LISI GROUP - 2018 Financial report

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2.4.3.1 - Interest rate risk
The Group’s main exposure in terms of interest rate risk arises from the
exposureofitsfinancialassetsandliabilitiesatvariableratestovariations
in interest rates, which could have an impact on these cash flows.
Within the framework of its overall policy, the Group partly converts its
initially variable rate liabilities into fixed rate liabilities, using financial
instruments such as interest rate swaps.
These hedging instruments are negotiated on OTCmarketswith banking
counterparts, in a centralized manner by the Group’s Financial
Department. They are not considered by the Group to be hedging
instruments and are recorded at fair value to the income statement.
TheGroupdidnotsetupanynewhedges in2018.Its instruments ineffect
atDecember31,2018relatetoanoutstandingamountof€61.8million.The
featuresoftheseinstrumentsarepresentedinnote2.7.4“Commitments”.
As at December 31, the Group’s net variable rate position broke down as
follows:
(in thousands of euros) 12/31/2018 12/31/2017
Loans – variable rates 54,800 100,052
Short-term banking facilities 16,441 16,441
Cash and cash equivalents (143,479) (180,174)
Net position prior to management (72,238) (63,681)
Interest rate SWAP 46,302 66,797
Hedging 46,302 66,797
Net position after management (118,540) (130,478)
Theapproachtakenconsistedintakingintoaccountasacalculationbasis
for the sensitivity to rates the net, lending and borrowing positions.
At December 31, 2018, the impact on the unhedged portion of a 100 basis
point change in the variable rates was €1,185 thousand.
2.4.3.2 - Commodities price fluctuation risk
At December 31, the Group hedged the risk on its future purchases of the
raw materials nickel and aluminum. The fair value at December 31, 2018
ofthederivativesused(commodityswaps)was+€43thousand.Otherraw
materials cannot be hedged due to lack of available instruments. More
information is provided in chapter 5 paragraph 4.6.1.
2.4.3.3 - Currency risk
Overall, the Group is subject to two types of foreign exchange risk:
−− outside the EUR and USD zones, it has production facilities in a dozen
countries, in which the majority of the sales of its subsidiaries are
denominated in EUR or in USD, whereas their costs are mainly
denominated in local currency, which is theGBP, CAD, TRY, CZKand, to
a lesser extent, the MAD, CNY, INR and PLN, giving rise to a cash
requirement in local currencies. Strengthening of these currencies
would affect the business performance of the Group;
−− USD ranks second in terms of amount invoiced in that currency by the
Group, after the EUR, mainly in LISI AEROSPACE. Invoicing in other
currenciesisnotsignificantattheGroupscale.AweakeningoftheUSD
would affect the Group’s economic performance.
In order to protect its results, the Group is implementing a hedging policy
aimed at reducing the factors of uncertainty affecting its operational
profitability and at giving it the time necessary to adapt its costs to any
unfavorablemonetary environment.
Hedging of the foreign exchange on risk local currencies
The Group has very good visibility over its local currency requirements.
Also, its hedging policy is based on managing a portfolio of financial
instruments to protect against a rise in local currencies. The hedging
horizon is 12 - 24months.
Hedging of USD currency risk
As indicated above, the generation of USDarisesmainly fromtheGroup’s
AerospaceDivision,whichbenefitsfromnon-currentcontractsproviding
for invoicing in this currency. The hedging policy is based on the
management of a portfolio of financial instruments to secure a
guaranteed average hedging rate. The hedging horizon may extend over
up to five years.
Portfolio of foreign exchange derivatives
The main hedging instruments used by the Group as part of its foreign
exchange risk management are forward sales, purchases and sales of
options and structured products.