Note 3 – Financial risks
3.1 Financial risk factors
Duni is exposed through its operations to a large number of different risk factors: market risks (including currency risks, price risks regarding energy consumption and pulp purchases by the subsidiary, Rexcell Tissue & Airlaid AB, interest rate risks in cash flow, as well as interest rate risks in fair value), credit risks and liquidity risks. Duni’s overall risk management policy focuses on contingencies on the financial markets.
Risk management is handled by a central finance department (Treasury) in accordance with policies adopted by the Board of Directors. Treasury identifies, evaluates and hedges financial risks in close cooperation with the Group’s operational units. The Board prepares specific policies regarding overall risk management and for specific areas, such as currency risks, interest rate risks, use of derivative and non-derivative financial instruments, as well as the investment of surplus liquidity. The financial hedge relations established by Duni as an element in its risk management do not qualify for hedge accounting pursuant to the rules in IAS 39. However, there is one exception: Duni has taken out interest rate swaps as hedge instruments. The interest rate swaps are reported in accordance with the rules governing cash flow hedging.
3.1.1 Market risks
Currency risk
Duni operates internationally and is exposed to currency risks which arise from various currencies exposures. The Group’s exposure to changes in exchange rates may be described as translation exposure and transaction exposure. Duni manages its translation exposure and transaction exposure by concentrating the exposure to a small number of Group companies and through a finance policy adopted by the Board of Directors.
Translation exposure
Items included in each individual subsidiary’s Annual Report are calculated based on the currency of the country in which the subsidiary has its primary financial and/or legal domicile (functional currency).The Parent Company’s Annual Report is presented in Swedish kronor (SEK), which is the Group’s presentation currency. Translation from each company’s functional currency to SEK does not give rise to any significant cash flow and thus this exposure is not hedged. Translation exposure arises when the income statements of subsidiaries are translated to SEK. At unchanged exchange rates compared with 2015, net sales for the year would have been SEK 85 m higher and the underlying operating income would have been SEK 27 m lower.
Duni is also exposed to another type of translation exposure which occurs in the balance sheets of the individual group companies due to the fact that such balance sheets may include items in a currency other than such group company’s functional currency. Revaluation of these items to the closing day rate is included in the Group’s result. This type of translation exposure is addressed in the section below.
The financial borrowing and lending in the individual subsidiaries is primarily internal through the Parent Company and in the respective subsidiary’s functional currency. In this manner, currency exposure regarding these items has been centralized on the Parent Company. In the Parent Company, 100% of the financial borrowing and lending is hedged in accordance with the Group’s policy, and thus a change in exchange rates has no essential effect on the result. The Parent Company’s external borrowing is matched to approximately 48% by internal net lending with the same currency breakdown. The remaining 52% of internal net lending is hedged on the currency futures market in accordance with Duni’s policy. Note 29 presents the value and nominal amounts of currency forward contracts entered into regarding borrowing and lending in the Parent Company.
As described in greater detail below in the section addressing transaction exposures, Duni manages its currency risks primarily by concentrating commercial transactions to take place essentially in the functional currencies of the subsidiaries. Thus, as regards the consolidated Group, the translation exposure in the working capital of the individual subsidiaries is assessed as minor.
Had all currencies been 5% higher/lower, due to exposure in the individual subsidiaries and the consolidated balance sheet items the Group’s earnings would have been approximately +/- SEK 7 m (2015: +/- SEK 1 m).Corresponding figures for the Parent Company are approximately +/- SEK 4 m (2015: +/- SEK 0 m).
Transaction exposure
The transaction exposure is minimized primarily through external commercial transactions essentially being carried out in the functional currencies of the subsidiaries. Purchases by subsidiaries, primarily internal, may however take place in currencies other than the subsidiary’s own functional currency, and thus these purchases are exposed to a currency risk. By also directing the internal flows as far as possible to the functional currency of the recipient subsidiary, the currency risk is concentrated to a small number of subsidiaries. The Group’s external flows are primarily in SEK and PLN, while external inward flows are primarily in DKK, NOK, CHF and GBP.
Duni does not have a policy to hedge interest payments, whether internal or external.
Duni has an indirect currency risk in USD through the subsidiary Rexcell Tissue & Airlaid AB. Internationally, pulp is priced in USD, and thus a strengthening/ weakening of USD gives rise to increased or reduced purchasing costs for the Group. This risk is neutralized to a certain extent since the pulp price falls or rises in conjunction with a strengthening/weakening of USD.
Price risks
Energy price risks
During 2016, the subsidiary Rexcell Tissue & Airlaid AB purchased approximately MWh 81,207 of electricity at a cost of approximately SEK 29 m; 3,792 tonnes of LPG for approximately SEK 15 m; and woodchips for the biofuel boiler at a cost of approximately SEK 9 m (2015: MWh 78,600 of electricity for SEK 23 m; 3,900 tonnes of LPG for SEK 17 m; and woodchips for SEK 8 m).
Through its energy-intensive operations, Rexcell Tissue & Airlaid AB is exposed to risks associated with changes in the price of energy, particularly gas and electricity. In those cases where the energy price is not hedged, price changes on the energy market have a direct impact on the company’s income. A change of +/-5% in the price of the electricity used by Rexcell Tissue & Airlaid AB affects earnings by approx. -/+ SEK 1 m (2015: -/+ SEK 2 m).
Rexcell Tissue & Airlaid AB has been allocated emission rights for the period 2013 to 2020, divided between Dals Långed and Skåpafors. The allocation for 2016 was 2,196 tonnes for Dals Långed and 18,794 tonnes for Skåpafors. The total number of emission rights will diminish each year up to 2020, when Dals Långed will have emission rights corresponding to 2,027 tonnes per year, and Skåpafors 17,349 tonnes per year. The production plant in Dals Långed is dormant and, when no production takes place, no emission rights are utilized. The allocation of emission rights by the County Administrative Board will be dormant as from 2017, but can be resumed up to 2020 upon application.
Excess emission rights are carried over to the following year, while support purchases are made if the emission rights are insufficient. In the event support purchases take place in 2017, the assessment is that they will not amount to any significant sum. In 2016, Rexcell Tissue & Airlaid AB had 9,623 (9,683) unused emission rights with a market value of SEK 0 (0) m. In total, 11 367 tonnes were consumed in Skåpafors in 2016.
Pulp price risk
OTC trading in financial contracts takes place with respect to certain paper and pulp products, i.e. there is a possibility to reduce the risk of fluctuations in the paper and pulp price. Purchases of paper and pulp are carried out by the subsidiary, Rexcell Tissue & Airlaid AB. Duni currently has not signed any such contracts. A change of +/- 1% per tonne in the price of pulp during 2016 affects earnings by -/+ SEK 3 m (2015: -/+ SEK 3 m).
Interest rate risks with respect to cash flows and fair value
Since all external borrowing is at variable interest rates (see Note 31 for more details), Duni is exposed to interest rate risks regarding cash flows, primarily in EURIBOR. The Parent Company’s internal lending and borrowing also takes place at variable rates. Part of the interest rate risk has been hedged at a fixed rate through 5-year interest rate swaps, expiring in August 2019.
Duni has no significant interest-bearing assets. The Group’s revenues and cash flows from the ongoing operations are, in all essential respects, independent of changes in market interest rates. The Group’s interest rate risk with respect to cash flows arises through external borrowing at a variable rate. Outstanding loans are entirely in EUR.
Had interest rates on the Group’s borrowing on December 31, 2016 been 100 points higher/lower, with all other variables being constant and taking into account swap agreements, Duni’s financial net for 2016 would have been SEK 7 m lower/higher (2015: SEK 3 m). Other components in equity would have been SEK 10 m (2015: SEK 13 m) lower/higher, primarily as a consequence of a decrease/increase in fair value of interest rate derivatives used as hedge instruments.
3.1.2 Credit risks
Credit risks are managed on a Group level. Credit risks arise through cash or cash equivalents, derivative instruments and balances held with banks and financial institutions, as well as credit exposure in relation to the Group’s customers, including outstanding receivables and agreed transactions.
Only banks and financial institutions with a long-term credit rating from an independent rating agency of at least “A-(minus)” are accepted. The total amount deposited or invested in a bank or a single finance company may not exceed SEK 150 m.
All new customers are subject to a credit rating assessment by an independent rating agency. In those cases where there is no independent credit rating, a risk assessment is made regarding the customer’s creditworthiness with consideration being given to the customer’s financial position, previous experience and other factors. Individual risk limits are established based on internal or external credit assessments in accordance with the limits established by the Board. The use of credit limits is monitored regularly.
The maximum credit risk consists of the book value of the exposed assets, including derivatives with positive market values.
Receivables overdue by more than 180 days accounted for 1.99% of total accounts receivable (2015: 1.95%). For the Parent Company, the corresponding figure is 1.63% (2015: 1.11%).
3.1.3 Liquidity risk
Duni’s liquidity risk consists of the possibility of the Group lacking cash or equivalents for the payment of its obligations. The risk is managed within Duni by Treasury ensuring that sufficient cash and equivalents are available through financing under agreed credit facilities (these are described in greater detail in Note 31) and the possibility to close market positions.
As per December 31, 2016, Duni had cash and equivalents of SEK 186 m (2015: SEK 203 m) as well as a non-utilized credit facility of SEK 850 m (2015: SEK 831 m). Payments for coming periods relating to financial liabilities are shown in the tables below.
Duni’s credit facility is subject to covenants consisting of a financial key ratio as well as a number of non-financial conditions. The financial key ratio comprises financial net debt in relation to an underlying EBITDA. The interest margin is calculated based on the same key ratio and adjusted based on given levels each quarter.
Current financing consists of a revolving credit facility of EUR 130 m, which has not been fully utilized. In addition to this financing, there is a put-call facility totaling EUR 20 m which matures in April 2018 and overdraft facilities are in place totaling SEK 7 m and PLN 10 m. Since 2015, Duni’s long-term financing is secured through a financing agreement which extends until April 2018. The table below shows the Group’s contracted outstanding non-discounted interest payments and mortgage repayments on financial liabilities, as well as assets and liabilities regarding derivative instruments:
| 1-3 months | 3-12 months | Later than 1 year but within 5 years | ||||||
| SEK m | Book value | Interest | Repayment | Interest | Repayment | Interest | Repayment | |
| Bank loans | -659 | -1 | -420 | – | -240 | – | – | |
| Overdraft facility | -14 | 0 | -14 | – | – | – | – | |
| Accounts payable and other liabilities | -451 | – | -451 | – | – | – | – | |
| – Currency forward contracts* | -12 | – | -12 | – | – | – | – | |
| – Interest rate swaps | -8 | -1 | 0 | 0 | – | 0 | -8 | |
| Derivative instruments – Liabilities | -20 | -1 | -12 | 0 | 0 | 0 | -8 | |
| – Currency forward contracts* | 1 | – | 0 | – | – | – | – | |
| – Interest rate swaps | – | – | – | – | – | – | – | |
| Derivative instruments – Assets | 1 | 0 | 0 | 0 | 0 | 0 | 0 | |
| Total | -1 143 | -2 | -897 | 0 | -240 | 0 | -8 | |
| * Gross flows are shown in the table below. | ||||||||
The market value of derivative instruments above regarding liabilities is broken down as follows:
| SEK m | 2016 | 2015 |
| Currency forward contracts | -11 | 4 |
| Interest rate swaps | -8 | -7 |
| Total | -19 | -3 |
Currency forward contracts are settled gross. The table below shows these currency forward contracts, broken down by the time remaining on the balance sheet date until the contractual expiration date. The amounts stated below are the contractual non-discounted amounts.
| SEK m | 2016 | 2015 |
| Currency forward contracts | ||
| – Inflow regarding contracts for financial assets and liabilities | 608 | 894 |
| – Outflow regarding contracts for financial assets and liabilities | -620 | -892 |
All flows are due and payable within one year. Financial currency forward contracts relate to both internal and external liabilities and receivables.
The above presentation includes all financial liabilities and derivatives instruments with negative and positive values. Amounts in foreign currency and amounts paid based on a variable rate of interest have been estimated through the use of the prevailing exchange rates on the balance sheet date and the most recent interest rate adjustments. Total repayment does not always correspond to the book value. This is due to the fact that the Group’s transaction costs in connection with the arrangement of loans are booked against the loan.
3.2 Management of capital risk
Duni’s objective with respect to the capital structure is to ensure the Group’s ability to continue its operations. The Group assesses capital on the basis of the net/debt equity ratio. This key ratio is calculated as net debt divided by total capital. The net debt is calculated as total borrowing less cash and cash equivalents. Total capital is calculated as total equity in the consolidated balance sheet plus net debt.
The net debt/equity ratio is as follows:
| Group | ||
| SEK m | 2016 | 2015 |
| Total borrowing | 659 | 537 |
| Overdraft facility | 14 | 12 |
| Other long-term receivables | 2 | 2 |
| Pension provisions | 268 | 236 |
| Group loans/receivables | – | – |
| Less: cash and cash equivalents | -186 | -203 |
| Net debt* | 757 | 585 |
| Total equity | 2 486 | 2 345 |
| Total capital | 3 243 | 2 930 |
| Net debt/equity ratio | 23% | 20% |
| * Calculation of net debt is exclusive of derivative instruments. | ||
3.3 Calculation of fair value
The fair value of derivatives traded on an active market is based on the listed market prices on the balance sheet date. The relevant ask price constitutes the listed market price which is used for the Group’s financial assets.
Fair value of financial instruments which are not traded on an active market (e.g. OTC derivatives) is determined through the use of valuation techniques. The Group uses a number of different methods and makes assumptions based on the market conditions prevailing on the balance sheet date. Listed market prices or broker listings for similar instruments are used with respect to long-term liabilities. Other techniques, such as calculation of discounted cash flows, are used to establish fair value for remaining financial instruments. Fair value for interest rate swaps is calculated as the present value of assessed future cash flows. Fair value for currency forward contracts is established through the use of listed prices for currency forward contracts on the balance sheet date.
Reported value for accounts receivable and accounts payable, less any impairment, is assumed to correspond to fair value since these items are short-term in nature. For information purposes, fair value of financial liabilities is calculated by discounting the future contracted cash flows to the current market interest rate which is available to the Group for similar financial instruments.
Pursuant to the standard for financial instruments, disclosure is required regarding valuation at fair value per level in the following fair value hierarchy:
Level 1 – Listed prices (unadjusted) on active markets for identical assets or liabilities.
Level 2 – Other observable data for assets or liabilities comprises listed prices included in Level 1, either directly (as price) or indirectly (derived from price).
Level 3 – Data for assets or liabilities which is not based on observable market data.
As stated in Note 32, Duni has derivative instruments valued at fair value and for hedging purposes; all derivative instruments are classified in Level 2.