The Group’s main financial instruments include current accounts, short-term deposits, short and long-term bank loans, finance leases and bonds.
The purpose of these is to finance the Group’s operating activities.
In addition, the Group has trade receivables and payables resulting from its operations.
The main financial risks to which the Group is exposed are market (currency and interest rate risk), credit and liquidity risk. These risks are described below, together with an explanation of how they are managed.
To cover these risks, the Group makes use of derivatives, primarily interest rate swaps, cross currency swaps and forward contracts, to hedge interest rate and Exchange rate risks.
Credit risk
With regard to trade transactions, the Group works with medium-sized and large customers (mass retailers, domestic and international distributors) on which credit checks are performed in advance.
The trade conditions initially granted are particularly stringent.
As a result, historical losses on receivables represent a very low percentage of revenues and do not require special coverage and/or insurance.
The maximum risk at the reporting date is equivalent to the carrying value of trade receivables recorded under financial assets.
Financial transactions are carried out with leading domestic and international institutions with a high credit rating. The risk of insolvency is therefore deemed to be insignificant.
The maximum risk at the reporting date is equivalent to the carrying value of these assets.
Liquidity risk
The Group's ability to generate substantial cash flow through its operations allows it to reduce liquidity risk to a minimum. This risk is defined as the difficulty of raising funds to cover the payment of the Group’s financial obligations.
The table below summarises financial liabilities at 31 December 2010 by maturity based on the contractual repayment obligations, including non-discounted interest.
For details of trade payables and other liabilities, see note 41 - Trade payables and other current liabilities.
31 December 2010 On demand Within 1 year Due in 1 to 2 years Due in 3 to 5 years Due in more than 5 years Total
€ million € million € million € million € million € million
Payables and loans to banks 38.4 0.2 0.2 0.0 38.8
Bonds 29.0 29.0 160.2 531.9 750.0
Derivatives on bond issues (1.0) (0.4) 12.5 23.7 34.7
Private placement 25.9 97.9 69.6 183.0 376.4
Property leases 3.5 3.0 0.0 1.3 7.9
Other financial payables 0.2 0.2 0.6 0.0 1.0
Total financial liabilities 0 96.0 129.9 243.0 739.9 1.208.8
Interest on private placement (2.7) (1.5) 1.6 1.6 (0.9)
Net of hedging assets 0 93 128 245 741 1.208
31 December 2009 On demand Within 1 year Due in 1 to 2 years Due in 3 to 5 years Due in more than 5 years Total
€ million € million € million € million € million € million
Payables and loans to banks 17.3 0.7 1.7 0.4 20.0
Bonds 24.3 26.7 87.3 635.2 773.5
Derivatives on bond issues (0.3) 0.3 3.6 54.1 57.6
Private placement 24.4 24.0 144.1 181.0 373.5
Property leases 3.5 3.5 3.0 0.0 10.0
Other financial payables 0.2 0.2 0.6 0.2 1.2
Total financial liabilities 0 69.4 55.4 240.2 870.9 1.235.9
The Group’s financial payables, with the exception of non-current payables with a fixed maturity, consist of short-term bank debt.
Thanks to its liquidity and management of cash flow from operations, the Group has sufficient resources to meet its financial commitments at maturity.
In addition, there are unused credit lines that could cover any liquidity requirements.
Market risks Interest rate risk
The Group is exposed to the risk of fluctuating interest rates in respect of its financial assets, short-term payables to banks and long-term lease agreements.
Fixed rates apply to long-term financial liabilities, certain loans obtained by Sella&Mosca S.p.A. and one of the Parent Company’s minor loans.
The Redfire, Inc. private placement also pays interest at a fixed rate.
The Parent Company’s bond issued in 2003 originally had a fixed interest rate in US dollars, but this became a variable rate in euro through a derivatives contract; a portion of the debt was subsequently transferred to a fixed rate in euro
The Parent Company’s bond issued in 2009 also paid a fixed-rate coupon, but a portion of this was later changed to a variable rate through an interest rate swap; the Company closed part of these contracts during the year, bringing the rate back to that established under the contract.
Note that, at 31 December 2010, around 65% of the Group’s total financial debt was fixed-rate debt.
Sensitivity analysis
The following table shows the effects on the Group’s income statement of a possible change in interest rates, if all other variables are constant.
A negative value in the table indicates a potential net reduction in profit and equity, while a positive value indicates a potential net increase in these items.
The assumptions used in terms of a potential change in rates are based on an analysis of the trend at the reporting date.
The table illustrates the full-year effects on the income statement in the event of a change in rates, calculated for the Group’s variable-rate financial assets and liabilities.
As regards the fixed-rate financial liabilities hedged by interest rate swaps, the change in hedging instrument offsets the change in the underlying liability, with practically no effect on the income statement.
Net of tax, the effects are as follows:
31 December 2010 Increase/decrease Income statement
in interest rates in basis points Increase in interest rates Decrease in interest rates
€ million € million
Euro +/- 28 basis points -0.3 0.3
Dollar +/- 8 basis points 0.0 0.0
Other currencies +/- 16 basis points on CHF Libor, +/- 13 basis points on GBP Libor, +/- 80 basis points on R$
Libor
0.1 -0.1
Total effect -0.2 0.2
31 December 2009 Increase/decrease Income statement
in interest rates in basis points Increase in interest rates Decrease in interest rates
€ million € million
Euro +/- 10 basis points -0.2 0.2
Dollar +/- 10 basis points 0.0 0.0
Other currencies +/- 50 basis points on CHF Libor, +/- 50 basis points on GBP Libor, +/- 300 basis points on R$
Libor
0.9 -0.9
Total effect 0.7 -0.7
Exchange rate risk
The expansion of the Group’s international business has resulted in an increase in sales on markets outside the eurozone, which accounted for 48.9% of the Group’s net sales in 2010.
However, the establishment of Group entities in countries such as the United States, Brazil, Australia and Switzerland allows this risk to be partly hedged, given that both costs and income are denominated in the same currency. In the case of the US, moreover, some of the cash flows from operations are used to redeem the US dollar-denominated private placement taken out locally to cover the acquisitions of certain companies.
Therefore, exposure to foreign exchange transactions generated by sales and purchases in currencies other than the Group’s functional currencies represented an insignificant proportion of consolidated sales in 2010.
For these transactions, Group policy is to mitigate the risk by using forward sales or purchases.
In addition, the Parent Company has issued a bond in US currency, where the Exchange rate risk has been hedged by a cross currency swap.
Sensitivity analysis
An analysis was performed on the economic effects of a possible change in the exchange rates against the euro, keeping all the other variables constant.
This analysis does not include the effect on the consolidated accounts of the conversion of the financial statements of subsidiaries denominated in a foreign currency following a possible change in exchange rates.
The assumptions adopted in terms of a potential change in rates are based on an analysis of forecasts provided by financial information agencies at the reporting date.
The types of transaction included in this analysis are as follows: the Parent Company’s bond issue, denominated in US dollars, and sales and purchase transactions in a currency other than the Group’s functional currency.
The Parent Company’s bond issue is hedged by cross currency swaps, while the other transactions are hedged by forward contracts; in both cases, therefore, a change in exchange rates would entail a corresponding change in the fair value of the hedging transaction and hedged item, but this would have no effect on the income statement. The effects on shareholders’ equity are determined by changes in fair value of the Parent Company’s interest rate swap and forward contracts on future transactions, which are used as cash flow hedges. The results of this analysis showed that the effects would not be significant.