Chapters
Annual Report 2020

3. Financial Risk Management

3.1 Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risks (currency risk, interest rate risk, price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments to hedge certain risk exposures.

The Group’s management provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and the use of derivative and non-derivative financial instruments.

3.1.1 Market Risk


(i) Foreign exchange risk

Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. The Group treasury’s risk management policy is to hedge the expected cash flows in most currencies, mainly by making use of derivatives as described in note 23.

The majority of the Group operations takes place in the ‘eurozone’, which comprises 58% (2019: 58%) of total revenue. Translation exposure to foreign exchange risk relates to those activities outside the eurozone, whose net assets are exposed to foreign currency translation risk. The currency translation risk is not hedged.

If the currencies had been 5% weaker against the euro with all other variables held constant, the Group’s result for the year would have been 7.2% higher (2019: 0.8% higher) of which 5.9% related of USD (2019: 2.2% higher impact of mainly USD offset by 1.4% lower impact of mainly currencies in Europe (HUF, SEK, PLN)) and equity would have been 2.4% lower (2019: 3.0% lower), of which 0.7% lower impact of GBP (2019: 0.8% lower impact of GBP).

Foreign exchange risks with respect to commercial transactions other than in the functional currency are mainly related to US dollar denominated purchases of goods in Asia, indirect exposure on goods and services invoiced in the functional currency but of which the underlying exposure is in a non-functional currency.

The Group designates the spot component of foreign forward exchange contracts to hedge its currency risk and applies a hedge ratio of 1:1. The Group’s policy is for the critical terms of the forward exchange contracts to align with the hedged item. Based on the Group's policy, the foreign currency risk relating to commercial transactions denominated in a currency other than the functional currency of companies within the Group, is hedged between 25% and 80% of the transactional cash flows based on a rolling 12-month forecast, resulting in a relatively limited foreign exchange risk for non-hedged commercial transactions.

Cash flow hedge accounting is applied when the forecasted transaction is highly probable.

GrandVision is exposed to the risk that the exchange rate related to its Argentinean operations will further devalue. Because the Argentinean peso-denominated assets, liabilities, income and expenses of the Argentinean operations are translated into euros for consolidation purposes, a further devaluation of the Argentinean peso going forward could result in lower translated results, assets and liabilities in GrandVision’s consolidated figures, which are presented in euros. As the Argentinean operations represent a limited part of the Group, the effects of a devaluation would be limited.

(ii) Interest rate risk

The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group generally borrows at variable rates and uses interest rate swaps as cash flow hedges of future interest payments based on a rolling 12-month forecast, which have the economic effect of converting interest rates from floating rates to fixed rates. The Group's policy is to maintain a minimum of 60% of its net debt on a forward-looking 12-months basis, related to interest rate risk at fixed rate. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed contract rates and floating interest rate amounts calculated by reference to the agreed notional principal amounts and benchmarks. The Group also uses 0% floors to hedge its exposure to negative interest rate risk. The Group applies a hedge ratio of 1:1.

The table below shows sensitivity analysis considering changes in the EURIBOR:

2020

2019

Impact on result before tax

Impact on Other Comprehensive Income

Impact on result before tax

Impact on Other Comprehensive Income

EURIBOR rate - increase 50 basis points

-1,992

3,804

- 2,281

5,979

EURIBOR rate - decrease 50 basis points

1,789

-2,792

2,278

- 4,188

Note 23 provides more detail on the derivatives the Group uses to hedge the cash flow interest rate risk.

(iii) Price risk

Management believes that the price risk is limited, because there are no listed securities held by the Group and the Group is not directly exposed to commodity price risk.

3.1.2 Credit Risk

Credit risk is managed both locally and on a Group level, where applicable. Credit risk arises from cash and cash equivalents, derivatives and deposits with banks and financial institutions, as well as credit exposures to wholesale customers, retail customers, health insurance institutions and credit card companies, including outstanding receivables and committed transactions. Refer to note 16 for details of expected credit losses for financial assets measured at amortized cost.

Derivative transactions are concluded, and cash and bank deposits are held only with financial institutions with strong credit ratings. The Group also diversifies its bank deposits and applies credit limits to each approved counterparty for its derivatives. The Group has no significant concentrations of consumer credit risk as a result of the nature of its retail operations. In addition, in some countries all or part of the consumer credit risk is transferred to credit card companies. The Group has receivables from its franchisees. Management believes that the credit risk in this respect is limited, because the franchisee receivables are often secured by pledges on the inventories of the franchisees. The utilization of credit limits is regularly monitored. Sales to retail customers are settled in cash or using major debit and credit cards.

In view of the Brexit event, through 2019 and 2020 GrandVision proactively, together with its relationship UK domiciled banks, have taken steps to ensure that these banks were able to continue providing their services. In addition, the Group continued to adhere to a strict counterparty risk policy with defined limits per counterparty based on size and external ratings, thereby effectively spreading the embedded counterparty risk in financial transactions over a number of financial institutions.

3.1.3 Liquidity Risk

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of bilateral credit facilities (immediately available funds), a commercial paper program and committed medium-term facilities (available at 4 days' notice). Due to the dynamic nature of the underlying business, the Group aims to have flexibility in funding by maintaining headroom of at least €200 million as a combination of cash at hand plus available committed credit facilities minus any overdraft balances and/ or debt maturities with a term of less than one year. The Group and the local management monitors its liquidity periodically based on expected cash flows.

The Group has a committed Revolving Credit Facility (RCF) of €1,200 million and a committed additional Liquidity Facility (RLF) of €400 million, which will be available in the event that the RCF is fully drawn (see note 22). For both facilities the interest rate on the drawings consists of a margin and the applicable rate (i.e. for a loan in euros, the EURIBOR), however the applicable rate can never be below zero percent. RCF margin is, in addition, adjusted based on the sustainability performance of the Group.

The facilities share the same financial covenants. As at 31 December 2020, the Group was subject to a covenant holiday and a new set of covenants will be applicable for the year 2021 (see note 3.2).

The Group has a commercial paper program under which it can issue commercial paper up to the value of €500 million. As at 31 December 2020, the amount outstanding under the commercial paper program was €345 million (2019: €453 million).

The table below analyzes the maturity of the Group’s financial liabilities and derivative financial liabilities. The amounts disclosed are the contractual undiscounted cash flows.

in thousands of EUR

Within 1 year

1-2 years

2-5 years

After 5 years

Total

31 December 2020

Lease liabilities

365,552

309,962

522,044

178,730

1,376,288

Borrowings

11,015

6,588

331,507

-

349,110

Commercial paper

343,620

-

-

-

343,620

Derivatives

3,099

2,891

6,093

-

12,083

Contingent consideration

1,750

2,760

686

5,196

Trade and other payables (excluding other taxes and social security)

489,210

-

-

-

489,210

31 December 2019

Lease liabilities

380,210

322,087

575,873

224,672

1,502,842

Borrowings

67,266

2,883

392,814

-

462,963

Commercial paper

452,053

-

-

-

452,053

Derivatives

2,441

2,881

6,897

1,355

13,574

Contingent consideration

2,000

2,789

11,190

-

15,979

Trade and other payables (excluding other taxes and social security)

492,920

-

-

-

492,920

As from 2019, the Group has Supply Chain Financing program. This program allows suppliers to receive payments early from the bank, at their full discretion. Since the Group does not have a direct benefit, the payment terms of the Group are not impacted by this scheme and there is no change to contractual relationship between the Group and the bank, the trade and other payable balances with suppliers participating in this program continue to be classified as trade and other payable.

3.2 Capital Risk Management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns to shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group monitors capital based on leverage ratio (defined as net debt/EBITDA - covenants). Management believes the current capital structure, operational cash flows, and profitability of the Group will safeguard the Group’s ability to continue as a going concern. GrandVision aims to maintain a maximum leverage ratio of 2.0 (net debt/EBITDA - covenants) excluding the impact of any borrowings associated with, and any EBITDA amounts attributable to, major acquisitions. At the outset of the COVID-19 pandemic, the Group temporarily shifted focus from monitoring capital based on the leverage ratio to securing the availability of financing to support the changing circumstances, including applying for government support in various countries.

Net debt consists of the Group's borrowings, derivatives and cash and cash equivalents, excluding lease liabilities. EBITDA used for monitoring financial covenants is calculated as adjusted EBITDA less depreciation of right-of-use assets and net financial result on lease liabilities and receivables ('EBITDA - covenants').

At the end of December 2020, GrandVision’s net debt position was €538,752 (2019: €752,708), with a leverage ratio of 1.3 (2019: 1.2). At 31 December 2020, a total of €325 million was drawn under the RCF (27% of the €1,200 million commitment) with the remaining debt obtained through the Commercial Paper market of €345 million, and other short-term facilities.

In June 2020, GrandVision entered into an additional Liquidity Facility (RLF) of €400 million. This RLF of €400 million, which is provided by five of GrandVision’s relationship banks, will be available in the event that the RCF is fully drawn. The term is one year with an additional year available at GrandVision's discretion.

In addition, and as a result of the active dialogue with its relationship banks, GrandVision has reached an agreement to amend its existing 2019–2024 €1,200 million Revolving Credit Facility (RCF), obtaining a relief from the financial covenant tests in 2020. The next financial covenant test will be performed at amended terms at the end of Q1 2021, and thereafter on amended terms at the end of each quarter in 2021. The new covenants provide the banking group with sufficient comfort while at the same time giving GrandVision operational and financial flexibility in case of unexpected COVID-19 setbacks. Both facilities, RCF and RLF, share the same financial covenants. An overview of the covenants is as follows:

Date

Covenants

30 June 2020

Covenant holiday

31 December 2020

Covenant holiday

31 March 2021

EBITDA - covenants of Q1 2021 above zero

30 June 2021

EBITDA - covenants of HY 2021 above €100 million and leverage ratio of 3.25x calculated as Net Debt to 4x 3 months preceding end Q2 2021 EBITDA - covenants

30 September 2021

leverage ratio of 3.25x calculated as Net Debt to 2x 6 months preceding end Q3 2021 EBITDA - covenants

31 December 2021

leverage ratio of 3.25x calculated as Net Debt to 2x 6 months preceding end Q4 2021 EBITDA – covenants

As of 2022, the financial covenants will revert to those defined in the RCF agreement covenant testing schedule.

On top of the above financial covenants, GrandVision will be providing a Liquidity Forecast to both bank groups on a monthly basis. Moreover, for as long as any loan is outstanding under the Additional Liquidity Facility, GrandVision shall ensure that the forecasted Liquidity (being the sum of Cash & Cash Equivalents and the undrawn available amounts under both the RCF and RLF) will be above €150 million at all times during each relevant 13-week forecast period.

3.3 Fair Value Estimation

The financial instruments carried at fair value can be valued using different levels of valuation methods. The different levels have been defined as follows:

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
  • Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) (level 2). Valuation techniques are used to determine the value. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-specific estimates. All significant inputs required to fair value an instrument have to be observable.
  • Inputs for asset or liability that are not based on observable market data (unobservable inputs) (level 3).

If multiple levels of valuation methods are available for an asset or liability, the Group will use a method that maximizes the use of observable inputs and minimizes the use of unobservable inputs.

The table below shows the level categories:

in thousands of EUR

Level 2

Level 3

At 31 December 2020

Assets

Derivatives used for hedging

728

-

Non-current assets

-

1,590

Total

728

1,590

Liabilities

Contingent consideration - Other current and non-current liabilities

-

1,203

Derivatives used for hedging

18,562

-

Total

18,562

1,203

At 31 December 2019

Assets

Derivatives used for hedging

1,581

-

Non-current assets

-

1,410

Total

1,581

1,410

Liabilities

Contingent consideration - Other current and non-current liabilities

-

7,688

Derivatives used for hedging

14,041

-

Total

14,041

7,688

The Group does not have any assets and liabilities that qualify for the level 1 category. There were no transfers between levels 1, 2 and 3 during the periods.

Level 2 category

An instrument is included in level 2 if the financial instrument is not traded in an active market and if the fair value is determined by using valuation techniques based on the maximum use of observable market data for all significant inputs. For the derivatives, the Group uses the estimated fair value of financial instruments determined by using available market information and appropriate valuation methods, including relevant credit risks. The estimated fair value approximates to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Specific valuation techniques used to value financial instruments include:

  • quoted market prices or dealer quotes for similar instruments;
  • the fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves;
  • the fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date discounted back to present value
Level 3 category

The level 3 category mainly refers to contingent considerations. The contingent considerations are remeasured based on the agreed business targets.