Notes on financial instruments

A financial instrument is a contract that results in a financial asset at one enterprise and a financial liability or equity instrument at another. Financial assets include especially cash and cash equivalents, trade receivables and other receivables and derivatives. Financial liabilities are obligations to pay cash or other financial assets on a regular basis. These include especially financial liabilities such as bank borrowings, bonds, lease liabilities and trade payables.

Financial instruments overview

The financial instruments as at the balance sheet date were as follows:

Cash and cash equivalents, trade receivables and other receivables have for the most part short remaining terms. Accordingly, their carrying amounts on the balance sheet date approximate their fair value. The fair value of non-current financial assets corresponds to the present value of the related payments under consideration of the prevailing market parameters to the extent that market values were not available.

Trade payables and other financial liabilities typically have short terms; their carrying amounts approximate the fair value. The fair value of  bank borrowings and lease liabilities are measured at the present value of the payments associated with them and under consideration of the relevant applicable market parameters to the extent that market values were not available. The fair value of the financial liabilities would qualify entirely as a Level 2 measurement at T€ 883,666 (2022: T€ 939,856).

T€ 150 (2022: T€ 150) of cash and cash equivalents, T€ 815 (2022: T€ 790) of securities and T€ 2,097 (2022: T€ 1,974) of other financial instruments were pledged as collateral for liabilities.

The non-recourse liabilities in the amount of T€ 509,668 (2022: T€ 607,974) are secured with the return flows from the respective project.

There was no reclassification between the valuation categories in the 2023 financial year.

The net income effects of the financial instruments according to valuation categories are as follows:

Interest from financial assets and financial liabilities is reported in net interest income, with the exception of interest from concession arrangements. Concession arrangements are part of the operating business, which is why interest income from concession arrangements is recognised in revenue and interest expense from concession arrangements is recognised in other operating expense.

Impairments, credit losses and reversals of impairment losses on financial assets and liabilities – excluding investments of less than 20% as well as securities – are reported under other operating expense or other operating income. Gains and losses on the disposal of financial receivables and liabilities are also recognised in other operating income or other operating expense.

Income from the derecognition of liabilities as well as payments received on derecognised receivables are reported under other operating income.

Income, expenses, impairment losses and reversals of impairment losses as well as disposal gains and losses on investments of less than 20% are recognised in net income from investments.

Income, expenses, impairment losses and reversals of impairment losses as well as disposal gains and losses on securities are recognised in net interest income.

Changes in other derivatives measured through profit or loss are recognised in net interest income.

Financial instruments measured at fair value

The fair values as at 31 December 2023 for financial instruments measured at fair value in the balance sheet were determined as follows:

The fair values as at 31 December 2022 for financial instruments measured at fair value in the balance sheet were determined as follows:

STRABAG records regroupings between the different fair-value-hierarchy levels at the end of the reporting period in which the regrouping took place.

During the financial years 2023 and 2022, there were no transfers between the levels.

Financial instruments in Level 1

The fair value is determined on the basis of quoted prices in an active market. An active market exists if the prices are regularly established and readily available to the market participants. The quoted market price for the financial instruments presented in Level 1 corresponds to the bid price at the balance sheet date.

Financial instruments in Level 2

These financial instruments are not traded in an active market. They involve exclusively derivatives held for hedging purposes and other derivatives. The fair value expresses the expected realisable value of the transaction on the balance sheet date. It is determined using recognised and standard financial methods of measurement on the basis of observable market data. Specifically, measurement is made using interest yield and currency curves in proportion to the term of the derivative. The methods of measurement used also take into account fees, market risk, credit risk, ratings and exchange rate risks.

Financial instruments in Level 3

These financial instruments involve exclusively a large number of smaller investments below 20% that are not traded on an active market. Their fair value is determined on the basis of simplified company valuations.

The carrying amount of investments below 20% developed as follows:

Due to the broad diversification of the investments, no major fluctuations in value are expected in the future.

The derivatives are comprised as follows:

Hedge accounting is not applied to other derivatives, but they are part of economic hedging relationships.

Principles of risk management

The STRABAG SE Group is subject to credit, market and liquidity risks related to its financial assets, financial liabilities and planned transactions. The goal of financial risk management is to minimise these risks through ongoing financially-oriented activities.

The basics of the financial policy are set by the Management Board and monitored by the Supervisory Board. The implementation of the financial policy and responsibility for the risk management are the domain of the group treasury. Certain transactions require prior approval by the Management Board, which is regularly informed as to the scope and amount of the current risk exposure.

The Group assesses concentrations of risk with regard to interest rate risk, currency risk and credit risk as low because customers are located in different countries, belong to different industries and operate in largely independent markets.

The Group’s business activities are subject to market price risks that are customary in the industry. These risks are not hedged through derivatives or financial instruments but through other hedging activities including but not limited to contractual agreements.

Further explanations on risk management can be found in the group management report from 31 December 2023.

Interest rate risk

The receivables from concession arrangements in the amount of T€ 481,311 (2022: T€ 532,251) and the non-current other financial assets in the amount of T€ 319,152 (2022: T€ 405,653) are mostly at fixed interest rates. Bank deposits, on the other hand, are mainly at variable interest rates. Investments with fixed interest rates are concluded for a maximum of three months. The risk of financial instruments on the assets side consists of falling interest rates. The increase in interest rates in the main Group countries in the 2023 financial year had a positive impact on net interest income due to the Group’s net cash position.

The most important bank borrowings involve non-recourse financing from projects in the amount of T€ 509,668 (2022: T€ 607,974), which are either at fixed interest rates or hedged against interest rate changes by means of interest rate swaps. The risk of the variable interest-bearing financial instruments on the liabilities side consists of rising interest rates on expenses resulting from an unfavourable change in market interest rates.

The interest rate risk is managed by concluding fixed interest rate agreements or through hedging with interest rate swaps for significant financing liabilities. In the case of bank deposits, investments are constantly adjusted to the changed market conditions by continuously monitoring the interest rate environment.

The amount of bank deposits and bank borrowings according to currency – giving the average interest rate at the balance sheet date – is represented as follows:

Bank deposits

Bank borrowings

Had the interest rate level at 31 December 2023 been higher by 100 basis points, then the EBT would have been higher by T€ 28,110 (2022: T€ 19,713) and the equity at 31 December 2023 would have been higher by T€ 47,567 (2022: T€ 40,847). Had the interest rate level been lower by 100 basis points, this would have meant a correspondingly lower equity and EBT. The calculation is made based on the level of interest-bearing financial assets and liabilities as at 31 December. Tax effects from interest rate changes were not considered.

Currency risk

Due to the decentralised structure of the Group, characterised by local companies in the respective countries, mainly closed currency positions appear in the balance sheet. Receivables and liabilities from business activities mainly offset each other in the same currency.

Internal hedging is performed for construction contracts where there are no closed currency positions (e.g. construction contracts that are not concluded in functional currency). As part of corporate-wide treasury management, these positions are then combined, and external hedging is performed if necessary.

The internal financing of companies within the Group using different functional currencies resulted in an earnings-relevant currency risk. Derivative financial instruments are transacted to limit this risk. The market values of these hedging transactions in the amount of T€ -7,135 (2022: T€ -18,756) are recognised in profit or loss in the income statement. The hedging transactions are reported under other financial assets or other financial liabilities.

In addition to the bank deposits and bank borrowings in foreign currencies (see “Interest rate risk”), the other non-current financial assets still include carrying amounts of T€ 21,554 (2022: T€ 128,795) in foreign currencies.

Development of the important currencies in the Group:

The following table shows the hypothetical changes in EBT and equity if the euro had been appreciated or depreciated by 10% in relation to another currency in the year 2023:

The following table shows the hypothetical changes in EBT and equity if the euro had been appreciated or depreciated by 10% in relation to another currency in the year 2022:

The calculation is based on original and derivative foreign currency holdings in non-functional currency as at 31 December as well as underlying transactions for the next twelve months. The effect on tax resulting from changes in currency exchange rates was not taken into consideration. Currency effects from net investments in foreign operations are recognised in the change in equity. Currency differences recognised directly in equity from the translation of the different functional currencies into euros are not taken into account.

Cash flow hedges

Currency risks in the Group result when the currency of the order differs from the functional currency of the company. The planned proceeds are received in the currency of the order (for example, euro or US dollar), while a substantial part of the associated costs is incurred in the local currency.

The Group uses foreign exchange forwards to hedge against this risk. These contracts are classified as hedges against future payments and are presented as cash flow hedges. As in the previous year, there were no currency hedging instruments to be recognised as cash flow hedges in the 2023 financial year.

To hedge against variable interest rate obligations, interest rate swaps are used especially with financing obligations from concession arrangements. This serves to hedge the variability of future cash flows from variable interest rate payments. Interest rate swaps are presented as cash flow hedges. These involve derivatives that are settled net.

The Group determines the existence of an economic relationship between the hedging instrument and the hedged item for the purpose of assessing the effectiveness of the hedge based on the interest rate benchmarks, terms, repricing dates and maturities of the nominal amounts.

The amounts of the hedged items as at 31 December 2023 are as follows:

The amounts of the hedged items as at 31 December 2022 are as follows:

The hedging instruments as at 31 December 2023 were comprised as follows:

Possible sources of ineffectiveness in these hedging relationships include:

• the effect of counterparty and own credit risk on the fair value of derivatives, which is not reflected in the change in the fair value of the hedged cash flows, and is attributable to interest rates changes
• differences in the repricing dates of the hedging instrument and the underlying transactions
• changes in the expected value of the cash flows from the underlying transaction being hedged and from the hedging instrument

In the 2023 financial year, a total of T€ 1,721 (2022: T€ 539) was recognised in the income statement under interest and similar income for the Scarborough interest rate swap due to ineffectiveness.

The hedging instruments as at 31 December 2022 were made up as follows:

In the 2022 financial year, a total of T€ 539 was recognised in the income statement under interest and similar income for the Scarborough interest rate swap due to ineffectiveness.

On 31 December 2023, the Group held the following instruments for the purpose of hedging interest rate fluctuation:

On 31 December 2022, the Group held the following instruments for the purpose of hedging interest rate fluctuation:

The reconciliation of the equity components as at 31 December 2023 is as follows:

The reconciliation of the equity components as at 31 December 2022 is as follows:

Credit risk

Credit risks arise when contractual parties do not meet their payment obligations by the date of settlement. Such risks exist with regard to payments of receivables from the operating business as well as the contractual cash flows from debt instruments in the category of measured at amortised cost (AC). To manage the credit risk from the operating business, STRABAG established a credit risk management system in line with the market conditions and customers. In particular, due to the economic uncertainties, loans to and receivables from private clients are being monitored even more closely than in the past.

The maximum credit risk of trade receivables, contract assets and other financial assets corresponds to the carrying amounts presented in the balance sheet.

The risk for receivables from clients can be rated as low due to the wide dispersion, a constant creditworthiness check and the presence of the public sector as an important client. The performance of work for private customers is largely secured by ongoing partial payments.

The risk of default for other primary financial instruments shown on the assets side can also be regarded as low, as the contract partners are mainly financial institutions with the highest level of creditworthiness or the public sector and/or there is wide dispersion. In the case of other non-current financial assets, ongoing creditworthiness checks are also carried out individually on the basis of expected future cash flows.

STRABAG SE holds no non-financial assets as security collateral. Financial collateral is only of minor importance, as the large number of public-sector customers presents hardly any payment risk.

Impairments on trade receivables and on contract assets are determined using the simplified approach. The impairments are determined taking into consideration the country-specific risks and the creditworthiness of the customers. For public clients, the probability of default for any country is based on Moody’s national scale ratings for that country, while for private clients in the country in question, the probability of default is assumed to be two rating levels higher.

Impairments, considered individually, are also made on financial assets if the carrying amount of the financial asset is higher than the present value of the future cash flows. This can be triggered by financial difficulties, insolvency of the client, breach of contract or significant default of payment. These impairments are composed of many individual items.

The risk provision as at 31 December 2023 for trade receivables and for contract assets developed as follows during the financial year:

In addition, ECL impairments on other financial assets amounting to T€ 4,056 (2022: T€ 3,144) exist as at 31 December 2023, as well as individual impairments amounting to T€ 260,451 (2022: T€ 143,857) for other non-current financial assets.

The risk provision as at 31 December 2022 for trade receivables and for contract assets developed as follows during the financial year:

The following shows the gross carrying amounts of the financial assets by risk class for which the expected losses were recognised over the entire remaining term.

The risk classes were determined according to the probabilities of default depending on country risk and creditworthiness of the debtors. Below 0.55% is assumed to be low risk, between 0.55% and 1.2% medium risk and above 1.2% high risk.

The gross carrying amounts for the 2023 financial year are as follows:

The gross carrying amounts for the 2022 financial year are as follows:

Liquidity risk

Liquidity for the STRABAG SE Group means not only solvency in the strict sense but also the availability of the necessary financial margin for mainstay business through sufficient aval lines.

To guarantee financial flexibility, liquidity reserves are kept in the form of cash and credit lines for cash and aval loans. The STRABAG SE Group keeps bilateral credit lines with banks and syndicated cash and aval credit lines in the amount of € 0.4 billion (2022: € 0.4 billion) and € 2.0 billion (2022: € 2.0 billion) respectively. The overall line for cash and aval loan amounts to € 8.5 billion (2022: € 8.2 billion). The syndicated surety credit line contains covenants which were clearly fulfilled at the reporting date due to the Group’s current financial and liquidity situation.

The STRABAG SE Group has sufficient liquidity reserves. Despite the uncertain economic situation, no significant changes in customers’ payment behaviour could be detected. An increase in liquidity risk could not be identified in the 2023 financial year.

In addition to continuous monitoring of the liquidity situation by the Group Treasury, a corporate-wide cash pooling system and strict working capital management at project level are used to manage liquidity risk. Internal allowances and charges as well as regular reporting obligations ensure efficient receivables and accounts payable management at project level. Another liquidity management tool is the regular financial planning based on output, earnings and investment plans.

The following payment obligations arise from the financial liabilities (interest payments based on interest rate as at 31 December and redemption) for the subsequent years:

Payment obligations as at 31 December 2023

The payment obligations from financial liabilities as at 31 December 2023 are comprised as follows:

The trade payables and the other liabilities without derivatives essentially lead to cash outflows in line with the maturity at the amount of the carrying amounts.

The payment obligations from leasing liabilities amount to T€ 72,134 for 2025, T€ 61,355 for 2026, T€ 51,862 for 2027 and T€ 48,189 for 2028.

The payment obligations from derivatives as at 31 December 2023 are comprised as follows:

The derivatives held for hedging purposes showed a positive market value as at the reporting date, which is why no payment obligations arise for them.

Payment obligations as at 31 December 2022

The payment obligations from financial liabilities as at 31 December 2022 are comprised as follows:

The trade payables and the other liabilities without derivatives essentially lead to cash outflows in line with the maturity at the amount of the carrying amounts.

The payment obligations from leasing liabilities amount to T€ 65,120 for 2024, T€ 59,774 for 2025, T€ 51,012 for 2026 and T€ 43,853 for 2027.

The payment obligations from derivatives as at 31 December 2022 are comprised as follows:

Financial guarantees

STRABAG has issued financial guarantees to banks for the benefit of its own subsidiaries or associates. Based on the loan amount outstanding as at 31 December 2023, the maximum guarantee amount is T€ 74,557 (2022: T€ 71,343). As utilisation of the guarantees is unlikely, no provision has been made for them. Theoretically, these abstract guarantees can be utilised at any time, which would lead to a short-term outflow of liquidity.