Interest rate risk
Interest rate risk is linked to medium and long-term loans and has a different impact depending on whether the loan is fixed or floating rate. In fact, if the loan is floating rate, the interest rate risk is on the cash flow; whereas if it is fixed rate, the interest risk is on the fair value.
The hedging policy adopted is designed to minimise any losses connected to fluctuations in interest rates in the case of floating rate loans by transforming them into fixed rate loans or stipulating collar contracts, and to minimise the higher cost of fixed rate loans compared with floating rate ones (the so-called “negative carry”).
Derivatives refer to the following loans:
| Loan | Derivatives | Accounting |
| A2A loan with BEI, expiry 2023, residual balance at December 31, 2010, amounting to 200 million euro, at floating rate. | Collar due to run until 2023; the fair value at December 31, 2010 was -6.7 million euro. | The loan is valued at amortised cost. The collar is a cash flow hedge, and the effective part of the hedge is booked to a specific equity reserve. |
| A2A bond loan with a nominal value of 1000 million euro, expiry 2016 and fixed coupon of 4.5%. |
IRS on the full nominal amount, same duration as the loan; fair value at December 31, 2010 was 30 million euro. | Fair value hedge The valuation based on the fair value hedge of the bond loan will be equal to the book value of the financial liability (as foreseen by IAS and the doctrine mentioned previously) which includes the financial expenses and a portion of the accrual relating to the premium and issue costs. Accumulated changes in the fair value of the risk being hedged are added to this value, i.e. the interest flow differentials, which will be booked to the income statement. |
| Collar on half of the nominal amount, same duration as the loan; the fair value at December 31, 2010 was -7.3 million euro. | The collar is valued at fair value with changes booked to the statement of income. | |
| Collar on 350 million euro, expiry November 2016; the fair value at December 31, was +6.3 million euro. | The collar is valued at fair value with changes booked to the statement of income. | |
| A2A bond loan with a nominal value of 500 million euro, expiry 2013 and fixed coupon of 4.875%. | Collar with double cap and same duration as the loan; the fair value at December 31, 2010 was 19.2 million euro. | The fair value option has been applied to the loan. The collar is valued at fair value with changes booked to the statement of income. |
| A2A loan from BEI, maturity 2014-2016, residual balance at December 31, 2010 62.5 million euro, floating rate. | Collar due to run until June 2012; the fair value at December 31, 2010 was - 2.3 million euro. | The loan is valued at amortised cost. The collar is a cash flow hedge, and the effective part of the hedge is booked to a specific equity reserve. |
| A2A revolving lines, 600 million euro, at floating rate. | Collar due to run until July 2012; the fair value of the hedge at December 31, 2010 was -15.2 million euro. | The loan is valued at amortised cost. The collar is valued at fair value with changes booked to the statement of income. |
| A2A Reti Elettriche loan from Cassa Depositi e Prestiti, maturity 2013, residual balance at December 31, 2010, 105.9 million euro, floating rate. | Collar with double cap, same duration as the loan and residual balance of 79.4 million euro (75% coverage of loan); the fair value at December 31, 2010 was -0.8 million euro. | The loan is valued at amortised cost. The collar is valued at fair value with changes booked to the statement of income. |
| AMSA loan with Mediocredito, expiry 2012, residual balance at December 31, 2010, amounting to 11.4 million euro, at floating rate. | Fixed rate swaps with the same duration as the loan; the fair value at December 31, 2010 the fair value was -0.3 million euro. | The loan is valued at amortised cost. The swap is a cash flow hedge, booking the effective part of the hedge to a specific equity reserve. |
| Leasing Ecolombardia-4 loan from Locat, maturity 2013, residual balance at December 31, 2010 of 5.2 million euro, at floating rate | Fixed rate swaps with the same duration as the loan; the fair value at December 31, 2010 the fair value was -0.1 million euro. | The lease is accounted for as a finance lease. The swap is a cash flow hedge, booking the effective part of the hedge to a specific equity reserve. |
| Ecoenergia loan from MPS, repaid in advance in the second half of 2007, original amount of 21 million euro. | Fixed rate swaps with the same duration (March 31, 2011) as the loan; the fair value at December 31, 2010 the fair value was -0.02 million euro. | The swap is measured at fair value with changes booked to the income statement. |
A structured model for interest rate risk analysis and management has been developed in-house. The method used for calculating exposure to this risk is based on the Montecarlo Method, which measures the impact that fluctuations in interest rates have on prospective financial flows. The method simulates at least ten thousand scenarios for each important variable, depending on the volatility and correlations associated with each of them, using forward market rate curves as prospective levels. Having obtained in this way a distribution of the probability of results, it is possible to extrapolate the maximum negative variance expected (worst case scenario) and the maximum positive variance expected (best case scenario), with a confidence interval of 99%.
More details are available in the 2010 Consolidated Financial Statement, under Risk Management section
