by year
2018 1 388
2019 296
2020 113
2021 27
2022- 138


Interest rate risk 
                
Wärtsilä is exposed to interest rate risk primarily through market value changes to the net debt portfolio (price risk) and also through changes in interest rates (re-fixing on rollovers). Wärtsilä hedges interest rate exposure by using derivative instruments such as interest rate swaps, futures and options. Changes in the market value of these derivatives are recognised directly in the statement of income. 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 2017 totalled EUR 619 million (629). The average interest rate was 1.3% (1.3) and the average re-fixing time 23 months (25). At the end of 2017, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 13 million (15) increase/decrease in the value of the net debt portfolio, including derivatives. 
                
Loans 
                
Wärtsilä spreads its interest rate risk exposure by taking both fixed and floating rate loans. The share of floating rate loans as a proportion of the total debt can vary between 30–70%. 

MEUR 2017 2016
Fixed rate loans 330 329
Floating rate loans 289 300
Derivatives 105 105
Share of fixed rate loans of total loans (including derivatives), % 70 69

A one percentage point change in the interest level would cause a EUR 2 million (2) change in the following year’s interest expenses of the debt portfolio, including derivatives. 
                
Additional information related to loans can be found in Note 16. Financial assets and liabilities by measurement category and Note 24. Financial liabilities
                
Liquidity and refinancing risk 
                
Wärtsilä ensures sufficient liquidity at all times by efficient cash management and by maintaining sufficient committed and uncommitted credit lines available. Refinancing risk is managed by having a balanced and sufficiently long loan portfolio. 
                
The existing funding programmes include: 

• Committed Revolving Credit Facilities totalling EUR 640 million (640). 
• Finnish Commercial Paper programmes totalling EUR 800 million (800).
    
The average maturity of the non-current debt is 44 months (43) and the average maturity of the confirmed credit lines is 28 months (33). Additional information in Note 24. Financial liabilities

At the year end, the Group had cash and cash equivalents totalling EUR 379 million (472) as well as EUR 640 million (640) non-utilised committed credit facilities. In addition a signed EUR 125 million long term loan was available for disbursement as of 31 December 2017. Commercial Paper Programmes were not utilised on 31 December 2017 nor on 31 December 2016. 

Committed Revolving Credit Facilities as well as the Parent Company's long term loans include a financial covenant (solvency ratio). 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)
2017 640
2018 160 480
2019 110 370
2020 110 260
2021 130 130
2022 130


Credit risk
 

The 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. 

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 assiociated with investments carried at amortised cost are assessed on a forward looking basis based on investment maturity dates and counterparty credit risk on quraterly basis. As of 31 December 2017 the expected credit loss was not material. 

Aging of trade receivables 

For trade receivables and receivables from revenue recognition in accordance with percentage of completion method, simplified approach is used and the loss allowance is measured at the estimate of the lifetime expected credit losses. Receivables from revenue recognition in accordance with percentage of completion method are usually covered with advance payments collected from customers. Thus, recognising credit losses based on the lifetime expected loss amounts mainly concerns trade receivables. For trade receivables not due or maximum 359 days overdue, an impairment of 0.1%–2.0% is made, depending on the aging category and the origin of the receivable. In calculating the expected credit loss rates, the company considers historical loss rates for each category, and adjusts for forward looking macroeconomic data. In addition to that, trade receivables more than 360 days old are assessed for impairment individually.

2017 2016
MEUR Trade receivables of which impaired Trade receivables of which impaired
Not past due 951 1 763 1
Past due 1–30 days 122 124
Past due 31–180 days 189 6 154 3
Past due 181–360 days 33 2 59 3
Past due 1 year 184 53 191 51
Total 1 478 62 1 291 58

In 2017, the result impact of write-offs was EUR -9 million (-10). 

Impairments

MEUR 2017 2016
Impairment, beginning of period 58 63
Other movements -4 -14
Impairment during the period 9 10
Impairment, end of period 62 58


The Group sells trade receivables in an amount that is currently not significant compared to the trade receivables as a whole. Sold receivables have been de-recognised in the consolidated statement of financial position. 
                
Equity price risk 
                
Wärtsilä has equity investments totalling EUR 10 million (12) in power plant companies, most of which are located in developing countries and performing well according to expectations. Additional information in Note 16. Financial assets and liabilities by measurement category
                
Capital risk management 
                
Wärtsilä’s policy is to secure a strong capital base to keep 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 31.12.2017 31.12.2016
Interest-bearing liabilities, non-current 517 520
Interest-bearing liabilities, current 102 108
Cash and cash equivalents -379 -472
239 157
Loan receivables -5 -7
Net interest-bearing debt 234 150
Total equity 2 396 2 321
Gearing 0.10 0.07
In the capital management Wärtsilä also follows the gearing development:
Equity and liabilities 5 607 5 391
Advances received -522 -516
5 085 4 874
Solvency ratio, % 47.1 47.6

 

© 2018 Wärtsilä