2. Financial risk management

In the normal course of business, the Group is exposed to changes in market risk, liquidity risk and credit risk.

Precious Woods financial risk management seeks to minimize potential adverse effects on financial performance.

Risk management is carried out by the Group finance department under conditions approved by the Board of Directors and Group Management. The Group Management takes decisions covering specific areas, such as foreign exchange risk, on a case-by-case basis.

Market risk

The market risk includes interest rate risk, foreign exchange risk and equity price risk.

Interest rate risk

Precious Woods has no significant interest-bearing assets. The Group’s interest rate risk arises from loans. Loans issued at variable rates expose Precious Woods to cash flow interest rate risks.

Management’s policy is to maintain its borrowings in fixed rate instruments. There was no material variable interest rate borrowing on 31 December 2018 as well as on 31 December 2019.

Foreign currency risk

Precious Woods operates internationally and is exposed to foreign currency risk arising from various currency exposures. The XAF is in a fix relation to the EUR. Most of the sales out from Gabon are denominated in EUR and largely all costs are in XAF. The sales out of Brazil are denominated in EUR and USD, the costs are in BRL. Therefore, the currency risk for the local books is given. Foreign currency risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. Group loans are denominated in CHF, BRL, EUR and XAF.

To manage their foreign currency risk arising from future commercial transactions the Group may use forward contracts, transacted by the Group finance department. The Group did not use this instrument in the past two years.

The sensitivity analysis below is based on the exposure on 31 December based on assumptions that have been deemed reasonable by Management, showing the impact on profit or loss before tax as well as on equity. The Group uses historical volatilities of the currency pairs below to determine the reasonable shift.

The following table summarizes the Group’s sensitivity to currency exposures regarding the positions in the statement of financial position of the main currencies on 31 December:

    31.12.19   31.12.19   31.12.19   31.12.18   31.12.18   31.12.18
in thousand EUR   Reasonable
  "Impact" on profit
or loss before tax
on equity
  "Impact" on profit
or loss before tax
on equity
EUR/CHF   +/–10%   +/–253   +/–2 156   +/–10%   +/–278   +/–2 153
USD/CHF   +/–10%   +/–72   +/–987   +/–10%   +/–39   +/–971
USD/BRL   +/–15%   +/–15   +/–676   +/–15%   +/–5   +/–1 206
CHF/BRL   +/–15%   +/–0   +/–6 997   +/–15%   +/–0   +/–6 798
XAF/CHF   +/–10%   +/–0   +/–1 572   +/–10%   +/–0   +/–1 486
Price risk

Precious Woods is exposed to equity securities price risks because of unlisted investments held by the Group and classified as measured at fair value through OCI. For details about the exposure please see Note 18.

Liquidity risk

Liquidity risk management is centralized at the Groups head office and monitored through cash-flow forecasts. The subsidiaries provide regular forecasts based on the expected cash-inflows and -outflows. Excess funds are pooled in accounts managed by the holding company. Cash deficits are funded by the holding company in general. Group administration raises the majority interest-bearing debt centrally. The Group seeks to reduce liquidity risks through sufficient cash reserves and credit facility arrangements.

The following table analyses the Group’s remaining contractual maturity for financial liabilities and derivative financial instruments.

in thousand EUR   Less than 1 year   Between 1 and 2 years   Over 2 years   Total
31 December 2019                
Trade and other payables   14 115       14 115
Lease liabilities   776   1 336   61   2 173
Loans and other financial liabilities   8 213   8 886   24 936   42 035
Non-derivative financial liabilities   23 104   10 222   24 997   58 323
in thousand EUR   Less than 1 year   Between 1 and 2 years   Over 2 years   Total
31 December 2018                
Trade and other payables   13 983       13 983
Finance lease liabilities   1 065   591   244   1 900
Loans and other financial liabilities   11 251   2 839   21 250   35 340
Non-derivative financial liabilities   26 299   3 430   21 494   51 223
Credit risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions.

Where banks and financial institutions are concerned, generally independently rated parties with a minimum rating of “A” are accepted. Precious Woods has one main relation with a bank, which has a rating of “A+”. Most of the sales are CAD (Cash Against Documents) or L/C (Letter of Credit) and if this does not apply and the customers are independently rated, these ratings are used. The Group has set up a policy to minimize credit risk and monitor its clients. Customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Group therefore monitors its account receivables at individual customer level by payment due date rather than the number of days from invoice date. No concentrations of credit risk are currently present. An allowance on bad debt is determined on both an individual and a collective basis. An individual allowance is determined when a customer disputes the amount due, or if legal steps have been taken to recover the overdue amount. Collective loss allowances are determined based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. For detailed information see Note 17.

Capital management

When managing capital, Precious Woods’ objectives are to safeguard the Group’s ability to continue as a going concern and to maintain an optimal structure to reduce the cost of capital. In order to reach these goals, Precious Woods issue new shares or sells assets to reduce debts. The mid-term target of the Group is to have an equity ratio of >40 %. The Group’s equity ratio compares the total shareholders equity to the total assets as presented in the consolidated statement of financial position. Capital is considered the equity attributable to holders of Precious Woods Holding. There were no changes in the Group’s approach to capital management during the year.

Guarantees and pledges of assets

The Group has pledged assets as follows:

  • Land EUR 24.0 million
  • Buildings and improvements EUR 3.5 million
  • Machinery and vehicles EUR 1.5 million
  • Leased machinery and vehicles EUR 3.1 million