The financial risks associated with VVO Group’s business are managed in accordance with the treasury policy confirmed by VVO Group plc. The objective is to protect the Group against unfavourable changes in the financial market. The management of financial risk is centralised in the Group’s Treasury unit.
The most significant financial risk is related to interest rate fluctuations affecting the loan portfolio. This risk is managed through fixed interest rates and interest rate derivatives. The most significant interest risk is associated with the market-based loans. This interest risk is hedged with interest rate derivatives according to VVO Group’s financing policy. The targeted hedging ratio is 50–100%. On the balance sheet date, the hedging ratio was 72 (68) per cent.
The interest risk associated with interest subsidy loans is decreased by the State’s interest subsidy. The interest rate of loans with annual payments is tied to changes in Finnish consumer prices, and the interest costs for the following year is known in the preceding autumn. Rent in properties with state-subsidied loans is determined according to the cost principle. Therefore, any changes in interest rates are transferred to rents. In accordance with its financing policy, VVO does not hedge these loans with interest rate derivatives.
The effects of changes in market interest rates on the income statement and equity are evaluated in the table below. The interest rate position affecting the income statement includes variable-rate loan and interest rate derivatives not included in hedge accounting. The effect on equity results from changes in the fair values of interest rate derivatives included in hedge accounting. Some market-based loan agreements involve a condition of a minimum of zero reference rate. As the market interest rates are currently negative, interest rate swat hedges may lead to a situation in which both fixed and variable interest must be paid.
Deferred tax effect is not included in the calculation.
The Group secures its liquidity through sufficient cash funds, the commercial paper programme and supporting credit limit agreements. Cash flow from the rental business is stable, and the suffi-ciency of liquidity is monitored with regular forecasts.
The Group’s liquidity remained good in the financial year. In order to ensure its liquidity, the Group has a EUR 200 million parent company commercial paper programme, EUR 100 million committed credit facility agreements and a EUR 5 million non-committed credit facility agreement. A total of EUR 108.8 (64.9) million of the facility associated with the commercial paper programme was in use at the end of the financial year. No credit facilities were in use at the balance sheet date.
The functioning of the money market has been affected by stricter bank regulation, which has re-flected on lending and the cost of financing. Due to VVO’s strong financial position and stable cash flow, the risk associated with the availability of financing is not considered significant.
The availability of financing is ensured by maintaining VVO’s good reputation among financiers and by keeping the equity ratio at an appropriate level. The risk associated with the availability of fi-nancing is mitigated by diversifying the maturities and financial instruments in the loan portfolio and by expanding the financier base. We prepare for the maturing of large loans well in advance.
The following table shows the contractual repayment and interest cash flows of financial liabilities and derivative instruments.
The figures for 31 December 2015 do not include liabilities related to Non-current assets held for sale.
The Group uses electricity derivatives to hedge against exposure to electricity price risk. The elec-tricity derivatives hedge highly probable future electricity purchases, and the trading in derivatives has been outsourced to an expert external to the Group. Electricity derivatives are not included in hedge accounting.
The Group’s surplus cash may be invested in accordance with the approved principles of the financial policy. Available-for-sale financial assets are subject to a price risk that is mitigated through diversification of investment assets. The investments do not involve a currency risk.
The sensitivity of the electricity derivatives and available-for-sale financial assets to +/-10% chang-es in the market price are shown in the table below.
Deferred tax effect is not included in the calculation.
VVO Group does not have any significant credit risk concentrations. The majority of sales receivables consists of rent receivables, which are efficiently diversified. In addition, the application of rental deposits decreases the credit risk associated with rent receivables.
Age distribution of sales receivables
Investments and derivative instruments involve a counterparty risk to financing activities. This risk is managed with a diverse portfolio of financially stable counterparties.
The Group’s cash flows are euro-denominated, and the business does not involve any currency risk.
The objective of the management of the Group’s capital structure is to optimise the capital structure in relation to the current market conditions. The objective is to achieve a capital structure that best ensures the Group’s strategic long-term operations and promotes the Group’s growth targets.
In addition to the financial result, the Group’s capital structure is affected by factors such as capital expenditure, asset sales, acquisitions, dividend payments, equity-based facilities and measurement at fair value. The Group’s loans do not involve covenants, but the Group monitors its key figures on a regular basis.
VVO Group plc’s Board of Directors has set the Group’s long-term equity ratio target at over 35 per cent. At 31 December 2015, the Group’s equity ratio was 41.1 (40.0) per cent. The interest cover ratio, representing VVO’s ability to cover its interest costs, was 4.6 on 31 December 2015. VVO Group’s interest-bearing liabilities totalled EUR 1,494.6 (1,850.1) million. EUR 460.7 million of in-terest-bearing liabilities have been transferred to Non-current assets held for sale. The equity ratio determination principle is presented in the financial statements under Formulas used in the calculation of the key figures.