(27) Financial instruments and risk management

Treasury risk management

The Group is exposed to a variety of financial risks, such as foreign currency risk, interest rate risk, credit risk, liquidity risk and capital risk. These risks are inherent to the way the Group operates as a multinational with a large number of local operating companies. The Company’s overall risk management policy is to identify, assess, and if necessary mitigate these financial risks in order to minimise potential adverse effects on the financial performance. The treasury risk management policy includes the use of derivative financial instruments to hedge certain exposures. The Executive Board is ultimately responsible for risk management. Financial risk management is, except for commodities risk and credit risk of non-financial counterparties, carried out by Group Treasury in line with clearly formalised treasury risk management policies.

Group Treasury identifies, evaluates and hedges financial risks at corporate level, and monitors compliance with the treasury risk management policies within the Group. Nutreco has a Risk Management Advisory Board that advises the Executive Board on financial risk management.

The capitalisation and funding of subsidiaries is a joint responsibility of Group Treasury and Group Tax, whereas the combination of equity and short-term inter-company loans is mostly used as financing structure. Decisions regarding the debt to equity ratio are based on various aspects including minimum regulatory requirements and the flexibility to change the structure. Except for dividend withholding tax in some countries and the currency control restrictions in Venezuela, the Group has no restrictions in paying inter-company cash dividends or in repaying inter-company loans.

The operating companies are responsible for identifying and managing financial risks, especially in relation to transactions in foreign currencies, commodities as well as credit risk for non-financial counterparties.

Within the boundaries set in the treasury risk management policy, the operating companies execute appropriate foreign currency risk management activities. Nutreco does not allow for extensive treasury operations to be executed by operating companies with external parties. To the extent possible, derivative financial transactions are executed through Group Treasury.

Group Treasury is responsible for reporting to the Executive Board on the Group’s exposures to a number of financial risks, including liquidity, foreign exchange, interest rate and credit risk on financial counterparties.
 

Financial instruments by class and by categories
 

Financial assets 31 December 2009

The following methods and assumptions were used to estimate the fair value of financial instruments:

Equity securities

Equity securities consist of Nutreco’s participation in several companies in which Nutreco does not have control or significant influence. The financial statements of the other investments for the financial year 2009 have not been approved and received before publication of the Nutreco results. As the fair value can therefore not be measured reliably, the participations are valued at cost. However, based on the figures for the financial year 2008, no large difference is expected between cost value and fair value.

Debt securities

For investments in debt securities, fair value is based upon the current market rates.
 

Cash and cash equivalents, trade and other receivables, trade and other payables

The carrying amounts approximate fair value because of the short maturity of those instruments.

Interest-bearing borrowings (current and non-current)

The fair value is estimated on the basis of discounted cash flow analyses, including interest for the current year, based upon Nutreco’s incremental borrowing rates for similar types of borrowing arrangements and interest rate contracts with comparable terms and maturities.

Fair value foreign exchange contracts, interest rate swaps and cross-currency interest rate derivatives

The fair value calculation of the foreign exchange contracts, interest rate swaps and cross-currency interest rate derivatives is based on the discounted cash flow method of future cash flows. The discounted calculation is based on actual market foreign exchange rates and actual market interest rates on reporting date.

Credit risk

Credit risk represents the accounting loss that would have to be recognised on the reporting date if other counterparties fail to perform as contracted. To reduce credit risk, Nutreco performs ongoing credit analysis of the financial condition of its counterparts, including creditworthiness and liquidity. As a consequence of the credit crisis and to the extent possible, special attention is paid to the liquidity of other parties such as banks, insurance companies, customer as well as strategic suppliers.

The international growth of premixes and specialty feed and fish feed for other fish species has resulted in a wider and international spread of customers but affected the credit risk for emerging markets. The risk profile of Nutreco’s customers differs per business segment:

• Premix and Feed Specialties: has, due to the geographical presence, a widely spread portfolio of customers in all continents.
• Compound Feed Europe and Animal Nutrition Canada: the activities in Europe, the USA and Canada regarding this segment have a widely spread portfolio of customers.
• Fish Feed: as a consequence of the further concentration in the salmon farming industry, Nutreco observes a concentration of risk, which has been partly mitigated by credit insurance.
• Meat and Other: the Spanish customers of meat activities are reputable food and retail suppliers.

The outstanding amounts of Nutreco’s largest customers Mercadona and Marine Harvest together account for less than 10% of the total outstanding amount as per 31 December 2009.

In 2003 and 2004, Nutreco has granted subordinated loans to the Dutch Nutreco Pension Fund for a total amount of EUR 12.1 million (2008: EUR 12.1 million). The solvency of the Dutch Nutreco Pension Fund has been impacted by the worldwide financial crisis, but has improved during 2009. The Dutch Nutreco Pension Fund does not have a short-term liquidity risk.

At balance sheet date a loan of EUR 13.0 million relates to Euribrid, a former investment of Nutreco divested in 2007. An interest of 5% is being charged by Nutreco. The nominal value of this loan amounts to EUR 13.6 million (2008: EUR 21.6 million) and has been discounted with a rate of 8.0%, resulting in the above amount of EUR 13.0 million (2008: EUR 19.9 million). This loan is subordinated and has been accounted for under other investments for an amount of EUR 12.3 million (2008: EUR 15.3 million) and under trade and other receivables for EUR 0.7 million (2008: EUR 4.6 million).

Nutreco has an exposure to banks created by the usage of cash investments and derivative financial instruments. The exposure created by cash investments equals the notional amount; the exposure created by the derivative financial instruments equals the fair value of these instruments.

Nutreco has an exposure to reputable banks that have a sufficient credit rating. Due to the credit crisis, banks are carefully monitored and credit limits are (temporarily) reduced in the event of uncertainty. Cash and cash deposits and derivative financial instruments are held with banks with a credit rating of at least A+ (Standard & Poor’s). The maturity of the exposure is, except for interest rate derivatives, short-term and spread over various banks to reduce the counterparty risk. Nutreco is exposed to credit losses in the event of non-performance by other parties to derivative financial instruments but, given the credit ratings, management does not expect this to happen. Provisions are recognised when necessary.

The maximum amount of credit risk of all financial assets is EUR 882.0 million (2008: EUR 985.9 million).
 

Rating cash, bank and derivatives

Interest rate risk

Nutreco is partly financed with interest-bearing borrowings in order to obtain an optimal capital structure. The specification of the total interest-bearing borrowings is disclosed in note 23. It is Nutreco’s long-term policy to manage its interest rate risk exposure by fixing 50-70% of interest rates of interest-bearing borrowings. Nutreco has agreed fixed interest rates for the cumulative preference shares and the private placements. In addition and in order to achieve a mix of fixed and floating rate exposure in accordance with Nutreco’s policy, part of the floating syndicated loan has been fixed with interest rate swaps. Any short-term debt is at floating interest rates, resulting in a cash flow interest rate risk. The interest rate risk is measured on the mix of fixed and floating debt including the effects of derivative financial instruments.

In 2004, Nutreco has agreed fixed interest rates for an amount of USD 158.0 million of the private placement, for periods of seven and ten years. The private placement also included a tranche of USD 46.0 million for a period of five years which has been repaid in 2009.

Two cross-currency interest rate swaps, with a fixed interest, have been contracted to swap interest and future repayment liabilities of USD 53.7 million to NOK and USD 60.4 million to CAD, which terminate in 2011 and 2014 respectively.

In April 2009, Nutreco issued senior notes in a private placement in the United States of America for a total amount of USD 150.0 million. The senior notes consist of three tranches for USD 54.3 million, USD 37.2 million and USD 58.5 million which mature in five, seven and ten years respectively. Cross-currency interest rate swaps, with a fixed interest, have been contracted to swap interest and future repayment liabilities of USD 54.3 million to CAD, which terminate in 2014. In addition, the fixed rate of USD 37.2 million of the private placement has been swapped to floating by means of fixed-to-floating interest rate swaps that mature in 2016.

Part of the interest rate risk of the syndicated loan has been hedged by two floating-to-fixed interest rate swaps of CAD 150.0 million and EUR 50.0 million, which mature in 2012 and 2013 respectively.  

With the cumulative preference shares, the private placements and these derivative financial instruments, 81% of the interest on Nutreco’s interest-bearing borrowings (non-current) has been fixed (82% as at 31 December 2008). The increasing effect of the additional fixed rated private placement (USD 150.0 million) and lower average interest-bearing borrowings have been offset by the unwinding of two floating-to-fixed interest rate swaps of CAD 125.0 million and by swapping USD 37.2 million of the private placement to floating interest.

The average fixed interest rate on the interest-bearing borrowings as at 31 December 2009 is 6.60% (2008: 4.96%) and the average variable interest rate on the interest-bearing borrowings as at 31 December 2009 is 6.20% (2008: 3.85%). The interest rates of the major currencies are ranging from 4.53% to 8.22% (2008: 2.42% to 6.66%) depending on the currency of the interest-bearing borrowing.

Mainly as a consequence of the issuance of the private placement and a lower average net debt due to a very strong operating cash flow, the relative share of fixed rate interest-bearing borrowings is 81%, exceeding the objective of 70%.

The cash and cash equivalents have been placed out on short-term deposits or bank accounts with floating interest.

Sensitivity analysis

At balance sheet date EUR 80.3 million (2008: EUR 91.2 million) of interest-bearing borrowings (non-current) is exposed to interest rate fluctuations. The exposure on the sum of interest-bearing borrowings (current) and cash and cash equivalents amounts to EUR 191.1 million net cash (2008: EUR 99.9 million net cash) at year-end.

An increase of 100 basis points of all floating interest rates at reporting date would have decreased the net financing costs in the income statement by EUR 1.1 million (2008: EUR 0.1 million decreased). A decrease of 100 basis points in interest rates at 31 December would have had the equal but opposite effect. This analysis assumes that all other variables, in particular foreign exchange rates, remain constant. In 2008, most relevant reference rates have decreased whereas credit margins have increased.

An increase of 100 basis points of all floating interest rates at reporting date would have increased the fair value of the outstanding interest rate swaps by EUR 7.0 million per 31 December 2009. As consequence of applying cash flow hedge accounting for the interest rate swaps this amount would increase the hedging reserve in equity.

Reprising analysis

The following graph shows the reprising calendar for non-current interest-bearing borrowings (including current portion) as recognised at the balance sheet date:

Foreign currency transaction risk

Foreign currency transaction risks within Nutreco mostly relate to the purchase of raw materials. In Animal Nutrition Canada, Compound Feed Europe and Fish Feed, price changes as a result of foreign currency movements generally can be passed through to customers. Additionally, in some markets, sales contracts include price clauses to cover foreign currency movements. The possibility and time to pass foreign currency movements through to customers vary per market. These possibilities are regularly assessed and currency movements are only passed through when a structural change has occurred.

Nutreco’s foreign currency transaction exposure is determined by foreign currency movements that are not likely to be passed through to customers. This foreign currency exposure is managed by means of derivative financial instruments like forward foreign exchange contracts and swaps as well as short-term bank balances in foreign currencies. Consistent with the average pass-through period, the average maturity of derivative financial instruments is three months, generally with a maximum of 12 months.

Per 31 December 2009, foreign currency transactions risks for trade receivables mainly comprise the currencies euro and US dollar for respectively EUR 11.9 million (2008: EUR 5.6 million) and EUR 9.0 million (2008: EUR 14.7 million). The foreign currency transaction risks for trade payables are, depending on the functional currency of an operating company, in the currencies euro and US dollar for respectively EUR 100.9 million (2008: EUR 22.8 million) and EUR 48.1 million (2008: EUR 97.6 million).

Nutreco’s risk management policy describes that recognised exposures of operating companies, mainly consisting of working capital and monetary items in non-functional currencies, are generally fully hedged. These exposures are internalised as much as possible and only the remaining exposure is hedged using derivative financial instruments. The monthly revaluation of recognised items and the revaluation of the related derivative financial instruments are, according to the fair value accounting principles, reported in the gross margin of operating companies.

Unrecognised exposures, like highly probable forecasted payments and receipts in non-functional currencies in the coming three months, are hedged on the basis of pass-through possibilities and probability of occurrence. These exposures are internalised as much as possible and only the remaining exposure is hedged using derivative financial instruments. These are mainly used in cash flow hedge relationships.

The impact of unhedged transactions and balances in foreign currencies resulted in a loss of EUR 2.1 million in 2009 (2008: EUR 7.4 million losses).

The revaluation of derivative financial instruments for which hedge accounting is applied is reported, for the effective part, in equity and recognised in the income statement at when the hedged transaction is recognised in profit or loss. At 31 December 2009, derivative financial instruments with a fair value of EUR 0.0 million (2008: EUR 0.3 million negative) are reported in the hedging reserve, as part of equity. This amount is expected to be released within the first six months of 2010.

Operating companies monthly report recognised and unrecognised exposures as well as the related derivative financial instruments to Group Treasury. This report is used to determine compliance with the treasury risk management policy and to determine the need for additional hedging transactions.

Group Treasury is the counterparty for internal derivative financial instruments of the operating companies resulting in a foreign currency exposure for Group Treasury which is, together with the exposure from corporate transactions, hedged with external derivative financial instruments. The revaluation of corporate monetary items, internal and external derivative financial instruments is reported separately as part of net financing costs for as far as not recognised in equity. In 2009, the foreign currency exposure of Nutreco Corporate resulted in a positive foreign currency effect of EUR 0.8 million (2008: EUR 0.6 million).

On 31 December 2009, the notional amount of outstanding foreign exchange derivative financial instruments related to transaction risk totalled EUR 163.9 million (2008: EUR 202.3 million), mainly relating to USD, NOK and CAD. The net fair value of the outstanding foreign exchange derivative financial instruments related to transaction risk hedging amounted to EUR 0.5 million (2008: EUR 3.2 million).

Foreign currency translation risk

Nutreco is exposed to foreign currency translation risks of investments in foreign operations, including long-term loans to foreign subsidiaries, and the net income of these foreign operations. Nutreco aims to minimise any direct impact in its comprehensive income statement as a consequence of foreign currency risk related to net investments. The objective is to restrict the annual and cumulative impact in its equity as a consequence of foreign currency risk related to net investments.

To mitigate the foreign currency exposure of foreign operations, the currency of Nutreco’s external funding is matched with the required financing of foreign operations, either directly by external foreign currency interest-bearing borrowings or by derivative financial instruments as foreign exchange swaps and cross-currency interest rate swaps.

The translation exposure is measured on currency limits, a portfolio limit and the investment limit for specific net investments. The currency limit is defined as the maximum exposure to a certain foreign currency as a percentage of the capital invested in that foreign currency. The risk that the total value of the net investments changes significantly in a year is managed by a portfolio limit. The probability of a significant change is calculated by the weighted exposure per currency and the volatility per currency.

Nutreco measures the translation exposure by the total amount of the capital invested per foreign currency reduced by the amount of net investment hedges in the same foreign currency.

At balance sheet date EUR 327.2 million (2008: EUR 349.9 million) of interest-bearing borrowings in foreign currencies, including the effect of CAD/USD (EUR 86.0 million) and NOK/USD (EUR 45.2 million) cross-currency interest rate swaps, are effectively used as net investment hedge for investments in CAD and NOK. Revaluation of these interest-bearing borrowings and related cross-currency interest rate swaps is recognised in the translation reserve.

In addition, Nutreco has used foreign exchange swaps, to further reduce the exposure to translation risks of shareholders’ equity of foreign Group companies or non-consolidated companies. On 31 December 2009, the notional amount of outstanding foreign exchange derivative financial instruments related to translation risk totalled EUR 226.8 million (2008: EUR 105.7 million), mainly relating to AUD, MXN, GBP, NOK and CAD. The increase compared to 2008 mainly relates to hedging net investments in CAD with derivative financial instruments instead of financial liabilities. The net fair value of the outstanding foreign exchange derivative financial instruments related to translation risk amounted to EUR 4.6 million (2008: EUR 4.0 million).

Sensitivity analysis

A 10% strengthening of the main foreign currencies, as listed in the table below, against the euro at reporting date would have increased equity by EUR 17.0 million (2008: EUR 12.7 million). A 10% weakening of these same main foreign currencies against the euro at reporting date would have had the equal but opposite effect. This analysis assumes that all other variables, in particular interest rates, remain constant.

Liquidity risk

The primary objective of liquidity management is providing sufficient cash and cash equivalents at all times to enable Nutreco to meet its payment obligations. Management monitors forecasts of the Group’s liquidity reserve on the basis of expected cash flows. Nutreco aims for sufficient committed credit facilities, a well-spread maturity schedule of its non-current interest-bearing borrowings and strong liquidity position.

On 8 April 2009, Nutreco issued USD 150.0 million in senior notes in a private placement in the United States of America. The notes have been used to repay the maturing USD 46 million tranche of the notes that were issued in 2004 and to refinance existing bank debt by long-term debt. In May 2009, Nutreco refinanced its syndicated loan facility, which would have matured in March 2010, by a new three-year syndicated loan facility.

Of the total facilities of EUR 1,095,1 million, an amount of EUR 455.5 million had been used as at year-end 2009 (2008: EUR 1,038,0 million and EUR 595.4 million, respectively). In addition, Nutreco had EUR 232.6 million (2008: EUR 228.3 million) of cash and cash equivalents available at year-end 2009.

Nutreco aims to optimise its international cash and borrowings positions by minimising its net interest expenses and maximising its net interest income, respectively, and by minimising its bank costs.

Terms and debt repayment schedule

Terms and conditions of outstanding non-current interest-bearing borrowings are as follows:

1 The interest rate is fixed by means of interest rate swaps which mature in 2012 and 2013.

Maturity profile financial liabilities 2009

The following tables show Nutreco’s contractually agreed (undiscounted) cash flows, including interest, as at the balance sheet date:

Commodity risk management

Risks relating to derivative financial instruments

The Group uses raw materials that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. In addition to fixed price contracts, futures and options are used to economically hedge the price volatility related to these above exposures.

At year-end, the Group had the following commodity derivatives outstanding. All contracts mature within 12 months.

As part of the Group’s commodity risk management strategy, contracts have been concluded for the purchase of physical commodities in line with the Group’s commodity risk management policy.

Back to the top ↑