3. Financial Risk Management

3.1 Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risks (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments to hedge certain risk exposures.

The Group’s management provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, and the use of derivative and non-derivative financial instruments.

3.1.1 Market Risk

(i) Foreign exchange risk

Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. The current Group treasury’s risk management policy is to hedge the expected cash flows in its main currencies, mainly by making use of derivative financial instruments as described in note 2.15. The Group has cash flow and fair value hedges.

The Group operates largely in the ‘eurozone’, which comprises 62.52% (2013: 63.40%) of total revenue. Translation exposure to foreign exchange risk relates to those activities outside the eurozone; these activities were mainly limited to operations in the United Kingdom, Latin America, Eastern Europe, Scandinavia, Russia, Turkey, China and India, whose net assets are exposed to foreign currency translation risk. The currency translation risk is not hedged.

If the currencies of these operations had been 5% weaker against the euro with all other variables held constant, the Group’s post-tax profit for the year would have been 1.0% lower (2013: 1.0% lower) and equity would have been 4.4% lower (2013: 3.7% lower). 

Further foreign exchange risks with respect to commercial transactions are mainly limited to purchases of goods in Asia, which are mainly US dollar-denominated. This risk is considered low as these purchases, in value, represent a minor part of the total purchases made by the Company. Based on the treasury policy the risk is partly hedged and cash flow hedge accounting is applied when the transaction is highly probable. Fair value hedge accounting is applied when the invoice is received.

(ii) Interest rate risk

The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group generally borrows at variable rates and uses interest rate swaps as cash flow hedges of future interest payments, which have the economic effect of converting interest rates from floating rates to fixed rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed contract rates and floating interest rate amounts calculated by reference to the agreed notional principal amounts and benchmarks.

In 2014, an increase of 50 basis points in the three-month EURIBOR rate would have a negative impact of €633 (2013: €0) on income before taxes, taking hedging measures into account and with all other factors being equal, and based on the financial instruments at year-end. The increase of 50 basis points in the three-month EURIBOR would have a positive effect (before income taxes) of €1,491 (2013: €3,945) on other comprehensive income. A decrease of 50 basis points in the three-month EURIBOR rate would have a positive impact of €633 on income before taxes (2013: €0), taking hedging measures into account and with all other factors being equal. The decrease of 50 basis points would have a negative effect (before income taxes) of €1,610 (2013: €4,008) on other comprehensive income.

Note 30 describes which financial derivatives the Group uses to hedge the cash flow interest rate risk.

(iii) Price risk

Management believes that the price risk is limited, because there are no listed securities held by the Group and the Group is not exposed to commodity price risk.

3.1.2 Credit Risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale, retail customers and health insurance institutions, including outstanding receivables and committed transactions. The Group has no significant concentrations of credit risk as a result of the nature of its retail operations. In addition, in some countries all or part of the credit risk is transferred to credit card companies. Furthermore the Group has receivables from its franchisees. Management believes that the credit risk in this respect is limited, because the franchisee receivables are secured by pledges on the inventories of the franchisees. The utilization of credit limits is regularly monitored. Sales to retail customers are settled in cash or using major debit and credit cards.

3.1.3 Liquidity Risk

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed and uncommitted overdraft credit facilities (immediately available funds) and committed medium-term facilities (available at 4 days’ notice). Due to the dynamic nature of the underlying business, the Group aims at maintaining flexibility in funding by maintaining headroom of at least €200 million as a combination of cash at hand plus available committed credit facilities minus any overdraft balances and/or debt maturities with a tenor of less than one year. Group management monitors its liquidity periodically on the basis of expected cash flows, and local management of the operating companies in general monitors liquidity even more frequently.

GrandVision refinanced its former €800 million Senior Facility Agreement and settled the €325 million outstanding Subordinated Shareholder Loan from HAL. A new €1,200 million Senior Facility Agreement was entered into on 18 September 2014, maturing on 18 September 2019 with 2 one-year extension options which can be exercised by the borrower at the first and second anniversary of the facility. The new €1,200 million Senior Facility Agreement also includes a €100 million uncommitted accordeon feature, which can be exercised during the life of the facility after all lenders have consented. The interest rate on the drawings consists of the margin and the applicable rate (i.e. for a loan in euros, the EURIBOR). The facility requires GrandVision to comply with the following financial covenants: maintenance of a maximum total leverage ratio (net debt/EBITDA) of less than or equal to 3.25 and a minimum interest coverage ratio (EBITDA/net interest expense) of 5. Compliance with the bank covenants is tested and reported on twice a year. As of the balance sheet date the Group is in compliance with the bank covenants and has been so for the duration of the loan.

The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.

in thousands of EUR

Within 1 year

1-2 years

2-5 years

After 5 years

Total

31 December 2014

Borrowings

124,022

11,058

977,165

-

1,112,246

Derivative financial instruments

1,518

2,508

-

-

4,026

Trade and other payables

372,829

-

-

-

372,829

31 December 2013

Borrowings

76,264

24,897

577,169

388,180

1,066,510

Derivative financial instruments

3,902

1,528

235

-

5,665

Trade and other payables

276,176

-

-

-

276,176

3.2 Capital Risk Management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. There are no externally imposed capital requirements.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debts. The Group monitors capital on the basis of leverage ratio (defined as net debt over EBITDA).

Management believes the current capital structure, operational cash flows and profitability of the Group will safeguard the Group’s ability to continue as a going concern. Following the refinancing in 2014, GrandVision aims to maintain a maximum leverage ratio of 2.0 (net debt/EBITDA) excluding the impact of any borrowings associated with, and any EBITDA amounts attributable to major acquisitions.

in thousands of EUR

31 December 2014

31 December 2013

Equity attributable to equity holders

622,890

501,686

Shareholder loan

-

325,000

Total capital

622,890

826,686

Net debt

922,436

837,313

Adjusted EBITDA

449,498

400,454

Net debt leverage (times)

2.1

2.1

3.3 Fair Value Estimation

The financial instruments carried at fair value can be valued using different levels of valuation methods. The different levels have been defined as follows:

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
  • Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) (level 2). Valuation techniques are used to determine the value. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-specific estimates. All significant inputs required to fair value an instrument have to be observable.
  • Inputs for asset or liability that are not based on observable market data (unobservable inputs) (level 3).

If multiple levels of valuation methods are available for an asset or liability, the Group will always use level 1.

The assets and liabilities for the Group measured at fair value qualify for the level 3 category except for the derivative financial instruments (note 30)Derivative Financial Instruments which qualify for the level 2 category. The Group does not have any assets and liabilities that qualify for the level 1 category.

The table below shows the level 2 and level 3 categories:

in thousands of EUR

Level 2

Level 3

At 31 December 2014

Assets

Derivatives used for hedging

891

-

Non-current receivables

-

2,841

Total assets

891

2,841

Liabilities

Contingent consideration - Other current and non-current liabilities

-

11,410

Derivatives used for hedging

4,045

-

Total liabilities

4,045

11,410

At 31 December 2013

Assets

Derivatives used for hedging

143

-

Non-current receivables

-

3,488

Total assets

143

3,488

Liabilities

Contingent consideration - Other current and non-current liabilities

-

4,539

Derivatives used for hedging

6,011

-

Total liabilities

6,011

4,539

There were no transfers between levels 1, 2 and 3 during the periods.

Level 2 category

An instrument is included in level 2 if the financial instrument is not traded in an active market and if the fair value is determined by using valuation techniques based on the maximum use of observable market data for all significant inputs. For the derivatives the Group uses the estimated fair value of financial instruments determined by using available market information and appropriate valuation methods, including relevant credit risks. The estimated fair value approximates to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Specific valuation techniques used to value financial instruments include:

  • quoted market prices or dealer quotes for similar instruments;
  • the fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves;
  • the fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date, with the resulting value discounted back to present value.
Level 3 category

The level 3 category refers to investments held in shopping malls and contingent considerations. For the investments held in shopping malls, an external expert performed a valuation of the shares and there were no additions or disposals, only a movement relating to foreign currency which is recorded in financial costs. The valuation technique is consistent compared to prior years and a valuation is undertaken on an annual basis. The contingent consideration is remeasured based on the agreed business targets.

3.4 Offsetting Financial Assets and Financial Liabilities

The only items netted are assets and liabilities under cash pool agreement and derivatives; please refer to note 21 for more details on the cash pool.