Annual Report 2015

34. Financial risk management

 

Principles of risk management

 

The target of financial risk management is to secure adequate and competitive financing for executing the Group’s operative businesses and strategy and to minimize the effects of market risks in Group’s financial results, financial position and cash flows. The Group aims to identify risk concentrations and hedge against them to necessary extent. The Group’s business involves financial risks, such as market, liquidity, credit and counterparty risks. Of Group's commodity risks, the price risk related to electricity is monitored actively, and managed with electricity derivatives.  

               
               

Risk management organization

 

Group Treasury is responsible for the centralized management of finances and financial risks in line with the financing guidelines approved by the Board of Directors. Group Treasury is responsible for the entire Group's currency, interest rate, liquidity and refinancing risk management in close co-operation with the business areas. The business areas are responsible for the identification, management and reporting of the financial risks associated with their operations to Group Treasury. Credit risk related to customer receivables is managed by the sales organizations of the business areas. Posti Kiinteistöt is responsible for managing the price risk of electricity.

               
               

Market risks

 

Currency risks

 

The goal of currency risk management is to reduce the Group’s currency risk to an optimal level as well as improve the transparency of profitability and predictability of financial results. The Group’s transaction risk primarily consists of currency-denominated receivables, payables and commitments. The key principle is to achieve full hedging against the transaction risks related to the balance sheet. Unhedged exposure is permitted within the limits specified in the Group’s financing policy. Loans granted by the parent company to subsidiaries are primarily in the subsidiary’s domestic currency, in which case the subsidiary has no currency risk arising from financial agreements. On the balance sheet date, Posti Group had external currency derivatives with a nominal value of EUR 8.6 million used to hedge against the currency risk associated with loans, receivables and commitments. The Group is exposed to translation risk in connection with investments in subsidiaries outside the euro zone. The objective of translation risk management is to ensure exchange rate fluctuations do not cause any material changes in the Group’s gearing. On the balance sheet date, the Group did not hedge against translation risk.

               

Due to high volatility and weakening of the ruble, the Group has taken the development of the Russian ruble and ruble markets under particular observation. As defined in the Group's treasury policy, equity investments in Russian subsidiaries are not hedged.  Due to high hedging costs the Group has for the time being quit hedging of the ruble-denominated receivables of the parent company and the local operative transaction risks.

               

Major transaction risk positions of financial instruments on the balance sheet date

               

2015

EUR-companies

         

RUB-companies

EUR million

RUB

SEK

NOK

PLN

USD

 

USD

Trade receivables and payables

0.1

-2.7

-0.3

0.0

3.0

 

0.2

Loans and bank accounts *)

14.8

-2.6

0.8

1.6

0.4

 

0.0

Derivatives **)

 

2.6

-1.2

-1.5

     

Open position

14.8

-2.7

-0.7

0.1

3.4

 

0.2

               

2014

EUR-companies

         

RUB-companies

EUR million

RUB

SEK

NOK

PLN

USD

 

USD

Trade receivables and payables

-0.2

0.2

-0.2

0.0

0.4

 

0.5

Loans and bank accounts *)

11.8

3.1

0.3

1.6

0.4

 

0.0

Derivatives **)

-11.8

-3.0

-0.3

-1.5

     

Open position

-0.2

0.2

-0.2

0.1

0.8

 

0.5

               

*) Includes cash and cash equivalents, interest-bearing receivables and liabilities

**) Including derivatives for hedging purposes

               

The sensitivity analysis on currency risk is based on balance sheet items denominated in other than functional currencies of the group companies on the balance sheet date. The analysis includes solely the currency risks related to the financial instruments. Based on the analysis, strengthening of the euro by 10 per cent against all other currencies would have an impact of EUR -1.7 (-0.7) million on the Group's profit before tax. Correspondingly, the strengthening of the USD against RUB by 10 per cent would have an impact of EUR 0.0 (0.1) million on the Group's profit before tax.

               

Major translation risk positions on the balance sheet date

               

2015

             

EUR million

RUB

SEK

NOK

PLN

     

Net investment

83.0

18.4

5.6

6.9

     

Hedging

-

-

-

-

     

Open position

83.0

18.4

5.6

6.9

     
               

2014

             

EUR million

RUB

SEK

NOK

PLN

     

Net investment

120.4

23.8

16.2

6.8

     

Hedging

-

-

-

-

     

Open position

120.4

23.8

16.2

6.8

     
               

Interest rate risk

 

The Group is exposed to interest rate risks through its investments and interest-bearing liabilities. The goal of interest rate risk management is to minimize financing costs and decrease the uncertainty that interest rate movements cause for the Group's financial result. The average interest-rate fixing period for the debt portfolio is determined in the financing policy. The objective of interest rate risk management related to liquid funds is to minimize the effect of interest rate movements on the fair value of the funds. In addition to diversification, interest rate risks associated with interest-bearing receivables and liabilities can be hedged through interest rate swaps, interest rate options and forward rate agreements.

               

On the balance sheet date, the Group's interest-bearing liabilities amounted to EUR 290.3 (295.5) million and interest-bearing receivables to EUR 353.8 (196.5) million. On the balance sheet date, all of the Group’s interest-bearing loans were subject to fixed interest rates. The loans were partly hedged by an interest-rate swap. The interest rate risk of the fixed rate bond issued by Posti Group Corporation for nominal value EUR 70 million is hedged by an interest rate swap. The Group has applied fair value hedge accounting to the interest-rate swap hedging the loan until 30 June, 2015, after which hedge accounting ceased to meet effectiveness criteria. Consequently, group discontinued hedge accounting as of July 1, 2015.

               

Interest-bearing receivables and debt according to interest rate fixing

               

2015

             

EUR million

 

Less than

1 year

1–5 years

More than

5 years

Total

   

Interest-bearing receivables

 

-319.3

-33.0

-1.5

-353.8

   

Bond

 

150.4

99.8

 

250.2

   

Finance lease liabilities

 

13.2

26.3

 

39.5

   

Other liabilities

 

0.0

0.5

 

0.6

   

Net debt

 

-155.7

93.6

-1.5

-63.6

   

Impact of interest-rate swaps

 

0.0

   

0.0

   

Total

 

-155.7

93.6

-1.5

-63.6

   
               
               

2014

             

EUR million

 

Less than

1 year

1–5 years

More than

5 years

Total

   

Interest-bearing receivables

 

-162.7

-33.8

 

-196.5

   

Bond

   

251.3

 

251.3

   

Finance lease liabilities

 

11.8

32.1

 

43.9

   

Other liabilities

 

0.2

0.1

 

0.3

   

Net debt

 

-150.8

249.7

 

98.9

   

Impact of interest-rate swaps

 

70.0

-70.0

 

0.0

   

Total

 

-80.8

179.7

 

98.9

   
               

A change of 1 percentage point in the interest rate at the end of the financial period would affect the Group's profit before taxes for the next 12 months by EUR -0.1 (-0.3) million.

               
               

Electricity price risk

 

The electricity price risk management aims to reduce the volatility in Group's profit and cash flows caused by electricity price fluctuations. The Group employs electricity derivatives to reduce the price risk related to electricity procurement. The Group uses standardized listed derivative products as hedging instruments. The derivatives are used for hedging purposes only, but hedge accounting as defined in the IFRS is not applied.

               

The Group has prepared a sensitivity analysis on open electricity derivatives at reporting date. A fluctuation of 10 percentage points in electricity price would have an impact of EUR 0.2 (0.3) million on the Group's profit before taxes.

               
               

Derivative contracts

 

2015

             

EUR million

 

Nominal

value

Net

fair value

Positive

fair value

Negative

fair value

   

Foreign currency derivatives:

             

Currency forward contracts, non-hedge accounting

 

8.6

0.0

0.1

0.0

   

Interest rate derivatives:

             

Interest rate swaps, non-hedge accounting

 

70.0

1.9

1.9

     

Electricity derivatives:

             

Electricity forwards, non-hedge accounting

 

2.5

-0.9

 

-0.9

   
               
               

2014

             

EUR million

 

Nominal

value

Net

fair value

Positive

fair value

Negative

fair value

   

Foreign currency derivatives:

             

Currency forward contracts, non-hedge accounting

 

47.9

1.9

2.2

-0.2

   

Interest rate derivatives:

             

Interest rate swaps, hedge accounting

 

70.0

3.9

3.9

-

   

Electricity derivatives:

             

Electricity derivatives, non-hedge accounting

 

4.1

-0.6

0.0

-0.6

   
               

Derivative instruments are used to hedge against currency, interest rate and electricity price risk. Currency forward contracts are measured at fair value using the forward rates at the reporting date. The fair values of interest rate swaps are calculated by discounting the forecasted cash flows of the contracts. The fair value of electricity derivatives is based on market prices on the reporting date.

               
               

Offsetting of financial instruments

 

Derivative assets

     

2015

2014

   

Derivative assets, reported as gross amount

     

2.0

6.0

   

Related derivative liabilities subject to master netting agreements

   

0.0

0.2

   

Net amount

     

1.9

5.8

   
               

Derivative liabilities

     

2015

2014

   

Derivative liabilities, reported as gross amount

     

0.9

0.9

   

Related derivative liabilities subject to master netting agreements

   

0.0

0.2

   

Net amount

     

0.9

0.6

   
               

Derivative agreements are subject to offsetting in the case of default, insolvency or bankruptcy of the counterparty. Derivative agreements have not been offset in the statement of financial position.

               
               

Liquidity risk

 

The liquidity and refinancing risk means that the Group’s liquidity reserve is insufficient to cover the Group’s commitments and investment possibilities or that the cost of the refinancing or additional financing need is exceptionally high. The Group places a considerable emphasis on accurate cash management and liquidity planning in order to minimize liquidity risks generated by large daily fluctuations in the Group’s cash flows. In addition to cash and cash equivalents, the Group aims to secure sufficient financing in all circumstances, and has as financial reserves, a syndicated credit facility (committed) of EUR 150.0 million, maturing in 2019, and a non-binding commercial paper program of EUR 200.0 million.

               

On the balance sheet date, the Group had liquid funds and an unused committed credit facility of EUR 408.8 (334.5) million. Liquid funds include cash and cash equivalents and investments tradable on the secondary market whose tradability is secured by the liquid size of the issue and the creditworthiness of the issuer. In addition, the Group had an unused commercial paper program of EUR 200.0 (200.0) million.

Contractual cash flows from financial liabilities, including interests

               

2015

             

EUR million

2016

2017

2018

2019

2020–

 

Total

Bonds

161.2

104.6

       

265.8

Finance lease liabilities

14.2

27.1

0.1

0.0

0.2

 

41.6

Other liabilities

0.0

0.5

       

0.6

Trade payables

54.8

         

54.8

Derivatives:

             

Interest rate derivatives, cash flows payable

0.9

         

0.9

Interest rate derivatives, cash flows receivable

-3.1

         

-3.1

Currency derivatives, cash flows payable

0.0

         

0.0

Currency derivatives, cash flows receivable

-0.1

         

-0.1

Electricity derivatives, cash flows payable

1.7

0.8

       

2.5

Total

229.7

132.9

0.1

0.0

0.2

 

363.0

               
               

2014

             

EUR million

2015

2016

2017

2018

2019–

 

Total

Bonds

11.2

161.2

104.6

     

277.0

Finance lease liabilities

13.1

33.3

0.0

0.0

0.7

 

47.1

Other liabilities

0.0

0.1

       

0.2

Trade payables

51.0

         

51.0

Derivatives:

             

Interest rate derivatives, cash flows payable

1.0

1.0

       

2.0

Interest rate derivatives, cash flows receivable

-3.1

-3.1

       

-6.1

Currency derivatives, cash flows payable

0.1

         

0.1

Currency derivatives, cash flows receivable

-2.5

         

-2.5

Electricity derivatives, cash flows payable

2.4

1.2

0.5

     

4.1

Total

73.2

193.7

105.1

0.0

0.7

 

372.8

               

Finance lease liabilities are in fact secured liabilities since, in default of payment, rights to the leased property transfer back to the lessor. Other loans have no security.

               

Credit and counterparty risk

 

Pursuant to authorizations given by the Board of Directors, the Group invests its liquid funds in debt instruments and bonds issued by companies, banks and states with a high credit rating, as well as bank deposits. Posti Group makes derivative contracts only with solvent banks and credit institutions. The book value of investments and derivative contracts corresponds to the maximum amount of the associated credit risk. Financing operations did not incur any credit losses during the financial year.  

               

Trade receivables are subject to only minor credit risk concentrations due to the Group’s extensive customer base. The book value of trade receivables corresponds to the maximum amount of the credit risk associated with them. Credit losses recognized for 2015 were EUR 0.8 (1.7) million.

               
               

Aging of trade receivables:

             
               

EUR million

     

2015

2014

   

Not yet due

     

164.8

174.8

   

1–30 days overdue

     

21.4

15.9

   

31–60 days overdue

     

3.0

3.0

   

61–90 days overdue

     

1.6

0.8

   

91–180 days overdue

     

0.0

0.6

   

181–365 days overdue

     

0.0

0.1

   

Total

     

190.8

195.3

   
               
               
               

Capital management

 

The target of the Group's capital management is to secure financing required by businesses and the Group’s ability to operate in capital markets under all circumstances. Although the Group has no public credit rating issued by a credit rating agency, it seeks to maintain a capital structure that would be required for investment grade rating. The Board of Directors assesses the capital structure on a regular basis. The covenants associated with the Group's loan agreements are standard terms and conditions that feature limitations on securities given, material changes in business activities, and changes in majority holdings. The Group has met the conditions of the covenants in 2015 and 2014. The Group’s loan agreements do not contain financial covenants.

               

The Group monitors its capital structure by assessing equity ratio and gearing.

               

Group's total capital

     

2015

2014

   

Interest-bearing liabilities

     

290.3

295.5

   

./. Interest-bearing receivables

     

353.8

196.5

   

 = Interest-bearing net liabilities

     

-63.6

98.9

   

Total equity

     

604.4

573.8

   
               

Equity ratio, %

     

47.8

45.9

   

Gearing, %

     

-10.5

17.2