With a view to structured management of treasury activities and financial risks, since 2012 the Group adopted a Treasury Policy which contains guidelines for the management of:
• currency risk;
• interest rate risk;
• credit risk;
• price risk;
• liquidity risk.
This includes the following types:
• foreign exchange transaction risk, that is the risk of changes in the value of a ﬁnancial asset or liability, of a forecasted transaction or a firm commitment, changes due to exchange rate ﬂuctuations;
• foreign exchange translation risk, that is the risk that the translation of the assets, liabilities, costs and revenues relating to a net investment in a foreign operation into the reporting currency may give rise to an exchange gain or loss.
In the Amplifon Group, the foreign exchange transaction risk is highly limited in consideration of the
fact that each country is largely autonomous in the operation of its business, incurring costs in the
same currency as it realises the revenue and derives primarily from intragroup transactions medium long-term and short loans,, recharges for intercompany service agreements), which give rise to an exchange rate risk exposure to the companies operating in a currency other than that of the intragroup transaction.
Additionally, exposure to foreign exchange transaction risk arises from investments in listed ﬁnancial instruments denominated in a currency other than the investing company’s functional currency.
Foreign exchange translation risk arises from investments in the following countries: United States,
United Kingdom, Switzerland, Hungary, Turkey, Poland, Australia, New Zealand, India and Egypt.
The Group’s strategy is to minimise the impact on the income statement of the changes in exchange rates and provides for hedging of the exposure of the financial positions of individual companies denominated in currencies other than the reporting currency, and specifically: (i) by bonds in US dollars issued by Amplifon S.p.A. and subscribed by Amplifon USA Inc; (ii) the inter-company loans denominated in currencies other than Euro between Amplifon S.p.A. and the Group associates in the United Kingdom and Australia.
The intercompany loans existing between the companies in Australia and New Zealand, as well as an intercompany loan granted by Amplifon S.p.A. to its English affiliate, are considered equity investments insofar as they are not interest bearing and are not expected to be repaid. Any changes in exchange rates are, therefore, charged directly to the translation reserve without impacting the income statement.
The risks arising from other intercompany transactions and investments in quoted instruments in foreign currency are not high since the amounts involved are not signiﬁcant, hence they are not hedged.
Taking the foregoing into account, the ﬂuctuations in exchange rates during the financial year had no signiﬁcant effects on the Amplifon Group’s consolidated ﬁnancial statements.
With regard to foreign exchange translation risk, as individual countries earn income and pay expenses in their own currency no hedging is undertaken, having also considered the potential complexity of similar hedging transactions. The effects of the significant strengthening of the Euro against the Australian and US dollars caused the Group’s EBITDA in Euro to be lower by a few percentage points with respect to the Group’s total EBITDA.
Currency risk - sensitivity analysis
The two private placements denominated in US dollars, namely the outstanding portion of the 2006- 2016 issue of USD 70 million and the USD 130 million 2013-2025 issue, are hedged against currency risk. As a result of the hedge the Euro/USD rate has been locked-in for the duration of the above mentioned loans.
Therefore, it is reasonable to assume that any change in exchange rates will not give rise to a signiﬁcant profit and loss effect as the foreign currency positions and the hedging derivatives will automatically generate changes of the same amount but of the opposite sign.
Similar considerations may be made with regard both intercompany loans denominated in currencies other than Euro between Amplifon S.p.A. and UK and Australia subsidiaries.
The intercompany loans existing between the companies in Australia and New Zealand, as well as an intercompany loan granted by Amplifon S.p.A. to its UK affiliate, are considered equity investments insofar as they are not interest bearing and are not expected to be repaid. Any changes in exchange rates are, therefore, charged directly to the translation reserve without impacting the income statement.
As a consequence the sensitivity analysis of the above mentioned items is not disclosed.
The analysis excludes receivables, payables and future commercial ﬂows which have not been hedged since, as stated above, these are not signiﬁcant.
Interest rate risk
Interest rate risk includes:
• fair value risk, that is the risk that the value of a ﬁnancial asset or liability at ﬁxed interest rate may change due to ﬂuctuations in market interest rates;
• cash flow risk, that is the risk that the future cash ﬂows of a floating interest rate ﬁnancial asset or
liability may ﬂuctuate due to changes in market interest rates.
In the Amplifon Group fair value risk arises on the issue of ﬁxed-income bonds (private placement and Eurobond). The cash flow risk derives from taking out variable-rate bank loans.
The Group’s strategy is to minimise cash flow risk, especially in respect of long-term exposures, through a balanced division between fixed- and floating-rate loans, judging whether to transform floating-rate borrowings to fixed-rate both when each loan is taken out and during the life of the loans, while noting the interest rate levels seen in the markets on each occasion. In any event, at least 50% of the debt must be hedged against changes in interest rates.
Long/medium term debt at 31 December 2013 amounted to €431 million and it is linked to fixed rate debt capital market issues. The debt has yet to be swapped to floating rate as interest rates are currently low and there is little room for additional decreases with respect to the possibility of an increase. Consequently the risk that a swap of the current debt into floating rate could result in financial charges over the life of the debt which, overall, exceeds the current fixed rate was viewed as high.
Interest rate risk - sensitivity analysis
As mentioned above, all the indebtedness generates interest at a fixed rate. More in detail:
• the USD private placements are hedged against interest rate risk. As a result of the swaps, the Euro interest rate was set at 5.815% for the outstanding amount of the 2006-2016 private placement (equal to USD 70 million) and to 3.9% (average rate) for the different tranches of the 2013-2025 private placement (equal to USD 130 million);
• the €275 million 5-year bond loan reserved for non-American institutional investors and listed on the Luxembourg Stock Exchange’s Euro MTF issued on 16 July 2013 by Amplifon S.p.A. (Eurobond) has a coupon of 4.875%.
With respect to the remaining financial assets and liabilities at floating-rate the following table highlights the higher/lower income before tax arising from increases/decreases in interest rates.
In light of interest rate levels at 31 December 2013 (ECB euro rate of 0.25%), sensitivity analysis considers an upside of 1% and a downside of –0.25%.
Credit risk is the possibility that the issuer of a ﬁnancial instrument defaults on its obligations and
causes a ﬁnancial loss to the holder.
In the Amplifon Group credit risk arises from:
(i) sales made as part of ordinary business operations;
(ii) the use of ﬁnancial instruments that require settlement of positions with the counterparty;
(iii) from the transfer of Group-owned American stores to franchisees, with the payment originally spread over up to 12 years, following the transformation of the business model of the subsidiary Sonus, from the direct to the indirect channel.
With regard to the risk under (i) above, it is noted that the only positions with a high unitary value are amounts due from Italian public-sector entities, whose risk of insolvency – while existing – is remote and further mitigated by the fact that they are factored without recourse, on a quarterly basis, to specialist factoring companies. Additionally, the credit risk arising out of sales to private individuals to whom payment by installments has been allowed, is becoming significant as is that arising from sales to US indirect channel firms (wholesalers and franchisees), that in any case are related to several partners which individually own to Amplifon a limited amount, that also with reference to the biggest of them do not exceed the amount of a few million dollars.
Due to the continuance of the general economic crisis, some may not be able to honour their debts. This causes a risk of increased working capital and debtor losses. The Group, through its Corporate functions, has set up a system of monthly reporting on its debtors, to monitor their composition and due dates for each country and decide with local management the action to be taken to recover overdue accounts and determine credit policy. In particular, with regard to private customers, that are however largely paying cash, instalment or ﬁnanced sales have been limited to a maximum term of 12 months and where possible they are managed by external ﬁnance companies which advance the whole amount of the sale to Amplifon, while with regard to the indirect channel in US, the situation is strictly monitored by local management.
The risk referred to in (ii) above, notwithstanding the inevitable uncertainties linked to sudden and
unforeseeable counterparty default, is managed by diversifying the main national and international
investment grade financial institutions and through the use of specific counterparty limits with regard to both liquidity invested and/or deposited and to the notional amount of derivative contracts.
The counterparty limits are higher if the counterparty has a Standard & Poor’s and Moody’s short term rating equal to at least A-1 and P-1, respectively. The Group’s CEO and CFO may not carry out transactions with non-investment grade counterparties unless specifically authorized to do so.
The risk referred to in (iii) above is mitigated by ensuring the return of the sold stores to form part of Amplifon property in the instance where payment is not made.
This arises from the possibility that the value of a ﬁnancial asset or liability may change due to changes in market prices (other than those caused by currency or interest-rate ﬂuctuations) whether these changes arise from speciﬁc characteristics of the ﬁnancial asset or liability or the issuer of the ﬁnancial liability, or are caused by market factors. This risk is typical of ﬁnancial assets not listed on an active market, which may not easily be realised at a value close to their fair value.
In the Amplifon Group price risk arises from certain ﬁnancial investments in listed instruments, mainly bonds. Given the size of these investments, this risk is not signiﬁcant and is therefore not hedged.
This risk often arises from the possibility that an entity may have difficulty ﬁnding sufficient funds to
meet its obligations. It includes the risk that the counterparties that have granted loans or lines of credit may request repayment.
This risk, which had become particularly significant, first as a result of the 2008 financial crisis and
more recently, as a result of the crisis involving the peripheral Euro zone countries’ sovereign debt crisis and the single currency itself, still exists albeit smaller in scope.
In this situation the Group continues to pay the utmost attention to cash flow and debt management, maximizing the positive cash flow from operations, as well as repaying all expiring debt well in advance.While liquid assets were more than sufficient to cover all the obligations maturing through the end of 2013, during the year the Amplifon Group completed two important transactions on the debt capital markets which made it possible to completely refinance the short term debt falling due, as well as the portions maturing in 2014 and 2015, in order to use available resources to support business and take advantage of possible growth opportunities. More in detail:
• Amplifon USA completed a private placement on the American market of USD 130 million with 7, 10 and 12 year maturities, an average duration of 10.3 years and an average coupon of 3.90% after the swap in Euros. USD 15 million of the loan was disbursed on 30 May 2013 and USD 115 million was disbursed on 31 July 2013;
• on 16 July 2013 Amplifon S.p.A. issued a €275 million 5-year bond loan on the European market with a coupon of 4.875% reserved for non-American institutional investors and listed on the Luxembourg Stock Exchange’s Euro MTF market.
Through these transactions the Group was not only able to procure the financial resources needed to repay the second tranche of the 2006-2016 private placement that expired on 2 August 2013 amounting to, at the hedging rate, €67 million, but also on 23 July 2013 to repay in advance the entire amount outstanding on the syndicated loan taken out for the NHC Group acquisition at the end of 2010 which amounted to €254.5 million. The debt is now primarily long term, with the first maturity in August 2016 when the last tranche of the 2006-2016 private placement of €55 million, at the hedging rate, will fall due.
These activities, along with the liquidity, long term credit lines which amount to €100 million and the
positive cash flow that the Group continues to generate, lead us to believe that, at least in the short
term, liquidity risk is not significant.
Hedging instruments are used by the Group exclusively to mitigate - in line with company strategy - interest rate and currency risk and are exclusively ﬁnancial derivatives. In order to maximise the effectiveness of these hedges Group strategy prescribes that:
• the counterparties be of large size and high credit standing and that the transactions be within the limits laid down by treasury policy in order to minimise counterparty risk;
• the instruments used match, as far as possible, the characteristics of the risk they hedge;
• the performance of the instruments used be monitored, not least in order to check and, if necessary, optimise the appropriateness of the structure of the instruments used to attain the aims of the hedge.
The derivatives used by the Group are generally represented by so-called plain vanilla ﬁnancial instruments. In particular, the types of derivatives adopted are the following:
• cross currency swaps;
• interest rate swaps;
• interest rate collar;
• forward foreign exchange contracts.
On initial recognition these instruments are measured at fair value. On subsequent reporting dates the fair value of derivatives must be re-measured and:
(i) if these instruments fail to qualify for hedge accounting, any changes in fair value that occur after initial recognition are taken to proﬁt and loss;
(ii) if these instruments subsequently qualify as fair value hedges, from that date any changes in the fair value of the derivative are taken to profit and loss; at the same time, any fair value changes due to the hedged risk are recorded as an adjustment to the book value of the hedged item and the same amount is recorded in the income statement; any ineffectiveness of the hedge is recognised in proﬁt and loss;
(iii) if these instruments qualify as cash flow hedges, from that date any changes in the fair value of the derivative are taken to net equity; changes in the fair value of the derivative that are recognised
in net equity are subsequently transferred to the income statement in the period in which the transaction that is hedged against affects the income statement; when the object of the hedge is the purchase of a non-financial activity, changes to the fair value of the derivative taken to net equity are reclassified to adjust the purchase cost of the activity which is the object of the hedge (so-called basis adjustment); any ineffectiveness of the hedge is recognised in proﬁt and loss.
The Group’s hedging strategy is recognised in the accounts as described above starting from the time at which the following conditions are satisﬁed:
• the hedging relationship, its purpose and the overall strategy are formally deﬁned and documented; the documentation includes the identiﬁcation of the hedging instrument, the hedged item, the nature of the risk to be neutralised and the procedures whereby the entity will assess the effectiveness of the hedge;
• the effectiveness of the hedge may be reliably assessed and there is a reasonable expectation, conﬁrmed by ex post evidence, that the hedge will be highly effective for the period in which the hedged risk is present;
• if the hedged risk is that there may be changes in the cash ﬂow arising from a future transaction, the latter is highly probable and has exposure to changes in cash ﬂow that could affect proﬁt and loss.
Derivatives are recorded as assets if their fair value is positive and as liabilities if their fair value is negative. These balances are shown under assets or liabilities if related to derivatives which do not
meet hedge accounting criteria, conversely they are classiﬁed according to the hedged item.
In particular, if the hedged item is classified as a current asset or liability, the positive or negative fair value of the hedging instrument is included under current assets or liabilities; if the hedged item is classified as a non-current asset or liability, the positive or negative fair value of the hedging instrument is included under non-current assets or liabilities.
The Group does not have in place any hedges of a net investment.
Intercompany hedges, if any, are eliminated on consolidation.