Note Financial risk management and hedge accounting
3
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Effective interest rate on debt to banks and credit
institutions
at balance sheet date
2018 2017
SEK 1.50 0.80
DKK 1.50 0.70
USD 3.30 2.30
CNY 5.00 4.60
TRY 27.00 15.00
BRL 8.00 11.00
INR 7.00 6.50
Sensitivity analysis – Interest rates
At the closing date, the Group had a floating-rate-based net
debt of SEK 2,274 million (3,191). A 1 percent change in
interest rates would therefore have a full-year effect of SEK
23 million (32) on the Group’s interest costs before tax.
Loans and capital structure
AAK’s policy on capital structure is to maximize debt
financing, though not to a level that would threaten the
Company’s position as an investment grade company.
AAK’s target key ratios are as follows:
Target 2018 2017
Net interest-bearing
debt/EBITDA < 3.0 1.06 1.17
This target level is considered to be relatively conservative
and contributes to ensuring that AAK will be able to retain its
high credit rating.
The Group’s policy is to allocate total net borrowings per
subsidiary relative to each subsidiary’s share of the Group’s
free cash flow. This minimizes the currency risk in relation to
the Group’s ability to pay interest on and amortize its borrowings,
which in turn strengthens the Group’s debt capacity.
Total borrowing reported in the balance sheet,
per currency at balance sheet date
SEK million 2018 2017
SEK 1,182 350
DKK 780 502
USD 399 1,145
CNY 176 244
TRY 270 315
BRL 121 240
INR 241 140
Other 41 46
Total 3,212 2,982
Sensitivity analysis – Currency
With all foreign currency transaction risk hedged by currency
hedge contracts, leaving a very limited net exposure, changes
in foreign currencies will have an insignificant effect on each
subsidiary’s profit margin. However, changes in foreign
currencies relative to SEK do affect Group profit when the
profit of each foreign subsidiary is translated into SEK. A 10
percent change in the exchange rates of all foreign currencies
relative to SEK would have an effect of ± SEK 120 million
(140) on Group operating profit. Furthermore, a 10 percent
change in the exchange rates of all foreign currencies
relative to SEK would affect Group net sales by SEK 2,100
million (2,000) and Group net working capital by SEK 390
million (350).
Interest rate risk
AAK’s policy on interest rate risk management is to minimize
volatility in cash flow and net profit caused by fluctuations in
interest rates. However, during abnormal market conditions
– e.g. a financial crisis – short-term interest rates can rise to
extreme levels. In order to protect the Group’s interest costs
against such abnormal scenarios, the interest rate on part of
the Group’s net interest-bearing debt can be fixed or capped.
At year-end 2018, the Group’s interest-bearing net debt,
including pensions, amounted to SEK 2,667 million (2,666).