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 finance 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 104.1 million (127.1) borrowings of companies included in inventory, which are recorded in current interest-bearing liabilities. These liabilities mainly consist of non-current loans of housing companies, which are under construction or completed, and these borrowings 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.

According to the treasury policy, the Group's liquidity reserve shall at all times match the Group's total liquidity requirement. Due to the nature of the group's business operations, seasonal borrowing is of great importance. The Group's liquidity management is based on cash flow forecasting.

Liquidity reserve of the Group consists of a commercial paper programme, committed credit limits, bank overdraft facilities, and liquid funds. The total amount of the group's commercial paper programme is EUR 300.0 million (300.0), of which EUR 13.1 million (63.4) was in use at 31 December 2015. Lemminkäinen has a committed EUR 185.0 million syndicated revolving credit facility, which is unsecured and matures in March 2017. At the end of the year, the group had unused committed credit facilities amounting to EUR 185.0 million (185.0) and overdraft limits amounting to EUR 12.3 million (33.2). The amount of liquid funds at 31 December 2015 was EUR 127.9 million (134.2).

The Group's available financing sources and liquid assets are sufficient to cover the obligations arising from current interest-bearing liabilities.

Contractual cash flows of financial liabilities and derivative instruments

EUR million 2016 2017 2018 2019 2020 2021– Total
31 Dec 2015






Interest-bearing liabilities 142.1 17.3 13.9 113.3 1.6 0.6 288.7
Interest rate derivatives 0.4 0.4 0.2


1.0
Forward foreign exchange contracts







Cash flows payable 60.2




60.2

Cash flows receivable -61.8




-61.8
Commodity derivatives







Cash flows payable 3.5 0.7



4.2

Cash flows receivable -0.1




-0.1
Other financial liabilities 160.5 0.2 0.2
0,0
160.9
Trade payables 60.3




60.3
Financial guarantees given 9.2 0.2 0.2 0.3
2.0 12.0

374.3 18.8 14.5 113.6 1.6 2.6 525.5









EUR million 2015 2016 2017 2018 2019 2020– Total
31 Dec 2014






Interest-bearing liabilities 218.1 23.6 17.9 14.5 113.3 2.2 389.6
Interest rate derivatives 0.3 0.3 0.3 0.2

1.1
Forward foreign exchange contracts







Cash flows payable 77.2




77.2

Cash flows receivable -81.9




-81.9
Commodity derivatives







Cash flows payable 1.3 0.5



1.8

Cash flows receivable -0.1




-0.1
Other financial liabilities 179.9 0.1 0,0 0.6 0,0 0.1 180.6
Trade payables 89.2




89.2
Financial guarantees given 14.4 1.5


0.3 16.2

498.4 26.0 18.2 15.3 113.3 2.5 673.8









                 

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 items in the statement of financial position. 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 the statement of financial position 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 2015 were the Russian rouble and the Norwegian krone. The change in translation differences in 2015 was EUR -4.2 million (-18.6), of which EUR -2.5 million (-15.8) was attributable to the Russian rouble and EUR -1.6 million (-2.7) 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 2015, the impact of exchange rate changes (2015 actuals compared to 2015 actuals recalculated with 2014 foreign exchange rates) on the Group’s net sales was EUR -67.2 million (-73.2), of which EUR -45.6 million (-40.0) was attributable to the Russian rouble and EUR -17.1 million (-19.7) to the Norwegian krone, and their impact on the operating profit was EUR -0.5 million (-5.0), of which EUR -1.0 million (-4.3) was attributable to the Russian rouble and EUR 0.3 million (-0.6) 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 transaction risk positions of the Group were mainly due to sales and purchases within the next 12 months, and receivables and liabilities in the statement of financial position.

The key currency pairs in which the group was exposed to transaction risk in 2015 and 2014 were EUR/RUB and EUR/SEK. In 2015 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 both external and intra-group financial assets and liabilities denominated in Swedish kronas and Russian roubles and derivatives hedging these items
    • the position does not include forecasted future cash flows
    • taxes are excluded in sensitivity analysis


EUR million Open transaction risk position 10% strengthening of EUR 10% weakening of EUR
31 Dec 2015


EUR/SEK 0.6 -0.1 0.1
EUR/RUB 0.2 0.0 0.0








EUR million Open transaction risk position 10% strengthening of EUR 10% weakening of EUR
31 Dec 2014





EUR/SEK 0.4 0.0 0,0
EUR/RUB 0.3 0.0 0.0









                 

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 borrowings, interest-bearing financial assets and interest rate derivatives. Interest rate changes have an effect on items in the income statement and consolidated statement of financial position.

The interest rate risk is managed by aligning the group's average period of interest fixing term with the interest rate sensitivity of the business. The interest rate sensitivity position of the Group's business is estimated to be about 15 months. In accordance with treasury policy average interest rate fixing term and fixed/floating ratio of the debt protfolio is being followed.

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. The Group has used interest rate swaps for managing interest rate risks. During 2014 a part of the interest rate swaps were used for hedge accounting and a hedging result of those derivatives have been recognised in interest expenses in 2014. There was no ineffectiveness to be recorded from hedge accounting during the financial year 2014. Hedging instruments assigned to hedge accounting have matured in 2014 and hedge accounting was terminated during that reporting period.

Interest rate fluctuations in 2015 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
    • interest rate changes have been calculated for a 12 month period
    • the position includes variable-rate financial liabilities, variable-rate financial assets (including cash and cash equivalents) and interest rate derivatives
    • market interest rate is assumed to be positive at the start of the year for all other instruments except for 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 million Interest rate risk position Impact on profit or loss (+ 1%) Impact on profit or loss (- 1%)
31 Dec 2015





Variable-rate financial liabilities
-140.8
-1.4
1.4
Variable-rate financial assets
127.9
1.3
-1.3
Interest rate derivatives
40.0
0.9
-0.9


27.2
0.8
-0.8

EUR million Interest rate risk position Impact on profit or loss (+ 1%) Impact on profit or loss (- 1%)
31 Dec 2014


Variable-rate liabilities -182.9 -1.8 1.8
Variable-rate receivables 134.5 1.3 -1.3
Interest rate derivatives 40.0 1.3 -1.4

-8.4 0.8 -0.9

                 

Commodity price risk

The group's paving operations are exposed to bitumen price risk. The price of bitumen is mainly determined by the world market price of oil. The group protects itself against the bitumen price risk with price clauses in sales agreements, fixed purchase prices, and derivatives for which hedge accounting is not applied. Group Treasury regurarly follows the bitumen position of the Group.

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 values of the aforementioned items as presented in the consolidated statement of financial position. 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 2015, the counterparty risk was considered to be low.

Ageing analysis of trade receivables

EUR million

31 Dec 2015 31 Dec 2014
Not due


107.0
108.7
Past due 1-30 days


13.9
22.3
Past due 31-60 days


2.3
3.2
Past due 61-90 days


1.3
3.4
Past due over 90 days


4.8
6.1




129.3
143.7









                 

Management of capital and the capital structure

Capital means the equity and interest-bearing liabilities shown on Lemminkäinen's consolidated statement of financial position. 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 and cash flow, 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 capital employed. Lemminkäinen has determined its financial targets to be among others ROCE above 15% in 2019, equity ratio above 35% during 2016-2019, and in addition, Lemminkäinen aims at a stable distribution of dividends, with at least 40 per cent of the profit for the financial year distributed to the shareholders.

The Group 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. The Group 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.

The Group has EUR 185 million committed unsecured revolving credit facility, which includes 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. At the end of the year, the company met its covenants. In May 2014, the company agreed due to a covenant breach with the providers of EUR 185 million revolving credit facility that Lemminkäinen shall strengthen its statement of financial position by a total of EUR 100 million by 30 September 2015. As part of the financing negotiations, the company also agreed not to distribute dividends for the financial year 2014. In March 2015 the company agreed with the lenders that Lemminkäinen will commit to strengthen its statement of financial position by a total of EUR 60 million instead of the previous EUR 100 million. This requirement was fulfilled in the third quarter 2015. Furthermore, the company may distribute a maximum of 40 per cent of the Group’s net profit for the financial years 2015 and 2016 as dividends without a preapproval of the lenders.

During the reporting period company repurchased notes to a nominal amount of EUR 27.1 million of its EUR 70 million hybrid bond which were issued in 2012. During the comparison period the company executed several actions to strengthen its balance sheet and financial position. In March 2014 the company issued a EUR 70 million hybrid bond, and in June 2014 the company issued a EUR 100 million unsecured senior five-year bond. In October 2014 the company repaid its EUR 60 million bond. In addition, during the year 2014 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). The company also divested its technical building services business for EUR 55.4 million in 2014.

The group's equity includes two with original nominal value EUR 70 million Hybrid bonds with no maturity date. The first of these was issued in March 2012 and as of 31.12.2015 EUR 42.9 million was outstanding (70.0). The second Hybrid bond was issued in March 2014 and as of 31.12.2015 EUR 70.0 million was outstanding (70.0). 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. The annual coupon rate until the first redemption date of the bond issued in 2012 is 10% and the annual coupon rate of the bond issued in 2014 is 8.75% .

The EUR 100 million unsecured senior five-year 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.

EUR million

31 Dec 2015 31 Dec 2014
Interest-bearing liabilities


254.7
347.8
Liquid assets


127.9
134.2
Interest-bearing net debt


126.8
213.6
Equity, total


377.6
412.5
Equity ratio, %


40.6
37.1
Gearing, %


33.6
51.8
Return on investment, %


10.2
13.5
Return on capital employed, %


5.3
4.5