APC 2015 Annual Report Download - page 43

2015 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC 41
OVERVIEW OF THE GROUP’S STRATEGY, MARKETS AND BUSINESSES
1
RISK FACTORS
7.4 Market risks
Interest rate risk
The Group is exposed to risks associated with the effect of
changing interest rates in different countries. Interest rate risk on
borrowings is managed at the Group level, based on consolidated
debt and taking into consideration market conditions in order to
optimize overall borrowing costs. Most bond debt is fi xed rate. At
December31, 2015, 90% of the Group’s gross debt was fi xed rate.
Maturities of fi nancial liabilities are presented in note24.1 to the
consolidated fi nancial statements.
A 1% increase in interest rates would have a positive impact of
around EUR23million on the Group’s net fi nancial expense.
The fi nancial instruments used to hedge the exposure of the Group
to fl uctuations in interest rates are described in note 26 to the
consolidated fi nancial statements for the year ended December31,
2015.
Exposure to currency exchange risk
The Group’s international operations expose it to the risk of
fl uctuation of exchange rates. If the Group is not able to hedge
these risks, fl uctuations in exchange rates between the euro and
these currencies can have a signifi cant impact on our results and
distort year-on-year performance comparisons.
We manage our exposure to currency risk to reduce the sensitivity of
earnings to changes in exchange rates through hedging programs
relating to receivables, payables and cash fl ows, which are primarily
hedged by means of forward purchases and sales.
Depending on market conditions, risks in the main currencies may
be hedged based on cash fl ow forecasting using contracts that
expire in 12months or less.
Schneider Electric’s currency hedging policy is to protect our
subsidiaries against risks on transactions denominated in a
currency other than their functional currency. More than twenty
currencies are involved, with the US dollar, Chinese y uan, Singapore
d ollar, Australian d ollar, British p ound, the Hungarian f orint and
Russian r ubbles representing the most signifi cant sources of
those risks. The fi nancial instruments used to hedge our exposure
to fl uctuations in exchange rates are described in note26 to the
consolidated fi nancial statements for the year ended December31,
2015 (Chapter5).
In2015, revenue in foreign currencies amounted to EUR21.2 billion,
including around EUR7.0 billion in US dollar and 3.6  billion in
Chinese yuan.
The main exposure of the Group in terms of currency exchange risk
is related to the US dollar, the Chinese yuan and to currencies linked
to the US dollar. The Group estimates that in the current structure
of its operations, a 5% appreciation of the euro compared to the
US dollar would have a negligible impact on operating margin (a
translation effect of EUR32 million on EBITA).
Equity risk
Exposure to equity risk primarily relates to treasury shares but
remains limited. The Group does not use any fi nancial instruments
to hedge thesepositions.
An increase in raw material prices could have
negative consequences
The Group is exposed to fl uctuations in energy and raw material
prices, in particular steel, copper, aluminum, silver, lead, nickel, zinc
and plastics. If we are not able to hedge, compensate for or pass on
to customers any such increased costs, this could have an adverse
impact on our fi nancial results.
The Group has, however, implemented certain procedures to limit
exposure to rising non-ferrous and precious raw material prices.
The purchasing departments of the operating units report their
purchasing forecasts to the Corporate Finance and Treasury
Department. Purchase commitments are hedged using forward
contracts, swaps and, to a lesser extent, options.
The fi nancial instruments used to hedge our exposure to fl uctuations
in raw material prices are described in note26 to the consolidated
fi nancial statements for the year ended December31, 2015.
In2015, purchases of raw materials totaled around EUR1.9 billion,
including around EUR850  million for non-ferrous and precious
metals, of which roughly 55 % was for copper. The Group enters
into swap and options agreements intended to hedge all or part
of its non-ferrous and precious metals purchases in order to limit
the impact of price volatility of these raw materials on our results.
At December 31, 2015, the Group had hedged positions with a
nominal value of EUR158 million on these transactions.
Counterparty risk
Financial transactions are entered into with carefully selected
counterparties. Banking counterparties are chosen according
to the customary criteria, including the credit rating issued by an
independent rating agency.
Group policy consists of diversifying counterparty risks and periodic
controls are performed to check compliance with the related rules.
In addition, the Group takes out substantial credit insurance and
uses other types of guarantees to limit the risk of losses on trade
accounts receivable.
Liquidity risk
Liquidity is provided by the Group’s cash and cash equivalents
and undrawn confi rmed lines of credit. As of December 31,
2015, the Group had access to cash and cash equivalents
totaling EUR3.0 billion. As of December 31, 2015, the Group
had EUR2.7billion in undrawn confi rmed lines of credit, of which
EUR2.5billion matures after December2016.
The Group’s credit rating enables it to raise signifi cant long-term
fi nancing and attract a diverse investor base. The Group currently
has an A- credit rating from Standard&Poor’s and an A3 credit
rating from Moody’s. The Group’s liabilities and their terms and
conditions are described in note24 of Chapter5.