Scania annual report 2004

NOTE 29 Financial instruments and financial risk management
Financial assets in the Scania Group consist primarily of financial leases
and hire purchase receivables that have arisen in the Customer Finance
segment as a consequence of financing of customers’ vehicle purchases.
Other financial assets of significance are trade receivables from independent
dealerships and end customers in the Vehicles and Service
segment plus liquid assets. Scania’s financial liabilities consist largely
of loans, mainly taken out in order to fund the Customer Finance
segment’s lending and leasing to customers and, to a lesser extent,
to fund capital employed in Vehicles and Service.
Financial assets and liabilities give rise to various kinds of risks, which
are primarily managed by means of various derivative instruments.
Scania uses derivative instruments, mainly for the purpose of:
• transforming corporate-level borrowings in a limited number of
currencies to those currencies in which the respectively funded
assets are denominated,
• transforming the interest rate refixing period for funding to the interest
rate refixing period in the Customer Finance loan and lease portfolio,
as well as the desired interest rate refixing period for funding of other
assets,
• converting expected future commercial payments in foreign currencies
to SEK and
• to a lesser extent, converting projected surplus liquidity in foreign
currencies to SEK.
Financial risk management in the Scania Group
In addition to business risks, Scania is exposed to various financial risks
in its operations. The financial risks that are of the greatest importance
are currency, interest rate, refinancing and credit risks, which are all
regulated by a financial policy adopted by Scania’s Board of Directors.
Credit risk related to customer commitments is managed, within established
limits, on a decentralised basis by means of local credit assessments.
Decisions on major credit commitments are made in corporate
Hedging of currency flows 31 December 2004
credit committees. Other risks are managed primarily at corporate level
by Scania’s treasury unit. For the purpose of promoting long-term
profitability, Scania’s financial policy states that financial risks shall be
minimised and access to liquidity shall be safeguarded. On a daily
basis, the corporate treasury unit measures the risks of outstanding
positions, which are managed within established limits in compliance
with the financial policy.
Currency risk
Currency risk is the risk that changes in currency exchange rates will
adversely affect cash flow. Changes in exchange rates also affect
Scania’s income statement and balance sheet as follows:
• Earnings are affected when income and expenses in foreign currencies
are translated to Swedish kronor.
• The balance sheet is affected when assets and liabilities in foreign
currencies are translated to Swedish kronor.
During 2004, 94 percent of Scania’s sales occurred in countries outside
Sweden. Since a large proportion of production occurs in Sweden, at
costs denominated in Swedish kronor, this means that Scania has large
net inflows of foreign currencies. During 2004, total net revenue in foreign
currencies amounted to about SEK 19 billion (18). The largest currencies
in this flow were EUR and GBP. Note 31 shows Scania’s net flows in
the most commonly occurring currencies.
Based on the geographic distribution of revenues and expenses
during 2004, a one percentage point change in the Swedish krona
against other currencies, excluding currency hedging, has an impact on
operating income of about SEK 190 m. on an annual basis.
Scania’s policy is to hedge its currency flows during a period of time
equivalent to the projected orderbook until the date of payment.
However, the hedging period is allowed to vary between 0 and 12
months. Hedging of currency risks mainly occurs by selling currencies
on forward contracts, but also by means of currency options.
GBP/SEK EUR/SEK KRW/SEK CHF/SEK NOK/SEK ZAR/SEK
Quarter Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2
Q 1 3 2005 15 13.04 100 9.22 5 000 0.0063 10 5.99 70 1.10 30 1.16
Q 2 2005 5 13.02 150 9.17 14 6.01 30 1.11
Q 3 2005 140 9.08 15 5.97
Q 4 2005 80 9.05 8 5.96
Total (in millions) 20 13.04 470 9.13 5 000 0.0063 47 5.98 100 1.11 30 1.16
Closing day rate 12.71 9.01 0.0064 5.83 1.09 1.16
31 Dec 2004
Unrealised gain/loss 8.1 59.6 – 0.4 5.4 1.7 0.4
31 Dec 2004
1 Volume is expressed in millions of local currency units.
2 Average forward price and lowest redemption price for currency options.
3 January volumes are not included, since the unrealised gain/loss effect was reported in December.
The effect of currency derivatives on operating income totalled SEK
65 m. (620), of which SEK 31 m. (54) was related to still unexpired
contracts that were offset on the balance sheet date by net assets in
the balance sheet. The value of outstanding contracts not reported in
earnings which will affect 2005 earnings can be seen in the table
“Hedging of currency flows” below.
To ensure efficiency and risk control, borrowings in Scania's subsidiaries
largely occur through the corporate treasury unit in local currencies,
and are then transferred to the subsidiaries in the form of internal
loans. By means of currency swap agreements, the loans are converted
at corporate level to adequate currencies. Scania's borrowings in various
currencies excluding and including currency derivatives can be seen
in the table on page 72 on borrowings and effective interest rates.
At the end of 2004, Scania’s net assets in foreign currencies amounted
to SEK 8,761 m. (10,140). See Note 30. The net foreign assets of
subsidiaries are normally not hedged. To the extent subsidiaries have
significant net monetary assets in local currencies, however, they may
be hedged. At year-end 2004, no foreign net assets were hedged
(SEK 346 m. in such assets were hedged at the end of 2003).
Interest rate risk
Interest rate risk is the risk that changes in market interest rates will
adversely affect cash flow or the fair value of financial assets and liabilities.
For Scania’s assets and liabilities that carry variable interest rates,
a change in market interest rates has a direct effect on cash flow, while
for fixed-interest assets and liabilities, the fair value of the portfolio is
instead affected. At year-end 2004, Scania’s interest-bearing assets
consisted primarily of assets in the Customer Finance segment and to
a certain extent of liquid assets. Interest-bearing liabilities consisted
mainly of loans, to a great extent intended to fund lending in Customer
Finance operations and to a lesser extent to fund working capital in
Vehicles and Service. To manage interest rate risks, the Group mainly
uses interest rate derivatives in the form of interest rate swap agreements.
Borrowing in Vehicles and Service is mainly used for funding of
working capital, which means that a short interest rate refixing period
matches the turnover rate of working capital. Scania’s policy concerning
interest rate risks in the Vehicles and Service segment is that the interest
rate refixing period on its loan portfolio should normally be 6 months, but
that deviations are allowed in the range between 0 and 24 months. At
year-end, the loan portfolio in Vehicles and Service amounted to SEK
3,050 m. (4,427) and the average interest rate refixing period was about
3 (3) months.
Given the same loan liabilities and interest rate refixing period as at
year-end 2004, a change in market interest rates of 100 basis points
(1 percentage point) would change the interest expenses in Vehicles
and Service by about SEK 25 m. on an annual basis. Due to the short
interest rate refixing period, the fair value of the loan portfolio would not
be significantly affected.
Scania’s policy regarding interest rate risks in the Customer Finance
segment is that lending and borrowing should match in terms of interest
rates and maturity periods. Interest rate refixing in related to the credit
portfolio and borrowing in Customer Finance had the following structure
as of 31 December 2004:
Continued
71 NOTES • SCANIA ANNUAL REPORT 2004