Due to floating-rate items the Group is exposed to cash flow changes resulting from interest rate fluctuations. As a result of fixed-rate items the Group is exposed to changes in the fair value of items measured at a fair value. The risk of fair value changes resulting from interest rate changes relates to IRS and CCIRS contracts as well as the loan granted to Elektrociepłownia Stalowa Wola S.A. The Group is also exposed to the risk of lost benefits related to a decrease in interest rates in the case of fixed-rate debt or to an increase in interest rates in the case of fixed-rate assets, although the changes are not disclosed in the financial statements.
The purpose of interest rate risk management is to limit negative effects of market interest rate fluctuations on the Group’s cash flows to an acceptable level and to minimize finance costs. In order to hedge interest rate risk related to floating-rate debt, the Group entered into interest rate swap (IRS) contracts, described in detail in Note 51.3 hereto. IRS transactions concluded in order to hedge interest rate risk are subject to hedge accounting.
The following tables present the carrying amounts of the Group’s financial instruments exposed to interest rate risk. As the Company has adopted a dynamic financial risk management strategy where the hedged item is cash flows relating to the exposure to the floating WIBOR 6M interest rate, the interest rate risk for a portion of interest cash flows has been reduced by the hedging IRS transactions. Thus, a portion of the carrying amount of debt with floating interest cash flow fluctuations hedged with interest rate swaps has been presented in the tables below together with valuation of these hedging instruments as fixed-rate items.
Financial instruments by interest rate type
Export to Excel| Financial instruments | As at 31 December 2020 | As at 31 December 2019 | ||||
|---|---|---|---|---|---|---|
| Fixed interest rate |
Floating interest rate |
Total | Fixed interest rate |
Floating interest rate |
Total | |
| Financial assets | ||||||
| Deposits | 53,448 | – | 53,448 | 50,228 | – | 50,228 |
| Loans granted | 96,293 | 2,420 | 98,713 | 246,243 | 9,242 | 255,485 |
| Cash and cash equivalents | – | 788,277 | 788,277 | – | 1,143,598 | 1,143,598 |
| Derivative instruments-CCIRS | 5,023 | – | 5,023 | – | – | – |
| Derivative instruments-IRS | – | – | – | 19,462 | – | 19,462 |
| Financial liabilities | ||||||
| Bank overdrafts | – | 2,261 | 2,261 | – | 2,261 | 2,261 |
| Preferential loans and borrowings | – | 16,717 | 16,717 | – | 12,488 | 12,488 |
| Arm’s length loans and borrowings | 2,789,476 | 3,183,679 | 5,973,155 | 2,892,708 | 4,122,116 | 7,014,824 |
| Bonds issued | 6,782,151 | 740,058 | 7,522,209 | 5,756,491 | 500,531 | 6,257,022 |
| Obligations under finance leases | 1,146,094 | – | 1,146,094 | 1,006,603 | – | 1,006,603 |
| Derivative instruments-CCIRS | 1,755 | – | 1,755 | 12,885 | – | 12,885 |
| Derivative instruments-IRS | 90,061 | – | 90,061 | – | – | – |
Other financial instruments of the Group which are not included in the above tables, are not interest-bearing and therefore they are not subject to interest rate risk.
Sensitivity analysis
For the needs of the analysis of sensitivity to changes in market risk factors the Group uses the scenario analysis method. The Group relies on expert scenarios reflecting its judgement concerning the behaviour of individual market risk factors in the future. The scope of the analysis includes only those items which meet the IFRS definition of financial instruments.
The interest rate risk sensitivity analysis is conducted by the Group using the parallel shift in the yield curve by the potential change in reference interest rates within a horizon until the date of the next financial statements. The interest rate risk sensitivity analysis has been carried out based on average reference interest rates in the year. The scale of potential changes in interest rates has been estimated on the basis of implied volatility for interest rate options quoted on the interbank market for currencies which expose the Group to the interest rate risk as at the balance sheet date.
The Group identifies its exposure to the risk of changes in WIBOR, EURIBOR, ESTRON and LIBOR USD interest rates. As at 31 December 2020 and 31 December 2019, its exposure to changes in EURIBOR, ESTRON and LIBOR USD rates was insignificant.
The tables below present sensitivity of the gross profit/loss as well as other comprehensive income (gross) to reasonably potential changes in interest rates within a horizon until the date of the next financial statements, assuming that all other risk factors remain unchanged.
Table 2
Export to Excel| Classes of finacial instruments | 31 December 2020 | Sensitivity analysis for interest rate risk as at 31 December 2020 |
31 December 2019 | Sensitivity analysis for interest rate risk as at 31 December 2019 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying amount |
Value at risk | WIBOR +225 pb | WIBOR -225 pb | Carrying Profit/(Loss) / amount |
Value at risk | WIBOR +38 pb | WIBOR -38 pb | |||||
| Profit/(Loss) / Other comprehensive income* |
Profit/(Loss) / Other comprehensive income* |
|||||||||||
| Loans granted | 98,713 | 74,943 | (15,002) | 19,352 | 255,485 | 225,260 | (9,883) | 10,398 | ||||
| Cash and cash equivalents | 921,345 | 788,277 | 14,790 | (7,787) | 1,237,952 | 1,143,598 | 4,237 | (4,237) | ||||
| Derivatives (assets) | 158,846 | 5,023 | 29,458 | (29,458) | 105,529 | 19,462 | 37,204 | (37,204 ) | ||||
| Preferential loans | 16,717 | 16,717 | (376) | 376 | 12,488 | 12,488 | (47) | 47 | ||||
| Arm’s length loans | 5,973,155 | 4,934,027 | (111,016) | 111,016 | 7,014,824 | 6,320,285 | (24,017) | 24,017 | ||||
| Bonds issued | 7,522,209 | 2,829,640 | (63,667) | 63,667 | 6,257,022 | 1,890,467 | (7,184) | 7,184 | ||||
| Derivates (liabilities) | 175,584 | 91,816 | 415,964 | (415,964) | 12, 527 | 12,885 | 6,098 | (6,098) | ||||
| Total | 270,151 | (258,798) | 6,408 | (5,893) | ||||||||
*Refers to Interest Rate Swap financial derivatives covered by hedge accounting, as further discussed in Note 51.3 to these consolidated financial statements.
As at 31 December 2020, the sensitivity analysis for the risk of falling interest rates does not take into account cash in bank accounts for which, according to contractual provisions, banks will not charge negative interest rates.
The risk exposure as at 31 December 2020 and as at 31 December 2019 is representative of the Group’s risk exposure during the preceding one-year period.