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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 and procurement operate within a framework of policies and procedures which have been approved by the Board of Management, which has overall responsibility for the Group's Risk Management Framework. The Audit Committee oversees the Group's Risk Management Framework. The treasury and commodity risk policies are reviewed at least on an annual basis to ensure the policies are up to date with respect to relevant risks and changing business environment. 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 periodic Treasury Committee and a Commodity Risk Management Committee meeting to review treasury and commodity activities and compliance with both policies. The Treasury Committee resides within the finance discipline and is chaired by the CFO. In the Commodity Risk Committee, both procurement and finance disciplines are represented, with executive level involvement by means of the CEO, CFO, and COO.

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. The USD US Private Placement is treated as a Net Investment hedge to partially mitigate the translation foreign exchange risk on the US net asset values. 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 if required, mitigation actions are discussed in the Treasury Committee. Currently, no other translation effects than part of the US net asset values are being hedged.

Intercompany financing is denominated in the functional currency of the entity receiving the funding, hence the currency risk is at Corbion group level. According to our Treasury policy, currency risks above a certain threshold are hedged using foreign exchange forward contracts. No hedge accounting is applied and both gains and losses on the derivatives and the foreign currency gains and losses on the intercompany financing positions are recognized as a net position in the income statement as a financial income or financial charge.

Transaction risk

The currency transaction risk arises in the course of ordinary business activities when a company trades, borrows, or lends in a currency other than its functional currency. During the time interval between anticipation/commitment and actual payment/receipt, exchange rates may fluctuate and the company is exposed to a currency risk. Corbion uses forward currency contracts and currency swaps in order to hedge risks arising from purchase and sales transactions and/or commitments from current purchase and sales transactions. Committed transaction exposures and anticipated transaction exposures above a certain threshold with high probability are hedged and included in cash flow hedge accounting. Group Treasury is responsible for monitoring transaction risks and defining the appropriate hedging strategy, which is approved in the Treasury Committee.

Sensitivity analysis of financial instruments to exchange rate changes

The following sensitivity shows the impact of movements in exchange rates on the exchange rate hedging instruments in place as at 31 December 2021. A 10% weakening of the euro against the Brazilian real would have no effect on the hedge reserve (equity), while the net result would decrease by € 6.8 million. A 10% weakening of the euro against the Japanese yen would decrease the hedge reserve (equity) by € 1.2 million, while the net result would not be impacted. A 10% weakening of the euro against the US dollar would have no effect on the hedge reserve (equity), while the net result would decrease by € 6.6 million.

Interest rate risk

Interest rate risk is the risk that interest paid or received on loans and cash investments will vary over a period of time as a direct consequence of changes in the level of interest rates. With regards to interest rate risk, group treasury has the objective to reduce the sensitivity of interest rate fluctuations on the financial income and charge of the income statement and resulting cash flows, by actively managing this risk. To reduce the sensitivity, Corbion prefers variable / floating interest rates for short-term (< one year) financing instruments (including short term drawings), while selecting fixed interest rates for long-term (> one year) financing instruments. As to cap the maximum potential P&L volatility at all times, a threshold is defined for the maximum floating exposure. Interest rate swaps and forward interest rate contracts may be used to adjust the nature of the interest rate and currency of long-term financing to fit the desired risk profile. Interest rate hedging by group treasury is allowed after approval from the Treasury Committee.

Corbion's interest rate risk arises primarily from its debt. Corbion has an interest rate policy aimed at reducing volatility in its interest expense. As at 31 December 2021 long-term debt (€ 359.1 million) is financed at fixed rates (2.57% on average) for a period of on average 5.7 years. Drawings under the Revolving Credit Facility have a floating interest rate for a period shorter than one year. As at 31 December 2021, there were no interest rate derivatives in place.

Sensitivity analysis to changes in market interest rate

Assuming a constant mix of variable and fixed interest rate instruments, an interest rate increase by 50 basis points versus the rates on 31 December 2021 with all other variables held constant, would not have a significant impact, neither on the net result nor on the equity.

Commodity risk

Commodity Risk is the risk of unfavorable changes in commodity prices that may lead to losses in Corbion’s profit and loss statement and that can lead to fluctuations in the statement of cash flows. The Commodity Risk Committee establishes the overall risk tolerance framework for Corbion and ensures that the commodity price risk associated with Corbion's business margins are identified, considered and managed. The main functions of the Risk Committee are to monitor the price risk exposure of selected commodities (e.g. sugar, corn, wheat, soybean oil and energy) and key chemicals, to define methodologies, procedures, and systems to control the risks, to select appropriate risk management tools and to monitor execution of the Commodity Risk Policy by procurement.
Corbion uses commodity derivative contracts to reduce the risk of price fluctuations in the main commodities used, like natural 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 € 11.2 million as at 31 December 2021 (31 December 2020: asset of € 4.5 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

The following sensitivity shows the impact of movements in commodity prices on the commodity hedging instruments in place as at 31 December 2021. If the purchase price of the involved commodities would increase by 10%, profit and loss would be impacted by € 0.2 million.

Liquidity risk

Liquidity risk is the risk of Corbion not being able to obtain sufficient financial means to meet its obligations in time. Liquidity risk Management is the most important pillar for the group treasury function of Corbion and therefore the treasury policy defines actively managing the liquidity risk as the primary objective of group treasury, so that at all times the company is able to meet its financial obligations of the whole Group in the short and long-term. Liquidity risk is managed by ensuring sufficient liquidity capacity through (incoming) cash and cash equivalents and the availability of committed borrowing capacity as well as a solid financial risk profile. Corbion manages liquidity risk by means of cash-flow projections for the short term (daily), medium term (quarterly review for running year by quarter) and long term (up to 5 years, bi-annual review).

The committed credit facilities at Corbion’s long-term disposal amounted to € 300 million as at 31 December 2021. Corbion also has a private placement of $ 295 million and a subordinated private placement of € 100 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 2021

    

Private placement

8.0

137.7

158.9

304.6

Subordinated loan

2.0

23.9

87.4

113.3

Owed to credit institutions

75.1

  

75.1

Lease liabilities

15.7

36.0

31.9

83.6

Contingent considerations

3.0

19.8

 

22.8

Trade payables

128.0

  

128.0

Other non-interest-bearing current liabilities

97.8

  

97.8

Total

329.6

217.4

278.2

825.2

     

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

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

Corporate finance, which is the process of optimizing the capital structure and capital allocation of the group, is an important pillar of the group treasury function within Corbion, as it is closely linked to the management of the liquidity risk. A prudent corporate finance policy and approach aims to maintain sufficient access to liquidity and supports a solid financial risk profile. Corbion’s size, geographical presence in different financial markets, financial strength, consolidated cash flow generation, and public share listing gives access to multiple financing instruments. Group treasury is responsible for managing the optimized overall capital structure of the group, which is set by the Treasury Committee, using multiple financing sources (e.g. debt, mezzanine or equity instruments), both at a group Level and at an operating company level. Group treasury is responsible for defining the funding requirements and funding strategy of the group, which is reviewed and approved annually by the Treasury Committee.

The debt 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).

 

2021

2020

Private placement

259.7

239.5

Revolving credit facility

74.7

42.4

Subordinated loan

99.4

 

Lease commitments

69.4

53.9

Total financial liabilities part of net debt

503.2

335.8

Cash and cash equivalents

-42.2

-51.6

Net debt

461.0

284.2

-/- Subordinated loan

-99.4

 

Covenant net debt for covenant ratio calculation

361.6

284.2

Reconciliation of liabilities arising from financing activities

 

Private placement

Revolving credit facility

Subordinated loan

Leases

Total

As at 1 January 2021

239.5

42.4

 

53.9

335.8

Financing cash flows

 

32.0

100.0

 

132.0

Repayments

   

-12.4

-12.4

New lease commitments

   

23.6

23.6

Exchange rate differences

20.2

  

4.3

24.5

Other

 

0.3

-0.6

 

-0.3

As at 31 December 2021

259.7

74.7

99.4

69.4

503.2

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 covenant 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 and/or divested 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 2021 as well as in 2020. Corbion targets a Covenant net debt/EBITDA ratio of 2.0x over the investment cycle with a peak of 2.5x.

Ratios at year-end

 

2021

2020

Covenant net debt position/covenant EBITDA

2.6

1.7

Interest cover

14.6

16.5

Financial instruments

Corbion is using financial derivatives to control the risks related to fluctuations in foreign currencies, commodities and interest rates. Entering into financial derivatives is only allowed when there is an underlying exposure. Hedging instruments needs to be approved by the Treasury Committee and hedge accounting is applied where appropriate.

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 2021

Level 1

Level 2

Level 3

Total

Derivatives

    

• Foreign exchange contracts

 

-0.8

 

-0.8

• Commodity swaps/collars

 

11.2

 

11.2

Total

 

10.4

 

10.4

Breakdown fair values of financial instruments

31 December 2021

Balance sheet value

Fair value

Financial fixed assets

  

• Loans, receivables, and other

94.8

100.1

   

Receivables

  

• Trade receivables

163.2

163.2

• Other receivables

39.4

39.4

• Prepayments and accrued income

8.7

8.7

   

Cash

  

• Cash other

42.2

42.2

   

Interest-bearing liabilities

  

• Private placement

-259.7

-259.1

• Owed to credit institutions

-74.7

-74.7

• Subordinated loan

-99.4

-99.8

   

Non-interest-bearing liabilities

  

• Trade payables

-128.0

-128.0

• Other payables

-97.8

-97.8

   

Derivatives

  

• Foreign exchange contracts

-0.8

-0.8

• Commodity swaps/collars

11.2

11.2

   

Total

-300.9

-295.4

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 € 8.1 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 € 26.8 million.

The amount of € 8.8 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 early 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 31-12-2021

As at 31-12-2020

As at 31-12-2021

As at 31-12-2020

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

    

Foreign exchange contracts

-0.8

0.6

  

Commodity swaps

10.1

6.0

0.8

1.5

     

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

    

Commodity swaps

-0.2

-3.0

  

Total derivatives in hedge relations

9.1

3.6

0.8

1.5

     

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

    

Commodity swaps

0.4

 

0.1

 

Total derivatives through income statement

0.4

 

0.1

 

Total derivatives

9.5

3.6

0.9

1.5