Management of financial risks

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 2015 Tieto used currency forward contracts, options and swaps to mitigate the risks. Gains and losses from foreign exchange contracts are accounted in Group income statement except for contracts in Czech koruna against euro, where hedge accounting has been applied and for which the result of unrealised contracts is booked into Group equity. With regard to Czech koruna, hedge accounting has not been applied any longer to the new deals made after April 2015. All deals made beforehand will remain in equity until the earliest of: day when the underlying item hedged impacts income statement or until the hedged cash flow is no longer expected to occur. Currency derivatives have a maturity of less than 12 months.
 
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 2015 was 90% (2014: 95%).
 
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                  
31.12.2015 -72.0 31.8 -40.2 42.9     7.2 -4.3 2.9
31.12.2014 -21.0 20.2 -0.8 0.9     2.1 -0.1 2.0
                   
NOK                  
31.12.2015 -27.9 -5.9 -33.8 31.2     2.8 -3.1 -0.3
31.12.2014 -23.1 0.0 -23.1 22.1     2.3 -2.2 0.1
                   
PLN 2)                  
31.12.2015 1.0 -12.3 -11.3 11.7     -0.1 -1.2 -1.3
31.12.2014 0.0 -8.0 -8.0 8.2     0.0 -0.8 -0.8
                   
CZK 2)                  
31.12.2015 -7.8 -65.1 -72.9 65.3     0.8 -6.5 -5.8
31.12.2014 -3.6 -53.4 -57.0 57.0     0.4 -5.7 -5.3
                   
INR                  
31.12.2015 -11.4 -54.0 -65.4 52.7     1.1 -5.3 -4.1
31.12.2014 -2.8 -14.6 -17.4 14.6     0.3 -1.5 -1.2
                   
USD                  
31.12.2015 1.0 16.0 17.0 -15.2     -0.1 1.5 1.4
31.12.2014 2.2 1.1 3.3 -2.9     -0.2 0.3 0.1
                   
Other
31.12.2015 -1.3 5.8 4.5 -6.8     0.1 0.7 0.8
31.12.2014 -5.7 0.0 -5.7 0.4     0.6 -0.0 0.5
 
                   
 
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 2 016 million exposure forms the majority of the translation risk. The translation position was unhedged at the end of 2015.
 
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 2015 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 27 months (49 months in 2014).
 
31 Dec 2015
EUR million
    Amount Duration Average
rate, %
Rate sensitivity 3)
Capital markets -99.5 3.4 2.9 0.0
Money markets 156.2 0.0 0.9 1.6
Other loans -71.8 0.2 0.5 -0.7
Other receivables 0.5 1.4 6.5 0.0
 
31 Dec 2014
EUR million
    Amount Duration Average
rate, %
Rate sensitivity 3)
Capital markets   -99.3 4.1 2.9 0.0
Money markets     160.6 0.0 0.3 1.6
Other loans     -13.0 0.2 1.2 -0.1
Other receivables     1.1 1.0 0.0 0.0
 
 
Commodity risk management
 
The Group has changed its power procurement practice in December 2015. 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.
 
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 2015       Maturity structure      
EUR million   Amount drawn Amount available 2016 2017 2018 2019 2020 2021–
Loans Bond 100.0 0.0 - - - 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 0.0 0.0 100.0 0.0 0.0
                   
  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     0.0 0.0 0.0 0.0 0.0 0.0
                   
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 0.0
                   
                   
31 Dec 2014       Maturity structure      
EUR million   Amount drawn Amount available 2015 2016 2017 2018 2019 2020–
Loans Bond 100.0   - - - - 100.0 -
  Commercial paper programme   250.0 - - - - - -
  Revolving credit facility   100.0 - - - - - -
  Liabilities towards Joint Ventures 9.0   9.0 - - - - -
  Other loans 4.0   2.5 1.5 - - - -
    113.0 350.0 11.5 1.5 0.0 0.0 100.0 0.0
                   
  Interest payments     3.0 2.9 2.9 2.9 1.1 -
                   
Derivative liabilities/assets Forward contracts outflow     160.1 - - - - -
  Forward contracts Inflow     -160.1 - - - - -
  Derivatives net flow     0.0 0.0 0.0 0.0 0.0 0.0
                   
Trade payables Outflow 91.0   91.0 - - - - -
                   
Other liabilities Financial lease liability 0.3   0.3 - - - - -
                   
Total   204.3 350.0 105.8 4.4 2.9 2.9 101.1 0.0
 
 
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 2015 a bad debt provision of EUR 1.9 million was released (EUR 1.0 million release in 2014). EUR 0.3 million bad debts were booked in 2015 (EUR 0.1 million in 2014). 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 2015 31 Dec 2014
Net debt 13.2 -59.2
12 month EBITDA (excluding capital gains) 175.2 164.8
Net debt/EBITDA (excluding capital gains) 0.1 -0.4
 
 
 
Offsetting financial assets and liabilities
                   
For the financial assets and liabilities subject to enforceable master netting arrangements or similar arrangements above, each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and liabilities will be settled on a gross basis. However, for several agreements the netting option can only be exercised in the event of default of the other party.

Financial assets consists of Trade Receivables, Derivatives and Cash balances; financial liabilities consist of Trade Payables and Derivatives. 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 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 0 1.6 -1.2   0.4
Total 1.6 0 1.6 -1.2 0 0.4
             
            Related amounts not set off in the balance sheet  
As at 31 December 2014 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 1.4 0 1.4 -0.6 0 0.8
Total 1.4 0 1.4 -0.6 0 0.8
 
Financial liabilities
                   
            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 assets
presented in
the balance sheet
Financial Instruments Cash collateral received Net amount
Derivative financial liabilities -1.4 0 -1.4 1.2 0 -0.2
Total -1.4 0 -1.4 1.2 0 -0.2
             
            Related amounts not set off in the balance sheet  
As at 31 December 2014 Gross amounts of recognized financial liabilities Gross amounts of recognised financial assets 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 liabilities -1.9 0 -1.9 0.6 0 -1.3
Total -1.9 0 -1.9 0.6 0 -1.3