Financial risk factors
Novozymes’ international operations mean that the income statement and balance sheet are exposed to a number of financial risk factors. Financial risks are managed centrally for the entire Group. The use of financial instruments is governed by the treasury policy approved by Novozymes’ Board of Directors. The treasury policy is unchanged from previous years. This policy contains rules on the financial instruments that can be used for hedging, the counterparties that can be used and the risk profile that is to be applied. Financial instruments are used to hedge existing assets and liabilities or expected future net cash flow.
Currency exposure
Currency exposure arises due to imbalances between income and costs in each individual currency and because Novozymes has more assets than liabilities in foreign subsidiaries. Operating profit is most exposed to the EUR, USD and JPY. A 2.25% movement in the EUR would, other things being equal, result in a change in operating profit of around DKK 45-55 million. A movement of 5% in the USD would result in a change in operating profit in the region of DKK 40-60 million. A movement of 5% in the JPY would result in a change in the region of DKK 5-10 million.
Initially, Novozymes’ policy is to hedge existing net assets in foreign currencies and expected future net exposure from the company’s operations. Hedging of exchange rate exposure is carried out through a combination of currency loans, forward exchange contracts, currency swaps and options. The exchange rate hedging transactions are based on Novozymes’ expectations of future exchange rate movements and are carried out to minimize the risk of loss and therefore increase the predictability of the Group’s financial results.
Currency exposure relating to investments in foreign subsidiaries is hedged where this is deemed appropriate. Currency exposure is managed primarily by taking out currency loans and entering into currency swaps. Currency swaps, which are used to hedge participating interests, generally have a maturity period of over 12 months.
Interest rate exposure
Interest rate exposure arises in relation to interest-bearing assets and liabilities. A change of one percentage point in the average interest rate on Novozymes’ net interest-bearing assets would have an effect on profit before tax of DKK 5 million. In accordance with Novozymes’ treasury policy, a minimum of 30% of loans must be fixed interest loans. At year-end 2007, 63% of the loan portfolio was at fixed rates of interest based on financial instruments. According to Novozymes’ treasury policy, free funds may only be invested in government bonds, extremely liquid domestic mortgage-credit bonds and money-market deposits.
Credit risk
Credit risk is managed at Group level. Credit risk occurs especially on available funds, derivatives and customer sales. Credit risk of available funds is managed by dealing in financial instruments and placing deposits only with banks that have a Moody’s credit rating of at least A2 or an S&P rating of A. Credit risk is calculated on the basis of net market values and is governed by the company’s treasury policy. Novozymes has entered into netting agreements (ISDA) with all the banks used for dealing in financial instruments, which means that Novozymes’ credit risk is limited to net assets. At December 31, 2007, the maximum credit risk related to one counterparty was equivalent to DKK 66 million. The credit risk of debtors is countered by thorough, regular analyses based on customer type, country and specific conditions. Generally, customers are highly creditworthy.
Liquidity risk
In connection with the Group’s ongoing financing of operations, including refinancing risk, the finance function shall ensure adequate and flexible liquidity. This is guaranteed by placing deposits in cash and extremely liquid negotiable instruments, and using binding credit facilities.
