C26. Financial risk management

Principles of financing and financial risk management

Telia Company’s financing and financial risks are managed under the control and supervision of the Board of Directors of Telia Company AB. Financial management is centralized within the Group Treasury unit of Telia Company, which operates as Telia Company’s internal bank and is responsible for the management of financing, management of capital requirements and cash. Group Treasury is also responsible for Telia Company’s financial risk management, related to implementation of group policies and instructions, identification and monitoring of financial risks as well as implementation of hedging strategies thereof. The most noticeable risks under Group Treasury’s responsibility are credit risk, liquidity risk, currency risk, interest rate risk and (re-)financing risk. Group Treasury also seeks to manage the cost of financial risk management.

Telia Company finances its operations mainly by borrowing under its uncommitted open-market financing programs directly in Swedish and international money markets and capital markets. The communicated funding strategy themes have been to increase duration, to diversify funding sources and to keep a prudent liquidity position. Capital market funding is the primary source and bank funding is considered mainly as backup. This increases flexibility and ensures access to markets with attractive pricing. The open-market financing programs typically provide a cost-effective and flexible alternative to bank financing.

Former segment region Eurasia is since 2015 classified as held for sale and discontinued operations since December 31, 2015, and therefore not included in the figures for 2016. For further information, see Note C34 “Discontinued operations and assets classified as held for sale.”

Capital management

Telia Company’s capital structure and dividend policy is decided by the Board of Directors. The ambition is to distribute at least 80 percent of free cash flow from continuing operations excluding licenses. 

Telia Company shall target a solid investment grade long-term credit rating of A- to BBB+ and a leverage corresponding to Net debt/EBITDA of 2x plus/minus 0.5x to secure the company’s strategically important financial flexibility for investments in future growth, both organically and by acquisitions.

In May 2016, Moody’s Investors Service confirmed its P-2 rating for short-term borrowings and announced a downgrade to Baa1 rating for long-term borrowings with a stable outlook. In September 2016, Standard & Poor’s Ratings Services placed its rating of A- for long-term borrowings on a credit watch negative and affirmed its A-2 rating for short-term borrowings. These ratings represent a solid investment grade level and are thus expected to allow Telia Company continued good access to the financial markets.

Telia Company is not subject to any externally imposed capital requirements.

Telia Company defines capital as equity.

Credit risk management

Credit risk is the risk of delay or loss of value or income as well as incurred costs due to counterparty default or failure to meet its financial obligations. The carrying amount of Telia Company´s instruments with credit risk exposure is as follows.

SEK in millions

Note

Dec 31, 2016

Dec 31, 2015

Other non-current assets

C15

19,542

17,860

Trade and other receivables

C17

13,670

14,639

Interest-bearing receivables

C18

11,143

10,679

Cash and cash equivalents

C18

14,510

14,647

Total

 

58,865

57,825

When entering into financial transactions such as interest rate swaps, cross currency swaps and other derivative transactions, Telia Company accepts only creditworthy counterparties with a solid investment grade rating. Telia Company requires each counterparty to have an International Swaps and Derivatives Association, Inc. (ISDA) agreement. The permitted exposure of each counterparty when entering into a financial transaction depends on the rating of that counterparty.

The net aggregated exposure in derivatives as of December 2016, is distributed by the counterparty long-term rating with Moody’s in the table below. Received collateral, regulated by the Credit Support Annex of the ISDA agreements, is deducted from the exposure.

 

SEK in millions

Dec 31, 2016

Dec 31, 2015

Counterparty rating Aa3

727

271

Counterparty rating Aa2

121

312

Counterparty rating A1

769

320

Counterparty rating A2

1,128

Counterparty rating A3

226

216

Counterparty rating Baa1

Counterparty rating Baa2

2

Counterparty rating Baa3

2

Total exposure of counterparties in derivatives

1,842

2,251

Surplus cash in Telia Company can be invested in bank deposits and securities issued by banks and corporates with at least a rating of A- (Standard & Poor’s) or A3 (Moody’s). In addition, cash can be invested in government bonds and treasury bills issued by the Swedish, German, Finnish, Norwegian or Danish government, Swedish municipals, investment funds and securitized assets with AAA/Aaa rating.

The credit risk with respect to Telia Company’s trade receivables is diversified geographically and among a large number of customers, private individuals as well as companies in various industries. Solvency information is required for credit sales to minimize the risk of bad debt losses and is based on group-internal information on payment behavior, if necessary supplemented by credit and business information from external sources. Bad debt expense in relation to consolidated net sales was approximately 0.5 percent in 2016 and 0.6 percent in 2015.

Liquidity risk management

Liquidity risk is the risk that Telia Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

Telia Company has internal control processes and contingency plans for managing liquidity risk. The short-term and mid-term liquidity management takes into account the maturities of financial assets and financial liabilities and estimates of cash flows from operations.

A centralized daily cash pooling process enables Telia Company to manage liquidity surpluses and deficits according to the actual needs on group and subsidiary level.

Telia Company’s policy is to have a prudent liquidity position in terms of available cash and/or unutilized committed credit facilities. Telia Company’s short term liquidity risk is managed with the liquidity reserve described below.

SEK in millions

Dec 31, 2016

Dec 31, 2015

Surplus liquidity

   

Cash and bank

5,854

10,929

Cash equivalents1

8,656

3,718

Cash and cash equivalents (see also Note C18)

14,510

14,647

Short-term investments2 (see also Note C18)

5,043

5,216

Total

19,553

19,862

Long-term investments3 (see also Note C15)

10,185

8,841

Total surplus liquidity

29,738

28,703

Committed credit facilities

   

Revolving credit facilities (limit amount)

14,365

18,270

Bank overdraft and short-term credit facilities (limit amount)

3,817

2,063

Utilized credit facilities

-2,196

-4,110

Total unutilized committed credit facilities

15,986

16,223

Liquidity position

45,724

44,926

1) Bank deposits and securities which matures within 3 months of the date of acquisition.

2) Securities with maturities between 3 and 12 months. Convertible to cash within 2 days, i.e. excluding securities that for regulatory reasons are not convertible to cash within 2 days.

3) Securities with maturities exceeding 12 months. Convertible to cash within 2 days.

Telia Company’s committed bank credit facilities and overdraft facilities, intended for short-term financing and back-up purposes, were as follows.

SEK in millions

     

Dec 31, 2016

Dec 31, 2015

Group entity

Type

Characteristics

Final maturity

Currency

Limit

Limit

Telia Company AB

Revolving credit facility

Committed, syndicated

December 2017

EUR

9,135

Telia Company AB

Revolving credit facility

Committed, syndicated

June 2017

EUR

9,135

Telia Company AB

Revolving credit facility

Committed, syndicated

September 2021

EUR

14,365

Telia Company AB
and subsidiaries

Bank overdraft facility

Committed, bilateral

Extended yearly

(various)

3,817

2,063

As of December 31, 2016, contractual undiscounted cash flows for the group represented the following expected maturites. The amounts regarding the group’s interest-bearing borrowings and derivatives include installments and estimated interest payments. Amounts in foreign currency have been converted into SEK using the exchange rate prevailing as of the end of the reporting period. Future interest payments, related to instruments with floating interest rates, have been estimated using forward rates. Where gross settlements are performed (cross currency interest rate swaps, currency swaps and forward exchange contracts), all amounts are reported on a gross basis.

Expected maturity
SEK in millions

Note

Jan–Mar 2017

Apr–Jun 2017

Jul–Sep 2017

Oct–Dec 2017

2018

2019

2020

2021

Later years

Total

Utilized bank overdraft and short-term credit facilities

 

-185

-185

Open-market financing program
borrowings

 

-9,164

-57

-351

-1,792

-4,453

-11,267

-10,513

-11,489

-59,088

-108,175

Other borrowings

 

-291

-75

-75

-74

-296

-293

-290

-72

-1,466

Finance lease agreements

 

-2

-2

-2

-2

-7

-6

-6

-7

-11

-45

Cross currency interest rate swaps and interest rate swaps

                     

 Payables

 

-6,770

-950

-57

-3,079

-6,755

-5,306

-7,685

-1,110

-26,392

-58,104

 Receivables

 

8,269

1,077

68

3,000

7,146

5,696

8,002

1,133

26,451

60,842

Currency swaps and forward exchange contracts

                     

 Payables

 

-47,500

-2,157

-450

-50,107

 Receivables

 

47,131

2,052

448

49,631

Goverment bonds and treasury bills

C15

9

9

Loans and receivables

C15

1,801

335

212

128

520

2,997

Financial guarantees

C22

Other long term liabilities

C23

-108

-54

-51

-48

-11

-271

Trade Payables and Other Current Liabilities

C24

-8,370

-69

-68

-273

-8,780

Credit and performance guarantees

C29

-112

-112

Total

 

-16,697

-366

-485

-2,222

-2,775

-10,895

-10,331

-11,465

-58,531

-113,766

Currency risk management

Currency risk is the risk that fluctuations in foreign exchange rates will adversely affect the group’s results, financial position and/or cash flows. Currency risk can be divided into operational transaction exposure and conversion exposure.

Transaction exposure relates to net inflows or outflows of foreign currencies required by operations and financing. Telia Company’s general policy is to hedge the majority of known operational transaction exposure up to 12 months into the future. Financial flows are usually hedged until maturity, even if that is longer than 12 months.

Regarding foreign currency transaction exposure, CFO has a clearly defined deviation mandate which is capped at the equivalent of SEK 10 million calculated as one day Value at Risk (VaR), expressed as the long/short SEK counter-value amount that may be exposed to currency fluctuations. Since SEK is the functional currency of Telia Company borrowings are normally denominated in, or swapped into SEK unless linked to international operations or allocated as hedging of net investments abroad.

Financial transaction exposure risk

As of December 31, 2016, contractual undiscounted financial cash flows split by currency, for the group’s interest-bearing borrowings, assets and derivatives represented the following expected maturities, including installments and estimated interest payments. Amounts in foreign currency have been converted to SEK using the exchange rate prevailing as of the end of the reporting period. Future interest payments, related to instruments with floating interest rates, have been estimated using forward rates.

SEK in millions

Jan–Mar 2017

Apr–Jun 2017

Jul–Sep 2017

Oct–Dec 2017

2018

2019

2020

2021

Later years

Total

DKK

lnterest bearing asset

 

lnterest bearing debt

 

Derivatives

-5,004

-5,004

 

Net

-5,004

-5,004

EUR

lnterest bearing asset

4,846

479

5,325

 

lnterest bearing debt

-8,854

-942

-414

-754

-3,617

-7,155

-9,767

-10,872

-46,795

-89,171

 

Derivatives

18,029

1,019

25

-26

1,139

4,927

7,211

-76

-6,622

25,626

 

Net

14,021

556

-389

-780

-2,478

-2,228

-2,556

-10,948

-53,417

-58,220

GBP

lnterest bearing asset

 

lnterest bearing debt

-121

-121

-121

-121

-121

-5,306

-5,911

 

Derivatives

-181

121

121

121

121

121

5,306

5,730

 

Net

-181

-181

JPY

lnterest bearing asset

 

lnterest bearing debt

-8

-2

-8

-353

-794

-7

-7

-7

-1,408

-2,594

 

Derivatives

8

2

8

353

794

7

7

7

1,408

2,594

 

Net

NOK

lnterest bearing asset

 

lnterest bearing debt

-18

-70

-88

-88

-88

-457

-2,261

-3,070

 

Derivatives

-702

-3,064

-18

-2,119

-4,774

39

34

399

-18

-10,223

 

Net

-702

-3,082

-18

-2,189

-4,862

-49

-54

-58

-2,279

-13,293

USD

lnterest bearing asset

19

19

 

lnterest bearing debt

 

Derivatives

5,982

-446

5,536

 

Net

6,001

-446

5,555

SEK

lnterest bearing asset

7,214

817

351

164

429

3,973

3,837

1,840

18,625

 

lnterest bearing debt

-594

-14

-3

-569

-129

-4,189

-820

-104

-3,318

-9,740

 

Derivatives

-16,789

2,065

-4

2,040

3,111

-4,705

-7,056

-427

-16

-21,781

 

Net

-10,169

2,868

344

1,635

3,411

-4,921

-4,039

1,309

-3,334

-12,896

Total, net

3,966

342

-63

-1,780

-3,929

-7,198

-6,649

-9,697

-59,030

-84,039

The cash flow pertains to foreign exchange rate hedging of receivables, payables and cash balances in foreign currencies. Foreign exchange rate risks are also mitigated through the group’s net investment in EUR and NOK, see section “Conversion exposure risk.”

Operational transaction exposure sensitivity

In most cases, Telia Company customers are billed in their respective local currency. Receivables from and payables to other operators for international fixed-line traffic and roaming are normally settled net through clearing-houses. Hence, the operational need to net purchase foreign currency is primarily due to a deficit from such settlements and the limited import of equipment and supplies. Main sources of transaction exposures are derived from the Nordic operations involving SEK, EUR, NOK and DKK.

Currency
SEK in millions

Impact on Net income
if currency rate depreciates
by 10 percent 2016

Impact on Net income if currency
rate depreciates by 10 percent

2015

SEK

-510

-369

EUR

450

329

NOK

-13

-36

DKK

14

-9

Other

9

13

The sensitivity analysis is based on the assumption that the operational transaction exposure is equivalent to that in 2016, and provided that no hedging measures were taken.

Conversion exposure risk

Conversion exposure relates to net investments in foreign operations. CEO has a mandate to implement hedging up to a specific ratio limit. Telia Company’s net investments in foreign operations were distributed by currency as follows.

SEK in millions

2016

2015

Net
investments

Hedged through borrowings or derivatives

Net

Net
investments

Hedged through borrowings or derivatives

Net

DKK

3,240

3,240

608

608

EUR

72,461

-43,991

28,470

75,719

-50,231

25,488

GBP

98

98

137

137

NOK

16,255

-1,438

14,817

13,797

-1,304

12,493

RUB

4,957

4,957

4,459

4,459

TRY

16,099

16,099

16,693

16,693

USD

1,746

1,746

389

389

Other currencies

431

431

218

218

Total

115,287

-45,429

69,858

112,021

-51,536

60,485

Conversion exposure sensitivity

The positive impact on group equity would be approximately SEK 7.0 billion if the Swedish krona weakened by 10 percentage points against all conversion exposure currencies. The calculation is based on the exposure as of December 31, 2016, including hedges but excluding any potential equity impact due to Telia Company’s operational need to net purchase foreign currency, or to currency translation of other net income related items.

Interest rate risk management

Telia Company’s sources of funds are primarily equity attributable to owners of the parent, cash flows from operating activities, and borrowings. The interest-bearing borrowing and financial investments expose the group to interest rate risk. Interest rate risk is the risk that a change in interest rates will negatively affect the group’s net interest expense and/or cash flows.

Average interest rates, including relevant hedges, on Telia Company AB’s outstanding long-term and short-term borrowings as of the end of the reporting period was as follows.

Percent

Dec 31, 2016

Dec 31, 2015

Long-term borrowings

2.07

2.15

Short-term borrowings

1.88

1.62

Debt key figures on debt portfolio as of the end of the reporting period was as follows. Amounts indicated represent carrying values.

SEK in millions

Dec 31, 2016

Dec 31, 2015

 

Duration (years)

5.1

4.8

Average maturity (years)

7.8

8.4

Short-term borrowings

11,307

9,337

Long-term borrowings

83,161

91,646

Interest rate adjustment <1year

67,170

65,641

Interest rate adjustment >1year

31,737

35,342

Telia Company’s financial policy provides the framework for management of interest rates and the average maturity of borrowings and investments. The group aims at balancing the estimated running cost of borrowing and the risk of significant negative impact on earnings, should there be a sudden, major change in interest rates. The group’s policy is that the duration of the debt portfolio should be between 3 to 7 years.

If the loan portfolio structure deviates from the desired one, various forms of derivative instruments are used to adapt the structure in terms of duration and/or currency, including interest rate swaps and cross currency interest rate swaps.

As of December 31, 2016, Telia Company’s rate reset periods of interest bearing assets, liabilities and derivatives represented the following interest types and expected maturities. Amounts indicated represent nominal values.

SEK in millions

Jan–Mar 2017

Apr–Jun 2017

Jul–Sep 2017

Oct–Dec 2017

2018

2019

2020

2021

Later years

Total

Fixed

                   

lnterest bearing asset

11,046

947

300

3,138

2,872

1,540

19,843

lnterest bearing debt

-7,741

-185

-1,066

-6,215

-7,670

-10,903

-47,325

-81,106

Derivatives

7,183

161

-168

9,712

6,215

7,183

8,509

14,528

53,324

Net

10,487

923

300

-168

8,647

3,138

2,385

-854

-32,797

-7,939

Float

                   

lnterest bearing asset

3,465

3,465

lnterest bearing debt

-5,676

-350

-6,026

Derivatives

-43,078

-9,922

-52,999

Net

-45,289

-10,272

-55,560

Total, net

-34,802

-9,349

300

-168

8,647

3,138

2,385

-854

-32,797

-63,500

Telia Company has designated certain interest rate swaps as cash flow hedges to hedge against changes in the amount of future cash flows related to interest payments on existing liabilities also including certain long-term borrowings hedging net investments, see Note C20 “Long-term and short-term borrowings”. Hedge ineffectiveness related to outstanding cash flow hedges was immaterial and recognized in net income. Net changes in fair value recognized in other comprehensive income are offset in a hedging reserve as a component of equity, see Note C11 “Other comprehensive income.” In 2016, no cash flow hedges were discontinued due to the original forecasted transactions not having occurred in the originally specified time period.

Interest rate risk sensitivity

As of December 31, 2016, Telia Company had interest-bearing debt of SEK 94.9 billion, carrying value, with duration of interest of approximately 5.1 years, including derivatives. The volume of loans exposed to changes in interest rates over the next 12-month period was at the same date approximately SEK 67.2 billion, carrying value, assuming that existing loans maturing during the year are refinanced and after accounting for derivatives.

The exact effect of a change in interest rates on the financial net stemming from this debt portfolio depends on the timing of maturity of the debt as well as reset dates for floating rate debt, and that the volume of loans may vary over time, thereby affecting the estimate.

However, assuming that those loans were reset by January 1, 2017, at a one percentage point higher interest rate than the prevailing rate as per December 31, 2016, and remained at that new level during 12 months, the post-tax interest expense would increase by approximately SEK 524 million. At the same time the effect on equity would be a decrease of SEK 178 million due to cash flow hedges.

Fair value of the loan portfolio would change by approximately SEK 5.0 billion, should the level in market interest rates make a parallel shift of one percentage point, and assuming the same volume of loans and a similar duration on those loans as per year-end 2016.

Refinancing risk management

In order to reduce refinancing risk, the group aims to distribute loan maturity dates over a longer period. The group’s policy is that the average maturity of borrowings should exceed 4 years and that a maximum of 25 percent of the funding is allowed to mature within 2 years. As of December 31, 2016 the average maturity of Telia Company’s borrowings was 7.8 years and 11 percent of the borrowings due within 2 years.

Pension obligation risk and sensitivity

See Note C21 “Provisions for pensions and employment contracts” for details on the pension obligation risks and a sensitivity analysis.

Management of insurable risks

The insurance cover is governed by corporate guidelines and includes a common package of different property and liability insurance programs. The business units and other units being responsible for assessing the risks decide the extent of actual cover. Corporate Insurance at Telia Company AB manages the common group insurance programs and uses a captive, Telia Försäkring AB, as a strategic tool in managing the insurance programs. The risks in the captive are in part reinsured in the international reinsurance market.

Master netting arrangements and similar
agreements

Telia Company has entered into ISDA Master Agreements for its OTC derivative business, i.e. interest rate and currency derivatives, with all of its core banks. These ISDA Master Agreements allow the parties to do close-out nettings. For derivatives in the financial operations, CSAs (credit support annex) may be entered into as an annex to the respective master agreement, and are recognized as other current receivables/liabilities. Under the CSA, the parties agree to provide each other with eligible support, which is calculated based on a weekly exposure under the specific agreement. Funds transferred and interest accrued under a CSA agreement is not considered collateral.

For information on discontinued operations, see Note C34 “Discontinued operations and assets classified as held for sale”.

SEK in millions

Note

December 31, 2016

Gross amounts, financial

assets

Gross amounts, financial
liabilites

Net amounts of

financial assets

in the statement of

financial position

Related
financial

liabilities that
are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C15, C18

5,437

5,437

-2,517

-1,407

1,513

Currency swaps and forward exchange contracts

C15, C17

259

259

-255

4

Other assets

 

34

-19

15

15

Total

 

5,729

-19

5,711

-2,772

-1,407

1,532

               
               

SEK in millions

Note

December 31, 2016

Gross amounts, financial liabilities

Gross amounts, financial assets

Net amounts of

financial liabilities in the statement of financial position

Related
financial
assets that
are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C20

2,877

2,877

-2,517

360

Currency swaps and forward exchange contracts

C23, C24

694

694

-255

440

Other liabilites

 

36

-19

17

17

Total

 

3,608

-19

3,589

-2,772

817

               
               

SEK in millions

Note

December 31, 2015

Gross amounts, financial

assets

Gross amounts, financial
liabilites

Net amounts of

financial assets

in the statement of

financial position

Related
financial

liabilities that
are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C15C18

5,546

5,546

-2,192

-1,558

1,796

Currency swaps and forward exchange contracts

C15C17

351

351

-26

325

Other receivables

 

24

-8

16

16

Total

 

5,921

-8

5,913

-2,218

-1,558

2,137

               
               

SEK in millions

Note

December 31, 2015

Gross amounts, financial liabilities

Gross amounts, financial assets

Net amounts of

financial liabilities in the statement of financial position

Related
financial
assets that
are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C20

2,393

2,393

-2,192

201

Currency swaps and forward exchange contracts

C23, C24

101

101

-26

75

Other liabilites

 

29

-8

20

20

Total

 

2,523

-8

2,514

-2,218

296