03 | financial risk management

3.1. Financial risk factors

Due to the nature of its activities, the group is exposed to various financial risks: market risks (interest rate risks and exchange rate risks), credit risks and liquidity risks. The risk management and control model helps identifying and analysing the different risks.

The financial and economic conditions of the past few years demand permanent attention for financial risks. The group is constantly focused on cost control. Specific attention is being paid to credit management, both in terms of managing credit risks and reducing the number of days sales outstanding. Risks are further reduced by insuring most trade receivables and selling a portion of the trade receivables to factoring companies.

Group risk management focuses on minimising the potential negative effects of developments on the financial markets on the group’s performance. If deemed necessary, the group uses financial instruments to hedge certain risks. The treasury department identifies and assesses financial risks and hedges them subject to approval by the Executive Board.

The group recognises the following categories of financial instruments.

31 DECEMBER 2015

CARRYING
AMOUNT

FAIR VALUE

MAXIMUM
CREDIT EXPOSURE

Financial fixed assets

22,010

14,446

23,377

Trade receivables

366,934

366,934

100,750

Other receivables

4,005

4,005

4,005

Cash and cash equivalents

81,354

81,354

81,354

474,303

466,739

209,486

Syndicated credit facility

208,458

210,028

Acquisition-related contingent considerations

6,182

6,182

Other non-current credit facilities

769

1,031

Bank overdrafts

359

359

Trade payables

487,350

487,350

Derivative financial instruments

567

567

703,685

705,517

31 DECEMBER 2014

CARRYING
AMOUNT

FAIR VALUE

MAXIMUM
CREDIT EXPOSURE

Financial fixed assets

48,889

41,491

50,282

Trade receivables

275,103

275,103

82,858

Other receivables

3,901

3,901

3,901

Cash and cash equivalents

64,691

64,691

64,691

392,584

385,186

201,732

Syndicated credit facility

149,416

150,015

Subordinated credit facility

58,749

59,216

Acquisition-related contingent considerations

7,685

7,685

Other non-current credit facilities

2,243

2,551

Bank overdrafts

4,052

4,052

Trade payables

411,314

411,314

Derivative financial instruments

583

583

634,042

635,416

The method used to estimate fair value is disclosed in note 3.2.

3.1.1. Market risks

Interest rate risks
Funds drawn from borrowings granted at variable interest rates expose the group to interest rate risks. On the one hand the group, as a provider of employment services, views variable interest rates as a natural hedge for fluctuations in operating income while, on the other hand, it wants to remain vigilant and be able to respond to any opportunities that arise.

The group regularly uses various simulated scenarios to ascertain whether existing measures to hedge interest rate risks remain adequate. The analysis focuses on the effects of interest rate changes on income, due to the fact that the vast majority of the loans were granted at a variable interest rate, with the risk partly hedged by derivative financial instruments (note 19).

As the group has no significant interest-bearing assets, group income is therefore largely unaffected by interest rate fluctuations.

An increase of 50 basis points in the EURIBOR rate has a negative impact of € 0.9 million on income before tax (2014: negative impact of € 1.5 million) and a decrease in equity of € 0.3 million (2014: decrease of € 0.8 million), taking hedging measures into account and with all other factors being equal. A decrease of 50 basis points in the EURIBOR rate has a positive impact of € 0.3 million (2014: positive impact of € 1.5 million) on income before tax and a decrease in equity of € 0.2 million (2014: increase of € 0.8 million), taking hedging measures into account and with all other factors being equal.

Currency exchange risks
In view of the fact that group activities in currencies other than the euro are very limited, exchange rate risks are not hedged. No loans are issued in a currency other than the euro.

3.1.2. Credit risks

Credit risks arise from trade receivables, cash and cash equivalents, financial derivatives and deposits held at banks.

Trade receivables are generally insured by insurance companies (with at least an A rating S&P, Moody’s, Fitch or A.M. Best). Receivables from governments and financial institutions in the Netherlands are not insured. Where a trade receivable is not insured, the client’s creditworthiness is assessed prior to the service being supplied, taking past experiences and other considerations into account. Credit limits are assigned to clients based on information supplied by insurance companies or internal guidelines approved by the Executive Board. Credit limits are assessed regularly.

The treasury department maintains contacts with insurance companies and monitors the application of the main credit procedures. The group has an information system to closely track the creditworthiness of its customers. The system complements the services provided by the insurance company, making the credit risks more transparent. It combines the group’s own information, purchased business information and credit reports issued by the credit insurer. Good results are achieved through periodical discussions with the insurance company and internal monitoring of the credit risks. Credit meetings are held monthly in all countries to discuss important aspects of the trade receivables. The Executive Board is informed regularly and extensively on developments in its credit management policy. Note 14 ‘Trade and other receivables’ provides a further analysis of the credit risks on trade receivables.

The group only uses the banks which issued the syndicated loan for financial receivables such as cash and cash equivalents, derivative financial instruments and deposits.

3.1.3. Liquidity risks

The objective of liquidity risk management is to safeguard the continuity of the group, to ensure returns for shareholders and rewards for other stakeholders and to maintain the best possible capital structure with a view to reducing the costs of capital. To maintain or adjust the capital structure the group can adjust dividend payments, repay share capital, issue new shares or sell assets to reduce its liabilities. Working capital is monitored and the investment policy is aimed at generating positive cash flows from earnings.

To optimise the financing structure and lower the interest expenses the group repaid the € 60 million subordinated loan prematurely in 2015. Furthermore the existing syndicated credit facility was extended for five years and the group has the opportunity to extend the facility no more than two more times for a period of up to one year. At the same time the available facility was reduced from € 500 million to € 450 million. In addition the group sold the amount receivable resulting from the CICE tax measure in France to a financial institution for an amount of € 48.8 million and reduced the factoring of trade receivables by a net amount of € 32.1 million (receivables sold at the end of 2015: € 92.0 million, end-2014: € 124.1 million).

The treasury department ensures that there are sufficient cash and cash equivalents and credit facilities available to manage liquidity risks. The Executive Board uses cash flow reports including forecasts to assess the liquidity risk. In addition, the group’s liquidity is safeguarded through compliance with the terms and conditions of the syndicated credit facility and other borrowings.

The principal conditions of the syndicated credit facility concern the senior leverage ratio (which needed to be kept equal to or below 3.0) and the interest cover ratio (equal to or above 3.5). An additional condition, the total leverate ratio, applied until the subordinated credit facility was repaid early. This total leverage ratio would not exceed 3.5 from 1 January 2015 up to and including 30 June 2015 and would not exceed 3.25 from 1 July 2015 up to and including 31 December 2015. The syndicated credit facility also stipulates a maximum on the value of acquisitions per year and during the entire term. The method of calculating ratios is defined in the covenant with the banks. The adjustments resulting from the terms and conditions of the covenant in the calculation of the interest cover ratio, the senior leverage ratio and the total leverage ratio concern adjustments ensuing from the agreements made with the banks in the covenant with respect to the valuation of non-operating expenses, the unrealised valuation result on derivatives, extraordinary adjustments with regard to defined benefit pension schemes and the impact of the application of the amended IFRS 3 on investments in subsidiaries. The ratios are reported to the banks on a quarterly basis.

The group aims a long-term debt position with a senior leverage ratio equal to or below 1.0.

The unutilised part of the syndicated credit facility was € 154 million at the end of 2015 (2014: € 267 million).

Possible effects of the intended public offer announced by Recruit Holdings Co., Ltd. on group financing has been further investigated but do not influence group liquidity.

Total and senior leverage ratio
The following table specifies the total and senior leverage ratios as at 31 December.

2015

2014

Bank overdrafts and borrowings

215,768

222,145

Minus: cash and cash equivalents

-81,354

-64,691

Plus: adjustments in accordance with terms and conditions of covenant

6,356

11,107

Total net debt position in accordance with terms and conditions of covenant

140,770

168,561

Minus: subordinated credit facility

-

-58,749

Total net senior debt position in accordance with terms and conditions of covenant

140,770

109,812

Operating income

63,793

67,173

Plus: depreciation, amortisation and impairments

26,915

25,553

Plus: adjustments in accordance with terms and conditions of covenant

30,432

7,252

EBITDA

121,140

99,978

Total leverage ratio (net debt position / EBITDA)

1.2

1.7

Senior leverage ratio (net senior debt position / EBITDA)

1.2

1.1

The total leverage ratio in recent quarters until the moment of early repayment of the subordinated credit facility are disclosed below:

COVENANT

ACTUAL

31 March 2014

3.75

2.2

30 June 2014

3.75

2.3

30 September 2014

3.75

2.0

31 December 2014

3.75

1.7

31 March 2015

3.75

1.7

30 June 2015

3.75

2.0

The senior leverage ratio in recent quarters are disclosed below:

COVENANT

ACTUAL

31 March 2014

3.0

1.6

30 June 2014

3.0

1.7

30 September 2014

3.0

1.4

31 December 2014

3.0

1.1

31 March 2015

3.0

1.1

30 June 2015

3.0

1.5

30 September 2015

3.0

1.8

31 December 2015

3.0

1.2

Interest cover ratio
The method of calculating the interest cover ratio as at 31 December is specified below.

2015

2014

Net finance costs

15,364

9,539

Minus: amortisation of costs of syndicated and subordinated credit facility

-2,025

-1,437

Minus: adjustments in accordance with terms and conditions of covenant

-6,870

-219

Interest

6,469

7,883

Interest cover ratio (EBITDA / interest)

18.7

12.7

The evolution of the interest cover ratio in recent quarters was as follows:

COVENANT

ACTUAL

31 March 2014

3.5

6.9

30 June 2014

3.5

8.5

30 September 2014

3.5

11.4

31 December 2014

3.5

12.7

31 March 2015

3.5

13.9

30 June 2015

3.5

14.8

30 September 2015

3.5

16.7

31 December 2015

3.5

18.7

Repayment terms
The table below states the repayment terms of the group’s financial commitments. The amounts listed in the table are contractually agreed cash flows which have not been discounted and therefore do not coincide with the carrying amount. The term of the syndicated credit facility ends in 2020.

Repayment terms at end-2015 based on the nominal value including interest due are disclosed below:

TOTAL

< 3 MTH

3-6 MTH

6-12 MTH

1-2 YEARS

2-5 YEARS

> 5 YEARS

Syndicated credit facility

218,050

419

419

847

1,680

214,685

-

Acquisition-related contingent considerations

6,226

188

-

-

-

6,038

-

Other credit facilities

1,072

3

-

-

-

-

1,069

Bank overdrafts and borrowings

359

359

-

-

-

-

-

Trade and other payables

487,350

487,350

-

-

-

-

-

Derivative financial instruments

339

81

85

173

-

-

-

713,396

488,400

504

1,020

1,680

220,723

1,069

Repayment terms at end-2014 based on the nominal value including interest due are disclosed below:

TOTAL

< 3 MTH

3-6 MTH

6-12 MTH

1-2 YEARS

2-5 YEARS

> 5 YEARS

Syndicated credit facility

152,891

450

455

921

151,065

-

-

Subordinated credit facility

67,905

973

984

1,990

63,958

-

-

Acquisition-related contingent considerations

8,031

75

3,347

150

-

4,459

-

Other credit facilities

2,647

6

-

60

1,590

-

991

Bank overdrafts and borrowings

4,052

4,052

-

-

-

-

-

Trade and other payables

411,316

411,316

-

-

-

-

-

Derivative financial instruments

474

58

59

123

234

-

-

647,316

416,930

4,845

3,244

216,847

4,459

991

3.2. Estimating fair value

The group uses the following hierarchy for the disclosure of financial instruments recognised at fair value:

  • Level 1: market prices for financial instruments traded on an active market;
  • Level 2: information other than market prices for the fair value of financial instruments that are not traded on an active market. The group uses various methods and makes assumptions based on market conditions at the balance sheet date. For non-current debt it uses market prices or market prices given by traders for comparable instruments, and
  • Level 3: other methods, including estimated present value calculations, are used to determine the valuation of other financial instruments.

The acquisition related contingent considerations and derivative financial instruments (note 19) are recognised on the balance sheet at fair value (level 2 and level 3). 

The principal methods and assumptions used to estimate the fair values as stated in 3.1 are summarised below:

  • Financial fixed assets: the fair value is calculated based on the expected future cash inflows arising from repayments and interest payments. The fair value of non-interest bearing guarantee deposits with no fixed maturity is equal to nil. The fair value of interest-bearing guarantee deposits with a fixed maturity is estimated using the discounted cash flow method (level 2).
  • Trade receivables, trade payables, other receivables and payables, cash and cash equivalents: for current receivables and payables with a maturity of less than one year the fair value is equal to the nominal value. The fair value of other receivables and payables is calculated using the discounted cash flow method (level 2).
  • Interest-bearing borrowings, debts and acquisition related contingent considerations: the fair value is calculated using the present value of expected future cash outflows arising from repayments and interest payments (level 2).
  • Derivatives: the value of derivatives is determined based on expected future cash flows (level 2).

The group discounts its financial instruments using the effective return relevant to its risk profile and the maturity of the financial instrument at the balance sheet date. The fair value is determined by discounting the relevant cash flows using a market discount rate applicable to comparable instruments.