Credit facilities

Metso uses a variety of credit facilities to finance its operations in the short and long run.

The objective of Metso's debt financing is to safeguard ongoing business operations and to optimize the cost of capital. As part of our strategy, our goal is to maintain an investment grade rating. The Group Treasury has the objective to secure the availability of funds for operations and capital expenditure, including acquisitions, and to arrange funding at competitive terms and conditions and from several different sources. Group Treasury is responsible for relationships with banks and other financial institutions. Metso currently has sufficient financial resources to meet its financial needs.

Metso is credit rated by Standard & Poor's on a frequent basis. They assign Metso with long- and short-term ratings together with an outlook statement. Metso was rated by Moody’s until September 21, 2015. If Moody's continues to rate Metso's existing outstanding bonds, these ratings will be based on publicly available information only.

Standard & Poor's rating

BBB

Long-term rating

A-2

Short-term rating

Stable

outlook

Standard & Poor's rating history
Moody's rating history

 

EUR 1,500 million EMTN Programme
Revolving credit facility
EUR 500 million Commercial paper program

Financial risk management

As a global company, Metso is exposed to a variety of business and financial risks. Financial risks are managed centrally by the Group Treasury under annually reviewed written policies approved by the Board of Directors. Treasury operations are monitored by the Treasury Management Team chaired by the CFO. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units. Group Treasury functions as counterparty to the operating units, manages centrally external funding and is responsible for the management of financial assets and appropriate hedging measures. The objective of financial risk management is to minimize potential adverse effects on Metso's financial performance.

Sensitivity analysis

Sensitivity analysis figures presented in connection with different financial risks are based on the risk exposures at the balance sheet date. The sensitivity is calculated by assuming a change in one of the risk factors of a financial instrument, such as interest or currency. It is not likely that the future volatility of a risk factor will develop in accordance with the test assumptions and that only one factor would be impacted.

When calculating the sensitivity, Metso has chosen to use market conventions in assuming a one percentage point (100 basis points) variation in interest rates, 10 percent change in foreign exchange rates and in commodity prices because this provides better comparability from one period to another and information on the volatility to users of financial statements. Metso is aware that such assumptions may not be realistic when compared to past volatility and they are not intended to reflect the future. Metso has chosen not to use past volatility as this could mislead the users of financial statements to assume the analysis reflect management's view on the future volatility of the financial instruments. 

Liquidity and refinancing risk and capital structure management

Liquidity or refinancing risk arises when a company is not able to arrange funding at terms and conditions corresponding to its creditworthiness. Sufficient cash, short-term investments and committed and uncommitted credit facilities are maintained to protect short-term liquidity. Diversification of funding among different markets and adequate number of financial institutions is used to safeguard the availability of liquidity at all times. Group Treasury monitors bank account structures, cash balances and forecasts of the operating units and manages the utilization of the consolidated cash resources.

Metso's refinancing risk is managed by balancing the proportion of short-term and long-term debt as well as the average remaining maturity of long-term debt. The tables below analyze the repayments and interests on Metso’s liabilities by the remaining maturities from the balance sheet date to the contractual maturity date. The net interest payments of interest rate swaps hedging long-term loans are included in the long-term debt repayment figures.

Maturities of debts

 

As   of December 31

 

 

2017

2016

 

EUR million 

<1 year

15 years

>5 years

<1   year

1–5 years

>5   years

Long-term debt

     

 

 

 

Repayments

283

274

300

0

676

100

Interests

14

30

7

18

38

5

Short-term debt

 

 

 

 

 

 

Repayments

21

-

-

27

-

-

Interests

0

-

-

1

-

-

Trade payables

342

-

-

274

-

-

Other liabilities

10

-

-

10

-

-

Metso total

670

304

307

330

714

105

Financial guarantee contracts

-

 

 

-

 

 

               

Interest rate risk

Interest rate risk arises when changes in market interest rates and interest margins influence finance costs, returns on financial investments and valuation of interest bearing balance sheet items. Interest rate risks are managed by balancing the ratio between fixed and floating interest rates and administrating duration of debt and investment portfolios. Additionally, Metso may use derivative instruments such as forward rate agreements, swaps, options and futures contracts to mitigate the risks arising from interest bearing assets and liabilities. The interest rate risk is managed and controlled by the Group Treasury and measured using sensitivity analysis and duration of long-term debt. The Macaulay Duration of long-term debt was 2.3 years on December 31, 2017 (1.9 years).

At the end of 2017 the balance sheet items exposed to interest rate risk were interest bearing assets of EUR 829 million (EUR 820 million) and interest bearing debt of EUR 853 million (EUR 795 million). Of the total interest bearing debt 70 percent (68%) was denominated in EUR but 98 percent (97%) had exposure only to the risk of interest rate of EUR.

The basis for the interest rate risk sensitivity analysis is an aggregate group level interest rate exposure, composed of interest bearing assets, interest bearing debt and financial derivatives, such as interest rate swaps and options, which are used to hedge the underlying exposures. For all interest bearing current debt and assets to be fixed during next 12 months a one percentage point move upwards or downwards in interest rates with all other variables held constant would have an effect on Metso’s net interest expenses, net of taxes, of EUR +/- 1.4 million (EUR +/- 1.9 million).

A one percentage point move upwards or downwards in all interest rates with all other variables held constant would have following effects, net of taxes, in income statement and equity:

EUR million

2017

2016

Effects in

 

 

Income statement

+/-   0.1

+/- 1.7

Equity

+/-   0.1

+/- 0.4

The effect in the income statement comprises the changes in the fair value of financial instruments which are directly recognized in the income statement as well as financial instruments under fair value hedge accounting. The effect in the equity is comprised of the changes in the fair value of derivatives qualifying as effective cash flow hedge instruments for long-term floating rate debt.

Foreign exchange risk

Metso operates globally and is exposed to foreign exchange risk in several currencies, although the geographical diversity of operations decreases the significance of any individual currency. About 80 percent of Metso's sales originate from outside the euro zone; the main currencies being Euro, US dollar, Australian dollar, Chilean peso, Chinese yuan, Brazilian real and Swedish krona.

Transaction exposure

Foreign exchange transaction exposure arises when an operating unit has commercial or financial transactions and payments in other than its own functional currency, and when related cash inflow and outflow amounts are not equal or concurrent.

In accordance with the Metso Treasury Policy, operating units are required to hedge in full the foreign currency exposures on balance sheet and other firm commitments. Future cash flows denominated in a currency other than the functional currency of the unit are hedged with internal foreign exchange contracts with the Group Treasury for periods, which do not usually exceed two years. Operating units also do some hedging directly with banks in countries, where regulation does not allow corporate internal cross-border contracts.

Group Treasury monitors the net position of each currency and decides to what extent a currency position is to be closed. Group Treasury is, however, responsible for entering into external forward transaction corresponding to the internal forward transaction whenever an operating unit applies hedge accounting. Metso Treasury Policy defines upper limits on the open currency exposures managed by the Group Treasury; limits have been calculated on the basis of their potential profit impact. To manage the foreign currency exposure Group Treasury may use forward exchange contracts and foreign exchange options.

Total amount of foreign currency exposures on December 31 was as follows:

EUR million

2017

2016

Operational items

254

206

Financial items

535

442

Hedges

-745

-630

Total exposure

44

18

This aggregate group level currency exposure is the basis for the sensitivity analysis of foreign exchange risk. This exposure, net of respective hedges, is composed of all assets and liabilities denominated in foreign currencies, projected cash flows for unrecognized firm commitments, both short- and long-term sales and purchase contracts and anticipated operational cash flows to the extent their realization has been deemed highly probable and therefore hedged. This analysis excludes net foreign currency investments in subsidiaries together with instruments hedging these investments.

Assuming euro to appreciate or depreciate ten percent against all other currencies, the impact on cash flows, net of taxes, derived from the year-end net exposure as defined above, would be EUR -/+ 2.8 million (EUR -/+ 2.5 million), which is mainly related to US dollar. Transaction exposure is spread over about 35 currencies and as of December 31, 2017 the biggest open exposures were in US dollar (43%) and China offshore renminbi (13%).

A sensitivity analysis of financial instruments as required by IFRS 7, excludes following items: projected cash flows for unrecognized firm commitments, advance payments, both short- and long-term purchase contracts and anticipated operational cash flows. The next table presents the effects, net of taxes, of a +/- 10 percent change in EUR foreign exchange rates:

 

2017

2016

EUR million

USD

SEK

Others

Total

Total

Effects in

 

 

 

 

 

     Income statement

-/+ 2.4

+/-   1.3

+/- 0.5

+/- 1.5

+/-   1.8

     Equity

-/+ 1.4

+/- 3.1

+/- 0.3

+/- 4.2

-/+   5.7

Effect in equity is the fair value change in derivatives contracts qualifying as cash flow hedges for unrecognized firm commitments. Effect in income statement is the fair value change for all other financial instruments exposed to foreign exchange risk including derivatives, which qualify as cash flow hedges, to the extent the underlying sales transaction, recognized under the percentage of completion method, has been recognized as revenue.

Translation risk

Foreign exchange translation exposure arises when the equity of a subsidiary is denominated in currency other than the functional currency of the Parent Company. The major translation exposures are in Chinese yuan, Brazilian real, Chilean peso and Swedish krona, which altogether comprise approximately 60 percent of the total equity exposure. Metso is currently not hedging any equity exposure.

Commodity risk

Commodity risk arises from variations in prices of raw materials and of supplies. Metso units identify their commodity price hedging needs and hedges are executed through the Group Treasury using approved counterparties and instruments. Hedging is done on a rolling basis with a declining hedging level over time.

Electricity exposure in the Nordic units has been hedged with electricity forwards, which are designated as hedges of highly probable future electricity purchases. Execution of electricity hedging has been outsourced to an external broker. As of December 31, 2017, Metso had outstanding electricity forwards amounting to 14 GWh (35 GWh).

To reduce its exposure to the volatility caused by the surcharge for certain metal alloys (Alloy Adjustment Factor) comprised in the price of stainless steel charged by its suppliers, Metso has entered into average-price swap agreements for nickel. The Alloy Adjustment Factor is based on monthly average prices of its components of which nickel is the most significant. As of December 31, 2017, Metso had outstanding nickel swaps amounting to 270 tons (288 tons).

The sensitivity analysis of the commodity prices based on financial instruments under IFRS 7 comprises the net aggregate amount of commodities bought through forward contracts and swaps but excludes the anticipated future consumption of raw materials and electricity.

A 10 percent change upwards or downwards in commodity prices would have effects, net of taxes, in the range of +/-0.0–0.2 to income statement and equity in years 2017 and 2016.

As cash flow hedge accounting is applied, the effective portion of electricity forwards is recognized in equity. The ineffective portion is recognized in the income statement. Hedge accounting is not applied to nickel agreements, and the change in the fair value is recorded in the income statement.

Other commodity risks are not managed using financial derivative instruments.

Credit and counterparty risk

Credit or counterparty risk is defined as the possibility of a customer or a financial counterparty not fulfilling its commitments towards Metso. The operating units of Metso are primarily responsible for credit risks pertaining to sales and procurement activities. The units assess the credit quality of their customers, by taking into account their financial position, past experience and other relevant factors. When appropriate, advance payments, letters of credit and third party guarantees or credit insurance are used to mitigate credit risks. Group Treasury provides centralized services related to customer financing and seeks to ensure that the principles of the Treasury Policy are adhered to with respect to terms of payment and required collateral. Metso has no significant concentrations of credit risks.

The maximum credit risk equals the carrying value of trade and loan receivables. The credit quality is evaluated both on the basis of aging of the trade receivables and also on the basis of customer specific analysis. The aging structure of trade receivables is presented in note 12.

Counterparty risk arises also from financial transactions agreed upon with banks, financial institutions and corporates. The risk is managed by careful selection of banks and other counterparties, by counterparty specific limits determined in the Treasury Policy, and netting agreements such as ISDA (Master agreement of International Swaps and Derivatives Association). The compliance with counterparty limits is regularly monitored.

The maximum amount of financial counterparty risk is calculated as the fair value financial assets available for sale or held for trading, derivatives and cash and cash equivalents on the balance sheet date.