Note 36 Financial risks and Finance policy

Finance and treasury

The Group is exposed to various types of financial risks through its operations. The term financial risk refers to fluctuations in the company’s profit and cash flow resulting from changes in exchange rates, interest rates, refinancing and credit risks. Group finance and treasury is governed by the Finance policy established by Peab’s Board of Directors. The policy is a framework of guidelines and regulations in the form of a risk mandate and limitations in finance and treasury. The Board has appointed a Finance Committee which is chaired by the Chairman of the Board. It is authorised to make decisions that follow the Finance policy in between meetings of the Board. The Finance Committee must report any such decisions at the next meeting of the Board. The Group Function Finance and Treasury and the Group’s internal bank Peab Finans AB manage coordination of Group finance and treasury. The overall responsibility of the finance function is to provide cost-effective funding and to minimise the negative effects on Group profit from financial risks.

The liquidity risk refers to the risk of Peab having difficulties in meeting its payment obligations as a result of a lack of liquidity or problems in converting or receiving new external loans. To ensure access to liquid funds binding credit facilities are contracted. The Group has a rolling one-month liquidity plan for all the units in the Group. Plans are updated each week. Group forecasts also comprise liquidity planning in the medium term. Liquidity planning is used to handle the liquidity risk and the cost of Group financing.

The objective is for the Group to be able to meet its financial obligations in favorable and unfavorable market conditions without running into significant unforeseen costs. Liquidity risks are managed centrally for the entire Group by the central Finance and Treasury function and the liquidity available at year-end is presented below.

Available liquid funds

Group, MSEK 2017-12-31 2016-12-31
Liquid funds and bank holdings 595 1,062
Unutilized overdraft facilities 750 1,000
Other unused credit lines 3,800 4,000
Total 5,145 6,062

The Finance policy dictates that Group net debt should mainly be covered by loan commitments that mature between 1 and 5 years. At the end of 2017, the average loan period for utilized credits was 98 months (62), for unutilized credits 27 months (29), and for all granted credits 58 months (45). In 2015 Peab refinanced its basic financing, a credit facility totaling SEK 5,000 million with a new credit facility of SEK 4,000 million with better terms. The new contract runs until September 2018 with the option to extend it one plus one year. The option for a second year extension was utilized in 2017, which means that the contract now runs until September 2020. This loan facility is supplemented by capital market financing, other kinds of short-term operations financing, project-related credits, financial leasing and installment financing. The loan agreements contain financial covenants in the form of interest coverage ratios and equity/assets ratios that the Group must meet, which is standard for this kind of loan. Peab exceeded the key ratios by a broad margin at the end of the year.

Peab set up a lending program for commercial papers in 2004. Under the program, Peab can issue commercial papers for a maximum of SEK 3.5 billion. The borrower is Peab Finans AB and the guarantor is Peab AB. At the end of the year, Peab had outstanding commercial papers worth SEK 200 million (1,329).

In February 2012 Peab received approval and registration from the FI (Financial Supervisory Authority) for the issue of Medium Term Notes (MTN) with a loan limit of SEK 3 billion. No new bonds under the MTN program were issued in 2017 (SEK 350 million) but bonds nominally worth SEK 350 million (1,000) matured during the year. At the end of the year Peab had outstanding bonds with a nominal value of SEK 650 million (1,000).

Total credit commitments, excluding unutilized leasing lines, the unutilized part of the certificate program and the unutilized part of MTN-program amounted to SEK 8,492 million (10,022) per 31 December 2017. Of the total credit commitments SEK 3,742 million (5,022) was utilized.

Age analysis of financial liabilities, undiscounted cash flow including interest

 Group 2017, MSEK Currency Average interest rate on balance sheet day, % Nominal value, original currency Amount SEK Matures 2018 Matures 2019 Matures 2020 Matures 2021 Matures 2022 Matures 2023-
Bank loans SEK 2.1 812 812 199 165 139 170 83 56
Bank loans NOK 2.4 237 237 185 28 8 4 4 8
Bank loans EUR 1.4 139 1,366 365 24 100 8 7 862
Commercial papers SEK 0.1 200 200 200
Bonds SEK 1.1 663 663 107 204 352
Financial leasing liabilities SEK 1.3 466 466 113 156 170 10 8 9
Financial leasing liabilities NOK 3.1 120 120 41 31 26 14 6 2
Financial leasing liabilities EUR 6.8 3 27 15 9 3
Total interest-bearing financial liabilities 3,891 1,225 617 798 206 108 937
Accounts payable SEK 4,093 4,093 4,093
Accounts payable NOK 543 544 544
Accounts payable EUR 25 245 245
Other liabilities SEK 213 213 83 34 74 22
Other liabilities NOK 88 88 59 7 19 3
Other liabilities EUR 2 24 24
Interest rate swaps SEK 44 29 6 5 4 0
Total non-interest bearing financial liabilities 5,251 5,077 40 86 45 3
Total financial liabilities 9,142 6,302 657 884 251 111 937

 

 Group 2016, MSEK Currency Average interest rate on balance sheet day, % Nominal value, original currency Amount SEK Matures 2017 Matures 2018 Matures 2019 Matures 2020 Matures 2021 Matures 2022-
Bank loans SEK 1.1 920 920 245 176 146 158 144 51
Bank loans NOK 3.0 336 354 184 153 3 5 5 4
Bank loans EUR 1.0 93 893 67 303 5 5 5 508
Commercial paper SEK 0.2 1,331 1,331 1,331
Bonds SEK 1.3 1,024 1,024 362 106 204 352
Financial leasing liabilities SEK 1.0 407 407 90 128 166 15 5 3
Financial leasing liabilities NOK 2.4 175 184 45 47 36 28 15 13
Financial leasing liabilities EUR 1.8 3 26 9 12 5
Total interest-bearing financial liabilities 5,139 2,333 925 565 563 174 579
Accounts payable SEK 3,696 3,696 3,696
Accounts payable NOK 586 618 618
Accounts payable EUR 17 160 160
Other liabilities SEK 173 173 90 23 4 33 21 2
Other liabilities NOK 9 10 6 4
Other liabilities EUR 1 14 14
Interest rate swaps SEK 102 56 28 6 5 4 3
Total non-interest bearing financial liabilities 4,773 4,640 51 10 38 25 9
Total financial liabilities 9,912 6,973 976 575 601 199 588

Interest rate risk

The interest rate risk is the risk that Peab’s cash flow or the value of financial instruments may vary with changes in market interest rates. The interest rate risk can result in changes in fair values and cash flows. A crucial factor affecting interest rate risk is the fixed interest period. On 31 December 2017, interest-bearing net debt amounted to SEK 1,216 million (1,862). Interest-bearing liabilities amounted to SEK 3,742 million (5,022), of which SEK 1,169 million (2,294) were short-term. The Finance policy dictates that the average fixed interest period on total borrowing may not exceed 24 months. Peab has chosen short fixed interest periods for outstanding credits. Per 31 December 2017 there were interest rate swaps of SEK 1,400 million (2,250) with maturity between 0 and 4 years at an effective interest rate of 2.9 percent (2.7) according to the table below. Peab pays a fixed annual interest rate and receives floating rates (Stibor 3 months) for the interest rate swap. Since Stibor 3 months was negative at the end of the year Peab will pay the floating rate as well. The swap agreement is recognised at fair value on the balance sheet day. Per 2017-12-31 this fair value was SEK -44 million (-95).

Interest rate derivates

MSEK Currency Effective rate % Amount SEK Matures 2017 Matures 2018 Matures 2019 Matures 2020 Matures 2021 Matures 2022 Matures 2023-
Interest rate swaps 2017-12-31 SEK 2.9 1,400 1,150 250
Interest rate swaps 2016-12-31 SEK 2.7 2,250 850 1,150 250

As the table below shows, the fixed interest period for SEK 3,278 million (3,622) of the Group’s total interest-bearing liabilities, including derivatives, is less than 1 year. Interest-bearing asset items totaling SEK 1,048 million (1,978) have short fixed interest periods, with the result that the fixed interest period for SEK 2,230 million (1,644) of Group net debt, including derivatives, is less than 1 year, making these liabilities directly susceptible to changes in market interest rates. Since the majority of the financial liabilities have a short maturity most of the interest rate risk is considered a cash flow risk. For further information regarding Peab’s risk sensitivity see the Sensitivity Analysis in the Board of Directors’ report.

Fixed interest rate period on utilized credits, excluding derivates per 31 December 2017

Fixed interest period Amount, MSEK Average effective interest rate, percent Share, percent
2018 3,528 1.5 94
2019- 214 2.4 6
Total 3,742 1.6 100

Fixed interest rate period on utilized credits, including derivates per 31 December 2017

Fixed interest period Amount, MSEK Average effective interest rate, percent Share, percent
2018 3,278 2.6 88
2019- 464 2.7 12
Total 3,742 2.6 100

Currency risks

The currency risk is the risk that fair values and cash flows of financial instruments may fluctuate with changes in the value of foreign currencies.

Financial exposure

Group borrowing is done in local currencies to reduce currency risks in operations. Assets and liabilities in foreign currency are translated at the rate on the balance sheet date. Borrowing in the interest-bearing liabilities per 31 December 2017, including leasing but excluding currency and interest rate derivatives, was allocated as follows:

  2017-12-31  2016-12-31 
Local currency in millions  MSEK Local currency in millions  MSEK
SEK 2,061 2,061 3,625 3,625
EUR 136 1,340 92 883
NOK 341 341 487 514
Total 3,742 5,022

Internal loans from Peab Finans AB are used to handle temporary liquidity needs in Peab’s foreign operations. Currency swaps are used to eliminate exchange risks. Currency swaps usually run less than three months. Currency swaps are reported at fair value when closing the books and value changes are reported as unrealized exchange rate differences in the income statement and as current receivables and liabilities on the balance sheet. At the end of the year, there were EUR 22 million (50) in outstanding currency swaps relating to financial exposure. Last year EUR 42 million referred to currency swaps for the Lemminkäinen Oyj shareholding which was divested in the fourth quarter 2017. Exchange rate differences in net financials items from financial exposure were SEK -22 million (-7). Exchange rate differences in operating profit were SEK -2 million (-2).

Exposure of net assets in foreign currency

The translation exposure arising from investments in foreign net assets is primarily hedged through loans in foreign currency or forward exchange contracts. At the end of 2017 hedges in forward exchange contracts in EUR for foreign net assets in Finland were EUR 10 million (10).

Foreign net assets

Local currency in millions 2017 Of which hedged 2016 Of which hedged
NOK 1,360 822
EUR 30 10 38 10
PLN 2 1

A change in the euro rate as of December 31, 2017 by ten percent would involve a translation effect on equity of SEK 20 million (27). A corresponding change of the Norwegian crown would generate a translation effect on equity of SEK 136 million (87). The translation effects are calculated on that part of foreign net assets which are not hedged. The effects of corresponding exchange rate changes on profit/loss for the year are limited.

Annual translation differences in equity (net assets in foreign subsidiaries) amounted to SEK -53 million (166).

Commercial exposure

Although international purchases and sales of goods and services in foreign currency are currently limited, they are expected to increase as the competition grows regarding purchasing goods and services. Contracted or forecasted currency flows can be hedged for 12 months from the date of the contract. At the end of the year, there were exchange rate hedges related to forecasted currency flows of EUR 10 million (7).

Since anticipated currency flows are hedged there are no transaction or translation effects on equity (other than the effect on the hedge reserve) or in profit/loss for the year if exchange rates change.

Share price risk

Peab has been exposed to share price risk through its holding in the listed company Lemminkäinen Oyj. The entire shareholding was divested in 2017. The reported value of this holding on the balance date in 2016 amounted to SEK 480 million.

Credit risk

Credit risk refers to the risk of losing money if a counterparty fails to meet its obligations.

Credit risks in financial instruments

Credit risks in financial instruments are very limited since Peab only deals with counterparties with high credit ratings. Counterparty risks are primarily associated with receivables to banks and other counterparties involved in the purchase of derivatives. The Finance policy contains special counterparty regulations which specify the maximum credit exposure for various counterparties. The framework agreement of the International Swaps and Derivatives Association (ISDA) is used with all counterparties in derivative transactions. According to the agreement when a counterparty cannot settle its obligations in all transactions the agreement is discontinued and all outstanding dealings are then settled for a net amount. ISDA agreements do not meet the criteria for offsetting on the balance sheet. The information in the table below shows the financial instruments covered by ISDA agreements.

  2017 2016
Group, MSEK Financial assets Financial liabilities Financial assets Financial liabilities
Recognized gross amount 6 46 12 95
Amount covered by netting agreement -5 -5 -12 -12
Net sum after netting agreement 1 41 0 83

Peab did not suffer any financial instrument losses in 2017. Total counterparty exposure related to derivative trading calculated as a net receivable per counterparty amounted to SEK 1 million (0) at the end of 2017. The estimated gross exposure to counterparty risks related to liquid funds and current investments amounted to SEK 595 million (1,062).

Credit risk in accounts receivable

The risk that Group customers cannot meet their obligations, i.e. payment is not received from customers, is a customer credit risk. Credit losses are relatively rare in the construction business since there are a great number of projects and customers that are invoiced at regular intervals during production. The Group’s customers undergo a credit rating control providing information on customers’ financial positions from various credit rating companies before a project is undertaken. The Group has established a credit policy for handling customer credit. For instance, it specifies where decisions regarding credit limits of various sizes are taken and how uncertain receivables should be handled. Bank guarantees or other collateral are required for customers with low credit ratings or insufficient credit history. The maximum exposure to credit risk is the reported value presented on the Group balance sheet. Total bad debts amounted in 2017 to SEK 11 million (14). The credit quality in accounts receivable that are not yet due and not written down is considered good.

Age analysis, overdue not written down accounts receivable

Group, MSEK 2017 2016
Accounts receivable, not mature 6,217 6,612
Accounts receivable, overdue 0 – 30 days 610 570
Accounts receivable, overdue 31 – 90 days 149 284
Accounts receivable, overdue 91 – 180 days 492 134
Accounts receivable, overdue 181 – 360 days 212 49
Accounts receivable, overdue > 360 days 1,075 623
Total 8,755 8,272

Accounts receivable written-down

Group, MSEK 2017 2016
Opening balance 51 44
Reversed write-downs -15 -10
Write-downs 12 17
Reclassifications -2
Exchange rate differences 0 0
Balance carried forward 46 51

There are no mature receivables of significant amounts for other financial receivables.

 

Capital management

Peab strives to have a good capital structure and financial stability in order to provide a stable basis for continuing business activities, thereby enabling the company to keep existing owners and attract new ones. A good capital structure also promotes the development of good relations with the Group’s creditors in a manner which benefits all parties.

Capital is defined as Equity and refers to equity attributable to shareholders in the parent company.

Equity

Group, MSEK 2017 2016
Share capital 1,584 1,584
Other contributed capital 2,576 2,576
Reserves -167 -153
Retained earnings including profit for the year 6,368 5,373
Equity attributable to shareholders in parent company 10,361 9,380

One of Peab’s financial targets is an equity/assets ratio (equity divided by the balance sheet total) in excess of 25 percent. The Board of Directors believes that this level is well suited to Peab’s construction and civil engineering activities in Sweden, Norway and Finland. The target is a part of the Group’s strategic planning. If the equity/assets ratio is expected to exceed this level on a permanent basis, the capital should be transferred to the shareholders in an appropriate form. The equity/assets ratio at the end of 2017 was 32.1 percent (29.7).

It is the ambition of the Board of Directors to preserve a balance between a high return on equity, which can be done through increased lending, and the security and benefits associated with a higher equity ratio. Therefore, one of Peab’s financial targets is a return on equity (profit for the period attributable to shareholders in the parent company divided by the average equity attributable to shareholders in the parent company) in excess of 20 percent. The return on equity was 21.1 percent (20.1) for 2017. The Board believes the target figure is a relevant level long-term for Peab. In comparison, the Group’s average interest expenses on interest-bearing borrowing, including derivatives, were 2.6 percent (2.6) on 31 December 2017.

Peab´s target for dividends is an annual distribution of at least 50 percent of profit for the year to shareholders. The level of dividends should be reasonable in relationship to developments in Peab´s profit and consolidation requirements. An ordinary dividend of SEK 4.00 per share (3.60) is proposed for 2017. Excluding the 1,086,984 B shares owned by Peab AB on 31 December 2017, which do not entitle to dividends, the proposed dividend is equivalent to a total dividend distribution of SEK 1,180 million (1,062). Calculated as a share of the Group’s reported profit for the year, the proposed dividend amounts to 57 percent (61). Besides the ordinary dividend, extra cash dividends may be proposed if the Board of Directors finds there are sufficient funds which are not considered necessary to Group development. Extra dividends may also be made in other forms besides cash.

At the start of 2017, Peab’s holding of own shares amounted to 1,086,984 B shares, corresponding to 0.4 percent of the total number of shares. On 10 May 2017, Peab’s AGM authorized the Board of Directors to acquire shares in Peab AB up to an amount so that after acquisition Peab would hold a maximum of 10 percent of the registered shares in the company. During 2017 no repurchases or divestitures have taken place. The purpose of the purchase of own shares is to improve the capital structure of the company or to be used in the financing of acquisitions.