Financial risk management

The group’s operations expose it to the following financial risks:

  • market risks, related to operations in areas that use currencies other than the company’s functional currency (currency risk) and the risk of interest rate fluctuations;
  • liquidity risks, related to the availability of financial resources and access to the credit market;
  • credit risk, arising from normal trading transactions or financing activities.

The group specifically monitors each of these financial risks and acts promptly to contain them including via hedging derivatives. Ansaldo STS group’s approach to managing these risks, in line with internal policies, is described below. 

Currency risk management

As described in the “treasury management” policy, Ansaldo STS group manages currency risk by pursuing the following objectives:

  • limiting potential losses generated by unfavourable exchange rate fluctuations against the currencies used by Ansaldo STS S.p.A. and its subsidiaries. Losses are defined in cash flows rather than accounting terms;
  • limiting forecast or actual costs related to the implementation of currency risk management policies.

Currency risk shall only be hedged if it has a material impact on cash flows, compared to the functional currency.
Costs and risks related to a hedging policy (hedge, no hedge or partial hedge) shall be acceptable in both financial and commercial terms.
Currency risk may be hedged using the following tools:

  • purchase and sale of currency forwards: these are the most commonly used cash flows hedges;
  • funding/lending in foreign currency: used to mitigate the currency risk related to similar receivable and payable positions with banks or group companies.

The use of funding and lending in foreign currency as a hedging instrument shall only take place when consistent with Ansaldo STS group’s overall treasury management and financial position (both long- and short-term).
The purchase and sale of foreign currency is generally the hedging tool used when foreign markets are not sufficiently liquid or when it is the most cost effective hedging method. 

Currency risk hedging

There are three main types of currency risk:

1. The economic risk is the impact exchange rate fluctuations can have on capital budgeting decisions (investments, the location of production facilities and supply markets).
2. Transaction risk is the possibility that exchange rates may fluctuate between the time a commitment is undertaken to make future collections or payments in foreign currency (price list, budgets, orders preparation and invoicing) and when the actual collection or payment takes place, generating either exchange rate gains or losses.
3. The translation risk is the effect on the financial statements of multinational companies of translating dividends, or of consolidating assets and liabilities when exchange rates adopted for consolidation purposes differ from one reporting period and the next.

The Ansaldo STS group hedges the transaction risk in line with the Foreign Exchange Risk management policy, i.e., via the systematic hedge of cash flows generated by firm contractual commitments to buy and sell, in order to fix the exchange rates at the date the construction contracts are agreed, thereby neutralising the effects of exchange rate fluctuations.

Cash flow hedges  

Hedges are entered into at the time sales contracts are agreed, using plain vanilla instruments (currency swaps and forwards) that qualify for hedge accounting under IAS 39. They are recognised as cash flow hedges, whereby the effective portion of fair value gains or losses on hedging derivatives is recognised in the relevant hedging reserve once the hedging strategy is demonstrated to be effective.
If the hedge is not deemed effective (i.e., does not fall within the 80% and 125% range), fair value gains or losses on hedging instruments are immediately expensed as financial items and the related fair value gains or losses accumulated in the hedging reserve up to the date of the most recent successful test of effectiveness are reclassified to profit or loss. 

Fair value hedges 

These hedge fair value changes in a recognised asset or liability, an unrecognised firm commitment, an identified portion of this asset, liability or irrevocable commitment, related to a particular risk and that could impact profit or loss.
The group hedges fair value gains or losses related to the currency risk on recognised assets and liabilities.

Hedges are mainly undertaken with banks. The group has contracts in place for the following notional foreign currency amounts at 30 June 2013:

(€’000)   Sell 06 13  Buy 06 13  30.06.2013  Sell 12 12  Buy 12 12  31.12.2012
Euro    97,715    83,811   181,526   96,108   56,953   153,061 
US dollar    73,871    15,514   89,385   74,188   23,180   97,368 
Pound sterling    8,538    -   8,538   8,847   1,042   9,889 
Swedish krona    146    25,072   25,218   3,065   29,228   32,293 
Australian dollar    17,010    2,193   19,203   -   42,261   42,261 
Hong Kong dollar    263   -   263   309   -   309 
Abu Dhabi dirham    32,611    14,633   47,244   19,603   -   19,603 
South African rand    1,546    -   1,546   -   -   - 
 

The net fair value of the derivatives in place (both fair value and cash flow hedges) at 30 June 2013 was a positive €898 thousand. 

Interest rate risk management 

Under the policy, the aim of interest rate risk management is to reduce the negative effects of interest rate fluctuations on the group’s financial position, results of operations and weighted average cost of capital.
Ansaldo STS group manages interest rate risk to pursue the following objectives:

  • stabilising the weighted average cost of capital;
  • minimising Ansaldo STS group’s medium- and long-term weighted average cost of capital by focusing on the effects of interest rates on debt funding and equity funding;
  • optimising the return on financial investments within a general risk/return trade-off;
  • limiting costs related to the implementation of interest rate management policies, including direct costs related to the use of specific instruments and indirect costs linked to the internal structure needed to manage the risk.

Excess liquidity is invested in the short term for future acquisitions. Consequently, financial indebtedness is mainly of a short-term nature. Thanks to joint short-term management of assets and liabilities, the group’s exposure to interest rate fluctuations in the long term is relatively neutral.
Also in the first half of 2013, the group managed this risk without the use of derivatives. 

Liquidity risk management 

Ansaldo STS group has rolled out a series of tools to optimise treasury management with a view to the efficient management of cash and cash equivalents and to help its business grow. This was achieved by centralising the treasury function and an active presence on financial markets which has enabled the group to obtain short- and long-term non-revolving cash and unsecured credit lines to meet its needs.
It had a net financial position of €241.719 thousand at 30 June 2013 and a net financial position of €301,982 thousand at 31 December 2012. 

Credit risk management

The group does not have significant credit risks, either in terms of its trading counterparties or its financing and investing activities.
Its main customers are public entities or related to public bodies, mostly in the European, US and South-East Asia areas. Ansaldo STS group’s typical customer rating is therefore medium-to-high. However, for contracts with customers/counterparties with which the group does not have regular trading transactions, solvency is analysed at the time the offer is placed, in order to avoid future credit risks.
Given the nature of the group’s customers, collection times are longer (and, in certain countries, significantly longer) than those typical of other businesses, leading to overdue amounts, which are sometimes considerable.

Registered Office: 16151 Genoa Via Paolo Mantovani, 3 - 5
Paid-in Share Capital EUR 70,000,000 R.E.A. n. 421689 Register of Enterprises of Genoa Tax Code 01371160662
A Finmeccanica Company