7.5.1.4 Interest rate risk
in PLN millions, unless otherwise stated
In 2022 the Group was exposed to the risk of changes in interest rates due to loans granted to a joint venture, investing cash, the reverse factoring program and using borrowings.
Positions with variable interest rates expose the Group to the risk of changes in cash flow from a given position as a result of changes in interest rates (i.e. it has an impact on the interest costs or income recognised in profit or loss). Positions with fixed interest rates expose the Group to the risk of fair value changes of a given position, excluding positions measured at amortised cost, for which the change in fair value does not affect their measurement and profit or loss.
The main items which are exposed to interest rate risk are presented below:
| As at 31 December 2022 |
As at 31 December 2021 |
||||||
|---|---|---|---|---|---|---|---|
| Cash flow risk | Fair value risk | Total | Cash flow risk | Fair value risk | Total | ||
| Cash and cash equivalents | 1 200 | – | 1 200 | 2 333 | – | 2 333 | |
| Loans granted | – | 20 | 20 | – | 22 | 22 | |
| Nota 7.1 | Borrowings | (2 656) | -3 787 | -6 443 | (2 153) | (3 796) | (5 949) |
| Similar payables* | -18 | – | -18 | -55 | – | -55 | |
As at 31 December 2022 the Parent Entity had CIRS transactions (Cross Currency Interest Rate Swap) with maturities falling in June 2024 and June 2029, in the notional amount of PLN 2 billion, hedging both the sales revenues in the currency, as well as the variable interest rate of issued bonds. The open hedging position as at 31 December 2022 and as at 31 December 2021 is presented in the table in Note 7.5.1.3.
An analysis of the Group’s sensitivity to interest rate risk, assuming changes in interest rates for the balance sheet items in PLN, USD and EUR (presented in basis points, bps) is presented in the following table. An expert method including recommendations of the ARMA model was used to determine the potential volatility of interest rates.
| 31 December 2022 change in interest rate | 31 December 2021 change in interest rate | |||||||
| +150 pb (PLN, USD, EUR) |
-100 pb (PLN, USD, EUR) |
+250 pb (PLN) +150 pb (USD, EUR) |
-100 pb (PLN) -50 pb (USD, EUR) |
|||||
| profit or loss | other comprehensive income | profit or loss | other comprehensive income | profit or loss | other comprehensive income |
profit or loss |
other comprehensive income | |
| Cash and cash equivalents | 18 | – | (12) | – | 32 | – | (11) | – |
| Borrowings | (40) | – | 27 | – | (54) | – | 21 | – |
| Financial derivatives – interest rate | – | 134 | – | (97) | – | 186 | – | (66) |
| Similar payables | – | – | – | – | – | – | – | – |
| Impact on profit or loss | (22) | – | 15 | – | (22) | – | 10 | – |
| Impact on other comprehensive income | 134 | (97) | – | 186 | – | (66) | ||
Impact of the reference rates reform
The Group uses financial instruments based on variable interest rates, which fall under the reference rates reform. As a result of the reform, publication of certain IBOR rates ceased from 1 January 2022 and the next ones will cease to be published from 30 June 2023.
The Group identified agreements which include clauses based on LIBOR and which will be changed once the reference rates are superseded. These are mainly borrowing and factoring agreements. In 2022 some of the bilateral financing agreements were annexed in order to introduce SOFR or CME Term SOFR rates. Negotiations are underway with other financial institutions aimed at replacing LIBOR rates with an alternative benchmark.
On 7 July 2022, an Act on crowdfunding for business and support for borrowers, which is a basis to change the WIBOR and WIBID rates applicable to instruments in PLN, was adopted. As a result of legislative changes in September 2022, the Steering Committee of the National Work Group for reform of the reference rates selected WIRON as the target Risk-Free Rate (RFR) for the Polish financial market. Details on the replacement of current rates by an alternative one will be published in 2023, and the publication of old WIBOR and WIBID rates will end in 2025.
Until 2025, the IBOR reform will not have an impact on the interest rate applied in the Group’s derivatives, because the CIRS transactions entered into (open cross currency interest rate swaps) and bonds issued by the Group are based on the WIBOR reference rate. In the case of this benchmark, until 2025 we are in the transitional period, during which adjustments to transactions entered into before the reform will not be required. After 2025, the IBOR reform may have an impact on cash flow hedging of variable interest of issued bonds (Tranche B) in the amount of PLN 1.6 billion, based on WIBOR 6M, that is CIRS transactions (cross currency swap) with maturity falling in 2029. The Group applied temporary exemptions from application of specific requirements of hedge accounting under IFRS 9 due to the IBOR reform and adopted an assumption that it may continue the hedge relationships. The notional amounts of hedging instruments to which these exemptions apply are disclosed in the following table.
As at 31 December 2022, the Group estimated that the impact of IBOR reform on the financial statements of the Group will be immaterial.
As at 31 December 2022, the Group held financial instruments based on variable interest rates, which were not yet replaced by alternative rates.
| Type of financial instrument | Carrying amount as at 31 December 2022 |
|
| Bank loans | USD LIBOR 1M | (528) |
| WIBOR 1 | (63) | |
| Debt securities | WIBOR 6M | (2 002) |
| Reverse factoring | WIBOR 6M | (18) |
| Derivatives (CIRS for 2029, PLN 1 600 million) | WIBOR 6M | (198) |
| Total | (2 809) |