Note 29 - Exposure to market risks (liquidity, interest rate, exchange rate and equity risks) and credit risks
29.1 MARKET RISKS
29.1.1 EXPOSURE
Liquidity risks
The Group’s liquidity risk is controlled as it has a cash to debt ratio of 193.0% (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 €851 million, while total liquidity reserves represent €1,642 million (€687 million in cash and cash equivalents and short-term investments and €955 million in confirmed undrawn credit lines, of which €950 million in respect of the syndicated credit line).
The liquidity reserve relates mainly to the syndicated credit facility contracted in May 2015 for €1,250 million, of which €950 million remained undrawn at 31 December 2020. At that date, the facility falls due on 11 May 2022.
On 18 December 2020, the Group signed an agreement to amend and extend its syndicated credit facility (effective from 8 January 2021), which provides it with access to a total of €1,102 million up to 11 May 2022 and then €1,002 million up to 31 March 2023.
This amendment to the syndicated credit agreement also includes a loan for €465 million, 80% of which is guaranteed by the French state. Details of the loan were published in France’s Official Journal on 3 January 2021. On 8 January 2021, the Group drew down the full amount of this loan. The loan’s initial one-year term can be extended for up to five additional one-year periods. This option may be exercised at the Company’s discretion at the end of the initial one-year term.
The fair value of any derivatives hedging debt is included in the calculation of net debt (see note 28.3).
The proportion of bonds redeemable at maturity represented 53% of total gross debt at 31 December 2020 (54% of total gross debt at end-2019). An amount of €500 million falls due in 2023 and in 2026 and an amount of €300 million falls due in 2024 under bonds redeemable at maturity.
Risks arising from the application of default clauses on 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 lease 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 2020, the ratio stipulated by the covenant was suspended by the banks in the context of Covid-19. Following the signature of the agreement to amend and extend the syndicated credit facility and secure a state-backed loan on 18 December 2020 (effective 8 January 2021), this ratio will be applicable at 31 December 2022 at a threshold of 4.5.
A liquidity indicator applies for the period March 2021 to September 2022, calculated each quarter based on the amount of cash and cash equivalents and the undrawn portion of the syndicated credit facility. The specified threshold increases from €750 million to €1,000 million as from December 2021.
The amendment to the syndicated credit agreement and the statebacked loan also stipulate that (i) Lagardère SCA shall not pay any dividends in 2020 in respect of 2019 or in 2021 in respect of 2020, (ii) the maximum dividend that may be paid in 2022 in respect of 2021 is €0.50 per share, on condition that net debt is less than €2,000 million, (iii) the maximum dividend that may be paid in 2023 in respect of 2022 is €1.30 per share, and (iv) the maximum dividend that may be paid from 2024 onwards is €1.30 per share, with the possibility of an increase in this amount depending on the level of the leverage ratio. There is also a limit of €5 million per annum on share buybacks carried out outside the scope of the liquidity agreement for as long as the leverage ratio remains above 3.5x.
Interest rate risks
Fixed-interest bonds account for 53% of total gross debt. The €498 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 €497 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 €687 million at 31 December 2020. Variable-rate debt stood at €1,092 million at 31 December 2020 (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 2020 a sudden rise in interest rates would have a limited impact on the Group’s net finance costs.
At 31 December 2020 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 27.1.
Exchange rate risks
At 31 December 2020, the foreign currency hedges set up for all of the Group’s divisions – in the form of direct forward agreements – amounted to €53 million (sales) and €78 million (purchases).
The Group does not hedge the income statement translation risk.
Its main exposures in this respect are given below.
The percentage of 2020 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 22%
- Pound sterling 8%
- Other 20%
Total 100%
Based on accounting data for 2020, 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 2020 | |
| US dollar(*) | €(2) million | |
| Pound sterling(**) | €(6) 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 shortterm, variable-rate borrowings denominated in the local currency in order to avoid exchange rate risks. These represented €362 million at 31 December 2020.
For long-term investments including acquisitions, the Group may set up medium-term borrowings in the investment currency. At 31 December 2020, instruments classified as net investment hedges represented an amount of €395 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. 2020 | Market capitalisation at 31 Dec. 2020 | |||
| Lagardère SCA | 1,590,628 | 1.21% | 20.48 | €32,576,061 | |||
| Pension plan assets invested in equities | €30,095,069 | ||||||
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 €280 million at 31 December 2020, of which 11%, or €30 million, is invested in equities (see note 27.1).
29.1.2 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. 2020 | 31 Dec. 2019 | 31 Dec. 2020 | 31 Dec. 2019 | 2020 | 2019 | ||
| Cross-currency swaps designated as hedges of debt(*) | Net investment | 350 | 383 | 16 | (8) | 24 | (15) |
| Currency swaps designated as hedges of debt(*) | Fair value | 537 | 506 | - | - | - | - |
| Operating currency hedges (forward purchases and sales) | Cash flows and fair value | 130 | 384 | (2) | (2) | - | (5) |
| Total | 1,017 | 1,273 | 14 | (10) | 24 | (20) | |
(*) The change in the fair value of financial instruments designated as hedges of debt represented a positive €24 million at 31 December 2020, recognised in other comprehensive income.
Details of the cross-currency swaps hedging debt at 31 December 2020 are as follows:
Nominal amounts represent USD 430 million, with maturities at April 2023, June 2024 and June 2026. At 31 December 2019, these contracts represented USD 430 million and had the same maturities. 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.
29.2 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.
29.2.1 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.
Total customer receivables represented €1,050 million at 31 December 2020. 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 proportions of consolidated revenue deriving from business with the Group’s largest, five largest and ten largest customers were as follows:
| (%) | 2020 | 2019 |
| Largest customer | 11.1 | 5.1 |
| Five largest customers | 18.4 | 9.3 |
| Ten largest customers | 23.3 | 12.0 |
The Group’s short-term investments and cash and cash equivalents came to €687 million at 31 December 2020. 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 €280 million (including €259 million in the United Kingdom). A total of 38% of these assets are invested in bonds.
Hedging contracts are primarily entered into to hedge foreign exchange risks. Their notional amount was €1,017 million at 31 December 2020. 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.
29.2.2 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.