Debt Investors

INTRODUCTION

Dyno Nobel highly values the support provided by all of its debt investors and providers. This section sets out a general description of the Dyno Nobel Group's material debt funding arrangements.

Dyno Nobel operates a centralised Treasury model and manages all major aspects of treasury and capital management through its Group Treasury team located at its head office in Melbourne, Australia.

The Group Treasury team is responsible for maintaining a capital management structure appropriate for strong investment grade credit. The team also manages ongoing liquidity requirements as well as foreign exchange, interest rate and commodity risk.

Capital Management:

Financial Risk Management:

CAPITAL MANAGEMENT

RATING

Dyno Nobel maintains long term investment grade credit ratings with Standard & Poor'sand Moody's. These ratings were initially provided in 2009. The individual ratings by each of the rating agencies as at 30th September 2024 are listed below:

  • Standard & Poor's – BBB (Stable)
  • Moody's – Baa2 (Stable)

Ratings are a statement of opinion, not statements of fact or recommendations to buy, hold or sell any securities. Ratings may be changed, withdrawn or suspended at any time. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if in its judgment circumstances warrant. Dyno Nobel is under no obligation to update information regarding such ratings should they change over time.

Access to reports

For access to the Rating Agency Reports, please contact the rating agencies directly.

Neither Standard & Poor's Ratings Services (Standard & Poor's) or Moody's Investors Service Inc (Moody's) (nor any of their respective affiliates), nor Dyno Nobel (nor any member of the Dyno Nobel Group) make any warranties, express or implied, to users or others as to the accuracy or adequacy of any report by Standard & Poor's or Moody's, or as to the adequacy of results to be obtained by using such report. Neither Standard & Poor's nor Moody's Service (nor any of their respective affiliates), nor Dyno Nobel (nor any member of the Dyno Nobel Group) shall have any liability whatsoever for errors, omissions or inadequacies in such a report or for direct, incidental or consequential damages or lost profits relating to such report.

KEY CREDIT METRICS AND TARGETS

In keeping with Dyno Nobel's commitment to maintain an investment grade credit profile, the Board and Management have set targets for certain credit metrics. These targets are intended to be limits and at most times during a financial cycle the company would be expected to operate inside these limits. The limits are set with the maintenance of an investment grade credit profile in mind and at levels that provide a significant buffer from debt covenant levels. The key credit metrics and targets are listed below:

Gearing (Debt to EBITDA): between 1.5x-2.0x

Interest Cover (EBITDA to Interest Expense): >6.0x

Separately there are financial covenants under Dyno Nobel's Syndicated Bank Facility (see 'Financial Covenants').

DEBT FACILITIES

Fixed interest rate bonds

The Group held the following fixed interest rate bonds at 30 September 2024:

  • AUD431.25m 7 year bonds on issue in the Australian debt capital markets. The bonds have a fixed rate semi-annual coupon of 4.3 percent and mature in Mar 2026.
  • HKD560m 7 year bonds on issue in the US 144A/ Regulation S debt capital market. The bonds have a fixed rate annual coupon of 4.13 percent and mature in February 2026
  • USD305.74m 10 year bonds on issue in the Regulation S debt capital market. The bonds have a fixed rate semi-annual coupon of 3.95 percent and mature in August 2027.
  • USD250m 9 year bonds on issue in the US Private Placement market. The bonds have a fixed rate semi-annual coupon of 4.03 percent and mature in October 2028.
  • USD250m 11 year bonds on issue in the US Private Placement market. The bonds have a fixed rate semi-annual coupon of 4.13 percent and mature in October 2030.

Bank facilities

Bank facilities of AUD490m and USD200m were entered into in March 2021 and are structured as follows:

  • 3 year facility domiciled in Australia consisting of two tranches. Tranche A has a limit of AUD490m and Tranche B has a limit of USD200m. The facility matures in October 2025 following an extension in August 2024.

Tenor of interest bearing liabilities

The Group's average tenor of its interest bearing liabilities at 30 September 2024 is 3.4 years (2023:4.4 years).

FINANCIAL COVENANTS

The Dyno Nobel Group's Syndicated Bank Facilities are subject to certain leverage, interest cover ratio and net worth thresholds. In addition, secured debt cannot exceed a certain percentage of the Group's total assets.

Certain members of the Group are also required to make certain representations and warranties under all of its funding arrangements and, to the extent possible, these representations and warranties are consistent across the various financing arrangements.

FINANCIAL RISK MANAGEMENT

FINANCIAL RISK MANAGEMENT PHILOSOPHY

Dyno Nobel has exposure to financial risks including the following:

  • market risk (foreign exchange, interest rate, equity price and commodity risk);
  • liquidity risk; and
  • credit risk.

FINANCIAL RISK MANAGEMENT CONTROLS

Dyno Nobel's financial risk management program is managed by the centralised Treasury team. All risk management activities are performed within a tightly controlled framework consisting of detailed policies and procedures approved by the Dyno Nobel Board with appropriate segregation of duties. The Group Treasury team has been established as a cost centre and no incentives are linked to returns from derivative positions. No speculative trading in financial derivatives is permitted under any circumstances.

The Dyno Nobel Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Board established the Audit and Risk Management Committee, which assists the Board with, amongst other things, the monitoring of the Group's risk management. The Audit and Risk Management Committee reports regularly to the Board.

Dyno Nobel's financial risk management policies establish a framework for identifying, analysing and managing the financial risks faced by the Dyno Nobel Group. These policies set appropriate financial risk limits and controls, identify permitted derivative instruments and provide guidance on how financial risks and adherence to limits are to be monitored and reported.

Financial risk management policies and systems are reviewed regularly to ensure they remain appropriate given changes in market conditions and/or the Group's activities.

The Audit and Risk Management Committee reviews and monitors compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Dyno Nobel Group. The Audit and Risk Management Committee is assisted in its role by the Group's internal auditors. The internal auditors undertake both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit and Risk Management Committee.

MARKET RISK MANAGEMENT

Market risk is the risk that changes in commodity prices, foreign exchange rates and interest rates will affect Dyno Nobel's income, cash flows and/or value of its holdings of derivative instruments. The objective of market risk management is to manage market risk exposures within acceptable parameters, while optimising the return on risk. To achieve this objective an "insurance based" approach is often taken whereby Dyno Nobel will pay a premium to limit the impact of unfavourable market movements while allowing at least partial participation in favourable movements.

For some market risks, primarily commodity price risks, there is either no specific derivative market available or the derivative market is illiquid and expensive. In some cases, derivative markets exist but contain unacceptable levels of basis risk (the risk that the change in price of a hedge may not match the change in price of the item it hedges). In these circumstances, Dyno Nobel chooses not to hedge using derivatives.

Foreign Exchange Risk Management

Dyno Nobel is exposed to foreign exchange movements on sales and purchases denominated, either directly or indirectly, in foreign currency (primarily in United States dollars). Where these exposures are significant and cannot be eliminated by varying contract terms or other business arrangements, formal hedging strategies are implemented in accordance with policies approved by the Dyno Nobel Board . The formal hedging strategies involve collating and consolidating exposure levels centrally and hedging specific transactions, after taking into account offsetting exposures, by entering into derivative contracts with highly rated financial institutions. Dyno Nobel's principal transactional foreign exchange risks can be split into two main categories: short term transactional exposures and longer term forecast exposures. In addition, Dyno Nobel has translational exposures.

Short Term Transactional Exposures

As Dyno Nobel both imports and exports fertilisers and raw materials in foreign currency, its profitability is impacted by foreign exchange movements. Timing differences between receipts and payments of foreign currency are managed using swaps. Where there is a net excess or shortfall of foreign currency, forward foreign exchange contracts are taken out to hedge those exposures. Dyno Nobel achieves hedge accounting for these derivatives.

Longer Term Forecast Exposures

The profitability of Southern Cross Fertilisers Pty Limited, a wholly owned subsidiary of the Company, is impacted by foreign exchange movement due to the manufacturing inputs (gas, electricity, labour) being denominated in Australian dollars, whilst the manufactured outputs (phosphate-based fertilisers) are sold either in United States dollars or in Australian dollars based on an import parity formula impacted by the rate of exchange.

The amount of anticipated future sales is forecast in light of a number of factors. Policies approved by the Dyno Nobel Board limit the percentage of forecast sales that can be hedged with the percentage reducing as the time horizon increases.

Dyno Nobel may hedge longer term forecast exposures using option structures that may include outright bought calls and/or collars. These contracts allow a degree of participation in favourable outcomes on the underlying exposures resulting from decreases in the AUD/USD exchange rate, but limit the unfavourable outcomes resulting from increases in the AUD/USD exchange rate beyond the strike rate of the options.

Translational Exposures

Dyno Nobel has foreign operations with non-AUD functional currencies and is therefore exposed to translation risk resulting from foreign exchange movements which impact on the AUD equivalent value of these operations.

The impact of the translation risk is managed by a combination of borrowing in the same currency as the net foreign assets (primarily USD) and by using cross currency swaps to create 'synthetic' foreign currency debt.

Interest Rate Risk Management

Dyno Nobel is exposed to interest rate risk on outstanding interest bearing liabilities and investments. The mix of floating and fixed rate debt is managed within policies determined by the Board of Directors using approved derivative instruments.

The interest rate risk arises from long term borrowings in Australian and United States dollars. Policies approved by the Dyno Nobel Board limit the percentage of interest rate exposure that can be hedged within a band, with the percentage reducing as the time horizon increases.

Dyno NobelThe USD interest expense also has the advantage of creating a natural foreign exchange offset to the company's USD earnings stream.

Commodity Risk Management

Dyno Nobel is exposed to changes in commodity prices by virtue of its operations. Where possible, some of that risk is managed by negotiating appropriate contractual terms with its suppliers and customers.

Natural gas represents a significant raw material cost for the company's ammonia and nitrogen based manufacturing. In order to manage the price risk associated with natural gas in Australia, long term fixed price contracts are entered into for the supply of gas. In the United States, the company aims, where possible, to mitigate some of its exposure to natural gas price risk by entering into contracts with its customers which pass on the risk of natural gas price movements.

Dyno Nobel is exposed to price volatility on the commodities it sells. These exposures can be categorised into three main areas: ammonium nitrate, ammonium phosphate and urea.

Dyno Nobel aims to manage its price risk exposure to ammonium nitrate by entering into long term contracts with its customers with fixed sales prices that are adjusted for changes to input costs such as natural gas and for movements in CPI.

Sales of ammonia, ammonia phosphates and urea are generally based on spot prices with minimal ability to contract for long terms. For these commodities, no appropriate derivative market is available.

LIQUIDITY RISK MANAGEMENT

Liquidity risk is the risk that the company will not be able to meet its financial obligations as they fall due. Dyno Nobel's approach to managing liquidity is to ensure that there are sufficient committed funding facilities available to meet the its financial commitments in a timely manner. Dyno Nobel's forecast liquidity requirements are continually reassessed based on regular forecasting of capital requirements including extensive stress testing of critical assumptions such as input costs, sales prices, volumes and exchange rates.

Typically, Dyno Nobel holds a minimum liquidity buffer of AUD500M above forecast funding requirements to meet any unforeseen cash flow requirements including unplanned reduction in revenue, business disruption and unplanned capital expenditure. This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters.

The main facilities that provide the undrawn committed funding are the A$490M and US$200M unsecured three year maturing in October 2025. These are revolving multicurrency facilities in AUD and USD with interest payable at BBSY/Term SOFR plus a margin.

Capital Risk Management

The key objectives when managing capital is to safeguard the ability to continue as a going concern and maintain optimal returns to shareholders and benefits for other stakeholders. "Capital" is considered to be all sources of funding, whether debt or equity. Management also aims to maintain a capital and funding structure that optimises the cost of capital available to the Company over the long term.

The key objectives include:

  • maintaining an investment grade credit profile and the requisite financial metrics;
  • securing access to diversified sources of debt funding with a spread of maturity dates and sufficient undrawn committed facility capacity;
  • optimising over the long term, and to the extent practicable, the Weighted Average Cost of Capital (WACC) to reduce the cost of capital while maintaining financial flexibility.

In order to optimise the capital structure, management may alter the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, draw down additional debt or sell assets to reduce debt in line with the strategic objectives and operating plans of the Company.

Various financial ratios and internal targets are assessed and reported to the Board on a regular basis by management to monitor and support the key objectives set out above. These ratios include:

  • Gearing ratio: Net debt to Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA); and
  • Interest cover: EBITDA to Interest Expense

CREDIT RISK MANAGEMENT

Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The major exposure to credit risk arises from trade receivables and from derivative financial instruments.

Trade and Other Receivables

Dyno Nobel's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer base, including the default risk of the industry and country in which customers currently operate, have an influence on credit risk. Credit risk on sales to overseas customers is normally negated by way of entering into irrevocable letters of credits with financial institutions or by asking customers to pay in advance.

Dyno Nobel has a credit policy under which each new customer is analysed individually for creditworthiness before the company enters into any sales transaction on an open credit account with standard payment, delivery terms and conditions of sale. The creditworthiness review includes analysing the financial information provided by the customer, where applicable, and reports from external ratings agencies. Based on this analysis, credit limits are established for each customer, which represents the projected highest level of exposure, at any one point in time, which a customer may reach. These limits are reviewed annually for all customers with a limit greater than AUD0.5m and on an as needs basis if an increase is required. Customers that fail to meet the benchmark creditworthiness or who are in breach of their credit limits, are normally moved to a "Cash Before Delivery" basis.

Financial Instruments

Dyno Nobel limits its exposure to credit risk created by investing in financial instruments by only investing in liquid securities and only with counterparties that have a credit rating of at least A-.