Kenon Holdings Ltd. | CIK:0001611005 |

Note 32 – Financial Instruments

 

A.

General

 

The Group has international activity in which it is exposed to credit, liquidity and market risks (including currency, interest, inflation and other price risks). In order to reduce the exposure to these risks, the Group holds derivative financial instruments, (including forward transactions, interest rate swap (“SWAP”) transactions, and options) for the purpose of economic (not accounting) hedging of foreign currency risks, inflation risks, commodity price risks, interest risks and risks relating to the price of inputs.

 

This note presents information about the Group’s exposure to each of the above risks, and the Group’s objectives, policies and processes for measuring and managing the risk.

 

The risk management of the Group companies is executed by them as part of the ongoing current management of the companies. The Group companies monitor the above risks on a regular basis. The hedge policies with respect to all the different types of exposures are discussed by the boards of directors of the companies.

 

The comprehensive responsibility for establishing the base for the risk management of the Group and for supervising its implementation lies with the Board of Directors and the senior management of the Group.

 

B.	Credit risk

 

Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on their obligations under the contract. This includes any cash amounts owed to the Group by those counterparties, less any amounts owed to the counterparty by the Group where a legal right of set-offs exist and also includes the fair values of contracts with individual counterparties which are included in the financial statements. The maximum exposure to credit risk at each reporting date is the carrying value of each class of financial assets mentioned in this note. 

 

 

(1)

Exposure to credit risk

 

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

 

		As at December 31
		2017				2016
		$ thousands
		Carrying amount
Cash and cash equivalents			1,417,388				326,635
Short-term investments and deposits			7,144				89,545
Trade receivables, net			44,137				284,532
Long-term trade receivables			-				10,120
Other current assets			35,752				28,462
Deposits and other long-term receivables including derivative instruments			281,717				66,434
			1,786,138				805,728

  

 

The maximum exposure to credit risk for trade receivables, as of the date of the report, by geographic region was as follows:  

 

		As at December 31
		2017				2016
		$ thousands
Israel			44,058				34,779
South America			-				93,293
Central America			-				155,142
Other regions			79				11,438
			44,137				294,652

(2)

Aging of debts and impairment losses

 

Set forth below is an aging of the trade receivables:

 

		As at December 31, 2017												As at December 31, 2016
		For which impairment was not recorded				For which impairment was recorded								For which impairment was not recorded				For which impairment was recorded
						Gross				Impairment								Gross				Impairment
		$ thousands												$ thousands
Not past due			50				—				—				233,787				8				(8	)
Past due up to 3 months			40,879				—				—				50,723				—				—
Past due 3 – 6 months			3,208				—				—				9,160				282				(282	)
Past due 6 – 9 months			—				—				—				83				—				—
Past due 9 – 12 months			—				—				—				652				—				—
Past due more than one year			—				—				—				247				4,714				(4,714	)
			44,137				—				—				294,652				5,004				(5,004	)

 

C.	Liquidity risk

 

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and adverse credit and market conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

 

The Group manages its liquidity risk by means of holding cash balances, short-term deposits, other liquid financial assets and credit lines.

 

Set forth below are the anticipated repayment dates of the financial liabilities, including an estimate of the interest payments. This disclosure does not include amounts regarding which there are offset agreements:

 

		As at December 31, 2017
		Book value				Projected cash flows				Up to 1 year				1-2 years				2-5 years				More than 5 years
		$ thousands
Non-derivative financial liabilities
Loans from banks and others *			317,684				317,786				317,786				-				-				-
Trade payables			58,895				58,895				58,895				-				-				-
Other payables			77,869				77,964				77,964				-				-				-
Non-convertible debentures **			91,122				125,089				13,153				7,086				34,033				70,817
Loans from banks and others **			627,150				846,652				157,805				50,768				173,222				464,857
Liabilities in respect of financing lease			-				-				-				-				-				-
Financial guarantee ***			44,342				44,342				44,342				-				-				-
Financial liabilities – hedging instruments
Forward exchange rate contracts			439				439				439				-				-				-
Financial liabilities not for hedging
Derivatives on exchange rates			73				73				73				-				-				-
			1,217,574				1,471,240				670,457				57,854				207,255				535,674

 

*

Excludes current portion of long-term liabilities.

 

**

Includes current portion of long-term liabilities.

 

***

Financial Guarantees contractual period in Qoros is dependent on Qoros’s timeliness to meet the obligation of current loans payable.

 

		As at December 31, 2016
		Book value				Projected cash flows				Up to 1 year				1-2 years				2-5 years				More than 5 years
		$ thousands
Non-derivative financial liabilities
Loans from banks and others *			213,417				219,651				219,651				-				-				-
Trade payables			285,612				285,612				285,612				-				-				-
Other payables			160,540				160,540				59,650				10,121				21,718				69,051
Non-convertible debentures **			867,287				1,190,032				58,113				57,217				616,765				457,937
Loans from banks and others **			2,143,499				2,756,851				340,684				244,508				977,251				1,194,408
Liabilities in respect of financing lease			88,169				114,069				13,013				12,171				57,432				31,453
Financial guarantee ***			118,763				118,763				118,763				-				-				-
Financial liabilities – hedging instruments
Interest SWAP contracts			22,865				22,865				9,930				5,788				4,192				2,955
Forward exchange rate contracts			2,399				2,399				1,627				772				-				-
Financial liabilities not for hedging
Interest SWAP contracts and options			2,125				2,125				783				570				688				84
Derivatives from debt restructure			29,594				29,594				-				29,594				-				-
			3,934,270				4,902,501				1,107,826				360,741				1,678,046				1,755,888

 

*

Excludes current portion of long-term liabilities and long-term liabilities which were classified to short-term.

 

**

Includes current portion of long-term liabilities and long-term liabilities which were classified to short-term.

 

***

Financial Guarantees contractual period in Qoros is dependent on Qoros’s timeliness to meet the obligation of current loans payable.

 

D.	Market risks

 

Market risk is the risk that changes in market prices, such as foreign exchange rates, the CPI, interest rates and prices of capital products and instruments will affect the fair value of the future cash flows of a financial instrument.

 

The Group buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Boards of Directors of the companies. For the most part, the Group companies enter into hedging transactions for purposes of avoiding economic exposures that arise from their operating activities. Most of the transactions entered into do not meet the conditions for recognition as an accounting hedge and, therefore, differences in their fair values are recorded on the statement of profit and loss.

 

(1)

CPI and foreign currency risk

 

 

The Group’s functional currency is the U.S. dollar. The exposures of the Group companies are measured with reference to the changes in the exchange rate of the dollar vis-à-vis the other currencies in which it transacts business.

 

The Group is exposed to currency risk on sales, purchases, assets and liabilities that are denominated in a currency other than the respective functional currencies of the Group entities. The primary exposure is to the shekel, euro, pound, Peruvian Nuevo Sol and yuan (RMB).

 

The Group uses options and forward exchange contracts on exchange rates for purposes of hedging short-term currency risks, usually up to one year, in order to reduce the risk with respect to the final cash flows in dollars deriving from the existing assets and liabilities and sales and purchases of goods and services within the framework of firm or anticipated commitments, including in relation to future operating expenses.

 

 

The Group is exposed to currency risk in relation to loans it has taken out and debentures it has issued in currencies other than the dollar. The principal amounts of these bank loans and debentures have been hedged by swap transactions the repayment date of which corresponds with the payment date of the loans and debentures.

 

 

The Group has CPI-linked loans. The Group is exposed to high payments of interest and principal as the result of an increase in the CPI. It is noted that part of the Group’s anticipated revenues will be linked to the CPI. The Group does not hedge this exposure beyond the expected hedge included in its revenues.

Type	Valuation technique	Significant unobservable data	Inter-relationship between significant unobservable inputs and fair value measurement
Interest rate Swaps	The Group applies standard valuation techniques such as: discounted cash flows for fixed and variables coupons (estimated with forward curves) using as discounted rates the projected LIBOR zero coupon curve. The observable inputs are obtained through market information suppliers.	Not applicable	Not applicable
Foreign Exchange Forwards	The Group applies standard valuation techniques which include market observable parameters such as the implicit exchange rate calculated with forward points. These variables are obtained through market information suppliers.	Not applicable	Not applicable
Credit from banks, others and debentures	Discounted cash flows with market interest rate	Not applicable	Not applicable
Marketable Securities held for trade	DLOM valuation method	Not applicable	Not applicable