5 Financial Instruments

5.1 Accounting classification

The following table shows the carrying amounts of financial assets and financial liabilities.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which FMO has access at that date.

At June 30, 2020

FVPL - mandatorily

FVPL-designated

Fair value hedging instruments

FVOCI-equity instruments

Amortized cost

Financial liabilities used as hedged items

Total

Financial assets measured at fair value

       

Short-term deposits

1,016,741

-

-

-

-

-

1,016,741

Derivative financial instruments

209,649

-

229,250

-

-

-

438,899

Loans to the private sector

642,990

-

-

-

-

-

642,990

Equity investments

1,608,837

-

-

107,955

-

-

1,716,792

Total

3,478,217

-

229,250

107,955

-

-

3,815,422

Financial assets not measured at fair value

       

Banks

-

-

-

-

60,339

-

60,339

Current accounts with state funds and other programs

-

-

-

-

230

-

230

Short-term deposits

-

-

-

-

615,341

-

615,341

Interest-bearing securities

-

-

-

-

401,382

-

401,382

Loans to the private sector

-

-

-

-

4,312,068

-

4,312,068

Other receivables

-

-

-

-

21,982

-

21,982

Total

-

-

-

-

5,411,342

-

5,411,342

Financial liabilities measured at fair value

       

Derivative financial instruments

290,017

-

6,857

-

-

-

296,874

Total

290,017

-

6,857

-

-

-

296,874

Financial liabilities not measured at fair value

       

Short-term credits

-

-

-

-

190,997

-

190,997

Current accounts with state funds and other programs

-

-

-

-

109

-

109

Debentures and notes

-

-

-

-

1,636,306

4,511,174

6,147,480

Accrued liabilities

-

-

-

-

21,002

-

21,002

Other liabilities

-

-

-

-

28,190

-

28,190

Total

-

-

-

-

1,876,604

4,511,174

6,387,778

At December 31, 2019

FVPL - mandatorily

FVPL-designated

Fair value hedging instruments

FVOCI-equity instruments

Amortized cost

Financial liabilities used as hedged items

Total

Financial assets measured at fair value

       

Short-term deposits

926,769

-

-

-

446,708

-

1,373,477

Derivative financial instruments

157,177

-

144,060

 

-

-

301,237

Loans to the private sector

696,513

-

-

-

-

-

696,513

Equity investments

1,756,644

-

-

122,921

-

-

1,879,565

Total

3,537,103

-

144,060

122,921

446,708

-

4,250,792

Financial assets not measured at fair value

       

Banks

-

-

-

-

64,626

-

64,626

Current accounts with state funds and other programs

-

-

-

-

1,194

-

1,194

Short-term deposits

-

-

-

-

1,373,477

-

1,373,477

Interest-bearing securities

-

-

-

-

350,237

-

350,237

Loans to the private sector

-

-

-

-

4,334,109

-

4,334,109

Other receivables

-

-

-

-

25,824

-

25,824

Total

-

-

-

-

6,149,467

-

6,149,467

Financial liabilities measured at fair value

       

Derivative financial instruments

244,447

-

12,724

-

-

-

257,171

Total

244,447

-

12,724

-

-

-

257,171

Financial liabilities not measured at fair value

       

Short-term credits

-

-

-

-

94,339

-

94,339

Current accounts with state funds and other programs

-

-

-

-

2,832

-

2,832

Debentures and notes

-

-

-

-

2,035,002

3,773,180

5,808,182

Accrued liabilities

-

-

-

-

22,983

-

22,983

Other liabilities

-

-

-

-

43,959

-

43,959

Total

-

-

-

-

2,199,115

3,773,180

5,972,295

5.2 Short-term deposits

 

June 30, 2020

December 31, 2019

Collateral delivered (related to derivative financial instruments)

104,518

95,176

Dutch central bank

508,758

350,122

Mandatory reserve deposit with Dutch central bank

2,065

1,410

Call Deposits

-

-

Short term deposits measured at AC

615,341

446,708

Commercial paper

772,079

796,725

Money market funds

244,662

130,044

Short term deposits measured at FVPL

1,016,741

926,769

Total

1,632,082

1,373,477

Mandatory reserve deposits are not available for use in FMO’s day-to-day operations.

5.3 Derivatives 

  

Carrying amount

   

June 30, 2020

Notional amount

Assets

Liabilities

Change in fair value used for calculating hedge ineffectiveness

Ineffectiveness recorded in profit or loss

Line item in P&L that includes hedge ineffectiveness

Interest rate swaps

4,299,504

229,250

6,857

90,836

1,547

Results from financial transactions

       

December 31, 2019

      

Interest rate swaps

3,653,162

144,061

12,724

46,692

317

Results from financial transactions

June 30, 2020

Carrying amount of the hedged item

Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item

  

Balance sheet line item

Liabilities

Assets

Liabilities

Change in fair value used for calculating hedge ineffectiveness

Accumulated amount remaining in the balance sheet for any hedged items that have ceased to be adjusted for hedging gains and losses

Debentures and notes

4,511,174

-

-

-92,383

-

      

December 31, 2019

     

Debentures and notes

3,773,180

-

-

-46,375

-

June 30, 2020

 

Notional amounts

Fair value assets

Fair value liabilities

Derivatives other than hedge accounting instruments:

    

ˑ

Currency swaps

110,068

-507

1,997

ˑ

Interest rate swaps

1,359,001

13,691

31,411

ˑ

Cross-currency interest rate swaps

4,701,069

192,551

254,825

Subtotal

 

6,170,138

205,735

288,233

Embedded derivatives related to asset portfolio

 

-

3,914

1,785

Total derivative assets (/liabilities) other than hedge accounting instruments

 

6,170,138

209,649

290,017

December 31, 2019

 

Notional amounts

Fair value assets

Fair value liabilities

Derivatives other than hedge accounting instruments:

    

ˑ

Currency swaps

324,015

428

869

ˑ

Interest rate swaps

1,745,060

34,159

44,255

ˑ

Cross-currency interest rate swaps

3,061,803

116,801

197,625

Subtotal

 

5,130,878

151,388

242,749

Embedded derivatives related to asset portfolio

 

-

5,789

1,698

Total derivative assets (/liabilities) other than hedge accounting instruments

 

5,130,878

157,177

244,447

5.4 Equity Investments

The reduction in fair values of the equity portfolio can be seen across sectors and geographies and is the result of global declines in emerging market equity prices affected by COVID - 19 pandemic. Refer to Section 3.3 'Equity Investment Risk' for information about the inputs applied for determining a reliable fair value estimate.

 

Equity measured at FVPL

Equity measured at FVOCI

Total

Net balance at January 1, 2020

1,756,644

122,921

1,879,565

Purchases and contributions

102,451

-

102,451

Return of Capital (including sales)

-64,800

-

-64,800

Changes in fair value

-185,458

-14,966

-200,424

Net balance at June 30, 2020

1,608,837

107,955

1,716,792

5.5 Associates

The movement change in 'Associates' during first half year of 2020 is mainly a result of decrease in valuation (-€57 million) of Arise B.V. which is FMO's main investment. The decline in the valuation of Arise B.V. is caused by the COVID-19 factor applied. This factor is based on Arise’s management expectations of fair value movements during HY 2020 of its underlying associates. This expectation has been validated with the methodology as reflected in Section 3.3 ‘Equity Risk Investment’.

 

2020

Net balance at January 1, 2020

285,867

Purchases and contributions

6,011

Return of Capital (including sales)

-4,640

Changes in value

-66,023

Net balance at June 30, 2020

221,215

5.6 Fair values

Fair value hierarchy

All financial instruments for which fair value is recognized or disclosed are categorized within the fair value hierarchy, based on lowest level input that is significant to the fair value measurement as a whole, as follows:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

Level 3 – Valuation technique for which the lowest level input that is significant to the fair value measurement is unobservable.

Valuation processes

For recurring and non-recurring fair value measurements categorized within Level 3 of the fair value hierarchy, FMO uses the valuation processes to decide its valuation policies and procedures and analyze changes in fair value measurement from period to period.

FMO’s fair value methodology and governance over applied methods includes a number of controls and other procedures to ensure appropriate safeguards are in place to ensure quality and adequacy. The responsibility of ongoing measurement resides with the relevant departments. Once submitted, fair value estimates are also reviewed and challenged by the Investment Risk Committee (IRC). The IRC approves the fair values measured including the valuation techniques and other significant input parameters used. The appropriateness of the valuation techniques applicable to the underlying instruments is assessed as part of the valuation process and any potential changes between levels in the fair value hierarchy are considered.

Valuation techniques

When available, the fair value of an instrument is measured by using the quoted price in an active market for that instrument (level 1). A market is regarded as active if transactions of the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, valuation techniques are used that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Valuation techniques include:

  1. Recent broker/ price quotations

  2. Discounted cash flow models

  3. Option-pricing models

The techniques incorporate current market and contractual prices, time to expiry, yield curves and volatility of the underlying instrument. Inputs used in pricing models are market observable (level 2) or are not market observable (level 3). A substantial part of fair value (level 3) is based on net asset values.

Investments are measured at fair value when a quoted market price in an active market is available or when fair value can be estimated reliably by using a valuation technique. The main part of the fair value measurement related to investments (level 3) is based on net asset values of investment funds as reported by the fund manager and are based on advanced valuation methods and practices. When available, these fund managers value the underlying investments based on quoted prices, if not available multiples are applied as input for the valuation.

The table below presents the carrying value and estimated fair value of FMO’s non fair value financial assets and liabilities.

The carrying values in the financial asset and liability categories are valued at amortized cost except for the funding in connection with hedge accounting. The underlying changes to fair value of these assets and liabilities are therefore not recognized in the balance sheet.

 

June 30, 2020

December 31, 2019

Non fair value financial assets-liabilities

Carrying value

Fair value

Carrying value

Fair value

     

Short term deposits at AC

615,341

615,341

446,708

446,708

Banks

60,339

60,339

64,626

64,626

Interest-bearing securities

401,382

411,277

350,237

355,823

Loans to the private sector at AC

4,312,068

4,497,176

4,334,109

4,533,256

Total non fair value financial assets

5,389,130

5,584,133

5,195,681

5,400,413

     

Short-term credits

190,997

190,997

94,339

94,339

Debentures and notes

6,147,480

6,156,460

5,808,182

5,791,673

Total non fair value financial liabilities

6,338,477

6,347,457

5,902,521

5,886,012

The valuation technique we use for the fair value determination of loans to the private sector and non-hedged funding is based on the discounted cash-flow method. The discount rate we apply is a spread curve based on the average spread of the portfolio.

The following table gives an overview of the financial instruments valued at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

At June 30, 2020

Level 1

Level 2

Level 3

Total

     

Financial assets mandatorily at FVPL

    

-Short-term deposits

1,016,741

-

-

1,016,741

-Derivative financial instruments

-

434,985

3,914

438,899

-Loans to the private sector

59,054

-

583,936

642,990

-Equity investments

7,041

-

1,601,797

1,608,837

     

Financial assets at FVOCI

    

-Equity investments

-

-

107,955

107,955

Total financial assets at fair value

1,082,836

434,985

2,297,602

3,815,423

     

Financial liabilities mandatorily at FVPL

    

-Derivative financial instruments

-

296,874

-

296,874

Total financial liabilities at fair value

-

296,874

-

296,874

December 31, 2019

Level 1

Level 2

Level 3

Total

     

Financial assets mandatorily at FVPL

    

Short-term deposits

926,769

-

-

926,769

Derivative financial instruments

-

295,449

5,788

301,237

Loans to the private sector

66,647

-

629,866

696,513

Equity investments

7,726

-

1,748,918

1,756,644

     
     

Financial assets at FVOCI

    

Equity investments

-

-

122,921

122,921

Total financial assets at fair value

1,001,142

295,449

2,507,493

3,804,084

     

Financial liabilities mandatorily at FVPL

    

Derivative financial instruments

-

255,473

1,698

257,171

Total financial liabilities at fair value

-

255,473

1,698

257,171

Movements in financial instruments measured at fair value based on level 3

Derivative financial instruments

Loans to the private sector

Equity investments

Total

     

Restated Balance at January 1, 2019

4,624

670,605

1,556,952

2,232,181

Total gains or losses

    

-In profit and loss (changes In fair value)

1,075

-20,359

45,509

26,225

-In other comprehensive income (changes in fair value & exchange rate differences)

-

-

17,496

17,496

Purchases /disbursements

-

101,268

296,294

397,562

Sales/repayments

-

-113,463

-85,734

-199,197

Write-offs

-

-10,498

-

-10,498

Accrued income

-

1,965

-

1,965

Exchange rate differences

89

10,845

18,461

29,395

Derecognition and/or restructuring FVPL versus AC

-

613

-

613

Conversion from loans to equity

-

-11,110

11,312

202

Transfers into level 3

-

-

19,275

19,275

Transfers out of level 3

-

-

-7,726

-7,726

Balance at December 31, 2019

5,788

629,866

1,871,839

2,507,493

     

Total gains or losses

    

-In profit and loss (changes In fair value)

-1,868

-2,075

-165,029

-168,972

-In other comprehensive income (changes in fair value & exchange rate differences)

-

-

-14,966

-14,966

Purchases /disbursements

-

20,553

101,864

122,417

Sales/repayments

-

-60,918

-64,800

-125,718

Principal capitalization

-

4,126

-

 

Write-offs

-

-

-

-

Accrued income

-

-4,858

-

-4,858

Exchange rate differences

-6

-2,758

-19,156

-21,920

Derecognition and/or restructuring FVPL versus AC

-

-

-

-

Conversion from loans to equity

-

-

-

-

Transfers into level 3

-

-

-

-

Transfers out of level 3

-

-

-

-

Balance at June 30, 2020

3,914

583,936

1,709,752

2,293,476

Valuation techniques and unobservable inputs used measuring fair value of loans to the private sector

Type of debt investment

Fair value at June 30, 2020

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity to unobservable inputs

     

Loans

104,437

Discounted cash flow model

Based on client spread

A decrease/increase of the used spreads with 1% will result in a higher/lower fair value of approx €6m.

 

195,231

ECL measurement

Based on client rating

An improvement / deterioration of the Client Rating with 1 notch will result in 1% increase/decrease

 

64,272

Credit impairment

n/a

n/a

Debt Funds

219,996

Net Asset Value

n/a

n/a

Total

583,936

   
Valuation techniques and unobservable inputs used measuring fair value of equity investments

Type of equity investment

Fair value at June 30, 2020

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity to unobservable inputs

     

Private equity fund investments

863,088

Net Asset Value

n/a

n/a

Private equity direct investments

22,069

Recent transactions

Based on at arm’s length recent transactions

n/a

 

391,005

Book multiples

1.0 – 2.5

A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €39 million.

 

258,539

Earning Multiples

Depends on several unobservable data such as EBITDA multiples (range 1.0 - 11,3)

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €26 million.

 

7,250

Discounted Cash Flow (DCF)

Based on discounted cash flows

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €1 million.

 

95,923

Put option

The guaranteed floor depends on several unobservable data such as IRR, EBITDA multiples, book multiples and Libor rates

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €10 million.

 

71,878

Firm offers

Based on offers received from external parties

n/a

Total

1,709,752