Through the Group’s comprehensive and international operations it is exposed
to financial risks. The board of Directors is responsible for establishing
the Group’s finance policy, which comprises guidelines, objectives and limits
for financial management and the managing of financial risks within the
Group. The financial risks are managed by the Treasury function. The primary
objective of the function is to contribute to the creation of value by managing
the financial risks to which the Group is exposed to during the ordinary
course of business, and to optimize the Group’s financial net. The Treasury
function also provides services to Group companies and its task is to support
subsidiaries with loans, deposits and foreign exchange deals, and to act as
advisors in financial matters. The function conducts internal banking operations
and is also responsible for the Group’s cash management.
Currency risk is defined as the risk that fluctuations in the foreign exchange
market will have an adverse effect on the Group’s cash flow, profit or balance
sheet. Foreign exchange movements affects the result of the Group when
sales and purchases are made in different currencies (transaction exposure).
An adverse effect on Group earnings can also occur when earnings of foreign
subsidiaries are translated to SEK and on the value of the Group equity when
the net assets of foreign subsidiaries are translated to SEK (translation exposure).
The currencies with the highest impact on the Group’s earnings and the
net assets are USD, CNY, EUR, AUD and GBP. The currency risk affects the
Group’s competitive situation in various ways.
Changes in exchange rates can adversely affect Group earning when revenues
from sales and costs for production and sourcing are denominated in
different currencies. Since a large percentage of production is concentrated
to a few countries, while sales occur in many countries, the Group is exposed
to a large net inflow of foreign currencies. To reduce the exposure to foreign
currencies, currencies received are used to pay for purchases in the same
currency. Accounts receivable and accounts payable are hedged through
financial instruments. Orders are hedged to safeguard the gross margin. In
addition, capital investments are hedged. Hedge accounting in line with IAS
39 is applied.
The profit for the year is affected when the financial results of subsidiaries
are translated to SEK and other comprehensive income is affected
when net assets of subsidiaries are translated to SEK.
Interest rate risk
Interest rate risk is defined as the risk that changes in the interest rate
market will have an adverse effect on the Group’s net interest items. The
impact on the net interest items of a change in interest rates depends on the
interest terms of assets or liabilities. The average fixed-interest term on the
Group’s borrowing was 3 months (6 months) at year-end.
On 25 June 2015 the Group signed a multi-currency Senior Revolving
Facility of SEK 1,250 million. Drawdowns under the Revolving Credit Facility
are made as short terms loans. The average interest rate on the Group’s debt
portfolio was 1.8% (3.6%) at year-end.
The Credit Facility of the Group contains certain requirements on key
financial ratios, known as covenants. These covenants are the following key
– The Net Debt to EBITDA
– The Net Debt to Equity
The credit risk is the risk that the counterpart in a transaction does not fulfill
its contractual obligations.
The maximum credit risk is the equivalent of the posted value of the
financial assets. Given the Group’s distribution of costumers and the fact that
the customers are operating at different market segments and geographies,
the general underlying credit risk is assessed to be relatively low. Individual
credit assessments are made for all customers. The Group’s financial assets
which neither have matured nor been written down are considered to have
high credit rating.
Funding and liquidity risks
Funding risk is the risk that the Group does not have access to adequate financing
on acceptable terms at any given point in time. The Senior Revolving
Facility of SEK 1,250 million has a tenor of five years with maturity 2020. The
liquidity risk is defined as the risk that the Group cannot full fill its short term
payment obligations. According to the financial policy of the Group the liquidity
reserve shall at all times amount to such a level it can cover fluctuations
in the daily business over the next six months. To meet this requirement the
Group has overdraft facilities and confirmed credit facilities. The overdrafts
facilities of the Group amounts to SEK 105 million.
Commodity price risk is defined as the risk that fluctuations in commodity
markets will have an adverse effect on the Group’s profit. The financial risks
related to raw materials are primarily concentrated to steel. The Group does
not hedge the price risk in commodities.
When translating foreign subsidiaries income statement to SEK the average
rate of the relevant period is used. The balance sheet is translated to SEK
with the closing rate.