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. An important element of DSM’s financial policy and capital management is the allocation of cash flow. DSM primarily allocates cash flow to investments aimed at strengthening its business positions and securing the dividend payment to its shareholders. Remaining cash flow is further used for acquisitions and partnerships that strengthen DSM’s competences and market positions. See the Financial and reporting policies of the Report by the Managing Board, for more extensive information. The net debt to equity ratio (gearing) is disclosed as part of Note 25.

Liquidity risk

Liquidity risk is the financial risk due to uncertain development of liquidity. An entity 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 financial markets on which it depends are subject to loss of liquidity.

The primary objective of liquidity management is to optimize the corporate cash position, among other things, by securing availability of sufficient liquidity for execution of payments by DSM entities, at the right time and the right place.

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 (2016: €1,000 million). The agreements for the committed credit facilities have neither financial covenants nor material adverse changes clauses. At year-end 2017, no loans had been taken up under the committed credit facilities.

Furthermore, DSM has a commercial paper program amounting to €1,500 million (2016: €1,500 million). The company will use the commercial paper program to a total of not more than €1,000 million (2016: €1,000 million).
At 31 December 2017, €0 million had been issued as commercial paper (2016: €0 million). 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

 
Fixed-rate
borrowings
Floating-rate
borrowings
Monetary liabilities
Guarantees
Subtotal
Interest payments
Cash at redemption1
Total cash out
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
         
         
2017
        
Within 1 year
8
-
2,108
-
2,116
35
2
2,153
Within 1 to 2 years
301
-
46
-
347
35
8
390
Within 2 to 3 years
-
-
25
-
25
29
10
64
Within 3 to 4 years
5
-
9
-
14
29
5
48
Within 4 to 5 years
499
-
4
-
503
29
5
537
After 5 years
1,746
-
49
113
1,908
612
16
1,985
         
Total
2,559
-
2,241
113
4,913
218
46
5,177

1 Difference between nominal redemption and amortized costs.

2 Cumulative interest payments in remaining years.

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

The table contains the cash flows from derivatives with positive fair values and from derivatives with negative fair values to have a complete overview of the financial derivatives related cash flows.

Financial derivatives cash flow

 
2017
2018
2019
2020
2021
2022
Total
2016
       
Inflow
2,143
42
58
42
12
-
2,297
Outflow
(2,337)
(43)
(66)
(45)
(12)
-
(2,503)
        
2017
       
Inflow
-
2,655
63
42
38
21
2,819
Outflow
-
(2,675)
(72)
(45)
(41)
(21)
(2,854)

Interest rate risk

Interest rate risk is the risk that adverse movements of interest rates lead to high costs on interest-bearing debt or assets, 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.

At 31 December 2017, €0 million of debt carried a floating rate interest (2016: €36 million).

At 31 December 2017, DSM had no outstanding fixed-floating interest rate swaps (end of 2016 none).

The following analysis of the sensitivity of borrowings, assets 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 2017, with all other variables held constant. A 1% reduction in interest rates would result in a €18 million pre-tax loss in the income statement and equity on the basis of the composition of financial instruments on 31 December 2017, 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 financial instruments on 31 December 2017 to changes in interest rates is set out in the following table:

Sensitivity to change in interest rate

 
2017
2016
 
Carrying
amount
Sensitivity of financial
income and expense
to change in interest of:
Carrying
amount
Sensitivity of financial
income and expense
to change in interest of:
  
+1%
(1%)
 
+1%
(1%)
       
Loans to associates and joint ventures
193
-
-
253
-
-
Current investments
954
10
(10)
944
9
(9)
Cash and cash equivalents
899
9
(9)
604
6
(6)
Short-term borrowings
(77)
(1)
1
(853)
(1)
1
Long-term borrowings
(2,551)
-
-
(2,552)
-
-

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 €0 million (2016: €865 million). At 31 December 2017, the notional amount of the currency forward contracts was €3,525 million (2016: €2,241 million).

In 2017, DSM hedged USD 570 million (2016: USD 580 million) of its projected net cash flow in USD in 2018, of which USD 189 million against EUR and USD 381 million against CHF by means of average-rate currency forward contracts at an average exchange rate of USD 1.15 per euro and CHF 0.96 per USD, respectively, for the four quarters of 2018. Each quarter the relevant hedges for that quarter will be settled and recognized in the income statement. In 2017, DSM also hedged JPY 5,550 million (2016: JPY 5,550 million) of its projected net cash flow in JPY in 2018, 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 114 per Swiss franc and JPY 125 per euro, respectively, for the four quarters of 2018. DSM also continued the hedge of projected GBP cash obligations against CHF, namely GBP 11 million at an average exchange rate of CHF 1.24 per British pound. These hedges have fixed the exchange rate for part of the USD and JPY receipts and GBP payments in 2018. Cash flow hedge accounting is applied for these hedges. As a result of similar hedges concluded in 2016 for the year 2017, €10 million negative (2016: €32 million negative) was recognized in the 2017 operating profit 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 partial hedging of the currency risk associated with the translation of DSM's CHF denominated investments was continued for an amount of €204 million (2016: CHF 370 million). The partial hedging of the currency risk associated with the translation of DSM's net investment in Patheon (USD) started in March 2017 and was discontinued upon the sale of DSM's share in Patheon N.V. in August 2017. 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 to change in exchange rate

 
2017
2016
 
Carrying
amount
Sensitivity to change in
all exchange rates of:
Carrying
amount
Sensitivity to change in
all exchange rates of:
  
+10%
(10%)
 
+10%
(10%)
       
Loans to associates and joint ventures
193
5
(5)
253
6
(6)
Current investments
954
1
(1)
944
34
(34)
Cash and cash equivalents
899
46
(46)
604
42
(42)
Short-term borrowings
(77)
(8)
8
(853)
(10)
10
Long-term borrowings
(2,551)
(1)
1
(2,552)
(1)
1
Interest rate swaps
-
-
-
-
-
-
Currency forward contracts
3
(18)
18
(139)
(128)
128
Currency forwards related to net investments in foreign entities
1
(17)
17
(47)
(36)
36
Average-rate forwards used for economic hedging2
12
(13)
13
(27)
(17)
17
Commodity hedging
17
2
(2)
-
-
-

1 Fair-value change reported in Translation reserve.

2 Fair-value change reported in Hedging reserve.

Sensitivity changes on these positions will generally be recognized in profit or loss or in the translation reserve in equity, 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.

With the policies explained above the currency risks of DSM and the impact resulting from the sensitivity of changes in exchange rates as disclosed above, are covered, with only minimal residual exposures left. These are considered to be not material. With regard to the forecasted transactions, the hedging takes place in accordance with pre-approved percentages.

Price risk

Financial instruments that are subject to changes in stock exchange prices or indexes are subject to a price risk. At year-end 2017, 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 risks 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 management. 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 about impairments is in addition to the notes already presented in Note 2.

DSM's policy is to grant corporate guarantees for credit support of subsidiaries and associates, to get access to credit facilities which are necessary for their operating working capital needs and which cannot be funded by the corporate cash pools and/or for bank guarantees needed for local governmental requirements. 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 2017
31 December 2016
 
Carrying amount
Fair value
Carrying amount
Fair value
Assets
    
Other participations
89
89
50
50
Loans to associates and joint ventures
193
215
253
258
Other non-current receivables
177
177
136
136
Current receivables
1,690
1,690
1,653
1,653
Financial derivatives
57
57
40
40
Current investments
954
954
944
944
Cash and cash equivalents
899
899
604
604
     
Liabilities
    
Non-current borrowings
2,551
2,649
2,552
2,717
Drawing rights liabilities
64
64
68
68
Current borrowings
77
77
853
886
Financial derivatives
24
24
253
253
Other current liabilities
2,039
2,039
1,972
1,972

The following methods and assumptions were used to determine the fair value of financial instruments: cash, current investments, current receivables, current borrowings (excluding current portion of long-term instruments) and other current liabilities are stated at carrying amount, which approximates fair value in view of the short maturity of these instruments. The fair value 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 2016 and 2017.

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

Carrying amounts financial instruments at fair value

 
Fair value hierarchy
Assets
Liabilities
Total
     
Bonds
Level 1
-
(2,663)
(2,663)
Other participating interests
Level 1
24
-
24
     
Currency swaps related to investments
Level 2
-
(47)
(47)
Currency swaps and forward contracts
Level 2
40
(206)
(166)
     
Earn-out receivables / payables
Level 3
108
(17)
91
Other participating interests
Level 3
26
-
26
     
Balance at 31 December 2016
 
198
(2,933)
(2,735)
     
Bonds
Level 1
-
(2,649)
(2,649)
Other participating interests
Level 1
47
-
47
     
Currency forward contracts related to investments
Level 2
1
-
1
Currency swaps and forward contracts
Level 2
39
(24)
15
Commodity derivatives
Level 2
17
-
17
     
Earn-out receivables / payables
Level 3
85
(39)
46
Other participating interests
Level 3
42
-
42
     
Balance at 31 December 2017
 
231
(2,712)
(2,481)

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