Lemminkäinen is exposed to financial risks, the major ones being interest rate, exchange rate, liquidity and credit and availability of funding.
In its business operations, Lemminkäinen Group is exposed to financial risks, mainly interest rate, foreign exchange rate, funding, liquidity and credit risks. The aim of the Groups financial risk management is to reduce uncertainty concerning the possible impacts that changes in fair values on the financial markets could have on the Groups result, cash flow and value. The management of financial risks is based on principles approved by the Board of Directors. The treasury policy defines the principles and division of responsibilities with regard to financial activities and the management of financial risk. The policy is reviewed and if necessary updated at least annually.
Execution of the treasury policy is the responsibility of the Group Treasury, which is mainly responsible for the management of financial risks and handles the Groups treasury activities on a centralised basis. The Groups treasury policy defines the division of responsibilities between the Group Treasury and business units in each subarea. The Group companies are responsible for providing the Group Treasury with up-to-date and accurate information on treasury-related matters concerning their business operations. The Group Treasury serves as an internal bank and co-ordinates, directs and supports the Group companies in treasury matters such that the Groups financial needs are met and its financial risks are managed effectively in line with the treasury policy.
Interest rate risk
The aim of Lemminkäinen Groups interest rate risk management is to minimise changes affecting the result, cash flows and value of the Group due to interest rate fluctuations. The Group Treasury manages and monitors the interest rate position. The Groups interest rate risk primarily comprises fixed-rate and variablerate loan and leasing agreements, interest-bearing financial receivables and interest rate derivatives. Interest rate changes affect items in the income statement and balance sheet.
The interest rate risk is decreased by setting the Groups average period of interest rate fixation to the same as the interest rate sensitivity of its business. The interest rate sensitivity position of the Groups business is estimated to be about 15 months. The treasury policy thus defines the Groups average period of interest rate fixation as 1218 months. The Group aims to keep 4065 per cent of its liabilities per currency hedged.
The Group can have both variable- and fixed-rate long-term borrowings. The ratio of fixed- and variable-rate borrowings can be changed by using interest rate derivatives. In 2012, the Group has used interest rate swaps for managing interest rate risks. Part of the interest rate swaps are used for hedge accounting and a hedging result of those derivatives will have impact on interest expenses until the year 2014. There was no ineffectiveness to be recorded from hedge accounting during the financial year.
Interest rate fluctuations in 2012 did not have any unusual effect on the Groups business, but a significant rise in the level of interest rates may have a detrimental effect on the demand for housing.
Sensitivity analysis of interest rate risk
The following assumptions are made when calculating the sensitivity caused by a change in the level of interest rates:
the interest rate change is assumed to be 1 percentage point
the position includes variable-rate financial liabilities, variable-rate financial receivables and interest rate derivatives
all factors other than the change in interest rates remain constant
taxes have not been taken into account when calculating sensitivity
Foreign exchange rate risk
The aim of foreign exchange rate risk management is to reduce uncertainty concerning the possible impacts that changes in exchange rates could have on the future values of cash flows, business receivables and liabilities, and other balance sheet items. Exchange rate risk mainly consists of transaction risk and translation risk.
Translation risk consists of foreign exchange rate differences arising from the translation of the income statements and balance sheets of foreign group companies into the Groups functional currency. In practice, the Groups reportable translation risk is caused by equity investments in foreign entities and their retained earnings, the effects of which are recorded under translation differences in shareholders equity. Lemminkäinen Group has foreign net investments in several currencies. In accordance with the treasury policy, Lemminkäinen Group protects itself from translation risks primarily by keeping equity investments in foreign entities at an appropriately low level, and thus does not use financial instruments to hedge the translation risks.
Transaction risk consists of cash flows in foreign currencies from operational and financial activities. The Group seeks to hedge business currency risks primarily by operative means. The remaining transaction risk is hedged by using instruments such as foreign currency loans and foreign currency derivatives. The group companies are responsible for identifying, reporting, forecasting and hedging their transaction risk positions internally. The Group Treasury is responsible for hedging the Groups risk positions as external transactions in accordance with the treasury policy. The general rule is that the major net positions forecasted for the 12 months following the review date are hedged, with a hedging ratio ranging from 25100 per cent and emphasising the first six months.
The key currencies in which the Group was exposed to transaction risk in 2012 were US-dollar and russian rouble. These transaction risk positions were mainly due to sales, procurement, receivables and liabilities. In 2012 the Group did not apply hedge accounting to transaction risk hedging.
Sensitivity analysis of transaction risk
The following assumptions have been made when calculating the sensitivity caused by changes in the euro/dollar and euro/rouble exchange rates:
the exchange rate change is assumed to be +/10%
the position includes financial assets and liabilities denominated in roubles and dollars
the position does not include forecasted future cash flows
taxes are excluded in sensitivity analysis
Funding and liquidity risk
The Group seeks to optimise the use of liquid assets in funding its business operations and to minimise interest and other financial expenses. The Group Treasury is responsible for managing the Groups overall liquidity and ensuring that adequate credit lines and a sufficient number of funding sources are available. It also ensures that the maturity profile of the Groups loans and credit facilities is spread sufficiently evenly over coming years as set out in the treasury policy. The Groups liquidity management is based on monthly forecasts of funding requirements and daily cash flow forecasting. The Groups excess liquidity is managed by means of internal deposits and cash pools.
According to the treasury policy, the Groups liquidity reserve shall at all times match the Groups total liquidity requirement, and it must be accessible within five banking days without any additional charges being incurred. The Groups total liquidity requirement consists of the liquidity requirement of day-to-day operations, risk premium needs and the strategic liquidity requirement.
Due to the nature of the Groups business operations, the importance of seasonal borrowing is great. The effect of seasonal variation on shortterm liquidity is controlled by using a commercial paper programme, committed credit limits and bank overdraft facilities. The total amount of the Groups commercial paper programme is EUR 300 million (EUR 300 mill.), of which EUR 86.8 million (EUR 119.9 mill.) was in use at 31 December 2012. At that time, the Group had unused committed credit facilities totalling EUR 139.6 million (EUR 140.7 mill.). The amount of liquid assets at 31 December 2012 was EUR 93.9 million (EUR 30.4 mill.).