Other reserves
46. Nature and scale of the risks arising from financial instruments
The Group’s main financial instruments include current accounts, short-term deposits, short and long-term bank loans, finance leases and bonds.
The purpose of these is to finance the Group’s operating activities.
In addition, the Group has trade receivables and payables resulting from its operations.
The main financial risks to which the Group is exposed are market (currency and interest rate risk), credit and liquidity risk. These risks are described below, together with an explanation of how they are managed.
To cover these risks, the Group makes use of derivatives, primarily interest rate swaps, cross currency swaps and forward contracts, to hedge interest rate and Exchange rate risks.
Credit risk
With regard to trade transactions, the Group works with medium-sized and large customers (mass retailers, domestic and international distributors) on which credit checks are performed in advance.
Each company carried out an assessment and control procedure for its customer portfolio, partly by constantly monitoring amounts received. In the event of excessive or repeated delays, supplies are suspended.
As a result, historical losses on receivables represent a very low percentage of revenues and annual outstanding receivables and do not require special coverage and/or insurance.
The maximum risk at the reporting date is equivalent to the carrying value of trade receivables.
Financial transactions are carried out with leading domestic and international institutions with a high credit rating. The risk of insolvency is therefore deemed to be insignificant.
The maximum risk at the reporting date is equivalent to the carrying value of these assets.
Liquidity risk
The Group's ability to generate substantial cash flow through its operations allows it to reduce liquidity risk to a minimum. This risk is defined as the difficulty of raising funds to cover the payment of the Group’s financial obligations.
The table below summarises financial liabilities at 31 December 2011 by maturity based on the contractual repayment obligations, including non-discounted interest.
For details of trade payables and other liabilities, see note 41 - Trade payables and other current liabilities.
31 December 2011
On
demand Within 1 year
Due in 1 to 2 years
Due in 3 to 5 years
Due in more
than 5 years Total
€ million € million € million € million € million € million
Payables and loans due to banks 144.9 - - - 144.9
Bonds 29.3 29.3 510.2 172.5 741.3
Derivatives on bond issues 1.8 2.3 15.1 28.8 47.9
Private placements 101.1 14.7 144.1 105.4 365.3
Property leases 3.2 0.2 0.6 3.8 7.8
Other financial payables 0.2 0.2 0.4 - 0.8
Total financial liabilities - 278.0 46.7 670.4 310.4 1,305.5
Interest on private placement (3.1) (4.5) (9.4) - (17.1)
Financial liabilities net of hedging assets - 274.9 42.1 661.0 310.4 1,288.4
31 December 2010
On
demand Within 1 year
Due in 1 to 2 years
Due in 3 to 5 years
Due in more
than 5 years Total
€ million € million € million € million € million € million
Campari Group – 2011 Consolidated financial statements 107 The Group’s financial payables, with the exception of non-current payables with a fixed maturity, consist of short-term bank debt.
Thanks to its liquidity and management of cash flow from operations, the Group has sufficient resources to meet its financial commitments at maturity.
In addition, there are unused credit lines that could cover any liquidity requirements.
Market risks Interest rate risk
The Group is exposed to the risk of fluctuating interest rates in respect of its financial assets, short-term payables to banks and long-term lease agreements.
Among long-term financial liabilities, fixed rates apply to certain loans obtained by Sella & Mosca S.p.A. and one of the Parent Company’s minor loans.
The Redfire, Inc. private placement also pays interest at a fixed rate.
The Parent Company’s bond issued in 2003 originally had a fixed interest rate in US dollars, but this became a variable rate in euro through a derivatives contract; a portion of the debt was subsequently transferred to a fixed rate in euro through an interest rate swap.
The Parent Company’s bond issued in 2009 also paid a fixed-rate coupon, but a portion of this was later changed to a variable rate through an interest rate swap. Note that, at 31 December 2011, around 59% of the Group’s total financial debt was fixed-rate debt.
Sensitivity analysis
The following table shows the effects on the Group’s income statement of a possible change in interest rates, if all other variables are constant.
A negative value in the table indicates a potential net reduction in profit and equity, while a positive value indicates a potential net increase in these items.
The assumptions used in terms of a potential change in rates are based on an analysis of the trend at the reporting date.
The table illustrates the full-year effects on the income statement in the event of a change in rates, calculated for the Group’s variable-rate financial assets and liabilities.
As regards the fixed-rate financial liabilities hedged by interest rate swaps, the change in the hedging instrument offsets the change in the underlying liability, with practically no effect on the income statement.
Net of tax, the effects are as follows:
31 December 2011 Increase/decrease Income statement
in interest rates in basis points Increase in interest rates Decrease in interest rates
€ million € million
Euro +/- 30 basis points -0.2 0.2
Dollar +/- 12 basis points 0.1 -0.1
Other currencies +/- 10 basis points on CHF Libor, +/- 25 basis points on GBP Libor, +/- 150 basis points on R$ Libor
- -
Total effect -0.1 0.1
31 December 2010 Increase/decrease Income statement
in interest rates in basis points Increase in interest rates Decrease in interest rates
€ million € million
Euro +/- 28 basis points -0.3 0.3
Dollar +/- 8 basis points - -
Other currencies +/- 16 basis points on CHF Libor, +/- 13 basis points on GBP Libor, +/- 80 basis points on R$ Libor
0.1 -0.1
Exchange rate risk
The expansion of the Group’s international business has resulted in an increase in sales on markets outside the eurozone, which accounted for 48.1% of the Group’s net sales in 2011.
However, the establishment of Group entities in countries such as the United States, Brazil, Australia, Russia and Switzerland allows this risk to be partly hedged, given that both costs and income are denominated in the same currency. In the case of the US, moreover, some of the cash flows from operations are used to redeem the US dollar- denominated private placement taken out locally to cover the acquisitions of certain companies.
Therefore, exposure to foreign exchange transactions generated by sales and purchases in currencies other than the Group’s functional currencies represented an insignificant proportion of consolidated sales in 2011.
For these transactions, Group policy is to mitigate the risk by using forward sales or purchases.
In addition, the Parent Company has issued a bond in US currency, where the Exchange rate risk has been hedged by a cross currency swap.
Sensitivity analysis
An analysis was performed on the economic effects of a possible change in the exchange rates against the euro, keeping all the other variables constant.
This analysis does not include the effect on the consolidated financial statements of the conversion of the financial statements of subsidiaries denominated in a foreign currency following a possible change in exchange rates.
The assumptions adopted in terms of a potential change in rates are based on an analysis of forecasts provided by financial information agencies at the reporting date.
The types of transaction included in this analysis are as follows: the Parent Company’s bond issue, denominated in US dollars, and sales and purchase transactions in a currency other than the Group’s functional currency.
The Parent Company’s bond issue is hedged by cross currency swaps, while the other transactions are hedged by forward contracts; in both cases, therefore, a change in exchange rates would entail a corresponding change in the fair value of the hedging transaction and hedged item, but this would have no effect on the income statement. The effects on shareholders’ equity are determined by changes in fair value of the Parent Company’s interest rate swap and forward contracts on future transactions, which are used as cash flow hedges.
The results of this analysis showed that the effects would not be significant.
47.
Commitments and risks
The main commitments and risks of the Campari Group on the closing date of the financial statements are shown below.
Non-cancellable operating leases
The following table shows the amounts owed by the Group, broken down by maturity, in future periods for leases on property.
Minimum future payments under operating leases 31 December 2011 31 December 2010
€ million € million
Within 1 year 6.3 4.9
1-5 years 17.9 13.0
More than 5 years 1.5 1.4
Campari Group – 2011 Consolidated financial statements 109
Non-cancellable financing leases
The table below shows the commitments relating to the financial leasing contract entered into by the Parent Company in 2003 (relating to the Novi Ligure industrial and property complex) and the commitments incurred by CJSC Odessa Sparkling Wine Company relating to its production site. The Parent Company contract was closed in February 2012 and the full payment amount is therefore classified within a year.
The contract stipulates future minimum payments as set out in the table, which also shows the relationship between the payments and their present value.
31 December 2011 31 December 2010
Finance leases Minimum future
payments Present value of future payments Minimum future payments Present value of future payments
€ million € million € million € million
Within 1 year 3.2 3.1 3.7 3.5
1-5 years 1.0 0.3 3.8 3.4
More than 5 years 3.6 0.4 3.9 0.5
Total minimum payments 7.8 3.8 11.4 7.4
Financial charges (4.0) (4.1)
Present value of minimum future payments 3.8 3.8 7.4 7.4
Existing contractual commitments for the purchase of property, plant and equipment These commitments totalled € 12.6 million, and all expire within the year.
The commitments mainly relate to the purchase of aging barrels for the Wild Turkey distillery in Kentucky (approximately € 8.8 million), the purchase of plants and improvements to the production units of the Parent Company (€ 0.5 million), Odessa Sparkling Wine Company (€ 0.4 million) and of Vasco (CIS) OOO (€ 0.7 million). Restrictions on the title and ownership of properties, equipment and machinery pledged to secure liabilities
The Group has several existing loans, with a current balance of € 0.2 million, secured by mortgages on land and buildings and liens on machinery and equipment for an original amount of € 5.3 million.
Other guarantees
The Group has issued other forms of security in favour of third parties in the form of customs bonds for excise duties totalling € 39.1 million at 31 December 2011 (€ 51.8 million at 31 December 2010).