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27. Financial risk management and financial instruments

Risk management framework

Corbion's activities are exposed to a variety of financial risks including currency, interest rate, commodity, liquidity, capital, and credit risk. The treasury department identifies and manages these risks, except the commodity risk which is managed by procurement. Treasury operates within a framework of policies and procedures which have been approved by the Board of Management. The treasury policy may change on an annual basis due to market circumstances and market volatility. Corbion uses derivatives solely for the purpose of hedging exposure mainly to the commodity, currency, and interest rate risks arising from the company's sources of finance and business. Corbion has a Treasury and a Commodity Risk Management Committee meeting periodically to review treasury and commodity activities and compliance with both policies.

Currency risk

Corbion is active on the international market, which means that it is exposed to risks arising from currency fluctuations, particularly in the US dollar, Brazilian real, Japanese yen, and Thai baht. Foreign currency exchange risk arises from future commercial transactions, recognized assets and liabilities, and net investments in foreign operations.

Translation risk

Corbion is subject to foreign exchange rate movements in connection with the translation of its foreign subsidiaries' income, assets, and liabilities into euros in the consolidated financial statements. To protect the value of future foreign cash flows, Corbion partially mitigates the foreign exchange exposure by applying natural hedging, meaning capital employed in foreign operations is financed using the country’s currency in order to avoid fluctuations due to translation effects.

US dollar translation effects on the operating result are partially hedged by the interest paid on the US dollar loan. Currency fluctuations particularly in the US dollar can have a material effect on Corbion’s income statement. Corbion has policies in place that monitor these risks and mitigation actions are discussed in the Treasury Committee.

Transaction risk

The currency transaction risk arises in the course of ordinary business activities. Corbion uses forward currency contracts and currency swaps in order to hedge risks arising from purchase and sales deals and/or commitments from current purchase and sales deals. Transactions that are highly probable are hedged and included in cash flow hedge accounting. Other reasonably probable transactions are partially hedged. For practical reasons a specific limit is defined for each currency.

Sensitivity analysis of financial instruments to exchange rate changes

A 10% weakening of the euro against the Japanese yen would decrease equity by € 1.1 million, while the net result would not be significantly impacted. A 10% weakening of the euro against the US dollar would decrease equity by € 0.5 million and will decrease the net result with € 0.5 million.

Interest rate risk

Corbion's interest rate risk arises primarily from its debt. Corbion has an interest rate policy aimed at reducing volatility in its interest expense. Currently Corbion's interest rate exposure has been fully fixed (2.88% on average) for all of Corbion's long-term debt (€ 239.5 million) for a period of on average 6.4 years.

Sensitivity analysis to changes in market interest rate

Assuming the same mix of variable and fixed interest rate instruments, an interest rate increase by 50 basis points versus the rates on 31 December 2020 with all other variables held constant, would not have a significant impact on the net result and no movement in equity.

Commodity risk

Corbion uses commodity derivative contracts to reduce the risk of price fluctuations in the main commodities used, being gas and sugar.

Corbion entered into commodity derivative contracts to hedge the variable price risk of the main commodities used. The fair value of these contracts amounted to an asset of € 4.5 million as at 31 December 2020 (31 December 2019: asset of € 1.2 million). Hedge accounting is applied for the major part of these commodity derivative contracts. Further analysis can be found in the section on hedge transactions.

The majority of the commodity derivative contracts expires within a year.

Sensitivity analysis of financial instruments to commodity price changes

If the purchase price of the involved commodities would increase by 10%, profit and loss would be impacted by € 0.1 million.

Liquidity risk

Liquidity risk is the risk of Corbion not being able to obtain sufficient financial means to meet its obligations in time. The company actively manages liquidity risk by maintaining sufficient cash and cash equivalents and the availability of committed borrowing capacity. Corbion manages cash flow based on cash-flow analysis for the next 12 months.

The committed credit facilities at Corbion’s long-term disposal amounted to € 300 million as at 31 December 2020. Corbion also has a private placement of $295 million with American institutional investors.

To provide insight into the liquidity risk the table below shows the contractual terms of the financial obligations (converted at balance sheet date), including interest paid.

The table below analyzes Corbion’s financial obligations which will be settled on a net basis, according to relevant expiration dates, based on the remaining period from the balance sheet date to the contractual expiration date. The amounts shown are contractual non-discounted cash flows.

 

Less than 1 year

Between 1 and 5 years

More than 5 years

Total

As at 31 December 2020

    

Private placement

7.4

131.4

149.8

288.6

Owed to credit institutions

43.0

  

43.0

Lease liabilities

11.1

21.8

34.3

67.2

Contingent considerations

8.7

24.2

0.2

33.1

Trade payables

99.4

  

99.4

Other non-interest-bearing current liabilities

64.2

  

64.2

Total

233.8

177.4

184.3

595.5

     

As at 31 December 2019

    

Private placement

18.7

18.6

116.3

153.6

Owed to credit institutions

148.3

  

148.3

Lease liabilities

12.2

36.2

34.5

82.9

Contingent considerations

5.0

17.4

7.2

29.6

Other debts

9.4

1.5

 

10.9

Trade payables

94.3

  

94.3

Other non-interest-bearing current liabilities

62.8

  

62.8

Total

350.7

73.7

158.0

582.4

Credit risk management

Credit risk refers to the losses that would be recognized if a customer or a counterparty to a financial instrument fails to meet its contractual obligations. In respect of disbursed loans, other receivables, and cash and cash equivalents the maximum credit risk equals the book value. In respect of derivatives it equals the fair value.
Given the credit rating that it requires of its partners Corbion has no reason to assume that they will not honor their contractual obligations. Based on today's insights, the actual credit risk is limited.

Capital risk management

Corbion manages its capital to ensure that entities in the Corbion group will be able to continue as going concerns while maximizing return to stakeholders through the optimization of the debt and equity balance.

The capital structure of Corbion consists of net debt (borrowings as detailed in Note 23) offset by cash and cash equivalents (as detailed in Note 17).

 

2020

2019

Private placement

239.5

124.9

Revolving credit facility

42.4

147.2

Lease commitments

53.9

66.2

Other debts

 

10.7

Total financial liabilities part of net debt

335.8

349.0

Cash and cash equivalents

-51.6

-45.7

Net debt

284.2

303.3

Reconciliation of liabilities arising from financing activities

 

Private placement

Revolving credit facility

Leases

Other debts

Total

As at 1 January 2020

124.9

147.2

66.2

10.7

349.0

Financing cash flows

145.7

   

145.7

Repayments

-12.7

-105.0

-13.1

-8.2

-139.0

New lease commitments

  

4.0

 

4.0

Exchange rate differences

-17.9

 

-5.1

-2.5

-25.5

Other

-0.5

0.2

1.9

 

1.6

As at 31 December 2020

239.5

42.4

53.9

 

335.8

The Corbion Treasury Committee reviews the capital structure of Corbion on a quarterly basis. As part of this review, the committee considers the cost of capital and the risks associated with each class of capital.

The main covenants for the revolving credit facility and the US private placement are:

  • The ratio of net debt position divided by Covenant EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization and impairment of (in)tangible fixed assets, excluding adjustments, increased by cash dividend of joint ventures received and annualization effect of newly acquired subsidiaries) may not exceed the factor 3.75.

  • A minimum interest cover (Covenant EBITDA divided by net interest income and charges) of 3.5.

These external conditions were met in 2020 as well as in 2019. Corbion targets a net debt/Covenant EBITDA ratio of 2.0x over the investment cycle.

Ratios at year-end

 

2020

2019

Net debt position/Covenant EBITDA

1.7

2.0

Interest cover

16.5

22.2

Financial instruments

Valuation of financial instruments

Corbion measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

  • Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

  • Level 2: Fair value measurements based on inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

  • Level 3: Fair value measurements based on valuation techniques that include inputs for the asset or liability that are based on observable market data (unobservable inputs).

Breakdown valuation of financial instruments

31 December 2020

Level 1

Level 2

Level 3

Total

Derivatives

    

● Foreign exchange contracts

 

0.6

 

0.6

● Commodity swaps/collars

 

4.5

 

4.5

Total

 

5.1

 

5.1

Breakdown fair values of financial instruments

31 December 2020

Balance sheet value

Fair value

Financial fixed assets

  

● Loans, receivables, and other

73.7

73.7

   

Receivables

  

● Trade receivables

123.7

123.7

● Other receivables

18.3

18.3

● Prepayments and accrued income

6.5

6.5

   

Cash

  

● Cash other

51.6

51.6

   

Interest-bearing liabilities

  

● Private placement

-239.5

-249.5

● Owed to credit institutions

-42.4

-42.4

● Other debts

  
   

Non-interest-bearing liabilities

  

● Trade payables

-99.4

-99.4

● Other payables

-64.2

-64.2

   

Derivatives

  

● Foreign exchange contracts

0.6

0.6

● Commodity swaps/collars

4.5

4.5

   

Total

-166.6

-176.6

Fair values are determined as follows:

  • The fair value of financial fixed assets does not significantly deviate from the book value.

  • The fair value of receivables equals the book value because of their short-term character.

  • Cash and cash equivalents are measured at nominal value which, given the short-term and risk-free character, corresponds to the fair value.

  • Market quotations are used to determine the fair value of debt owed to private parties, credit institutions, and other debts. As there are no market quotations for most of the loans the fair value of short- and long-term loans is determined by discounting the future cash flows at the yield curve applicable as at 31 December.

  • Given the short-term character, the fair value of non-interest-bearing liabilities equals the book value.

  • Currency and interest rate derivatives are measured on the basis of the present value of future cash flows over the remaining term of the contracts, using the bank interest rate (such as Euribor) as at the reporting date for the remaining term of the contracts. The present value in foreign currencies is converted using the exchange rate applicable as at the reporting date.

  • Commodity derivatives are measured on the basis of the present value of future cash flows, using market quotations or own variable market price estimations of the involved commodity as at the reporting date.

Derivatives

Hedge transactions

The amount of € 5.4 million in hedge reserve (see Note 19) relates to the hedging of risks arising from future purchase and sales deals and/or commitments from current purchase and sales contracts amounting to € 39.8 million.

The amount of € 1.0 million in translation reserve (see Note 19) relates to currency fluctuations in respect of the net investments in foreign operations less the currency fluctuations of the corresponding net investment hedges. In case of divestment of a net investment in a foreign operation, the corresponding net impact of the currency fluctuations is moved from the translation reserve to the income statement.

In the past year no cash flow hedges were terminated due to changes to the expected future transaction. No ineffective parts were recorded in respect of the net investment hedge and cash flow hedge.

Breakdown of fair values, maturities, and qualification of derivative financial instruments for accounting purposes

 

Short < 1 year

Long > 1 year

As at 31-12-2020

As at 31-12-2019

As at 31-12-2020

As at 31-12-2019

Derivatives receivables/(liabilities) used as hedge instrument in cash flow hedge relations:

    

Foreign exchange contracts

0.6

0.3

  

Commodity swaps

6.0

1.6

1.5

 
     

Derivatives receivables/(liabilities) used as hedge instrument in fair value hedge relations:

    

Commodity swaps

-3.0

-0.2

  

Total derivatives in hedge relations

3.6

1.7

1.5

 
     

Derivatives receivables/(liabilities) not used in a hedge relation with value change through income statement:

    

Commodity swaps

 

-0.2

  

Total derivatives through income statement

 

-0.2

  

Total derivatives

3.6

1.5

1.5