Note 37 - Financial risk factors

Novozymes’ international operations mean that the income statement and balance sheet are exposed to a number of financial risk factors. Financial risks are managed centrally for the entire Group. The use of financial instruments is governed by the treasury policy approved by Novozymes’ Board of Directors. The treasury policy is unchanged from previous years, and contains rules on which financial instruments can be used for hedging, the counterparties that can be used, and the risk profile that is to be applied. Financial instruments are used to hedge existing assets, liabilities, and future net cash flows.

Currency risk
Currency risk arises due to imbalances between income and costs in each individual currency and because Novozymes has more assets than liabilities in foreign currencies in connection with its many foreign companies. Operating profit is most exposed to the EUR, USD, and JPY.

A 0.5% movement in the EUR would, other things being equal, result in a change in operating profit of around DKK 15–20 million (2010: DKK 15–20 million). A movement of 5% in the USD would result in a change in operating profit of around DKK 60–80 million (2010: DKK 60–80 million). A movement of 5% in the JPY would result in a change of around DKK 5–10 million (2010: DKK 5–10 million) in operating profit. 

A 5% movement in the CNY would, other things being equal, result in a change in Shareholders' equity of around DKK 85 million (2010: DKK 71 million), while a movement of 5% in the USD would result in a change in Shareholders' equity of around DKK 19 million (2010: DKK 37 million).

Novozymes’ policy is to hedge existing net assets in foreign currencies and expected future net exposure from the Group’s operations. Hedging of exchange rate exposure is carried out through a combination of loans, forward exchange contracts, swaps, and options. Exchange rate hedging transactions are carried out to minimize risks and thereby increase the predictability of the Group’s financial results.

Currency risk relating to net investments in foreign subsidiaries is hedged where this is deemed appropriate and is managed primarily by taking out loans and entering into swaps. Currency swaps, which are used to hedge equity investments, generally have a maturity period of over 12 months.

Interest rate risk
Interest rate risk arises in relation to interest-bearing assets and liabilities. An increase of 1 percentage point in the average interest rate on Novozymes’ net interest-bearing assets would have a positive effect on profit before tax of around DKK 2 million. In accordance with Novozymes’ treasury policy, a minimum of 30% of loans must be at fixed interest rates. At year-end 2011, 71% (2010: 67%) of the loan portfolio was at fixed interest rates, based on financial instruments.

According to Novozymes’ treasury policy, free funds may only be invested in government bonds, ultra-liquid mortgage credit bonds, and money market deposits.

Credit risk
Credit risk arises especially on cash and cash equivalents, derivatives, and customer sales. The credit risk on cash and cash equivalents and derivatives is managed by only trading in derivatives and only placing deposits with banks that have a credit rating of at least A2 (Moody’s) or A (S&P). The credit risk is calculated on the basis of net market values and is governed by the Group’s treasury policy. Novozymes has entered into netting agreements (ISDA) with all the banks used for trading in financial instruments, which means that Novozymes’ credit risk is limited to net assets. At December 31, 2011, the Group considers its maximum credit risk to be DKK 2,794 million (2010: DKK 3,650 million), which is the total of the Group's financial assets.  At December 31, 2011, the maximum credit risk related to one counterparty was DKK 235 million (2010: DKK 502 million). The credit risk of debtors is countered by thorough, regular analyses based on customer type, country, and specific conditions, see also Accounting estimates and judgments. Generally, customers are creditworthy. No collateral was held for financial assets at December 31, 2011.

Liquidity risk
In connection with the Group’s ongoing financing of operations, including refinancing risk, efforts are made to ensure adequate and flexible liquidity. This is guaranteed by placing deposits in cash and ultra-liquid negotiable instruments, and using binding credit facilities.

The table below shows the future draw on liquidity based on the financial liabilities at December 31, 2011 (settled by financial assets). The table is broken down by payment periods, in accordance with the contractual due date. The amounts are shown undiscounted, so the figures cannot be directly reconciled with the respective items in the balance sheet.


Less Between Between After
than 1 1 and 2 2 and 5
DKK million    year years years  years  
Financial liabilities at December 31, 2011
Other financial liabilities 152  562  498  474 
Trade payables 745    -   -   -
Other payables 1,095    -   -   -
Gross settlement of derivatives (outflow) 27  261  19  12 
The figures below show the inflow from the above gross settlement of derivatives, so as to provide an adequate and fair picture of the actual draw on liquidity.
Gross settlement of derivatives (inflow)    10  255 
                                       
Less Between Between After
than 1 1 and 2 2 and 5
DKK million    year years years  years  
Financial liabilities at December 31, 2010
Other financial liabilities 271  1,057  478 
Trade payables 764    -   -   -
Other payables 1,178    -   -   -
Gross settlement of derivatives (outflow) 28  28  276  16 
The figures below show the inflow from the above gross settlement of derivatives, so as to provide an adequate and fair picture of the actual draw on liquidity.
Gross settlement of derivatives (inflow)    10  260