Management of financial risks

The Group is exposed to financial risks associated with its operations, specifically related to these types of risks:

  • market risks, relating to exchange rate risk (operativity in foreign currencies other than the functional currency) and interest rate risk;
  • liquidity risks, relating to the availability of financial resources and access to the credit market;
  • credit risks, resulting from normal commercial transactions or financing activities.

The Group specifically monitors each of these financial risks, with the objective of promptly minimising them, also through hedging derivatives. Below is an explanation of how the Ansaldo STS Group, based on its in-house directives, manages these types of risk.

Exchange rate risk management

As indicated in the directive “Treasury management”, the exchange rate risk management of the Ansaldo STS Group focuses on the achievement of these objectives:

  • limiting potential losses due to adverse fluctuations in the exchange rate as compared with the reporting currency of Ansaldo STS SpA and its subsidiaries;
  • limiting estimated or real costs connected to the implementation of exchange rate risk management policies.

The exchange rate risk should be hedged only if it has a relevant impact on cash flow as compared with the reporting currency.
The costs and risks connected with a hedging policy (hedge, no hedge, or partial hedge) should be acceptable both financially and commercially.
These instruments may be used to hedge exchange rate risk:

  • forward foreign exchange purchases and sales: exchange rate forwards are the most widely used instruments for cash flow hedges;
  • Foreign currency funding/lending: foreign currency funding and lending is used to mitigate the exchange rate risk associated with the relevant credit or debit positions with bank counterparties or Group companies.

Using funding and lending in foreign currency as a hedging instrument must always be aligned with the overall treasury management and with the overall financial position of Ansaldo STS SpA (long and short term).
Generally, the purchase and sale of foreign currency is used in the case of exotic currencies where the capital market is not considered liquid or where alternative hedging instruments are not available or are only available at high cost.

Hedging of exchange rate risk

There are three types of exchange rate risk:

  1. Economic risk:
    represented by the impact that currency fluctuations may have on capital budgeting decisions (investments, location of plants, procurement markets).
  2. Transaction risk:
    the possibility that exchange rates could change during the period between the time at which a commitment to collect or pay in foreign currency at a future date (setting price lists, establishing budgets, preparing orders, invoicing) arises and the time at which such collection or payment occurs, thereby having a positive or negative impact on the exchange rate delta.
  3. Translation risk:
    this relates to the impact that the translation of dividends or the consolidation of recognised assets and liabilities has on the financial statements of multinational companies whenever the consolidation exchange rates change from year to year.

The Ansaldo STS Group hedges transaction risks in accordance with the “Treasury Management” directive, which provides for the systematic hedging of commercial cash flows resulting from the assumption of contractual commitments of a specific nature as either buyer or seller, in order to ensure current exchange rates at the date of acquisition of long-term contracts and neutralising the effects of fluctuations in the reference exchange rates.

Cash Flow Hedge

Hedges are made at the time commercial contracts are finalised through plain vanilla instruments (swaps and forwards on foreign currencies) qualifying for hedge accounting under IAS 39. These hedges are carried as cash flow hedges. Accordingly, the changes in fair value of the hedging derivatives are recognised in a special cash flow hedge reserve once the effectiveness of the hedge is demonstrated.
Should the hedges prove to be ineffective, i.e. they do not fall within the effective range between 80-125%, changes in the fair value of the hedging instruments are immediately recognised in the Income Statement as financial items and the cash flow hedge reserve accumulated up until the date of the last successful effectiveness test is reversed to profit and loss.

Fair Value Hedges

A fair value hedge involves the hedging of an exposure to changes in the fair value of a recognised asset or liability, an irrevocable unrecognised commitment or an identified portion of such asset, liability or irrevocable commitment, attributable to a specific risk and that could affect the Income Statement.
The Group hedges against changes in fair value with regard to the exchange rate risk for assets and liabilities.
Hedging transactions are carried out predominantly with the banking system. At 31 December 2011 the Group had contracts referring to various currencies in the following notional amounts:

local currency in € thousands Sell11 Buy11 31.12.2011 Sell10 Buy10 31.12.2010
Euro 99,016 66,901 165,917 134,155 44,357 178,512
US dollar 54,363 27,183 81,546 56,555 25,722 82,277
GBP 11,064 157 11,221 7,986 - 7,986
Swedish krona - 23,838 23,838   25,745 25,745
Canadian dollar - - - 3,976 - 3,976
Australian dollar 13,631 7,159 20,790 11,023 6,580 17,603
Hong Kong Dollar - - - 63 - 63
Japanese yen - - - 3,506 - 3,506

At 31 December 2011, the net fair value of derivative financial instruments was positive in the amount of about EUR 2,870 thousand.

Sensitivity analysis on exchange rates

For the presentation of market risks, IFRS 7 requires a sensitivity analysis, that shows the effects of the assumed changes in the most relevant market variables on the Income Statement and equity.
Exchange rate risks arise from financial instruments (including trade receivables and payables) recorded in the Financial Statements or from highly probable cash flows denominated in a currency other than the functional currency.
Since the US dollar is the primary foreign currency used by the Group, sensitivity analysis was performed on financial instruments denominated in dollars existing at 31 December 2011, assuming a 5% appreciation (depreciation) of the euro against the US dollar.
This analysis showed that an appreciation or depreciation of the euro against the US dollar would have the following impact on the Group’s Financial Statements:

  31.12.2011 31.12.2010
(EUR 000) +5% -appreciation of euro against the US dollar -5% - depreciation of euro against the US dollar +5% - appreciation of euro against the US dollar -5% - depreciation of euro against the US dollar
Income Statement 964 (1,066) 2,537 (2,804)
Cash Flow Reserve (4,738) 4,738 (6,656) 6,656
Translation Reserve - - - -

Compared with the same analysis performed in 2010, it results a lower exposure of the Income Statement in relation to the euro/dollar exchange rate variations, as well as a lower impact on equity. The resulting effect is a consequence of a more homogeneous contractual exchange rate in the Forex derivatives of cash flows outstanding at the end of 2011 compared to 2010. This is the result of the renewal of several derivatives expired in the course of the previous year.

Management of interest rate risk

The aforementioned directive states that the goal of the management of interest rate risk is to lessen the negative impact of changes in interest rates, which may affect the Company’s Income Statement, the Balance Sheet and the weighted average cost of capital.
Interest rate risk management by Ansaldo STS is designed to achieve the following objectives:

  • to stabilise the weighted average cost of capital;
  • to minimise the weighted average cost of capital of Ansaldo STS over the medium to long term. To achieve this objective, interest rate risk management will focus on the impact of interest rates on debt funding and equity funding;
  • to optimise the profit on financial investments within a general profit-risk trade-off;
  • to limit the costs relating to the execution of interest rate risk management policies, including the direct costs tied to the use of specific instruments and indirect costs relating to the internal organisation needed to manage such risk.

In order to allow future acquisition transactions, the Group invests excess liquidity in the short term. At the same time, financial debt is mainly in the short term. The common management of short-term assets and liabilities makes the Group relatively neutral to changes in long-term interest rates.
In 2011 as well interest rate risk was managed without the use of interest rate derivatives.

Sensitivity analysis on interest rates

Sensitivity analysis was performed on the assets and liabilities exposed to interest rate risk, assuming a parallel and symmetric 50 basis point rise (fall) in interest rates; the adopted range has been chosen by IAS for the analysis.
The impact of these scenarios on the Group’s Financial Statements at 31 December 2011 is summarised in the following table:

  31.12.2011 31.12.2010
(EUR 000) +50 bps -50 bps +50 bps -50 bps
Income Statement 1,631 (1,631) 1,709 (1,709)
Reserves - - - -

These impacts are the result of greater interest income that would be produced by floating rate net financial debt, in the case of interest rates greater or lower than 50 basis points respectively.
The change in interest rates would have no impact on the valuation of financial instruments in the Financial Statements, as there are no financial assets or liabilities (not derivative) recognised at fair value through profit or loss.
The derivatives subscribed by the Group are exclusively exchange rate derivatives and a change in the interest rates of the various currencies would have non-relevant impacts on the year-end Fair Value.
There are no impacts on equity, as the company has no cash flow hedges on the interest rate risk.
The results achieved at 31 December 2011 remained unchanged if compared with 31 December 2010.

Management of liquidity risk

In order to support efficient management of liquidity and contribute to the growth in its businesses, the Ansaldo STS Group has established a set of tools to optimise the management of financial resources. This objective was achieved by centralising treasury operations with current account contracts between the Parent Company and the Group companies and maintaining an active presence on financial markets to obtain adequate short and long-term credit lines for endorsement facilities and for cash sufficient to meet the Group’s needs.
At 31 December 2011, the Group shows a net financial liquidity of EUR 289,674 thousand recording a decrease from 31 December 2010, when the net financial position was equal to EUR 318,150 thousand.

Liquidity analysis – amounts in thousands of euros – figures at 31 December 2011

A – Financial liabilities less derivatives Less than 1 year 1 to 5 years More than 5 years
Non-current liabilities      
Borrowings from third parties - 438 -
Borrowings from related parties - - -
Other liabilities - 1,962 -
Current liabilities      
Trade payables to related parties 37,443 8,541 -
Trade payables to third parties 373,826 12,041 -
Financial liabilities to third parties 14,915 - -
Financial liabilities to related parties - - -
Other financial liabilities - - -
Total A 426,184 22,982 -
B – Negative value of derivatives      
Hedge derivatives 5,818 - -
Trading derivatives (economic hedge) - - -
Total B 5,818 -  
Total A + B 432,002 22,982 -

Against borrowings and trade payables for EUR 454,984 thousand, financial assets are posted in these amounts:

C- Financial assets  
Cash and cash equivalents 160,928
Trade receivables – third parties 546,939
Trade receivables – related parties 133,130
Financial assets at fair value – third parties 30,756
Financial assets at fair value – related parties -
Financial receivables 113,343
Other assets -
Positive value of derivatives 8,688
TOTAL FINANCIAL ASSETS 993,784
D – Credit lines 53,560
TOTAL C + D 1,047,344
C+D-(A+B) 592,360

The Group has a net credit position and has available liquidity to self-finance and does not have to use banks to finance its own activity. The Group has a relatively little exposure to the tensions of the liquidity market.

Credit risk management

The Group is not exposed to significant credit risk, both as regards the counterparties of its commercial transactions and for financing and investing activities. Its primary customers are, in fact, government entities or off-shoots of such entities, concentrated in the euro area, the United States and Southeast Asia. The typical customer rating of the Ansaldo STS Group is therefore medium/high. Despite this, in the case of contracts with customers/counterparties with which the Group does not ordinarily do business, the customers’ solvency is assessed at the time of the offer to highlight any future credit risks.
The nature of Ansaldo’s customers means that collection times are longer (in some countries significantly longer) than in other businesses, creating significant outstanding past due positions.
At 31 December 2011 trade receivables from third parties, equal to EUR 546,939 thousand (EUR 493,085 thousand at 31 December 2010) are overdue for EUR 324,900 thousand, of which EUR 97,266 thousand past due by more than 12 months.
Trade receivables from third parties at 31 December 2011 mainly refer to the Group parent Ansaldo STS SpA for EUR 430,092 thousand with a total overdue amount equal to EUR 237,286 thousand, of which EUR 90,683 expired by more than 12 months.

The following table shows the composition of receivables at 31 December 2011:


Government entities Other customers  
31.12.2011 (K€) European
area 
American
area 
Other European
area 
American
area 
Other Total
- Held as guarantees 7,429 956 12,359 1,620 4,776 10,535 37,675
- Receivables not past due 77,559 692 24,173 71,077 2,283 46,255 222,039
- Receivables past due less than 6 months 34,532 164 3,698 17,455 4,990 16,600 77,439
- Receivables past due between 6 months and 1 year 27,505 179 58,909 17,407 3,393 5,127 112,520
- Receivables past due between 1 and 5 years 46,986 - 2,766 41,059 - 6,455 97,266
- Receivables past due more than 5 years - - - - - - -
Total 194,011 1,991 101,905 148,618 15,442 84,972 546,939

Movements in the provision for doubtful accounts of Group trade receivables are as follows:

(EUR 000) 2011 2010
01 January 13,784 7,911
Allocations 279 6,409
Reversals/Uses (2,698) (888)
Other changes 790 352
31 December 12,155 13,784

In the course of the year, the provision for doubtful trade receivables decreased by EUR 1,629 thousand. This reduction is mainly relative to the uses of the French subsidiary (EUR 953 thousand), the Australian subsidiary (EUR 884 thousand) and the Malaysian subsidiary (EUR 775 thousand).
Other changes include the exchange rate differences generated upon the consolidation of foreign subsidiaries.

In relation with the credit risk originated from the positive value of derivatives, the counterparties of derivative contracts are mainly financial institutions.
The table below breaks down the positive value of derivatives by the counterparty’s rating class.

The ratings below were provided by S&P.

Rating class Positive fair value
AA - 10.35%
A+ 0.64%
A 85.38%
A- 3.49%
BBB 0.14%
Total positive fair value 100%

Classification and fair value of financial assets and liabilities

The table below gives a breakdown of the Group financial assets and liabilities by the accounting categories under IAS 39.
Financial liabilities are all recognised on the amortised cost method, since the Group did not use the fair value option.
Derivatives are analysed separately.

31.12.2011 (EUR 000) Fair value through profit or loss Loans and receivables Held to maturity Available for sale Total Fair Value
Non-current assets            
Non-current receivables from related parties - 2,765 - - 2,765 2,765
Financial assets at fair value - - - - - -
Receivables - 15,467 - - 15,467 15,467
Current assets            
Current receivables from related parties - 133,130 - - 133,130 133,130
Trade receivables - 546,939 - - 546,939 546,939
Financial assets at fair value 30,756 113,343 - - 144,099 144,099
Financial receivables - - - - - -
Other current assets -          
31.12.2011 (EUR 000) Fair value through profit or loss Amortised Cost Total Fair Value
Non-current liabilities        
Non-current payables to related parties - - - -
Non-current borrowings - 438 438 438
Other non-current liabilities - - - -
Current liabilities        
Current payables to related parties - 45,984 45,984 45,984
Trade payables - 385,867 385,867 385,867
Borrowings - 14,915 14,915 14,915
Other current liabilities -      
31.12.2010 Fair value through profit or loss Loans and receivables Held to maturity Available for sale Total Fair Value
31.12.2010 (K€) Fair value through profit or loss Loans and receivables Held to maturity Available for sale Total Fair Value
Non-current assets            
Non-current receivables from related parties - 1,006 - - 1,006 1,006
Financial assets at fair value - - - - - -
Receivables - 14,243 - - 14,243 14,243
Current assets            
Current receivables from related parties - 131,723 - - 131,723 131,723
Trade receivables - 493,085 - - 493,085 493,085
Financial assets at fair value - 170,362 - - 170,362 170,362
Financial receivables - - - - - -
Other current assets - - - - - -
 
31.12.2010 (EUR 000)Fair value through profit or lossAmortised CostTotalFair Value
Non-current liabilities    
Non-current payables to related parties----
Non-current borrowings-1,6211,6211,621
Other non-current liabilities----
Current liabilities    
Current payables to related parties-54,59454,59454,594
Trade payables-348,539348,539348,539
Borrowings-3,9113,9113,911
Other current liabilities----

For short-term financial instruments, such as trade receivables and payables, the book value represents a fair approximation of fair value.

Derivatives

The IFRS provides the classification of the fair value of derivatives on the basis of reference parameters inferable from the market or from other financial indicators (for example: exchange rates, interest rate curve, etc.). Financial derivatives on currencies to hedge exchange rate risk fall within Level 2 of hierarchy since the fair value of these instruments is determined by recalculating the current value through official fixing of period-end exchange and interest rates listed on the market.

The table below provides the fair values of derivative instruments.

Fair value hierarchy at the reporting date  Fair Value at
31.12.2011
Level 2
Fair Value at 
31.12.2010 
Level 2
Assets        
  Interest rate swap      
    Trading - -
    Fair value hedge - -
    Cash flow hedge - -
  Currency forward/swap/option      
    Trading - -
    Fair value hedge 3,144 3,389
    Cash flow hedge 5,544 5,638
  Equity instruments (trading)   - -
  Embedded derivatives (trading)   - -
Liabilities      
  Interest rate Swap      
    Trading - -
    Fair value hedge - -
    Cash flow hedge - -
  Currency forward/swap/option      
    Trading - -
    Fair value hedge 943 1,061
    Cash flow hedge 4,875 6,678
  Equity instruments (trading)   - -
  Embedded derivatives (trading)   - -

The Group uses cash flow hedge derivatives hedging the exchange rate risk exposure for expected future transactions that are highly probable and fair value hedge derivatives hedging the exchange rate risk exposure of financial assets/liabilities recognised in the Financial Statements.

With reference to derivatives hedging exchange rate risk, the Group hedges both future receipts and payments. The table below provides the maturities of these hedged payments, for the USD currency.

 31.12.201131.12.2010
  Notional amount
(in thousands of USD)
Notional amount
(in thousands of USD)
Maturity Receipts Payments Receipts Payments
Within 1 year 327 21,122 8,680 4,622
1 to 3 years 8550 8,975 - 260
3 to 9 years 554 76 - 76
More than 9 years - - - -
Total 9,431 30,173 8,680 4,958

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