Search

Choose note

4.3 Financial risks
With respect to financial risk management, the Group observes a uniform treasury policy that has been approved by the Company's Board of Directors. Compliance with this policy and developments in the Group’s financial situation are monitored by the Board’s Audit Committee. The Group Treasury is centrally responsible for obtaining financial resources for the Group, for liquidity management, relations with providers of finance, and the management of financial risks. In the main, the Group’s financial resources have been obtained through the parent company, and the Group Treasury arranges financial resources for subsidiaries in their functional currencies. For subsidiaries with significant external ownership, the Group has not guaranteed financial liabilities in excess of its ownership interest.
Foreign exchange risks
Kesko Group conducts business operations in nine countries, in addition to which it makes purchases from numerous countries. In consequence, the Group is exposed to various foreign exchange risks arising from net investments in foreign operations (translation risks) and from assets, liabilities and forecast transactions (transaction risks) denominated in foreign currencies.
The Group companies’ financial resources are arranged in their functional currencies. The parent company bears the ensuing foreign exchange risk and hedges the risk exposure using derivatives or borrowings denominated in the relevant foreign currencies. The Belarusian currency BYN is not a freely convertible currency and hedging the associated exposure to foreign exchange risk is not possible.
Translation risks
The Group is exposed to foreign currency translation risks relating to net investments in subsidiaries outside the euro zone held on the balance sheet. This balance sheet exposure has not been hedged. The hedge can be designated if equity is repatriated, or if a currency is expected to be exposed to a significant devaluation risk. The most significant translation exposures are the Swedish krona, the Russian rouble and the Norwegian krone. The exposure does not include the non-controlling interest in equity. Relative to the Group's volume of operations and the balance sheet total, the foreign currency translation risk is low.
As of 1 January 2017, the functional currency of Russian real estate companies has been the rouble.
Group's translation exposure as at 31 Dec. 2017
€ million
NOK SEK RUB PLN BYN
Net investment 82.1 85.0 140.9 22.6 8.7
Group's translation exposure as at 31 Dec. 2016
€ million
NOK SEK RUB PLN BYN
Net investment 80.1 96.1 67.9 24.4 7.0
The following table shows how a 10% change in the Group companies’ functional currencies would affect the Group’s equity.
Sensitivity analysis, impact on equity as at 31 Dec. 2017
€ million
NOK SEK RUB PLN BYN
Change +10% -7.5 -7.7 -12.8 -2.1 -0.8
Change -10% 9.1 9.4 15.7 2.5 1.0
Sensitivity analysis, impact on equity as at 31 Dec. 2016
€ million
NOK SEK RUB PLN BYN
Change +10% -7.3 -8.7 -6.2 -2.2 -0.6
Change -10% 8.9 10.7 7.5 2.7 0.8
Transaction risks
International purchasing activities and foreign currency denominated financial resources arranged by the parent to subsidiaries expose the Group to transaction risks relating to several currencies. The currency-specific transaction risk exposure comprises foreign currency denominated receivables and liabilities in the balance sheet, forecast foreign currency cash flows, and foreign subsidiaries’ liabilities and receivables with respect to the parent. The risk is commercially managed by, for example, transferring exchange rate changes to selling prices, or by replacing suppliers. The remaining exposures are hedged using foreign currency derivatives. The subsidiaries report their foreign exchange exposures to the Group Treasury on a monthly basis.
In the main, the subsidiaries hedge their risk exposures with the Group Treasury, which in turn hedges risk exposures using market transactions within the limits confirmed for each currency. Intra-Group derivative contracts are allocated to the segments in segment reporting.
The Group does not apply hedge accounting in accordance with IAS 39 to the hedging of transaction risks relating to purchases and sales. In initial measurement, derivative instruments are recognised at fair value and subsequently in the financial statements, they are remeasured at fair value. The change in fair value of foreign currency derivatives used for hedging purchases and sales is recognised in other operating income or expenses.
The Group monitors the transaction risk exposure in respect of existing balances and forecast cash flows. The following table analyses the transaction exposure excluding future cash flows. The presentation does not illustrate the Group’s actual foreign exchange risk after hedgings. When forecast amounts are included in the transaction exposure, the most significant difference from the table below is in the USD exposures. As at 31 December 2017, the exposure with respect to USD was €-26 million.
Group's transaction exposure as at 31 Dec. 2017
€ million
USD SEK NOK PLN RUB BYN
Group's transaction risk -6.2 7.6 2.8 27.8 11.3 14.5
Hedging derivatives 21.7 -9.1 -4.6 -14.4 -8.6
Open exposure 15.5 -1.5 -1.8 13.5 2.7 14.5
Group's transaction exposure as at 31 Dec. 2016
€ million
USD SEK NOK PLN RUB BYN
Group's transaction risk -3.9 16.6 22.6 16.6 32.1 1.8
Hedging derivatives 31.3 -12.0 -18.2 -9.1 -19.6
Open exposure 27.4 4.6 4.4 7.5 12.5 1.8
A sensitivity analysis of the transaction exposure shows the impact on profit or loss of a +/-10% exchange rate change in intra-Group receivables and liabilities denominated in foreign currencies and foreign currency derivatives and borrowings used for hedging.
Sensitivity analysis, impact on pre-tax profit as at 31 Dec. 2017
€ million
USD SEK NOK PLN RUB BYN
Change +10% -1.4 0.1 -0.5 -1.2 -0.2 -1.3
Change -10% 1.7 -0.2 0.6 1.5 0.3 1.6
Sensitivity analysis, impact on pre-tax profit as at 31 Dec. 2016
€ million
USD SEK NOK PLN RUB BYN
Change +10% -2.5 -0.4 -0.4 -0.7 -1.1 -0.2
Change -10% 3.0 0.5 0.5 0.8 1.4 0.2
Liquidity risk
Liquidity risk management aims to maintain sufficient liquid assets and credit facilities in order to ensure the ongoing availability of sufficient financial resources for the Group’s operating activities.
The Group's solvency was excellent throughout the financial year 2017. As at 31 December 2017, liquid assets totalled €398 million (€391 million). Interest-bearing liabilities were €534 million (€515 million) and interest-bearing net debt €136 million (€123 million) as at 31 December 2017.
31 Dec. 2017 31 Dec. 2016
€ million < 1 year 1-5 years > 5 years Total < 1 year 1-5 years > 5 years Total
Maturities of financial liabilities and related finance costs
Borrowings from financial institutions 6.4 8.9 0.1 15.5 5.0 2.3 7.3
finance costs 0.8 1.1 0.0 1.9 0.0 0.1 0.1
Private Placement notes (USD) 20.0 20.0 22.0 22.0
finance costs 1.3 0.6 1.9 1.4 2.1 3.6
Bonds 224.8 224.8 225.0 225.0
finance costs 6.2 6.2 6.2 6.2 12.4
Pension loans 10.5 66.2 26.9 103.5 2.4 60.4 43.1 105.9
finance costs 1.0 2.5 0.6 4.1 1.1 3.1 1.0 5.3
Finance lease liabilities 3.5 7.5 0.1 11.0 2.9 5.7 0.0 8.6
finance costs 0.1 0.2 0.0 0.3 0.3 0.4 0.0 0.7
Payables to K-retailers 113.3 113.3 116.0 116.0
finance costs 0.0
Other interest-bearing liabilities 37.8 1.7 6.5 46.0 29.6 29.6
finance costs 0.3 1.1 0.1 1.6 0.0
Non-current non-interest-bearing liabilities 0.8 4.0 26.5 31.2 0.7 12.3 27.2 40.2
Current non-interest-bearing liabilities
Trade payables 1,023.7 1,023.7 1,069.2 1,069.2
Accrued expenses 308.5 308.5 316.2 316.2
Other non-interest-bearing liabilities 188.6 188.6 191.6 191.6
Financial liabilities in the balance sheet include €3.4 million (€6.5m) in items related to derivatives.
31 Dec. 2017 31 Dec. 2016
€ million < 1 year 1-5 years > 5 years Total < 1 year 1-5 years > 5 years Total
Cash flows of derivatives
Payables
Foreign exchange forward contracts outside hedge accounting 78.1 78.1 175.4 175.4
Net settlement of payables
Interest rate derivatives 0.2 1.3 1.5
Electricity derivatives 0.6 0.6 1.2 0.8 2.0
Foreign currency derivatives 0.1 0.1 1.5 2.1 3.6
Receivables
Foreign exchange forward contracts outside hedge accounting 76.2 76.2 172.4 172.4
Net settlement of receivables
Electricity derivatives 0.2 0.2 0.4 0.2 0.1 0.3
Derivatives relating to Private Placement notes
Foreign currency derivatives 0.0
Interest rate derivatives 0.2 0.1 0.3 1.5 1.5
The cash flows of Private Placement notes and related currency and interest rate derivatives are settled on a net basis. The interest rate derivative liability related to the arrangement is presented within other interest-bearing liabilities in the statement of financial position. The amount of interest-bearing liability in the balance sheet arising from this credit facility totals €20.1 million (€20.1 million).
The terms and conditions of the Private Placement credit facility and the committed facilities include ordinary financial covenants. The requirements of these covenants have been met. The borrowing terms include a financial covenant defining the ratio between net debt and EBITDA, which remained far from the maximum throughout the financial year. At change of control, Kesko is obligated to offer a repayment of the whole loan capital to the note holders. According to the terms and conditions of the loan facility, the change of ownership to retailers or an association of retailers does not constitute a change of control.
Payables to K-retailers consist of two types of interest-bearing liabilities by Kesko to K-retailers: retailers’ prepayments to Kesko and Kesko’s chain rebate liabilities to retailers. Chain rebates are retrospective discounts given to retailers and the terms vary from one chain to another.
At the balance sheet date, the total equivalent of undrawn committed long-term credit facilities was €200.0 million (€150.0 million). According to the terms and conditions of loan agreements, at change of control, the lenders have the right to terminate the credit facility and loan amounts possibly drawn. According to the terms and conditions of the loan facility, the change of ownership to retailers or an association of retailers does not constitute a change of control. In addition, the Group’s uncommitted financial resources available contained commercial paper programmes denominated in euros totalling an equivalent of €449 million (€449 million). In addition, in January 2018, the Group companies held a total of €334.1 million available for re-borrowing in a pension insurance company. Part of the pension insurance premiums paid annually by the Group companies are funded and the accumulated funds can be re-borrowed with a term of 1−10 years in accordance with regulations confirmed by the Ministry of Social Affairs and Health. Any amount of borrowing requires the posting of adequate collateral.
Interest rate risk on borrowings and sensitivity analysis
Changes in the interest rate level have an impact on the Group’s interest expense. The policy for hedging interest rate risk is aimed at balancing the effects of changes in the interest rate level on profit or loss for different financial periods.
The interest rate risk is centrally managed by the Group Treasury, which adjusts the duration by using interest rate derivative contracts. The target duration is three years, which is allowed to vary between one and a half and four years. The actual duration during the financial year was 1.8 (1.9) years on average.
On 11 September 2012, Kesko Corporation issued a €250 million bond. The bond carries a fixed coupon interest at 2.75% and it will be due for payment on 11 September 2018.
On 10 June 2004, Kesko Corporation issued a USD Private Placement in a total amount of USD 120 million in the United States. The facility has three tranches with bullet repayments, of which USD 60 million was paid on 10 June 2014, USD 36 million was paid on 10 June 2016 and USD 24 million will be due on 10 June 2019.
Kesko Corporation's USD Private Placement credit facility qualifies for hedge accounting against both foreign exchange and interest rate risk and it has been hedged by currency swaps and interest rate swaps with the same amounts and maturities as the borrowing. As a result, the borrowing is fully hedged against foreign exchange and interest rate risk. During the financial year, there was no ineffectiveness to be recorded in the income statement from this credit facility.
The sensitivity analysis for changes in interest rate level in respect of commercial paper liabilities realised during the financial year has used average balance values. At the balance sheet date of 31 December 2017, the effect of variable rate borrowings on the pre-tax profit would have been €-/+1.7 million (€-/+2.0 million), if the interest rate level had risen or fallen by 1 percentage point.
The bond, Private Placement notes and pension loans, €348.4 million in aggregate, have fixed rates, and their effective interest cost was 2.6%. At the end of the financial year, the average rate of variable-interest-rate borrowings from financial institutions, payables to retailers and other interest-bearing liabilities was 0.2%. Most of the borrowings are euro-denominated and the Private Placement notes are USD-denominated.
Financial assets and liabilities recognised at fair value
The Group’s liquid assets have mainly been invested in the debt instruments of major Finnish companies, in certificates of deposit and deposits with banks operating in Kesko’s market area, in bonds of selected companies and in corporate bond funds. The return on these investments for 2017 was 1.0% (1.7%) and the duration was 0.9 years at the end of the financial year. The maximum credit risk is the fair value of these investments in the balance sheet at the balance sheet date. The table below analyses financial instruments carried at fair value by valuation method.
Fair value as at 31 Dec. 2017
Fair value hierarchy of financial assets and liabilities
€ million
Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit or loss
Money market funds 159.9 159.9
Commercial papers 6.0 6.0
Bank certificates of deposit and deposits 5.0 5.0
Total 159.9 11.0 171.0
Derivative financial instruments at fair value through profit or loss
Derivative financial assets 0.7 0.7
Derivative financial liabilities 3.4 3.4
Available-for-sale financial assets
Private equity funds and other shares and interests 23.0 23.0
Commercial papers (maturing in less than 3 months) 37.5 37.5
Bonds and corporate bond funds 56.8 56.8
Total 56.8 37.5 23.0 117.3
Fair value as at 31 Dec. 2016
Fair value hierarchy of financial assets and liabilities
€ million
Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit or loss
Money market funds 59.8 59.8
Commercial papers 28.5 28.5
Bank certificates of deposit and deposits 5.0 5.0
Total 59.8 33.5 93.3
Derivative financial instruments at fair value through profit or loss
Derivative financial assets 4.4 4.4
Derivative financial liabilities 6.6 6.6
Available-for-sale financial assets
Private equity funds and other shares and interests 15.1 15.1
Commercial papers (maturing in less than 3 months) 53.5 53.5
Bank certificates of deposit and deposits (maturing in less than 3 months) 6.0 6.0
Bonds and corporate bond funds 97.3 97.3
Total 97.3 59.5 15.1 171.9
Level 1 instruments are traded in active markets and their fair values are directly based on quoted market prices. The fair values of level 2 instruments are derived from market data. The fair value of level 3 instruments is not based on observable market data (inputs not observable).
Changes in level 3 instruments
€ million
2017 2016
Private equity funds and other shares and interests as at 1 January 15.1 15.3
Purchases 9.3 0.6
Refunds received -0.5 -1.3
Gains and losses through profit or loss -0.4 0.6
Changes in fair values -0.6 -0.1
Private equity funds and other shares and interests as at 31 December 23.0 15.1
Level 3 includes private equity funds and other shares and interests. These investments have been classified as non-current available-for-sale financial assets. Level 3 financial assets are measured based on computations received from the companies. An income of €1.6 million has been recorded on these investments for the financial year 2017.
Current interest-bearing receivables and sensitivity analysis
The objective is to invest liquidity consisting of financial assets in the money markets using efficient combinations of return and risk. At regular intervals, the Group’s management approves the investment instruments and limits for each counterparty among those analysed by the Group Treasury. The risks and actual returns on investments are monitored regularly.
Current available-for-sale financial assets
€ million
2017 2016
Carrying amount as at 1 January 156.8 371.7
Changes -62.9 -215.7
Changes in fair value 0.3 0.7
Carrying amount as at 31 December 94.2 156.8
The available-for-sale financial assets include current investments in commercial papers, certificates of deposits and other interest rate instruments.
In the sensitivity analysis of floating rate receivables, average annual balances of invested assets have been used. The receivables include customer financing receivables, finance lease receivables, other interest-bearing receivables, and within investments, commercial papers and money market funds. The sensitivity of money market funds has been determined based on duration. If the interest rate level had changed by +/-1 percentage point, the effect of these items on the pre-tax profit would have been €+/-2.3 million (€+/-2.0 million) and €+/-1.3 million (€+/-1.7 million) on equity at the balance sheet date.
Maturity of non-current receivables
Maturity analysis of non-current receivables as at 31 Dec. 2017
€ million
2019 2020 2021 2022 2023− Total
Non-interest-bearing non-current receivables 2.2 0.1 0.0 0.4 2.7
Loans and receivables from associates and joint ventures 0.0 57.5 57.5
Other non-current receivables 0.0 0.0 0.0 0.0 5.0 5.1
Total 2.3 0.1 0.0 0.0 62.9 65.4
The carrying amount of non-interest-bearing non-current receivables equals their fair value.
Maturity analysis of non-current receivables as at 31 Dec. 2016
€ million
2018 2019 2020 2021 2022− Total
Non-interest-bearing non-current receivables 1.4 0.0 0.2 0.4 1.8
Loans and receivables from associates and joint ventures 1.5 56.0 57.5
Other non-current receivables 0.3 2.9 0.0 0.0 0.0 3.3
Total 3.2 2.9 0.0 0.2 56.4 62.6
Credit and counterparty risk
The divisions' business entities are responsible for the management of the credit risk associated with amounts due from customers. The Group has a credit policy and its implementation is controlled. The aim is to ensure the collection of receivables by carefully assessing customers’ creditworthiness, by specifying customer credit terms and collateral requirements, by effective credit control and credit insurances, as applicable. In Finland, the main part of the Group’s business activities is carried out in cooperation with retailers. According to retailer agreements, retailers shall arrange overdraft facilities to be held as collateral for their trade payables by the relevant Kesko subsidiary.
The Group companies apply a uniform practice to measuring past due receivables. A receivable is written down when there is objective evidence of impairment. The ageing analysis of trade receivables as at 31 December was as follows:
Ageing analysis of trade receivables
€ million
2017 2016
Trade receivables fully performing 742.2 731.1
1−7 days past due trade receivables 32.3 49.6
8−30 days past due trade receivables 22.5 18.6
31−60 days past due trade receivables 12.0 5.9
over 60 days past due trade receivables 27.1 26.0
Total 836.0 831.2
Within trade receivables, €346.9 million (€355.7 million) were from chain retailers. The collateral for chain retailer receivables is an overdraft facility granted by a Kesko associate, Vähittäiskaupan Takaus Oy, with the maximum always limited to the realisable value of the countersecurity from the K-retailer's company and its entrepreneur to Vähittäiskaupan Takaus Oy. At the end of the financial year, the aggregate value of countersecurities was €211.5 million (€224.1 million). In addition, the collateral for receivables includes other collaterals, such as business mortgages and other pledged assets.
Trade receivables include an impairment charge to a total of €23.2 million (€24.6 million) monitored on a separate allowance account. The original balance sheet value of these trade receivables was €37.2 million (€35.2 million). The aggregate amount of credit losses and impairments recognised in the profit for the financial year was €5.2 million (€6.7 million).
The amount of receivables with renegotiated terms totalled €5.9 million (€3.1 million).
Financial credit risk
Financial instruments involve the risk of non-performance by counterparties. Kesko enters into foreign currency and other derivative contracts only with creditworthy banks. Liquid funds are invested, in accordance with limits set annually for each counterparty, in instruments with good creditworthiness. Company and bank-specific euro and time limits are set for money market investments. These limits are reviewed during the year depending on the market situation.
Commodity risks and their sensitivity analysis
The Group uses electricity derivatives for the purpose of balancing out energy costs. The electricity price risk is assessed for five-year periods. The changes in the fair values of derivatives hedging the price of electricity supplied during the financial year are recognised within adjustments to purchases. Hedge accounting is applied to contracts hedging future purchases. The effective portion of derivatives that qualify for hedge accounting is recognised in the revaluation reserve of equity and the ineffective portion in the income statement within other operating income or expenses. The change in the revaluation reserve recognised in equity is presented in the statement of comprehensive income under revaluation of cash flow hedge.
Result of cash flow hedging
As a result of hedge accounting applied to electricity, an amount of €1.1 million (€1.8 million) was removed from equity and included in the income statement as purchase cost adjustment, and €-0.1 million (€1.4 million) was recognised in equity, respectively. Their combined effect on the revaluation reserve for the year was €1.0 million (€3.2 million) before accounting for deferred tax assets.
A fair value change of €-0.3 million (€-0.1 million) was recognised in equity for the USD-denominated Private Placement facility before accounting for deferred taxes. In addition, a €0.2 million (€0.3 million) interest expense adjustment for interest rate derivatives was recognised in the income statement.
At the end of the year, the ineffective portion of derivatives hedging the price risk of electricity was €-0.2 million (€-0.6 million).
As at the balance sheet date, a total quantity of 268,656 MWH (463,460 MWH) of electricity had been purchased with electricity derivatives and 657,384 MWH under fixed price purchase agreements. The 1–12 month hedging level was 77% (71%), the 13–24 month level was 50% (43%), the 25–36 month level was 39% (16%), and the 37–48 month level was 25% (3%).
The sensitivity analysis of electricity derivatives assumed that derivatives maturing in less than 12 months have an impact on profit. If the market price of electricity derivatives changed by -/+20% from the balance sheet date 31 December 2017, it would contribute €-/+1.0 million (€-/+1.5 million) to the 2018 income statement and €-/+0.3 million (€-/+0.7 million) to equity. The impact has been calculated before tax.
Derivatives
Fair values of derivative contracts
€ million
31 Dec. 2017
Positive
fair value (balance sheet value)
31 Dec. 2017
Negative
fair value (balance sheet value)
31 Dec. 2016
Positive
fair value (balance sheet value)
31 Dec. 2016
Negative
fair value (balance sheet value)
Interest rate derivatives 1.7 -1.9 2.7 -2.8
Foreign currency derivatives 0.4 -2.3 4.2 -4.6
Electricity derivatives 0.3 -0.6 0.2 -2.0
Notional principal amounts of derivative contracts
€ million
31 Dec. 2017 Notional principal amount 31 Dec. 2016 Notional principal amount
Interest rate derivatives 250.2 40.2
Foreign currency derivatives 96.8 197.8
Electricity derivatives 6.2 11.2
The derivative contracts include interest rate swaps relating to a foreign currency borrowing facility with a gross notional principal amount of €40.2 million and a fair value of €-0.4 million (€-0.1 million), and currency swaps with a notional principal amount of €20.1 million and a fair value of €-0.1 million (€2.7 million).
The fair values of derivatives are presented as gross amounts. Kesko has entered into netting arrangements under ISDA contracts with all counterparties engaged in transactions with derivatives. All of these contracts provide for mutual posting of collateral. The threshold level for collateral posting had not been exceeded at the balance sheet date. Analysed by counterparty, derivative financial liabilities could be set off in a total of €0.5 million.
The maximum credit risk from derivatives is the fair value of the balance sheet at the reporting date.