Financial risks

Interest-rate risks

Interest-rate risk refers to the adverse effects of changes in interest rates on the Group’s income. The main factors determining this risk include the interest-fixing period. All investments are interest bearing instruments, normally with maturities between 0 and 3 months. The Group Treasury manages the long-term loan portfolio to keep the average interest-fixing period between 0 and 3 years. Derivatives, such as interest-rate swap agreements, are used to manage the interest-rate risk by changing the interest from fixed to floating or vice versa. A downward shift in the yield curves of one percentage point reduces the Group’s net interest income by approximately SEK 72m (26).

Borrowings

The debt financing of the Group is managed by Group Treasury in order to ensure efficiency and risk control. Debt is primarily taken up at the parent company level and transferred to subsidiaries through internal loans or capital injections. In this process, swap instruments are used to convert the funds to the required currency. The Group’s borrowings contain no financial covenants that can trigger premature cancellation of the loans. For long-term borrowings, the Group’s goal is to have an average maturity of at least two years, an even spread of maturities.

Capital structure

The Group’s objective is to have a capital structure resulting in an efficient weighted cost of capital and sufficient credit worthiness where operating needs and the needs for potential acquisitions are considered. To achieve and keep an efficient capital structure, the Financial Policy states that the Group’s long-term ambition is to maintain a long-term rating within a safe margin from a non-investment grade. In December 2016, Standard & Poor’s upgraded Electrolux from BBB+ with stable outlook to A- with stable outlook.

Financing risk

Financing risk refers to the risk that financing of the Group’s capital requirements and refinancing of existing borrowings could become more difficult or more costly. This risk is decreased by ensuring that maturity dates are evenly distributed over time. The net borrowings, total borrowings less liquid funds, excluding seasonal variances, shall be long-term according to the Financial Policy.

Credit risk

Exposure to financial credit risks arises from the investment of liquid funds, and derivatives. This is managed as a financial counterparty risk within the Group. In order to limit exposure to financial credit risk, a counterpart list has been established, which specifies the maximum permissible exposure in relation to each counterpart. Both investments of liquid funds and derivatives are normally done with issuers and counterparts holding a long-term rating of at least A– defined by Standard & Poor’s or a similar rating agency.

Pension commitments

At year-end 2016, Electrolux had commitments for pensions and benefits that amounted to approximately SEK 30bn. Through pension funds, the Group manages pension assets of approximately SEK 26bn. Net provisions for post-employment benefits amounted to SEK 4,169m. Yearly changes in the value of assets and commitments depend primarily on developments in the interest-rate market and on stock exchanges. The Group’s pension commitments are ­managed centrally by Group Treasury.

Currency risk

Foreign-exchange risk refers to the adverse effects of changes in foreign-exchange rates on the Group’s income and equity. In order to manage such effects, the Group covers these risks within the framework of the Financial Policy. The Group’s overall currency exposure is managed centrally. For more information on Electrolux foreign exchange exposure, see pages 72–73.

Sensitivity analysis year-end 2016

¹⁾ Includes transaction effects but not translation effects.

²⁾ Assuming the Swedish krona appreciates/depreciates against all other currencies.