Management of financial risks

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

  • market risks, related to exchange rate risk in respect of operations in areas using currencies other than the functional currency and to the risk of changes in interest rates;
  • 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. In this case losses are defined in terms of cash flow rather in accounting terms;
  • 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;
  • Currency Swaps / Cross Currency Swaps: used together with exchange rate forwards, they are used to manage hedging dynamically by reducing the exchange rate risks of when cash flows occur earlier or later than expected in a currency other than the functional currency; 
  • 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 the Ansaldo STS Group (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 30 June 2011 the Group had contracts referring to various currencies in the following notional amounts:

(EUR thousand) Sell 06 11 Buy 06 11 30.06.2011 Sell 12 10 Buy 12 10 31.12.2010
Euro 105,662 29,991 135,653 134,155 44,357 178,512
US dollar
37,149 6,465 43,614 56,555 25,722 82,277
GBP 9,576                  -   9,576 7,986                           -   7,986
Swedish krona                  -   29,218 29,218                  -   25,745 25,745
Canadian dollar                  -                    -                     -   3,976                           -   3,976
Australian dollar 22,440 3,278 25,718 11,023 6,580 17,603
Hong Kong Dollar                  -                    -                     -   63                           -   63
Japanese yen                  -                    -                     -   3,506                           -   3,506

At 30 June 2011, the net fair value of derivative financial instruments was negative in the amount of EUR 2,880 thousand.

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 Group’s Income Statement, the Balance Sheet and the weighted average cost of capital.

Interest rate risk management by Ansaldo STS Group 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 Group 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 2011, the Group managed this risk without the use of derivatives due to the short-term maturities of the payables. Thus, at 30 June 2011, the Group had no open hedge positions to reduce interest rate risk.

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 and maintaining an active presence on financial markets to obtain adequate short and medium-term credit lines. Within this context Ansaldo STS has obtained short and long-term credit lines for endorsement facilities and for cash sufficient to meet the Group’s needs.
At 30 June 2011, the Group shows a net financial liquidity of EUR 212,804 thousand.
At 31 December 2010, the net financial liquidity was equal to EUR 318,150 thousand.

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.