33 Financial risk management

In its business operations, Lemminkäinen Group is exposed to financial risks, mainly funding, liquidity, foreign exchange rate, interest rate and credit risks. The aim of the Group's financial risk management is to reduce uncertainty concerning the possible impacts that changes in fair values on the financial markets could have on the Group's result, cash flow and value. The management of financial risks is based on principles of the treasury policy approved by the Board of Directors. The treasury policy defines the principles and division of responsibilities with regard to financial activities and the management of financial risk. The policy is reviewed and if necessary updated at least annually.

Execution of the treasury policy is the responsibility of the Group Treasury, which is mainly responsible for the management of financial risks and handles the Group's treasury activities on a centralised basis. The Group's treasury policy defines the division of responsibilities between the Group Treasury and business units in each subarea. The group companies are responsible for providing the Group Treasury with up-to-date and accurate information on treasury-related matters concerning their business operations. The Group Treasury serves as an internal bank and co-ordinates, directs and supports the group companies in treasury matters such that the Group's financial needs are met and its financial risks are managed effectively in line with the treasury policy.

Funding and liquidity risk

The Group seeks to ensure the availability of funding, optimise the use of liquid assets in funding its business operations and to minimise interest and other fiance costs. The Group Treasury is responsible for managing the Group's overall liquidity and ensuring that adequate credit lines and a sufficient number of different funding sources are available. It also ensures that the maturity profile of the Group's loans and credit facilities is spread sufficiently evenly over coming years as set out in the treasury policy. The maturity schedule of the interest-bearing liabilities, as per the Group’s accounting, is front-loaded. The reason for this is the EUR 127.1 million (EUR 73.1 mill.) liabilities of housing and commercial property companies. These liabilities mainly consist of non-current loans of housing companies under constraction which are recorded under current interest-bearing liabilities, and will be transferred to the buyers of the co-op shares when the units are handed over. Regarding unsold housing units, the Group will bear the liability by paying financial consideration for the units in question during a long loan period. The Group's available financing sources and liquid assets are sufficient to cover the obligations arising from current interest-bearing liabilities.

According to the treasury policy, the Group's liquidity reserve shall at all times match the Group's total liquidity requirement, and it must be accessible within five banking days without any additional charges being incurred. The Group's total liquidity requirement consists of the liquidity requirement of day-to-day operations, risk premium needs and the strategic liquidity requirement. The Group's liquidity management is based on monthly forecasts of funding requirements and daily cash flow forecasting. The Group's excess liquidity is managed by means of internal transactions and cash pools.

Due to the nature of the Group's business operations, seasonal borrowing is of great importance. The effect of seasonal variation on short-term liquidity needs is controlled by using a commercial paper programme, committed credit limits and bank overdraft facilities. The total amount of the Group's commercial paper programme is EUR 300 million (EUR 300 mill.), of which EUR 63.4 million (EUR 150.2 mill.) was in use at 31 December 2014. Lemminkäinen has a EUR 185 million, three-year syndicated revolving credit facility. The credit facility is binding and unsecured, and its maturres in March 2016. At the end of the year, the Group had unused committed credit facilities amounting to EUR 185.0 million (EUR 175.0 mill.) and overdraft limits amounting to EUR 33.2 million (EUR 44.0 mill.). The amount of liquid assets at 31 December 2014 was EUR 134.2 million (EUR 81.1 mill.).

Contractual cash flows of financial liabilities and derivative instruments

EUR 1,000 2015 2016 2017 2018 2019 2020– Total
31 Dec 2014






Interest-bearing liabilities 218,072 23,629 17,900 14,537 113,269 2,172 389,578
Interest rate derivatives 319 320 319 162

1,119
Forward foreign exchange contracts







Cash flows payable 77,180




77,180

Cash flows receivable -81,905




-81,905
Commodity derivatives







Cash flows payable 1,335 505



1,840

Cash flows receivable -87




-87
Other financial liabilities 179,856 69 23 559 23 120 180,649
Trade payables 89,220




89,220
Financial guarantees given 14,413 1,519


254 16,186

498,402 26,041 18,242 15,258 113,292 2,546 673,780









EUR 1,000 2014 2015 2016 2017 2018 2019– Total
31 Dec 2013






Interest-bearing liabilities 352,436 18,912 23,433 8,972 5,656 7,535 416,945
Interest rate derivatives 346 247 248 247 118
1,206
Forward foreign exchange contracts







Cash flows payable 106,015




106,015

Cash flows receivable -106,552




-106,552
Commodity derivatives







Cash flows payable 593 97 321


1,011

Cash flows receivable -14 -9



-23
Other financial liabilities 245,861 2,279 535


248,675
Trade payables 139,568




139,568
Financial guarantees given 17,413
1,519

254 19,186

755,664 21,526 26,056 9,219 5,774 7,790 826,029









                 

Foreign exchange rate risk

The aim of foreign exchange rate risk management is to reduce uncertainty concerning the possible impacts that changes in exchange rates could have on the future values of cash flows, business receivables and liabilities, and other balance sheet items. Exchange rate risk mainly consists of translation risk and transaction risk.

Translation risk consists of foreign exchange rate differences arising from the translation of the income statements and balance sheets of foreign group companies into the Group’s functional currency. Translation risk recorded in accounting is caused by equity investments in foreign entities and their retained earnings, the effects of which are recorded under translation differences in shareholders’ equity. Lemminkäinen Group has foreign net investments in several currencies. The key currencies in which the Group was exposed to translation risk in 2014 were the Russian rouble and the Norwegian krone. It is likely that the most significant translation risk is associated to these currencies in the future, too. The change in translation differences in 2014 was EUR -18.6 million, of which EUR -15.8 million was attributable to the Russian rouble and EUR -2.7 million to the Norwegian krone. Reportable translation risk is also caused by the reporting period’s income statement, the impact of which can be seen, among others, directly in the Group’s reportable net sales and operating profit in euros. In 2014, the impact of exchange rate changes on the Group’s net sales was EUR -73.2 million, of which EUR -40.0 million was attributable to the Russian rouble and EUR -19.7 million to the Norwegian krone, and their impact on the operating profit was EUR -5.0 million, of which EUR -4.3 million was attributable to the Russian rouble and EUR -0.6 million to the Norwegian krone. In accordance with the treasury policy, Lemminkäinen Group protects itself from translation risks primarily by keeping equity investments in foreign entities at an appropriately low level, and thus does not use financial instruments to hedge the translation risks.

Transaction risk consists of cash flows in foreign currencies from operational and financial activities. The Group seeks to hedge business currency risks primarily by operative means. The remaining transaction risk is hedged by using instruments such as foreign currency loans and foreign currency derivatives.

The group companies are responsible for identifying, reporting, forecasting and hedging their transaction risk positions internally. The Group Treasury is responsible for hedging the Group's risk positions as external transactions in accordance with the treasury policy. The general rule is that the major net positions, forecasted and known, for the 12 months following the review date are hedged, with a hedging ratio ranging from 25–100 per cent and emphasising the first six months.

The key currencies in which the Group was exposed to transaction risk in 2014 were Russian rouble and Swedish krona. These transaction risk positions were mainly due to sales, procurements, receivables and liabilities. In 2014 the Group did not apply hedge accounting to transaction risk hedging.

Sensitivity analysis of transaction risk

The following assumptions have been made when calculating the sensitivity caused by changes in exchange rates:

  • the exchange rate change is assumed to be +/– 10%
  • the position includes financial assets and liabilities denominated in Swedish kronas and Russian roubles
  • the position does not include forecasted future cash flows
  • taxes are excluded in sensitivity analysis
EUR 1,000 Transaction position +/- 10% impact on
profit or loss
31 Dec 2014

EUR/SEK 369 -34 / +41
EUR/RUB 264 -24 / +29








EUR 1,000 Transaction position +/- 10% impact on
profit or loss
31 Dec 2013





EUR/SEK -2,432 +221 / -270
EUR/RUB -6,432 +585 / -715









                 

Interest rate risk

The aim of Lemminkäinen Group's interest rate risk management is to minimise changes affecting the result, cash flows and value of the Group due to interest rate fluctuations. The Group Treasury manages and monitors the interest rate position. The Group's interest rate risk primarily comprises fixed-rate and variable-rate loan and leasing agreements, interest-bearing financial receivables and interest rate derivatives. Interest rate changes affect items in the income statement and balance sheet.

The interest rate risk is decreased by setting the Group's average period of interest fixing term to the same as the interest rate sensitivity of its business. The interest rate sensitivity position of the Group's business is estimated to be about 15 months. The treasury policy thus defines the Group's average interest fixing term as 12–18 months. The Group aims to keep 40–65 per cent of its liabilities per currency hedged.

The Group can have both variable and fixed-rate long-term borrowings. The ratio of fixed and variable-rate borrowings can be changed by using interest rate derivatives. In 2014, the Group has used interest rate swaps for managing interest rate risks. Part of the interest rate swaps were used for hedge accounting and a hedging result of those derivatives have been recognised in interest expenses. There was no ineffectiveness to be recorded from hedge accounting during the financial year. Hedging instruments assigned to hedge accounting have matured and hedge accounting terminated during the reporting period.

Interest rate fluctuations in 2014 did not have any unusual effect on the Group's business, but a significant rise in the level of interest rates may have a detrimental effect on the demand for housing.

Sensitivity analysis of interest rate risk

The following assumptions are made when calculating the sensitivity caused by a change in the level of interest rates:

  • the interest rate change is assumed to be 1 percentage point
  • the position includes variable-rate financial liabilities, variable-rate financial receivables and interest rate derivatives
  • all factors other than the change in interest rates remain constant
  • taxes have not been taken into account when calculating sensitivity
EUR 1,000 Interest rate risk position Impact on profit or
loss (+1%)
Impact on profit or
loss (-1%)
Impact on other comprehensive income (+1%) Impact on other comprehensive income (-1%)
31 Dec 2014




Variable-rate liabilities -182,901 -1,829 1,829

Variable-rate receivables 134,547 1,345 -1,345

Interest rate derivatives 40,000 1,295 -1,358





-8,354 812 -875


EUR 1,000 Interest rate risk position Impact on profit or
loss (+1%)
Impact on profit or
loss (-1%)
Impact on other comprehensive income (+1%) Impact on other comprehensive income (-1%)
31 Dec 2013

Variable-rate liabilities -172,028 -1,720 1,720

Variable-rate receivables 81,845 818 -818

Interest rate derivatives 47,180 1,606 -1,699 9 -9




-43,003 704 -798 9 -9

                 

Commodity price risk

The Group's paving operations are exposed to bitumen price risk. The price of bitumen is determined by the world market price of oil in practise. The Group protects itself against the bitumen price risk with fixed purchase prices, price clauses in sales agreements and derivatives for which hedge accounting is not applied. By the closing date, the group companies had used bitumen derivatives to hedge, in total, 11,000 MT (58,933 MT) of bitumen purchases.

Credit risk

Credit risks arise when a counterparty is unable to meet its contractual obligations, casusing the other party to suffer a financial loss. Lemminkäinen has defined a credit policy for customer receivables that aims to boost profitable sales by identifying credit risks in advance and controlling them. The credit policy sets the minimum requirements concerning trade credit and collections for Lemminkäinen Group. The Group's credit control function defines credit risks and the business units are responsible for managing them.

Most of the Group's business is based on established and trustworthy customer relationships and on contractual terms generally observed in the industry. The Group is exposed to credit risk mainly through the Group's trade receivables and receivables associated with deposits and receivables. The maximum amount of credit risk is the combined total of the balance sheet values of the aforementioned items. The amounts and due dates of the Group's trade receivables are presented in the table below. The Group does not have any significant credit risk concentrations as trade receivables are distributed among many different customers in a number of market areas. The business unit that made the contract actively monitors the receivables situation. If the business units renegotiate the terms of the receivables, they must do so in accordance with the requirements of the Group's credit policy. The risk of credit losses can be reduced by means of guarantees, mainly bank guarantees and bank deposits. In addition, Lemminkäinen uses factoring arrangements which also mitigates the credit risk.

Lemminkäinen's credit losses have been minimal in relation to the scale of its operations. The main risks are associated with business in Russia. As a general rule, construction projects in Russia are only undertaken against receipt of advance payments. If, in exceptional situations, a credit risk is taken, the amount permitted is always proportional to the expected margin on the project in question. Receiveables transferred for legally enforceable collection are recognised as credit losses.

The Group is exposed to counterparty risk when investing liquid assets and using derivative instruments. Liquid assets are invested in short-term bank deposits, certificates of deposit issued by solvent partner banks, and commercial papers issued by corporations with a good credit rating. The Group Treasury is responsible for the management of the Group's counterparty and credit risks related to cash, financial investments and financial transactions. The treasury policy specifies the approved counterparties and their criteria. At the end of 2014, the counterparty risk was considered to be low.

Ageing analysis of trade receivables

EUR 1,000

31 Dec 2014 31 Dec 2013
Not due


108,711
171,472
Past due 1–30 days


22,331
19,698
Past due 31–60 days


3,184
8,023
Past due 61–90 days


3,383
7,070
Past due over 90 days


6,131
8,889




143,740
215,152









                 

Management of capital and the capital structure

Capital means the equity and interest-bearing liabilities shown on Lemminkäinen's consolidated balance sheet. Lemminkäinen Group's capital management ensures cost-effectively that all of the Group's business sectors maintain their business viability at a competitive level in all cyclical conditions, that risk-carrying capacity is adequate, for example, in construction contracts, and that the company is able to service its borrowings and pay a good dividend.

The amount of the Group's interest-bearing liabilities is affected by factors such as scale of operations, seasonal changes in production, acquisitions, investments in or the sale of production equipment, buildings and land, and possible equity related arrangements. The company continuously monitors especially the amount of debt, the ratio of net debt to EBITDA, and the equity ratio. The company also follows the development of equity by means of the return on investment. A long-term average in excess of 18 per cent is regarded as a good return. The return on investment in 2014 was 13.5 per cent (-9.4%).

We may from time to time seek to repurchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. The amounts involved may be material. We may decide to hold, cancel or sell such repurchased debt. Possible subsequent sales of repurchased debt may be made against cash or other compensation or in exchange for equity securities and such sales may be executed as open market offers, privately negotiated transactions or otherwise. Repurchases or exchanges of outstanding debt or subsequent sales or exchanges of repurchased debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Some of the Group's financial arrangements include two financial covenants, the ratio of net debt to EBITDA and the equity ratio, which are monitored quarterly and calculated as an average of four previous quarters, which are monitored quarterly and calculated as an average of four previous quarters. The terms of the net debt/EBITDA covenant were not met in the first quarter. Consequently, the company started negotiations with certain lenders, which were completed on 21 May 2014. Due to the negotiations, the company has committed to strengthening its balance sheet with approximately EUR 100 million, among other measures. In the third quarter, the company conducted a rights offering. With the offering, the company raised gross proceeds of EUR 29.3 million (net proceeds of EUR 27.3 million). In addition, the company will divest non-core assets and operations by EUR 70 million by the end of September 2015. At the end of 2014, the company had carried out divestments amounting to EUR 21.5 million. The company will not pay any dividends for 2014 without the consent of certain lenders. Furthermore, in the second quarter the company agreed with its lenders on changes to the net debt to EBITDA covenant for the second and third quarters of 2014. At the end of the year, the company met its covenants.

In addition, the company has taken several other measures to strengthen its balance sheet and to improve its financial position. In the first quarter, the company issued a EUR 70 million hybrid bond. In the second quarter, the company divested its technical building services business for EUR 55.4 million and used the inbound cash flow from the divestment for repayment of current liabilities. In addition, the company issued a EUR 100 million unsecured senior five-year bond in June 2014. The EUR 100 million bond issued by the company was used for refinancing the EUR 60 million bond that matured in October 2014. The bond carries a fixed annual coupon at the rate of 7.375 per cent payable semi-annually. The terms and conditions of the bond include two financial incurrence-based covenants: an equity ratio and net debt to EBITDA. If the equity ratio covenant is not met, the company is restricted from making certain payments, including repurchases of its own shares and redemption of hybrid bonds. If the net debt to EBITDA covenant is not met, the company is restricted in its ability to raise additional debt.

The Group's equity includes two EUR 70 million hybrid bonds with no maturity date. The first of these was issued in March 2012 and the second in March 2014. These hybrid bonds are classified as equity instrument but the bond holders do not have any rights of a shareholders, and the bond does not dilute shareholders' ownership in the company. The hybrid bonds are unsecured and junior to all other borrowings of the company. The bond have no maturity date but company has the right to redeem them at it's own discretion after four years of the issuance date.

 

EUR 1,000


31 Dec 2014
31 Dec 2013
Interest-bearing liabilities


347,804
407,626
Liquid assets


134,197
81,081
Interest-bearing net debt


213,607
326,544
Equity, total


412,508
324,038
Equity ratio, %


37.1
27.3
Gearing, %


51.8
100.8
Return on investment, %


13.5
-9.4
                 
 
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