24. Management of financial risks

Financial instruments - Fair values and risk management

24. MANAGEMENT OF FINANCIAL RISKS
 
The group's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and commodity risk), credit risk and liquidity risk. The operative management of the treasury activities of Tieto is centralized into Group Treasury. The Group Treasury is responsible for managing the Group’s financial risk position and maintaining adequate liquidity. The Treasury Policy, which has been approved by the board of directors, defines the principles for measuring and managing liquidity risk, interest rate risk, foreign exchange risks and counterparty risk of the Group. The Treasury Policy also defines the division of responsibilities with regard to financial risk management. The Group reviews and monitors financial risks on a regular basis.
 
Market risk
 
Currency risk management
 
Transaction risk
                   
Currency risk means the risk that the result or economic situation of the Group changes due to changes in exchange rates. Foreign trade, Group internal transactions and liquidity management in non-euro countries generate transaction exposure to the Group. The objective of the Groups' currency risk policy is to secure profitability of operative business by managing recognised exposures while maintaining on a Group level a sufficient flexibility to adjust to changing currency markets. The Treasury Policy defines the approved hedging instruments for Tieto, and the company's policy is to hedge all identified currency exposures within the limits defined in the Policy. The underlying exposure includes financial items such as foreign currency accounts receivables and payables of operating companies, internal funding and foreign currency bank account balances, and estimated cashflows such as firm commitments and future trade transactions.
 
Swedish krona, Norwegian krona, Czech koruna, Indian rupee, Polish zloty and US dollar are the largest currencies in the exposure. Russian rouble does not have a material impact on group exposure. During 2016 Tieto used currency forward contracts and swaps to mitigate the risks. Gains and losses from foreign exchange contracts are accounted in Group income statement. With regard to Czech koruna, hedge accounting has not been applied any longer to the new deals made after April 2015. As of April 2016, all Cash flow hedge deals had realized.
 
Group Companies must hedge all their identified currency risks with the Group Treasury unless there are legal restrictions preventing this. The benchmark for the Group’s currency position is a situation where all the identified currency risks are eliminated. A deviation from this benchmark is defined as an open position. The following deviations can be made based on the total size of the Group’s gross currency position (identified currency risks, excluding the hedging transactions):
• +/- 15 %: Group Treasury
• +/- 25 %: Treasury Committee
• Greater deviation: Board
The overall operational hedging ratio at the end of December 2016 was 98% (2015: 90%).
 
EUR million Financial items
exposure
Estimated cash flows Total FX exposure External
FX hedges
    Transaction exposure sensitivity 1) FX hedge sensitivity 1) Net effect gain/(loss)
SEK                  
31.12.2016 -53.6 14.2 -39.4 39.2     5.4 -3.9 1.4
31.12.2015 -72.0 31.8 -40.2 42.9     7.2 -4.3 2.9
                   
NOK                  
31.12.2016 -51.5 -0.1 -51.6 51.6     5.2 -5.2 -
31.12.2015 -27.9 -5.9 -33.8 31.2     2.8 -3.1 -0.3
                   
PLN                  
31.12.2016 0.6 -3.9 -3.3 3.2     -0.1 -0.3 -0.4
31.12.2015 1.0 -12.3 -11.3 11.7     -0.1 -1.2 -1.3
                   
CZK                  
31.12.2016 -3.5 -27.9 -31.4 30.0     0.4 -3.0 -2.7
31.12.2015 -7.8 -65.1 -72.9 65.3     0.8 -6.5 -5.8
                   
INR                  
31.12.2016 - -18.8 -18.8 18.9     - -1.9 -1.9
31.12.2015 -11.4 -54.0 -65.4 52.7     1.1 -5.3 -4.1
                   
USD                  
31.12.2016 -0.8 4.3 3.5 4.3     0.1 -0.4 -0.4
31.12.2015 1.0 16.0 17.0 -15.2     -0.1 1.5 1.4
                   
Other                  
31.12.2016 -1.4 0.6 -0.8 -5.0     0.1 0.5 0.6
31.12.2015 -1.3 5.8 4.5 -6.8     0.1 0.7 0.8
 
                   
 
Translation risk
                   
According to the Treasury Policy, hedging translation exposure is subject to Board decision. Exposure includes the acquisition price, share capital and restricted and non-restricted reserves of subsidiaries in non-euro countries, as well as the result of the period. SEK 2 511 million exposure forms the majority of the translation risk. The translation position was unhedged at the end of 2016.
 
Interest rate risk management
 
The most significant part of Group's interest rate risk arises from Group's borrowings and financial investments. The objective of interest rate risk management is to minimize the effect of interest rate fluctuations on Tieto’s annual results and economic positions. Group Treasury is responsible for the monitoring and operative management of the Group’s interest rate position. Interest rate position includes loans, financial investments and interest rate derivative contracts. The Treasury Policy defines the interest rate risk management principles and allowed interest rate hedging instruments for the Group. According to the Treasury Policy 12 months is defined as a benchmark for the Group's interest rate position, in terms of weighted average time to re-pricing. At the end of 2016 most of the funding was based on fixed rate 6-year bond, issued in May 2013. Consequently, the average time to re-pricing for the loans, at the end of the year was 18 months (27 months in 2015).
 
31 Dec 2016
EUR million
    Amount Duration Average
rate, %
Rate sensitivity 2)
Capital markets -99.6 2.3 2.9 0.0
Money markets 56.7 0.0 1.4 0.6
Other loans -51.0 0.1 0.2 -0.5
Other receivables 0.3 0.8 6.3 0.0
 
31 Dec 2015
EUR million
    Amount Duration Average
rate, %
Rate sensitivity 2)
Capital markets   -99.50 3.42 2.90 0.00
Money markets     156.20 0.00 0.90 1.56
Other loans     -71.80 0.20 0.50 -0.72
Other receivables     0.50 1.40 6.50 0.01
 
 
Commodity risk management
 
Majority of power procurement has been centralized to a selected supplier and under the selected model, Group does not enter into any new power derivative agreements in its own name, however since the external supplier enters power derivative agreements for the purpose of hedging specifically Tieto's Group exposure, they are seperated from the host electricitiy delivery agreement by Tieto and measured at fair value through profit or loss statement, based on prevailing market rates for similar instruments. Please refer to Note 26.
 
Liquidity risk management and funding
 
Liquidity risk management and funding principles are defined in the Treasury Policy. One of the key tasks of Group Treasury is to secure adequate funding for the Group. The Group has a committed EUR 150 million credit facility, which matures in 2020. In May 2013 the Group issued a six-year bond of EUR 100 million which is scheduled to be repaid in 2019. The Group has also overdraft facilities and a EUR 250 million commercial paper programme available to maintain flexibility in funding. Additionally there is a EUR 50 million sale of receivables facility.
 
Debt structure
 
31 Dec 2016       Maturity structure      
EUR million   Amount drawn Amount available 2017 2018 2019 2020 2021 2022–
Loans Bond 100.0 - - - 100.0 - - -
  Commercial paper programme 51.0 199.0 51.0 - - - - -
  Revolving credit facility - 150.0 - - - - - -
  Liabilities towards Joint Ventures 16.0 - 16.0 - - - - -
  Other loans 0.3 - 0.3 - - - - -
    167.3 349.0 67.3 - 100.0 - - -
                   
  Interest payments - - 2.9 2.9 1.1 - - -
                   
Derivative liabilities/assets Forward contracts outflow - - 198.7 - - - - -
  Forward contracts Inflow - - -198.7 - - - - -
  Derivatives net flow - - - - - - - -
                   
Trade payables Outflow - - 96.3 - - - - -
                   
Other liabilities Financial lease liability 6.0 - 1.5 1.5 1.5 1.5 - -
                   
Total   173.3 349.0 168.0 4.4 102.6 1.5 - -
                   
                   
31 Dec 2015       Maturity structure      
EUR million   Amount drawn Amount available 2016 2017 2018 2019 2020 2021–
Loans Bond 100.0 - - - - 100.0 - -
  Commercial paper programme 50.0 200.0 50.0 - - - - -
  Revolving credit facility - 150.0 - - - - - -
  Liabilities towards Joint Ventures 19.3 - 19.3 - - - - -
  Other loans 2.6 - 2.6 - - - - -
    171.9 350.0 71.9 - - 100.0 - -
                   
  Interest payments - - 4.8 2.9 2.9 1.1 - -
                   
Derivative liabilities/assets Forward contracts outflow - - 294.5 - - - - -
  Forward contracts Inflow - - -294.5 - - - - -
  Derivatives net flow - - - - - - - -
                   
Trade payables Outflow - - 78.7 - - - - -
                   
Other liabilities Financial lease liability 7.4 - 1.5 1.5 1.5 1.5 1.5 -
                   
Total   179.3 350.0 156.9 4.4 4.4 102.6 1.5 -
 
 
Credit risk management
 
Credit risk is managed on Group level. Credit risk is derived from financial investments, derivative contracts and customer-related risks, such as accounts receivable. Group Treasury maintains a list of approved counterparties for commercial paper investment and other financial transactions in accordance with limits set in the Treasury Policy. According to the Treasury Policy, core banks of the Group should have a minimum long-term rating of Baa3 or BBB-. The Credit Policy defines the limits for the acceptable level of customer credit risk. Customer-related credit risks are assessed based on payment history and financial strength in accordance with the Credit Policy. Bad debts provisions are booked if the customer is late by more than 90 days. During 2016, provisions for bad debts increased by EUR 0.6 million (EUR 1.9 million release in 2015). EUR 1.7 million bad debts were booked in 2016 (EUR 0.3 million in 2015). The maximum exposure to customer related credit risk at the reporting date is the carrying value of trade receivables. The Group holds no collateral as a security for this credit risk. The Group has a Sale of Receivables facility with one of its core banks. The total facility size is EUR 50 million. There are no major concentrations of credit risk in the Group, whether through exposure to individual customers, specific industry sectors and/or regions.
 
Capital management
 
The target is to keep the capital structure on a level securing adequate financial flexibility for the operations. The capital structure of the Group is being continuously monitored through Net debt/EBITDA ratio. The ratio is calculated by dividing interest-bearing net debt with previous 12 month EBITDA (excluding capital gains) of the Group.
                   
                31 Dec 2016 31 Dec 2015
Net debt               109.7 13.2
12 month EBITDA (excluding capital gains)           194.7 175.2
Net debt/EBITDA (excluding capital gains)           0.6 0.1
                   
Net debt/EBITDA ratio (excluding capital gains, but including advances received) is also a covenant for Revolving credit facility. Tieto Group is within limits for this covenant as at end of year 2016 and comparative period.
 
Offsetting financial assets and liabilities
                   
Agreements with derivatives counterparties are based on ISDA Master Agreements or on agreements with similar content with regards to offsetting financial assets and liabilities, i.e., under the terms of these agreements, only when certain events occure, such as, default of either of parties or other force majeure circumstances, then the net position owing/receivable to a single counterparty will be taken as owing.
Financial assets consists of Trade Receivables, Derivatives and Cash balances; financial liabilities consist of Trade Payables and Derivatives. Group has no Overdraft balances outstanding as at end of reporting and comparable period. Trade Receivables, Cash balances and Trade Payables have been excluded from the table below since they are not subject to any enforceable master netting agreements or similar agreements and like with Derivatives will be settled on gross basis.
 
Financial assets
               
              Related amounts not set off in the balance sheet  
As at 31 December 2016 Gross amounts of recognized financial assets Gross amounts of recognised financial liabilities set off in the balance sheet Net amounts of financial assets presented in the balance sheet Financial Instruments Cash collateral received Net amount
Derivative financial assets 2.4 - 2.4 -1.1 - 1.2
Total 2.4 - 2.4 -1.1 - 1.2
             
            Related amounts not set off in the balance sheet  
As at 31 December 2015 Gross amounts of recognized financial assets Gross amounts of recognised financial liabilities set off in the balance sheet Net amounts of financial assets presented in the balance sheet Financial Instruments Cash collateral received Net amount
Derivative financial assets 1.6 - 1.6 -1.2 - 0.4
Total 1.6 - 1.6 -1.2 - 0.4
                 
Financial liabilities
                   
            Related amounts not set off in the balance sheet  
As at 31 December 2016 Gross amounts of recognized financial liabilities Gross amounts of recognised financial assets set off in the balance sheet Net amounts of financial liabilities presented in the balance sheet Financial Instruments Cash collateral received Net amount
Derivative financial liabilities -1.1 - -1.1 1.1 - -
Total -1.1 - -1.1 1.1 - -
             
            Related amounts not set off in the balance sheet  
As at 31 December 2015 Gross amounts of recognized financial liabilities Gross amounts of recognised financial assets set off in the balance sheet Net amounts of financial liabilities presented in the balance sheet Financial Instruments Cash collateral received Net amount
Derivative financial liabilities -1.4 - -1.4 1.2 - -0.2
Total -1.4 - -1.4 1.2 - -0.2