ASSA ABLOY is exposed to a variety of financial risks through its international business operations.
Organization and activities
ASSA ABLOY'S Treasury Policy, which is reviewed annually by the Board of Directors, constitutes a framework of guidelines and regulations for the management of financial risks and financial activities.
ASSA ABLOY'S financial activities are coordinated centrally within the subsidiary ASSA ABLOY Treasury S.A. in Switzerland, which is the Group's internal bank. External financial transactions are conducted by the internal bank, which also handles transactions involving foreign currencies and interest rates. The internal bank achieves many economies of scale when borrowing funds, fixing interest rates and exchanging currency flows.
Currency risk affects ASSA ABLOY mainly through translation of capital employed and net debt, through translation of income in foreign subsidiaries, and through flow of goods between countries.
The effect arising on translation of capital employed is limited by the fact that financing is largely done in local currency.
The capital structure in each country is optimized based on local legislation. So far as this constraint allows, the currency exposure and gearing per currency should reflect the overall exposure and gearing for the whole Group to limit the effect from movements in individual currencies. The internal bank uses currency derivatives to supply the appropriate funding and eliminate currency exposure.
The table 'Net debt by currency' below shows the use of currency forward contracts in association with funding, for the major currencies. The forward contracts are used to neutralize the exposure arising between net debt and internal needs.
Net debt by currency (in millions)
Exposure of Group earnings
A general strengthening of the Swedish krona in 2006 by one percent is calculated to have a negative impact of about SEK 265 M on Group sales and of about SEK 20 M on Group earnings.
Currency risk in the form of transaction exposure, or the relative values of exports and imports of goods, is limited in the Group.
From 2005 onwards, instead of hedging individual flows, the Group hedges a basket of flows with the aims of facilitating contract management and reducing administrative costs.
Forecast transaction flows by major currency for 2006 (imports + and exports –)
Interest rate risk
Interest rate fluctuations have a direct impact on ASSA ABLOY's net interest expense, but there is also an indirect effect on the Group's operating income as a result of the impact of interest rates on the economy as a whole.
The internal bank is responsible for identifying and managing the Group's interest rate exposure. Interest duration in the Group is generally short. At year-end, the average interest rate duration, excluding pension obligations, was about 16 months.
Effective interest rate by currency, 31 December 2005
* The SEK figure includes the effects of interest rate swaps.
External funding and interest rate swap
The table 'External funding / net debt' on page 64 gives an overview of interest rate swaps associated with debt. The interest-rate derivatives are structured to have durations matching the underlying debt securities. The internal bank swaps parts of the EMTN loan in EUR and the Private Placement program in USD to floating rates.
A rise/fall of 1 percentage point in market rates is calculated to have a negative/positive impact in the form of higher/
lower interest expense of SEK 65 M / SEK 69 M for the year 2006.