Note 30 - Exposure to market risks (liquidity, interest rate, exchange rate and equity risks) and credit risks
30.1 MARKET RISKS
30.1.5 EXPOSURE
Liquidity risks
The Group’s liquidity risk is controlled as it has a cash to debt ratio of 291.2% (calculated by dividing its available liquidity reserves – i.e., cash and cash equivalents, short-term investments and confirmed undrawn credit lines – by gross debt maturing in less than two years). Gross debt maturing within two years amounts to €747 million, while total liquidity reserves represent €2,175 million (€913 million in cash and cash equivalents and short-term investments and €1,262 million in confirmed undrawn credit lines).
The liquidity reserve relates mainly to the syndicated credit facility contracted in May 2015 for €1,250 million over an initial period of five years. On 26 April 2016 and 27 April 2017, Lagardère SCA used the two possible extensions and on both occasions received the unanimous approval of the 13 syndicated banks to extend its credit facility by one year. Following these extensions, the facility will now fall due on 11 May 2022.
Total borrowings include the value of any hedging instruments (see note 29.3).
The proportion of bond debt redeemable at maturity decreased from 62% to 54% of total borrowings between 31 December 2018 and 31 December 2019, with €500 million falling due in 2023 and 2026 and €300 million in 2024.
Risks arising from early repayment covenants
The €1,250 million syndicated credit agreement entered into in May 2015 and maturing in May 2022, contains a covenant relating to the ratio of net debt to adjusted EBITDA. Net debt is defined in in note 3.2 and is calculated as set out in note 29.
Adjusted EBITDA is defined as recurring operating profit of fully consolidated companies and discontinued operations (recurring EBIT), less depreciation, amortisation and impairment of property, plant and equipment and intangible assets, amortisation of signing fees, depreciation of right-of-use assets under building leases, cancellation of the fixed rental expense relating to buildings and other leases, plus dividends received from equity-accounted companies. Since 1 January 2019, date of the first-time application of IFRS 16, recurring operating profit of fully consolidated companies (see definition in note 3.2) excludes the impact of this standard on concession agreements only. Since lease liabilities are not considered to be borrowings, they are not included in the calculation of net debt. The syndicate behind the €1,250 million facility accepted the adjustment to the covenant in June 2019.
Breaching this ratio would entitle the lenders to demand early repayment of the loans granted.
The ratio is calculated every six months over a rolling 12-month period, on the basis of the published consolidated financial statements.
At 31 December 2019, the applicable covenant had not been breached and no drawdowns had been made on the €1,250 million syndicated credit facility.
Interest rate risks
Fixed-interest bonds account for 54% of total gross debt. The €497 million worth of bonds issued in 2016 and maturing in 2023 bear interest at a fixed rate (effective interest rate of 2.90%). The €298 million worth of bonds issued in 2017 and maturing in 2024 also bear interest at a fixed rate (effective interest rate of 1.81%). The €496 million worth of bonds issued in 2019 and maturing in 2026 also bear interest at a fixed rate (effective interest rate of 2.26%).
The Group regularly issues Commercial Paper and Medium-Term Notes with maturities of between 1 and 24 months, the frequency and maturities of which adjust the reference rates applied. In addition, the rate applied to the portfolio as a whole varies throughout the year. The Group’s other bank debt is mainly at variable interest rates. Cash and cash equivalents totalled €913 million at 31 December 2019. Variable-rate debt stood at €747 million at 31 December 2019 (excluding, in particular, liabilities related to put options granted to minority shareholders and deposits and guarantees received). Based on the amounts indicated above, at 31 December 2019 a sudden rise in interest rates would have a limited impact on the Group’s net finance costs.
At 31 December 2019 the Group did not hold any interest rate derivatives altering the breakdown of fixed- and variable-rate debt. The Group’s pensions and other post-employment benefit obligations are sensitive to changes in interest rates, as are the corresponding plan assets invested in bonds and money market instruments, although inversely so. The outstanding amounts of these obligations and assets are set out in note 28.1.
Exchange rate risks
The Group’s exposure to foreign exchange rate risks on commercial transactions chiefly concerns Lagardère Sports. At 31 December 2019, the foreign currency hedges set up for all four of the Group’s divisions – in the form of direct forward agreements – amounted to €166 million (sales) and €218 million (purchases). The Group does not hedge the income statement translation risk. Its main exposures in this respect are given below.
The percentage of 2019 consolidated revenue represented by the main currencies can be analysed as shown below (revenue reported by entities in the official currency of the country in which they are based):
- Euro 50 %
- US dollar 24 %
- Pound sterling 8 %
- Other 18 %
Total 100 %
Based on accounting data for 2019, the sensitivity of recurring operating profit of fully consolidated companies to a 10% decline in the respective exchange rates for the main foreign currencies against the euro over a full year, expressed in monetary terms before any adjustments, is as follows:
| Currency | Impact on 2019 recurring operating profit of fully consolidated companies | |
|---|---|---|
| US dollar(*) | €(13) million | |
| Pound sterling(**) | €(5) million | |
(*) Recurring operating profit of fully consolidated companies whose functional currency is the US dollar.
(**) Recurring operating profit of fully consolidated companies whose functional currency is the pound sterling.
In general, ordinary business operations are financed through short-term, variable-rate borrowings denominated in the local currency in order to avoid exchange rate risks. These represented €334 million at 31 December 2019.
For long-term investments including acquisitions, the Group may set up medium-term borrowings in the investment currency. At 31 December 2019, instruments classified as net investment hedges represented an amount of €499 million, denominated mainly in US dollars.
Equity risks
The Group’s principal direct and indirect investments in listed companies are:
| Equities | Number of shares held | Percent shareholding | Share price at 31 Dec. 2019 |
Market capitalisation at 31 Dec. 2019 |
|||
|---|---|---|---|---|---|---|---|
| Lagardère SCA | 2 276 966 | 1,74 % | 19,43 | €44,241,449 | |||
| Pension plan assets invested in equities |
€48,574,559 | ||||||
Treasury shares are initially recognised at cost and are deducted from consolidated equity. Subsequent changes in value have no impact on the consolidated financial statements.
The fair value of pension plan assets totalled €268 million at 31 December 2019, of which 18%, or €48 million, is invested in equities (see note 28.1).
30.1.2 MARKET RISK MANAGEMENT
The Group has implemented a policy aimed at reducing market risks by applying procedures that help identify and quantify these risks. Derivatives are used exclusively for non-speculative hedging transactions.
The derivatives portfolio can be analysed as follows:
| Category of hedging instrument |
Type of hedge | Nominal amount | Fair value | Other comprehensive income |
|||
|---|---|---|---|---|---|---|---|
| 31 Dec. 2019 | 31 Dec. 2018 | 31 Dec. 2019 | 31 Dec. 2018 | 2019 | 2018 | ||
| Cross-currency swaps designated as hedges of debt(*) |
Net investment | 383 | 375 | (8) | 7 | (15) | (11) |
| Currency swaps designated as hedges of debt(*) |
Fair value | 506 | 426 | - | - | - | - |
| Operating currency hedges (forward purchases and sales) |
Cash flows and fair value |
384 | 115 | (2) | 1 | (5) | (2) |
| Total | 1 273 | 916 | (10) | 8 | (20) | (13) | |
(*)The change in the fair value of financial instruments designated as hedges of debt represented a negative €15 million at 31 December 2019, recognised in other comprehensive income.
Details of the cross-currency swaps hedging debt at 31 December 2019 are as follows:
Nominal amounts represent USD 430 million, with maturities at April 2023, June 2024 and June 2026. At 31 December 2018, these contracts represented USD 430 million with maturities in 2019, 2023 and 2024.
The maturities of the cross-currency swaps are aligned with those of the underlying bonds and Schuldscheindarlehen German law private placement. From an economic standpoint, the derivatives enable the Group to convert fixed-rate euro-denominated bonds into fixed-rate US dollar-denominated debt. The maturity of other derivatives is within one year.
Interest rate risks
The Group does not use daily active interest rate management techniques in relation to any of its financial assets or liabilities. Cash investments are made in fixed-income instruments selected for their high-quality issuer entities and with maturities appropriate to the planned duration of the investments. Speculative or high-risk investments are not permitted. There are no derivatives related to these investments.
30.2 CREDIT AND COUNTERPARTY RISKS
Credit and counterparty risk represents the risk of financial loss for the Group in the event of default by a customer or debtor on its contractual obligations. This risk mainly relates to trade receivables.
30.2.1 EXPOSURE
The Group’s exposure to credit and counterparty risk arises principally from:
- customer receivables and commitments received in connection with commercial contracts;
- investments made to deposit surplus cash and/or to cover pension and other post-employment benefit obligations;
- hedging contracts in which the counterparties are financial institutions.
Customer receivables and commitments received in connection with commercial contracts totalled €1,844 million at 31 December 2019. The counterparties for the most significant customer receivables are distributors of Group products. Both in and outside France, receivables generally concern local customers and no single customer represents a high percentage of the sales concerned. The main commitments received relate to sports rights marketing contracts.
The proportions of consolidated revenue deriving from business with the Group’s largest, five largest and ten largest customers were as follows:
| 2019 | 2018 | |
|---|---|---|
| Largest customer | 5,1 % | 4,8 % |
| Five largest customers | 9,3 % | 8,8 % |
| Ten largest customers | 12,0 % | 11,8 % |
The Group’s short-term investments and cash and cash equivalents came to €913 million at 31 December 2019. In addition to bank account balances, the majority of these resources are invested in instruments with leading lenders.
Assets managed in connection with post-employment benefits amounted to €268 million (including €247 million in the United Kingdom). A total of 71% of these assets are invested in bonds. Hedging contracts are primarily entered into to hedge foreign exchange risks. Their notional amount was €1,273 million at 31 December 2019. The economic risk associated with these contracts depends on currency and interest rate fluctuations, and only represents a fraction of this notional amount. The counterparties in these contracts are leading banks. The Group’s counterparties are exposed to risks associated with the general economic environment, and as a result the possibility of default cannot be ruled out.
30.2.2 CREDIT AND COUNTERPARTY
RISK MANAGEMENT
Each division is responsible for managing its own credit risk in a decentralised way as appropriate to the specificities of its market and customer base. For new customers with the potential for large volumes of business with the Group, analyses are carried out and information (such as external credit ratings or bank references) is sought before entering into transactions, and specific guarantees or credit insurance may be arranged as a result. Counterparty-specific credit limits may also be set.
In newly-consolidated activities, measures are taken to progressively introduce monitoring procedures that are appropriate for the types of credit risk faced by the entity concerned. The Group has set up periodic reporting on counterparty risks to monitor its overall risk exposure to its principal counterparties, the variations in accumulated receivables, and the level of related provisions, and to oversee the measures put in place for managing this type of risk. The Financial Risk Committee periodically reviews these reports.
The Treasury and Financing Department is responsible for ensuring that the financial institutions with which the Group does business are of good quality.