Marel’s activities expose the company to a variety of financial risks: Market risk (including foreign exchange risk and price risk), credit risk, liquidity risk, cash flow risk, and fair value interest rate risk.
The company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the company’s financial performance. The company uses financial derivatives instruments to hedge certain interest rate and foreign exchange risk exposure.
Risk management is carried out within the company, where applicable, under policies approved by the Board of Directors. Financial risk is monitored and managed centrally in Group Treasury.
The company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the EUR/USD, EUR/GBP, and EUR/ISK on the cost side. The general policy is to apply natural currency hedging to the extent possible and prohibit any speculative trading of financial instruments.
Company funding is denominated in the main operational currencies to create natural hedging in the balance sheet. Where needed, financial exposure is hedged in accordance with company’s general policy on permitted instruments and exposure limits.
The company minimizes credit risk by monitoring credits granted to customers, and assigns collateral to cover potential claims. The company has policies in place to ensure that sales of products and services are made to customers with an acceptable credit history, and products are not delivered until payments are secured. Although one of Marel’s manufacturing sites is located in Iceland, sales to domestic customers account for less than 1% of total sales and the company is exposed to very limited credit risk in Icelandic krona.
Marel has banking relations with a diversified set of financial institutions around the world. There are policies in place that limit the amount of credit exposure to any one financial institution.
The company maintains global and local insurance policies. The coverage comprises property damage, business interruption, general and product liability, marine cargo/mounting, directors and officers liability, employers practice liability, business travel, and accidents. The company believes that its current insurance coverage is adequate.
Due to the dynamic nature of the underlying businesses, the company has prudent liquidity risk management to ensure sufficient flexibility in funding under the revolving part of the facilities agreement and current financial assets available.
The company’s income and operating cash flows are substantially independent of changes in market interest rates. The interest rates of finance leases to which the company is lessor or lessee are fixed at inception of the lease. These leases expose the company to fair-value interest rate risk. The company’s cash-flow interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the company to cash-flow interest rate risk, while borrowings issued at fixed rates expose it to fair-value interest rate risk.
The company manages its cash-flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. The company raises long-term borrowings at floating rates, and swaps a portion of them into fixed rates. The risk, measured as the potential increase in interest paid during the coming year based on a defined movement in interest rates, is monitored and evaluated regularly.