Pharmaceuticals Sector - Solvay

88
Solvay Global Annual Report 2005
(31) Derivative fi nancial instruments
The Solvay group uses derivatives to cover clearly identifi ed foreign exchange and interest rate risks (hedging
instruments). However, the required criteria to apply hedge accounting according to IFRS are not met in all cases.
This means that this form of accounting is not always applicable when the Group covers its economic risks.
Managing the transactional exchange risk
This is the exchange risk which attaches to a specifi c transaction, such as Group company buying or selling in a
currency other than its functional currency.
a) Hedging transactional exchange risk when certain
Subsidiaries are required to transfer their foreign exchange positions (e.g. customer invoices, supplier invoices) when
certain, to the CICC (1) coordination center. This systematic hedging centralizes the Group’s foreign exchange position
at CICC and relieves operating subsidiaries of the administrative burden of exchange risk management.
CICC’s foreign exchange position is then managed under rules and specifi c limits which have been set by the Group.
The main management tools are the spot and forward purchase and sale of currencies, and the purchase of options.
b) Hedging forecast short / medium-term foreign currency fl ows
Forecasted foreign currency fl ows are regularly mapped, by SBU, in order to measure the Group’s expected
exposure to transactional exchange risk on an annual horizon.
In its present structure, the Group’s exposure is essentially linked to the EUR / USD risk: the Group is «long» in USD
by around USD 600 million a year (this fi gure has increased since the Fournier acquisition), i.e. the Group’s overall
activities generate a net positive USD fl ow.
Based on this mapping and depending on market conditions, foreign exchange hedging can be carried out on the
basis of budgeted fl ows. The main fi nancial instruments utilized are forward currency sales and the purchase of put
options.
From the accounting point of view, where applicable this hedging is documented in such a way that it can be
processed as a «perfect hedge».
During 2005, based on cash fl ow forecasts, the Solvay group hedged USD 574 million of EUR / USD exchange risk
(EUR 188 million relating to 2005 and EUR 386 million relating to 2006).
The effects of this hedging are allocated by SBU and accounted for, depending on the accounting classifi cation,
either as sales or as other fi nancial gains and losses.
Managing the exchange risk on debt
Group borrowings are generally carried out by the Group’s fi nancial companies, which make the proceeds of these
borrowings available to the operating entities.
The choice of borrowing currency depends essentially on the opportunities offered by the various markets.
This means that the selected currency is not necessarily that of the country in which the funds will be invested.
Nonetheless, operating entities are fi nanced in their own local currencies, with this currency being obtained, where
appropriate, by currency swaps against the currency held by the fi nancing company. The cost of these currency
swaps is included under the cost of borrowing. These enable us to limit the exchange risk both in the fi nancial
company and in the company fi nally using the funds.
In emerging countries it is not always possible to borrow in local currency, either because local fi nancial markets
are too narrow and funds are not available, or because the fi nancial conditions are too onerous. In such a situation
the Group has to borrow in a strong currency. Nonetheless the Group has taken advantage of any opportunities to
refi nance its borrowing in emerging countries with local currency debt.
(1) Solvay Coordination Internationale des Crédits Commerciaux, S.A.