4 Financial risk management

The Group is exposed to various financial risks arising from its underlying operations and corporate finance activities.

These financial risks are market risk (including currency risk, interest risk and price risk), credit risk and liquidity risk.

This note presents information about the Group exposure to the above-mentioned risks, the Group policies and processes for managing these risks and Group management of capital. Risk management is carried out by the Group Treasury department under policies approved by the Financial Risk Management Committee (FRMC).

The FRMC has been established and currently includes the Chief Financial Officer, Chief Accounting Officer and Head of the Financial Control department, heads of Internal Audit department, Tax department, Treasury and Risk department and CFO Patient Value Operations and Corporate Strategy & Development. The FRMC is responsible for:

  • reviewing the results of UCB risk assessment;
  • approval of the recommended risk management strategies;
  • monitoring compliance with the financial market risk management policy;
  • approval of policy changes; and
  • reporting to the Audit Committee.

The Group financial risk management policies established by the FRMC need to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies are reviewed by the FRMC on a semi-annual basis to reflect changes in market conditions and the Group’s activities.

The FRMC has also identified and assessed the Brexit-related risks that apply to the Group’s business and concluded that UK’s Brexit decision would not have a major impact on the Group’s operations. In order to avoid delays in supply chain, the inventory level will be slightly increased for UK operations. Other business critical Brexit-related risks have been mitigated.

4.1 Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group income statement or the value of its assets and liabilities. The objective of market risk management is to manage and control market risk exposures. The Group enters into derivative financial instruments and also incurs financial liabilities or holds financial assets in order to manage market risk. Where possible, the Group seeks to apply hedge accounting in order to manage volatility in the income statement. It is the Group policy and practice not to enter into derivative transactions for speculative purposes.

4.1.1 Foreign exchange risk

The Group operates across the world and is exposed to movements in foreign currencies affecting its net income and financial position, as expressed in euro. The Group actively monitors its currency exposures, and when appropriate, enters into transactions with the aim of preserving the value of existing assets and liabilities, as well as anticipated transactions. The Group uses forward contracts, foreign exchange options and cross-currency swaps to hedge certain committed and anticipated foreign exchange flows and financing transactions.

The instruments purchased to hedge transactional exposure are primarily denominated in U.S. dollar, GB pound, Japanese yen and Swiss franc, the currencies where the Group has its most important exposures. The Group’s financial risk management policy is to hedge for the impact from the translation of foreign currency assets and liabilities into the functional currency of the relevant group subsidiaries, as well as the impact of currency fluctuations on the Group’s anticipated net foreign currency cash flows for a period of minimum 6 and maximum 26 months.

The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.

The effect of translational exposure arising from the consolidation of the foreign currency denominated financial statements of the Group foreign subsidiaries as well as from assimilated net foreign investment positions and net investment hedges is shown as a cumulative translation adjustment in the Group consolidated statement of changes in equity.

4.1.2 Effect of currency fluctuations

At 31 December 2018, if the euro had strengthened or weakened by 10% against the following currencies with all other variables being held constant, the impact on equity and post-tax profit for the year, based on the outstanding currency balances and hedge instruments at that date, would have been as follows:

At 31 December 2018

 

 

 

€ million

Change in rate: strenghtening/ weakening (-) EUR

Impact on equity: loss (-)/gain

Impact on income statement: loss (-)/gain

USD

+10%

-119

-16

 

-10%

146

19

GBP

+10%

-40

0

 

-10%

49

0

CHF

+10%

-58

-1

 

-10%

71

1

JPY

+10%

13

0

 

-10%

-16

0

 

 

 

 

At 31 December 2017

 

 

 

€ million

Change in rate: strenghtening/ weakening (-) EUR

Impact on equity: loss (-)/gain

Impact on income statement: loss (-)/gain

USD

+10%

-94

-6

 

-10%

115

7

GBP

+10%

-33

-4

 

-10%

40

5

CHF

+10%

-50

-2

 

-10%

61

3

JPY

+10%

12

-2

 

-10%

-15

2

 

 

 

 

4.1.3 Interest rate risk

Changes in interest rates may cause variations in interest income and expenses resulting from interest-bearing assets and liabilities. In addition, they can affect the market value of certain financial assets, liabilities and instruments as described in the following section on market risk of financial assets. The interest rates on the Group’s major debt instruments are both fixed and floating, as described in Notes 28 and 29. The Group uses interest rate derivatives to manage its interest rate risk, as described in Note 38.

The Group designates derivative financial instruments (interest rate swaps) as hedging instruments, under fair value hedges, to fixed rate financial assets and liabilities. Both the derivative financial instrument and the hedged item are accounted for at fair value through profit or loss.

In 2018, changes in fair value resulting from interest rate derivatives designated to the floating rate liabilities of the Group have been accounted for through equity under IFRS 9.

4.1.4 Effect of interest rate fluctuations

A 100 basis points increase in interest rates at balance sheet date would have increased equity by € 1 million (2017: € 1 million); a 100 basis points decrease in interest rates would have decreased equity by € 1 million (2017: € 1 million).

A 100 basis points increase in interest rates at balance sheet date would have increased profit and loss by € 0 million (2017: € 0 million); a 100 basis points decrease in interest rates would have decreased profit and loss by € 0 million (2017: € 0 million).

4.1.5 Other market price risk

Changes in the market value of certain financial assets and derivative financial instruments can affect the income or the financial position of the Group. Financial long-term assets, if any, are held for contractual purposes, and marketable securities, if any, are mainly held for regulatory purposes. The risk of loss in value is managed by reviews prior to investing and continuous monitoring of the performance of investments and changes in their risk profile.

Investments in equities, bonds, debentures and other fixed income instruments are entered into on the basis of guidelines with regard to liquidity and credit rating.

Amounts subject to market price risk are rather immaterial and therefore the impact on equity or the income statement of a reasonable change of this market price risk is assumed to be negligible.

Similar to 2017, during 2018 the Group traded on treasury shares, which were accounted for through equity.

4.2 Credit risk

Credit risk arises from the possibility that the counterparty to a transaction may be unable or unwilling to meet its obligations causing a financial loss to the Group. Trade receivables are subject to a policy of active risk management, which focuses on the assessment of country risk, credit availability, on-going credit evaluation and account monitoring procedures. There are certain concentrations within trade receivables of counterparty credit risk, particularly in the U.S., due to the sales via wholesalers (Note 24).

For some credit exposures in critical countries, such as certain Southern European countries, the Group has obtained credit insurance.

In the U.S. and China (since 2014), the Group entered into a trade receivable financing agreement that qualifies for derecognition. According to the terms and conditions of the agreement UCB does not retain any non-payment or further late payment risk relating to the transferred trade receivables.

The exposure of other financial assets to credit risk is controlled by setting a policy for limiting credit exposure to high-quality counterparties, regular reviews of credit ratings, and setting defined limits for each individual counterparty. The criteria set by Group Treasury for their investment policy are based on generally considered high-quality long-term credit ratings and 5 years Credit Default Swap rate.

Where appropriate to reduce exposure, netting agreements under an ISDA (International Swaps and Derivatives Association) master agreement are signed with the respective counterparties. The maximum exposure to credit risk resulting from financial activities, without considering netting agreements, is equal to the carrying amount of financial assets plus the positive fair value of derivative instruments.

4.3 Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under normal circumstances without incurring unacceptable losses or risking damage to the Group reputation.

The Group maintains sufficient reserves of cash and readily realizable marketable securities to meet its liquidity requirements at all times. In addition, the Group has certain unutilized revolving committed facilities at its disposal.

At the balance sheet date, the Group had the following sources of liquidity available:

  • cash and cash equivalents (Note 25): € 1 262 million (2017: € 1 049 million)
  • unutilized credit facilities and undrawn available amount under finance contract (Note 28): € 64 million (2017: € 72 million), linear digressive since 2016 until 2025
  • unutilized revolving credit facilities (Note 28): € 1 billion (2017: € 1 billion); the existing € 1 billion syndicated committed revolving credit facility of the Group, maturing in 2024 was undrawn per end 2018

The table below analyses the contractual maturities of the Group financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date, excluding the impact of netting. The amounts mentioned below with respect to the financial derivatives are indicative of the contractual undiscounted cash flows.

At 31 December 2018

 

 

 

 

 

 

 

€ million

Note

Total

Contractual cash flow

Less than 1 year

Between 1 and 2 years

Between 2 and 5 years

Over 5 years

Bank Borrowings and other long-term loans

28

146

146

11

121

14

0

Debentures and other short-term loans

28

0

0

0

0

0

0

Lease liabilities

28

101

105

38

29

32

6

Retail bond maturing in 2023

29

188

221

9

9

203

0

Institutional Eurobond maturing in 2022

29

351

377

7

7

363

0

Institutional Eurobond maturing in 2021

29

361

392

14

14

364

0

Retail bond maturing in 2020

29

252

268

9

259

0

0

EMTN notes maturing in 2019

29

75

77

77

0

0

0

Trade and other liabilities

34

1 812

1 812

1 786

8

17

1

Bank overdrafts

28

25

25

25

0

0

0

Interest rate swaps

 

51

51

15

14

22

0

Forward exchange contracts used for hedging purposes

 

 

 

 

 

 

 

Outflow

 

3 120

3 120

3 120

0

0

0

Inflow

 

3 006

3 006

3 006

0

0

0

Forward exchange contracts and other derivative financial instruments at fair value through profit and loss

 

 

 

 

 

 

 

Outflow

 

399

399

399

0

0

0

Inflow

 

399

399

399

0

0

0

 

 

 

 

 

 

 

 

At 31 December 2017

 

 

 

 

 

 

 

€ million

Note

Total

Contractual cash flow

Less than 1 year

Between 1 and 2 years

Between 2 and 5 years

Over 5 years

Bank Borrowings and other long-term loans

28

311

311

11

21

279

0

Debentures and other short-term loans

28

0

0

0

0

0

0

Lease liabilities

28

5

5

2

2

1

0

Retail bond maturing in 2023

29

188

230

9

9

27

185

Institutional Eurobond maturing in 2022

29

349

384

7

7

370

0

Institutional Eurobond maturing in 2021

29

365

407

14

14

379

0

Retail bond maturing in 2020

29

254

277

9

9

259

0

EMTN notes maturing in 2019

29

75

79

2

77

0

0

Trade and other liabilities

34

1 750

1 750

1 724

10

15

1

Bank overdrafts

28

26

26

26

0

0

0

Interest rate swaps

 

63

63

14

14

31

4

Forward exchange contracts used for hedging purposes

 

 

 

 

 

 

 

Outflow

 

2 753

2 753

2 753

0

0

0

Inflow

 

2 848

2 848

2 848

0

0

0

Forward exchange contracts and other derivative financial instruments at fair value through profit and loss

 

 

 

 

 

 

 

Outflow

 

2 460

2 460

2 460

0

0

0

Inflow

 

2 455

2 455

2 455

0

0

0

 

 

 

 

 

 

 

 

4.4 Capital risk management

The Group policy with respect to managing capital is to safeguard the Group’s ability to continue as a going concern in order to provide returns to shareholders and benefits to patients and to reduce the Group external debt further, in order to obtain a capital structure that is consistent with others in the industry.

 

 

 

€ million

2018

2017

Total borrowings (Note 28)

272

342

Bonds (Note 29)

1 227

1 231

Less: cash and cash equivalents (Note 25), debt securities (Note 22) and cash collateral related to lease liability

-1 262

-1 049

Net debt

237

525

Total equity

6 255

5 736

Total financial capital

6 492

6 260

Gearing ratio

4%

8%

 

 

 

4.5 Fair value estimation

The fair value of financial instruments traded in active markets (such as financial assets at fair value through OCI) is based on quoted market prices at the balance sheet date.

The fair value of financial instruments that are not traded in an active market is determined by using established valuation techniques such as option pricing models and estimated discounted values of cash flows. The Group uses a variety of methods and makes assumptions that are based on market conditions and the credit and the non-performance risks existing at each balance sheet date.

Quoted market prices are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of the interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of the forward exchange contract is determined using discounted value of the exchanged amounts in currencies, converted at the prevailing spot rate at the balance sheet date.

The carrying amount less impairment provision of trade receivables and trade payables is assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rates that is available to the Group for similar financial instruments.

4.5.1 Fair value hierarchy

IFRS 7 requires disclosure of fair value measurements by level of the following hierarchy:

  • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
  • Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly;
  • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

All fair value measurements disclosed are recurring.

4.5.2 Financial assets measured at fair value

31 December 2018

 

 

 

 

€ million

Level 1

Level 2

Level 3

Total

Financial assets

 

 

 

 

Financial assets at FVOCI (Note 22)

 

 

 

 

Quoted equity securities

69

0

0

69

Quoted debt securities

0

0

0

0

Derivative financial assets (Note 38)

 

 

 

 

Forward foreign exchange contracts – cash flow hedges

0

4

0

4

Forward exchange contracts – fair value through profit and loss

0

7

0

7

Interest rate derivatives – cash flow hedges

0

1

0

1

Interest rate derivatives – fair value through profit and loss

0

37

0

37

 

 

 

 

 

31 December 2017

 

 

 

 

€ million

Level 1

Level 2

Level 3

Total

Financial assets

 

 

 

 

Available for sale assets (Note 22)

 

 

 

 

Quoted equity securities

83

0

0

83

Quoted debt securities

0

0

0

0

Derivative financial assets (Note 38)

 

 

 

 

Forward foreign exchange contracts – cash flow hedges

0

112

0

112

Forward exchange contracts – fair value through profit and loss

0

19

0

19

Interest rate derivatives – cash flow hedges

0

0

0

0

Interest rate derivatives – fair value through profit and loss

0

45

0

45

 

 

 

 

 

4.5.3 Financial liabilities measured at fair value

31 December 2018

 

 

 

 

€ million

Level 1

Level 2

Level 3

Total

Financial liabilities

 

 

 

 

Derivative financial assets (Note 38)

 

 

 

 

Forward foreign exchange contracts – cash flow hedges

0

97

0

97

Forward exchange contracts – fair value through profit and loss

0

10

0

10

Interest rate derivatives – cash flow hedges

0

0

0

0

Interest rate derivatives – fair value through profit and loss

0

3

0

3

Other financial liabilities excluding derivatives (Note 30)

 

 

 

 

Warrants

0

0

55

55

 

 

 

 

 

31 December 2017

 

 

 

 

€ million

Level 1

Level 2

Level 3

Total

Financial liabilities

 

 

 

 

Derivative financial assets (Note 38)

 

 

 

 

Forward foreign exchange contracts – cash flow hedges

0

9

0

9

Forward exchange contracts – fair value through profit and loss

0

20

0

20

Interest rate derivatives – cash flow hedges

0

1

0

1

Interest rate derivatives – fair value through profit and loss

0

4

0

4

Other financial liabilities excluding derivatives (Note 30)

 

 

 

 

Warrants

0

0

76

76

 

 

 

 

 

During the reporting period ending 31 December 2018, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.

Fair value measurements categorized within Level 2 of the fair value hierarchy are calculated using either the “Discounted cash flow” or the “Black-Scholes” method (for FX options only) and market data publicly available.

The fair value of the warrants issued by a subsidiary is determined using a discounted net present value model of the probabilized cash outflows. There has not been any change in valuation technique compared to last year. The valuation is prepared by the Finance Team on a monthly basis and reviewed by the Executive Committee. The value of the warrants is based on the profitability of the subsidiary and the key assumptions used in the valuation model include unobservable inputs for forecasted net sales, milestone events and discount rate. The discount rate used amounts to 8.2%. An increase/decrease in net sales of 10% would lead to an increase/decrease of the fair value of the warrants with 0% (2017: 0%). A decrease/increase in the discount rate with 1% would lead to an increase/decrease of the fair value of the warrants with 0%) (2017: 1%). The change in fair value, recognized in profit and loss, amounts to € 6 million (2017 € 11 million) and is accounted for in other financial expenses (Note 16).

The following table presents the changes in Level 3 instruments:

 

 

 

€ million

Warrants

Total

1 January 2017

127

127

Cash purchase of additional warrants

0

0

Cash settlement of warrants

-48

-48

Effect of changes in fair value recognized in profit and loss

11

11

Effect of movements in exchange rates

-13

-13

31 December 2017

76

76

Cash purchase of additional warrants

0

0

Cash settlement of warrants

-30

-30

Effect of changes in fair value recognized in profit and loss

6

6

Effect of movements in exchange rates

3

3

31 December 2018

55

55

 

 

 

4.6 Offsetting financial assets and financial liabilities

While the Group has amounts subject to an enforceable master netting arrangement or similar agreements, financial assets and financial liabilities are reported gross on the statement of financial position as the requirements are not met to report them net. The reconciliations below depict the amounts subject to an enforceable master netting arrangement or similar agreement that have not been netted on the statement of financial position.

The tables below show financial assets and liabilities subject to enforceable master netting arrangements:

31 December 2018

 

 

 

 

 

Gross financial assets in the statement of financial position

Related amounts not set off in the statement of financial position

Net amounts

 

€ million

Financial instruments

Cash collateral received

Derivatives

49

27

0

22

Other

0

0

0

0

Total

49

27

0

22

 

 

 

 

 

31 December 2018

 

 

 

 

 

Gross financial liabilities in the statement of financial position

Related amounts not set off in the statement of financial position

Net amounts

 

€ million

Financial instruments

Cash collateral received

Derivatives

110

27

0

83

Other

0

0

0

0

Total

110

27

0

83

 

 

 

 

 

ISDA master agreements (International Swaps and Derivatives Association) have been signed with the respective counterparties allowing offsetting of financial assets and liabilities. This is applicable to the fair value settlement in case of default, but it is not applicable at the closing date 31 December 2018.

The tables below show financial assets and liabilities subject to enforceable master netting arrangements:

31 December 2017

 

 

 

 

 

Gross financial assets in the statement of financial position

Related amounts not set off in the statement of financial position

Net amounts

 

€ million

Financial instruments

Cash collateral received

Derivatives

176

31

0

145

Other

0

0

0

0

Total

176

31

0

145

 

 

 

 

 

31 December 2017

 

 

 

 

 

Gross financial liabilities in the statement of financial position

Related amounts not set off in the statement of financial position

Net amounts

 

€ million

Financial instruments

Cash collateral received

Derivatives

34

31

0

3

Other

0

0

0

0

Total

34

31

0

3