Financial risks

The central tasks of the HUGO BOSS Group include coordinating and managing internal financing requirements, ensuring the financial independence of the Group as a whole and mitigating financial risks.

The HUGO BOSS Group is mainly exposed to financing and liquidity risks, interest rate risks, currency risks and counterparty risks as well as tax and pension risks. These risks are subject to continuous and intensive monitoring and control measures.

Financing and liquidity risks

Managing liquidity risk is one of the central tasks of HUGO BOSS AG’s Treasury department. Liquidity risk is the risk that existing or future payment obligations cannot be settled in terms of timing, volume or currency due to a lack of cash. The HUGO BOSS Group manages this risk centrally. To ensure the Group’s liquidity and financial flexibility at all times, financial requirements are determined based on three-year financial planning. These are then secured using lines of credit and liquid funds.

In order to secure its long-term financial flexibility, in October 2015 HUGO BOSS refinanced the credit line originally due for repayment in March 2018. The new revolving credit facility with a credit line of EUR 450 million has a basic term of five years. It also has access to two renewal options of one year each.

EUR 75 million of this revolving tranche had been utilized as at the reporting date.

Apart from the syndicated financing line of credit, HUGO BOSS has short-term bilateral lines of credit amounting to EUR 257 million. Of this, EUR 89 million had been utilized as at the reporting date.

The existing syndicated loan agreement contains standard covenants requiring the maintenance of total leverage. A breach of covenants would lead to the early termination of the agreement. Even if general economic conditions deteriorate, HUGO BOSS does not see any risk of breaches of financial covenants. Financial Position, Financing Conditions

In addition, the syndicated loan contains a so-called “change of control clause” that grants the contracting parties additional termination rights in the event of a change of control. HUGO BOSS considers this risk very low.

There are no comparable agreements for its short-term credit facilities.

In addition to the lines of credit amounting to EUR 707 million as at December 31, 2015, the Group had liquid funds of EUR 81 million as at the reporting date. These funds are generally held as call deposits and time deposit investments. In addition, the HUGO BOSS Group mitigates financing and liquidity risks further using a cash pooling mechanism. Based on the amounts drawn from the lines of credit, the cash situation and the cash pooling mechanism in place, management deems the occurrence of financing and liquidity risks to be unlikely and the financial impact to be low.

Interest rate risks

The interest rate risk for HUGO BOSS results primarily from changes to market interest rates for payments on cash balances and liabilities subject to variable interest, while market-driven fluctuations in interest rates impact future interest income and payments on cash balances and liabilities subject to variable interest. Significant changes in interest rates can therefore affect the profitability, the liquidity and the financial position of the Group.

The financial liabilities of the HUGO BOSS Groups are mostly subject to variable interest rates and have short-term fixed-interest periods. To minimize the effects of future interest volatility on long-term borrowing costs, partial use is made of derivative financial instruments in the form of interest rate swaps. Derivatives designated to an effective hedge within the meaning of IFRS impact equity in the event of interest rate changes. Derivatives that are not designated to such a hedge are posted to profit or loss. As at the reporting date, unlike the previous year, there were no derivatives designated as effective interest rate hedges for the syndicated credit facility (2014: EUR 100 million) within the meaning of IFRS. The derivatives were closed and recognized in profit or loss during refinancing.

Moreover, opportunity effects can arise. These result from the recognition of non-derivative financial instruments at amortized cost rather than at fair value. The opportunity risk is the difference between both values, although this is neither reported in the statement of financial position nor in the income statement.

In accordance with IFRS 7, the effect on profit and equity of changes in the most important interest rates was analyzed. The scope of the analysis included variable-interest financial liabilities of EUR 135 million (December 31, 2014: EUR 133 million), interest derivatives of EUR 10 million (December 31, 2014: EUR 111 million), and cash and cash equivalents of EUR 81 million (December 31, 2014: EUR 129 million). The impact of interest rate fluctuations on future cash flows was not included in this analysis.

Owing to the continued low interest rates, the shift in the interest yield curve was left at +100/−10 basis points in the reporting year in order to present realistic scenarios in the analysis of interest rate sensitivity as at the reporting date. Taking the sharp fall in money market and capital market interest into account, HUGO BOSS considers this change to be appropriate.

An increase in market interest rates of 100 basis points as at December 31, 2015 would have led to an increase in net income of EUR 0.3 million (2014: EUR 1.4 million) and in equity of EUR 0.3 million (December 31, 2014: EUR 3.7 million). A fall in market interest rates by 10 basis points would have led to a drop in net income of EUR 0.1 million (2014: EUR 0.2 million) and a decline in Group equity of EUR 0.1 million (December 31, 2014: (EUR 0.4 million). The effects from interest rate derivatives would have resulted from changes in fair value. Cash flow risks would have mainly resulted from higher/lower interest income and expenses from cash and cash equivalents.

Interest rates in Europe and North America remained at a low level in 2015. Given the current interest rate policy being pursued by the European Central Bank and the persisting macroeconomic uncertainties in Europe, the Group does not anticipate any significant interest rate changes in this region in the near future. Since the vast majority of Group financing is transacted in euros, HUGO BOSS considers the potential impact of interest rates to be low. Given the expansionary monetary policy, particularly by the European Central Bank and the Federal Reserve, management currently considers interest rate changes likely with a low financial impact.

Currency risks

The currency risks of the HUGO BOSS Group essentially result from the global business activities and the Group’s internal financing activities. In operating business, exchange rate risks primarily arise due to the fact that products are bought and sold in different currencies in different amounts.

Distribution activities in key markets are performed by Group companies, which place their orders directly with the Group. In order to centrally manage the exchange rate risk, intercompany orders are generally invoiced in local currency. The exchange rate risk thus results from the cash flow in local currency of the subsidiaries. The currency risks of the HUGO BOSS Group from business operations are mainly attributable to the business operations in the United States, Great Britain, Australia, Switzerland, Japan, Turkey, Hong Kong and China as well as the purchasing activities of sourcing units in foreign currency.

Exchange rate risks also arise from the translation of the net assets employed at Group companies outside the Eurozone and of their income and expenses (translation risk). The Group does not hedge this risk. Notes to the Consolidated Financial Statements, Currency Translation

Exchange rate management is centrally performed for all Group companies. An exception to this is foreign currency risk at the level of the Turkish Group company with the functional currency of the euro, which manages the foreign currency risk in Turkish lira arising from salary, social security and transport payments on a local basis in close collaboration with the Treasury department.

The primary objective of exchange rate management at HUGO BOSS is to mitigate the overall exchange rate exposure using natural hedges. Such hedges are based on the offsetting of currency exposures from business operations throughout the Group against each other, thereby reducing the overall exposure requiring hedging measures by the amount of the closed positions. Forward exchange contracts and swaps as well as plain vanilla currency options can be concluded to hedge the remaining exposures. The objective of the hedging strategy is to limit the effects of exchange rate fluctuations on exposures already on the balance sheet and future cash flows. As a rule, the terms of the derivatives entered into are adjusted to the underlying hedged item when they are concluded. The derivative financial instruments, which are traded in the OTC market, are solely intended to hedge the risk intrinsic in hedged items. To obtain the best possible terms, quotes are requested from several banks and transactions are concluded with the bank that offers the best terms.

Foreign currency risks in financing result from financial receivables and liabilities in foreign currency and loans in foreign currency granted to finance Group companies. A distinction is drawn between two types of agreements when granting loans to Group companies. Operating loans are structured similarly to an overdraft facility and can be drawn flexibly within a set credit limit. Financing loans are granted to Group companies with greater and longer-term financing requirements. As at the reporting date, the main financing loans with repayment on final maturity were hedged using forward exchange contracts.

Group-wide guidelines ensure strict separation of the functions trading, handling and control for all financial market transactions. The same guidelines form the basis for the selection and scope of hedges. The objective of currency hedges is to minimize currency effects on the development of the Group’s net income and equity.

Based on the requirements of IFRS 7, the HUGO BOSS Group has calculated the effects of changes in the most important exchange rates on net income and equity. Currency risk is determined based on currency exposure already recognized as at December 31, 2015 and planned future cash flows in Turkish lira. This approach was selected because of the HUGO BOSS Group’s changed hedging strategy, which aims both to mitigate balance sheet risks and to hedge future cash flows. The exposures include cash, receivables and payables as well intercompany loans held in currencies other than the functional currency of each respective Group company. Effects from the translation of financial statements of foreign subsidiaries outside the Eurozone are not taken into account.

The following sensitivity analyses show the net income and equity that would have resulted if different exchange rates had prevailed as at the reporting date. It is assumed that the total financial currency exposure, its hedging ratio and the underlying volatility as at the reporting date are representative for the entire year.

The implicit volatility of the individual foreign currencies was factored in to present the fluctuation of the foreign currencies of relevance to the HUGO BOSS Group relative to the euro and satisfy the requirements of IFRS 7 with regards to the disclosure of a “reasonably possible change”.

Had the euro appreciated against the foreign currency exposures of relevance by one standard deviation in each case, the Group’s net income would have been EUR 3.4 million lower (2014: EUR -1.7 million) and its equity EUR 6.3 million lower (2014: EUR -3.0 million). Had the euro depreciated by the same amount, the Group’s net income would have been EUR 3.4 million higher (2014: EUR 1.7 million) and its equity EUR 6.3 million higher (2014: EUR 3.0 million). As at the reporting date, derivatives with a nominal value of EUR 24.3 million were designated as effective currency hedges within the meaning of IAS 39. Changes in value are recognized directly in equity. The sensitivity of equity is thus not reflected in the Group’s net income.

Management expects further changes in the exchange rates of relevance to HUGO BOSS to be likely in fiscal year 2016. The risk of exchange rate fluctuations and its impact on the earnings of the HUGO BOSS Group based on the above sensitivity analysis is classified as low.

Counterparty risk

The counterparty risk related to financial institutions mainly results from the investment of liquid funds as part of liquidity management, from any short-term bank deposits and from trading in derivative financial instruments.

With respect to financial instruments, the Group is exposed to a (bank) default risk in connection with the possible failure of a contractual party to meet its obligations. The maximum amount involved is therefore the positive fair value of the financial instrument in question. To minimize the risk of default, the HUGO BOSS Group generally only contracts financial instruments for financing activities with counterparties that have excellent credit ratings. Only in exceptional cases and subject to the approval of the Managing Board it is permitted within tight limits to hold time deposits and conclude derivative transactions with banks that have lower credit ratings. HUGO BOSS assumes that the concentration of risk is low and perceives the probability of counterparty default to be unlikely with a low financial impact. Notes to the Consolidated Financial Statements, Note 27

Tax risks

Tax issues are regularly analyzed and assessed by the central tax department in cooperation with external tax consultants. There are tax risks for all open assessment periods. These can result from current business operations or changes in the legal or tax structure of the Group. Sufficient provisions were recognized in prior fiscal years for known tax risks. The amount provided for is based on various assumptions such as interpretation of the respective legal requirements, latest court rulings and the opinion of the authorities, which is used as a basis by management to measure the loss amount and its likelihood of occurrence. Such assessment also takes into account the estimation of local, external experts such as lawyers and tax advisors. On account of changes in the tax legislation of individual countries or diverging estimations of existing issues by the tax authorities, the Group assumes that additional tax risks are possible with moderate financial impact.

Pension risks

The HUGO BOSS Group is exposed to risks in connection with defined benefit obligations. These can impact the net assets, financial position and results of operations of the Group. Pension commitments are measured on the basis of actuarial reports and accounted for accordingly. The main measurement parameters are the discount rate and the expected salary and pension trends. Future changes in measurement parameters can lead to an increase or decrease in pension provisions on subsequent reporting dates. Furthermore, changes in financial markets can affect the value of the plan assets available to cover the pension obligations. Furthermore, local pension regulations in specific countries can also lead to increased cash outflows. Pension risks and their effect on the net assets, financial position and results of operations are classified as likely with a low financial impact. Notes to the Consolidated Financial Statements, Note 26