Financial instruments and risks

Policies on financial risks

General

The main financial risks faced by DSM relate to liquidity risk, market risk (comprising interest rate risk, currency risk and price risk) and credit risk. DSM’s financial policy is aimed at minimizing the effects of fluctuations in currency-exchange and interest rates on its results in the short term and following market rates in the long term. DSM uses financial derivatives to manage financial risks relating to business operations and does not enter into speculative derivative positions. DSM does not hold financial instruments with embedded derivatives. DSM's financial policy, including policies and processes for managing capital, is discussed more extensively in Financial and reporting policy of the Report by the Managing Board.

Liquidity risk

Liquidity risk is the financial risk due to uncertain development of liquidity. An institution may not get access to sufficient liquidity if its credit rating falls, when it experiences sudden unexpected cash outflows or an unexpected drop in cash inflows, or some other event causes counterparties to avoid trading with or lending to the institution. A company is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity.

DSM has two committed credit facilities: one facility of €500 million issued in 2011 and maturing in September 2018 and one facility issued in 2013 of €500 million and maturing in March 2020. Together, the facilities amount to a total of €1,000 million (2015: €1,000 million).

Furthermore, DSM has a commercial paper program amounting to €1,500 million (2015: €1,500 million). The company will use the commercial paper program to a total of not more than €1,000 million (2015: €1,000 million). The agreements for the committed credit facilities have neither financial covenants nor material adverse changes clauses. At year-end 2016, no loans had been taken up under the committed credit facilities. DSM has no derivative contracts to manage currency risk or interest rate risk outstanding under which margin calls by the counterparty would be permitted.

Floating-rate and fixed-rate borrowings and monetary liabilities analyzed by maturity are summarized in the following table. Borrowings excluding credit institutions are shown after taking into account related interest rate derivatives in designated hedging relationships. DSM manages financial liabilities and related derivative contracts on the basis of the remaining contractual maturities of these instruments. The remaining maturities presented in the following table provide an overview of the timing of the cash flows related to these instruments. Financial assets are not linked to financial liabilities in order to meet cash outflows on these liabilities.

Borrowings and monetary liabilities by maturity

2015
Fixed-rate
borrowings
Floating-rate
borrowings
Monetary liabilities
Guarantees
Subtotal
Interest payments
Cash at redemption1
Total cash out
2015
        
Within 1 year
1
21
2,073
-
2,095
69
19
2,183
Within 1 to 2 years
751
7
8
-
766
68
13
847
Within 2 to 3 years
1
3
8
-
12
29
10
51
Within 3 to 4 years
300
-
7
-
307
29
10
346
Within 4 to 5 years
2
-
25
-
27
24
9
60
After 5 years
1,493
-
112
142
1,747
872
59
1,893
         
Total
2,548
31
2,233
142
4,954
306
120
5,380
         
         
2016
        
Within 1 year
756
30
2,039
-
2,825
74
6
2,905
Within 1 to 2 years
-
6
3
-
9
35
5
49
Within 2 to 3 years
300
-
4
-
304
35
4
343
Within 3 to 4 years
-
-
14
-
14
29
4
47
Within 4 to 5 years
1
-
2
-
3
29
3
35
After 5 years
2,245
-
45
117
2,407
912
25
2,523
         
Total
3,302
36
2,107
117
5,562
293
47
5,902

1 Difference between nominal redemption and amortized costs

2 Cumulative interest payment in remaining years

The exposure of the financial derivatives to liquidity risk is as follows. The amounts are gross and undiscounted.

Financial derivatives cash flow

 
2016
2017
2018
2019
2020
2021
Total
2015
       
Inflow
1,382
1,058
42
55
42
-
2,579
Outflow
(1,418)
(1,177)
(49)
(62)
(43)
-
(2,749)
        
2016
       
Inflow
-
2,143
42
58
42
12
2,297
Outflow
-
(2,337)
(43)
(66)
(45)
(12)
(2,503)

Interest rate risk

Interest rate risk is the risk that adverse movements of interest rates lead to high costs on interest-bearing debt, which negatively impact the company's capability to honor its commitments.
DSM’s interest rate risk policy is aimed at minimizing the interest rate risks associated with the financing of the company and thus at the same time optimizing the net interest costs. This policy translates into a certain desired profile of fixed-interest and floating-interest positions, including cash and cash equivalents, with the floating-interest position not exceeding 60% of net debt.

As at 31 December 2016, DSM had no outstanding fixed-floating interest rate swaps (end of 2015 only pre-hedges for refinancing in 2017). The zero-cost collar as pre-hedge for the interest rate of a €750 million bond to be issued in 2017 was settled at the early refinance in September 2016, making use of the positive market conditions. See Note 19 'Borrowings'.

The following analysis of the sensitivity of borrowings and related financial derivatives to interest rate movements assumes an instantaneous 1% change in interest rates for all currencies and maturities from their level on 31 December 2016, with all other variables held constant. A 1% reduction in interest rates would result in a €5 million pre-tax loss in the income statement on the basis of the composition of financial instruments on 31 December 2016, as floating-rate borrowings are more than compensated for by floating-rate assets (mainly cash). The opposite applies in the case of a 1% increase in interest rates. The sensitivity of the fair value of financial instruments on 31 December 2016 to changes in interest rates is set out in the following table:

Sensitivity of fair value to change in interest rate

 
2016
2015
 
Carrying
amount
Fair value
Sensitivity of fair value
to change in interest of:
Carrying
amount
Fair value
Sensitivity of fair value
to change in interest of:
   
+1%
(1%)
  
+1%
(1%)
         
Loans to associates and joint ventures
253
258
(7)
6
228
234
(7)
7
Current investments
944
945
(5)
5
9
9
-
-
Cash and cash equivalents
604
604
-
-
665
665
-
-
Short-term borrowings
(853)
(886)
7
(7)
(253)
(253)
1
(1)
Long-term borrowings
(2,552)
(2,717)
185
(203)
(2,557)
(2,750)
144
(156)
Interest rate swaps (fixed to floating and pre-hedges)
-
-
-
-
(1)
(1)
31
(31)

Currency risk

Currency risk is the risk that adverse movements of foreign currency rates lead to losses on assets or liabilities in currencies, which negatively impacts the results of operations and financial condition of the company.
It is DSM’s policy to hedge 100% of the currency risks resulting from sales and purchases at the moment of recognition of the receivables and payables. In addition, operating companies may – under strict conditions – opt for hedging currency risks from firm commitments and forecasted transactions. The currencies giving rise to these risks are primarily USD, GBP and JPY. The risks arising from currency exposures are regularly reviewed and hedged when appropriate. DSM uses average-rate currency forward contracts, currency forward contracts, spot contracts, and average-rate currency options to hedge the exposure to fluctuations in foreign exchange rates. At year-end, these instruments had remaining maturities of less than one year. For the hedging of currency risks from firm commitments and forecasted transactions cash flow, hedge accounting is applied: valuation effects of hedge obligations are reported as Hedging reserve in Note 16 'Equity'. Hedge accounting is not applied for hedges of recognized trade receivables and trade payables hedged with short-term derivatives.

To hedge intercompany loans, receivables and payables denominated in currencies other than the functional currency of the subsidiaries, DSM uses currency swaps or forward contracts. Cash flow hedge accounting is applied for instruments related to some larger internal loans with a total notional amount of €865 million. As at 31 December 2016, the notional amount of the currency forward contracts was €2,241 million (2015: €2,541 million).

In 2016, DSM hedged USD 580 million (2015: USD 650 million) of its projected net cash flow in USD in 2017, of which USD 190 million against EUR and USD 390 million against CHF by means of average-rate currency forward contracts at an average exchange rate of USD 1.14 per euro and CHF 0.96 per US dollar, respectively, for the four quarters of 2017. In 2016, DSM also hedged JPY 5,550 million (2015: JPY 5,450 million) of its projected net cash flow in JPY in 2017, of which JPY 4,000 million against CHF and JPY 1,550 million against EUR by means of average-rate currency forward contracts at an average exchange rate of JPY 108 per Swiss franc and JPY 118 per euro, respectively, for the four quarters of 2017. DSM also continued the hedge of projected GBP cash obligations against CHF, namely GBP 11 million at an average exchange rate of CHF 1.32 per British pound. These hedges have fixed the exchange rate for part of the USD and JPY receipts and GBP payments in 2017. Cash flow hedge accounting is applied for these hedges. As a result of similar hedges concluded in 2015 for the year 2016, in 2016 €32 million negative (2015: €40 million negative) was recognized in the operating income of the segments involved in accordance with the realization of the expected cash flows. There was no material ineffectiveness in relation to these hedges.

The currency risk associated with the translation of DSM's net investment in entities denominated in currencies other than the euro was partially hedged at year-end 2016. CHF-denominated net assets have been partially hedged by currency swaps (2016: CHF 370 million; 2015: CHF 370 million). There was no material ineffectiveness in relation to these hedges.

The following analysis of the sensitivity of net borrowings and derivative financial instruments to currency movements against the euro assumes a 10% change in all foreign currency rates against the euro from their level on 31 December, with all other variables held constant. A +10% change indicates a strengthening of the foreign currencies against the euro. A -10% change represents a weakening of the foreign currencies against the euro.

Sensitivity of fair value to change in exchange rate

 
2016
2015
 
Carrying
amount
Fair value
Sensitivity of fair value to
change in all exchange
rates of:
Carrying
amount
Fair value
Sensitivity of fair value to
change in all exchange
rates of:
   
+10%
(10%)
  
+10%
(10%)
         
Loans to associates and joint ventures
253
258
6
(6)
228
234
6
(6)
Current investments
944
945
34
(34)
9
9
1
(1)
Cash and cash equivalents
604
604
42
(42)
665
665
54
(54)
Short-term borrowings
(853)
(886)
(10)
10
(253)
(253)
(18)
18
Long-term borrowings
(2,552)
(2,717)
(1)
1
(2,557)
(2,750)
(1)
1
Interest rate swaps
-
-
-
-
(1)
(1)
-
-
Cross currency swaps
(136)
(136)
(108)
108
(110)
(110)
(112)
112
Currency forward contracts
(3)
(3)
(20)
20
-
-
(19)
19
Cross currency swaps related to net investments in foreign entities1
(47)
(47)
(36)
36
(47)
(47)
(38)
38
Average-rate forwards used for economic hedging2
(27)
(27)
(17)
17
(27)
(27)
(19)
19

1 Fair-value change reported in Translation reserve

2 Fair-value change reported in Hedging reserve

Fair-value changes on these positions will generally be recognized in profit or loss, with the exception of the instruments for which cash flow hedge accounting or net-investment hedge accounting is applied. Cash flow hedge accounting is applied for the average-rate forwards and average-rate currency options used for economic hedging; the fair value changes of these derivatives are recognized in the Hedging reserve in equity until recognition of the related cash flows. See also 'Financial derivatives cash flow'. Net-investment hedge accounting is applied for the cross-currency swaps used to protect net investments in foreign entities; the fair-value changes of these derivatives are recognized in the Translation reserve in equity until the net investment is disposed of, to the extent that the changes in fair value are caused by changes in currency-exchange rates.

Price risk

Financial instruments that are subject to changes in stock exchange prices or indexes are subject to a price risk. At year-end 2016, price risks related to investments in securities were limited.

Credit risk

Credit risk is the risk that a (commercial or financial) counterparty may not be able to honor a financial commitment vis-à-vis DSM. The company manages the credit risk to which it is exposed by applying credit limits per institution and by dealing exclusively with institutions having a high credit rating.

At the balance sheet date there were no significant concentrations of credit risk other than some financing relationships with associates and joint ventures (see Note 10).

With regard to treasury activities (for example cash, cash equivalents and financial derivatives held with banks or financial institutions) it is ensured that financial transactions are only concluded with counterparties that have at least a Moody's credit rating of A3 for long-term instruments. At business group level, outstanding receivables are continuously monitored by the management of the operating companies. Appropriate allowances are made for any credit risks that have been identified (as listed in Note 13 'Current receivables'). It is therefore unlikely that significant losses will arise in relation to receivables that have not been provided for.

The maximum exposure to credit risk is represented by the carrying amounts of financial assets that are recognized in the balance sheet, including derivative financial instruments. DSM has International Swaps and Derivatives Association (ISDA) agreements in place with its financial counterparties that allow for the netting of exposures in case of a default of either party. No significant agreements or financial instruments were available at the reporting date that would reduce the maximum exposure to credit risk. Information about financial assets is presented in Note 10 'Associates and joint ventures', Note 11 'Other financial assets', Note 13 'Current receivables', Note 14 'Current investments', Note 15 'Cash and cash equivalents' and Note 23 'Financial instruments and risks'. Information on guarantees is presented in Note 22 'Contingent liabilities and other financial obligations'.

Fair value of financial instruments

In the following table the carrying amounts and the estimated fair values of financial instruments are given:

 
31 December 2016
31 December 2015
 
Carrying amount
Fair value
Carrying amount
Fair value
Assets
    
Other participations
50
50
51
51
Loans to associates and joint ventures
253
258
228
234
Other non-current receivables
136
136
113
113
Current receivables
1,653
1,653
1,556
1,556
Financial derivatives
40
40
47
47
Current investments
944
944
9
9
Cash and cash equivalents
604
604
665
665
     
Liabilities
    
Non-current borrowings
2,552
2,717
2,557
2,750
Drawing rights liabilities
68
68
160
160
Current borrowings
853
886
253
253
Financial derivatives
253
253
232
232
Other current liabilities
1,972
1,972
1,842
1,842

The following methods and assumptions were used to determine the fair value of financial instruments: cash, current investments, current receivables, current borrowings and other current liabilities are stated at carrying amount, which approximates fair value in view of the short maturity of these instruments. The fair values of financial derivatives and long-term instruments are based on calculations, quoted market prices or quotes obtained from intermediaries.

The portfolio of derivatives consists of average-rate forward contracts that are valued against average foreign exchange forward rates obtained from Bloomberg and other derivatives that are valued using a discounted cash flow model, applicable market yield curves and foreign exchange spot rates. All inputs for the fair value calculations represent observable market data that are obtained from external sources that are deemed to be independent and reliable.

DSM uses the following hierarchy for determining the fair value of financial instruments measured at fair value:

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

The financial instruments that have a fair value different from the carrying amounts are classified as level 2 for both 2015 and 2016.

The following table shows the carrying amounts of the financial instruments recognized at fair value, broken down by type and purpose:

Carrying amounts financial instruments at fair value

 
Fair value hierarchy
Assets
Liabilities
Total
     
Interest rate swaps
Level 2
-
(1)
(1)
Currency swaps
Level 2
2
(74)
(72)
Total financial derivatives related to borrowings / investments
 
2
(75)
(73)
     
Currency forward contracts
Level 2
45
(157)
(112)
Balance at 31 December 2015
 
47
(232)
(185)
     
     
Interest rate swaps
Level 2
-
-
-
Currency swaps
Level 2
 
(47)
(47)
Total financial derivatives related to investments
 
-
(47)
(47)
     
Currency forward contracts
Level 2
40
(206)
(166)
Balance at 31 December 2016
 
40
(253)
(213)

During the year there were no transfers between individual levels of the fair value hierarchy.