Financing and liquidity risks are defined as the risks of being unable to meet payment obligations as a result of inadequate liquidity or difficulties in obtaining credit from external sources. The internal bank is responsible for external borrowing and external investments. ASSA ABLOY strives to have access, on every occasion, to both short-term and long-term loan facilities. The available facilities should include a reserve (facilities confirmed but not used) equivalent to 10 percent of the Group's annual total sales.
The column 'End of facility' in the table 'External funding / net debt' below shows that duration until repayment of debts contracted by the internal bank is not concentrated
in the short term. When there are many transactions with different maturities, the duration is computed by weighted average. At year-end, the average duration, excluding
pension liabilities, was 35 months. This is up from 2004
(14 months) because a refinancing was arranged in the second quarter in the form of a Private Placement in the USA for USD 330 M. The loan consists of five tranches with durations between seven and fifteen years.
Ratings from both agencies remain unchanged from the previous year.
Financial risk management exposes ASSA ABLOY to certain counterparty risks. Such exposure may arise, for example, from the placement of surplus cash, from trade receivables, and from the use of debt securities and derivative financial instruments.
ASSA ABLOY's policy is to minimize the potential credit risk from cash surplus by having no cash in bank accounts and by using cash available from subsidiaries to amortize ASSA ABLOY debt. This objective is controlled primarily through the cash pool network put in place by the internal bank. About 80 percent of commercial sales were settled through cash pools in 2005. The Group may nevertheless deposit surplus funds on a short-term basis with banks in order to match debt maturities.
Derivative financial instruments are allocated to banks according to risk factors set in the Group policy to limit counterparty risk.
The internal bank enters into derivative contracts ex-clusively with banks participating in the syndicated credit system or with banks rated AAA and AA.
An ISDA (full netting of transactions in case of default by one counterparty) is agreed in the case of interest derivatives.
Trade receivables are spread over a large number of individual customers, thus minimizing credit risk.
The Group is exposed to price risk related to purchases of certain commodities (primarily metals) used as raw materials in its business. To date, the Group has engaged in very limited hedging of materials traded on world markets through commodity forward contracts.
Derivative financial instruments such as currency and interest-rate forwards are used to the extent necessary. The use of derivative financial instruments is solely to reduce exposure to financial risks. Derivative financial instruments are not used with speculative intent.
The positive and negative market values in the table below show the market values of instruments outstanding at year-end, based on available market values, and are the same as the values reported on the balance sheet. The nominal value represents the gross value of the contract.
External funding / net debt (in millions)
* Hedge accounting.
Outstanding derivative financial instruments at 31 December (SEK M)