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 affect 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 AUD, EUR, GBP and USD. 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 is applied in line with IFRS9.
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. On 2 July 2018 the Group signed a multi-currency Senior Revolving Facility of SEK 2,500 million. Drawdowns under the Revolving Credit Facility are made as short terms loans. The Credit Facility of the Group contains certain requirements on key financial ratios, known as covenants. These covenants are the following key financial ratios:
- 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 2,500 million matures 2024. 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.
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 with financial market instruments.
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.