24. Financial risk management

Financial risk management principles


The task of financial risk management is to identify, manage and track the major financial risks in the Group’s business and business environment to enable the Group to achieve its strategic and financial goals in the best possible way. The responsibilities of the Board of Directors include ensuring that the Group has adequate internal monitoring system in place. Group’s policy for hedging against risks is approved by the Board of Directors and the Group’s CFO is responsible for implementing it in practice. The objective of the Group’s financial risk management is to minimise the effects of volatility for recognised major market risks on the Group’s result and balance sheet. Tecnotree Group does not apply hedge accounting as defined under IAS 39.


Financial risk management organisation


The financial risk management process is supported by the Management Board, who handles risks and risk management in its meetings on a regular basis. CEO reports the major risks to the Board of Directors. The Group’s financial management is responsible for managing foreign exchange, interest rate and liquidity risks according to the guidelines set by the Board.


Capital management


Tecnotree’s objective for capital management is to ensure cash sufficiency and support Group’s growth targets. Additionally, with capital management the Group is ensuring the operational precondition in capital markets during all conditions irrespective of industry’s market volatility. The key ratio in monitoring the development of Group’s capital structure is equity ratio, which is calculated by dividing equity with total balance sheet less advances reveiced.


In August 2015, the company's Board of Directors recognised the loss of shareholders’ equity of the Group’s parent company Tecnotree Corporation and delivered a statement concerning the matter to the Trade Register. The parent company’s shareholders’ equity was EUR 1,204 thousand negative on 31 December 2016 (EUR 3,020 thousand negative), but the Group’s shareholders’ equity was EUR 10,684 million positive (EUR 17,797 million positive).


At the end of the period, Tecnotree had a bank loan of EUR 28,317 thousand (EUR 21,781 thousand) as well as a fully used credit facility of EUR 0 (EUR 10,000 thousand). The financing agreement with the bank signed in August 2013 included covenants, but they expired after the District Court of Espoo confirmed the restructuring programme on 15 November 2016.


Components of equity ratio

EUR 1,000 2016 2015







Equity at the end of period 10,684 17,797



Balance sheet total



59,763 74,620
Advances received

Total balance sheet less advances reveiced 59,763 74,620







Equity ratio 17.9% 23.9%














Liquidity risk


The Group seeks to constantly assess and monitor the amount of liquid funds to ensure the sufficient amount of funding needed to finance the business.


On the reporting date, the Group’s cash and cash equivalents were EUR 3,503 (6,433) thousand. Part of the investments and cash and cash equivalents are located in countries from where the money cannot be freely transferred to other contries. These are disclosed in note 19.


At the end of the financial year, the company had a short-term loan of EUR 400 thousand. The company had in accordance to the payment program secured interest-bearing liabilities to financial institutions EUR 15,640 thousand, business mortgage debts EUR 7,881 thousand as well as restruturing debts EUR 4,396 thousand.

The cash flow situation of the company has continued to be critical. In long-term projects. The billing of the receivablen can take place with a long delay. This delay increases the risk associated with payments.

The volume of outstanding debts has continued to grow.

The cash flow varies considerably from one quarter to another, and this in turn places strain on the money situation.


2016 Balance sheet value Cash flow Less than
3 months
3-12
months
1-3 years Over 3 years







Guaranteed restructuring debts from financial institutions, interest-bearing 23,521 23,521 725 818 2,799 19,179
Interest payments on the loans
1,279 122 1,157

Trade payables 7,340 7,340 4,915 222 2,202
Non-interest bearing liabilities 4,396 4,396
150 793 3,453
Derivative liabilities 314 314 38 76 200
Total 35,571 36,850 5,800 2,424 5,995 22,631







2015 Balance sheet value Cash flow Less than
3 months
3-12
months
1-3 years over 3 years







Loans from financial institutions 21,781 21,781

21,781
Interest payments on the loans
2,418 1,290 898 230
Credit facilities in use 10,000 10,000

10,000
Interest payments on the credit facilities
1,229 565 394 269
Trade payables 6,060 6,060 1,280
4,780
Derivative liabilities 424 424 391
33
Total 38,265 41,912 3,526 1,293 37,093














Credit risk


Credit risk arises from the potential failure of counterparty to meet its contractual payment obligations. The amount of risk depends on the creditworthiness of the counterparty. The amount of credit risk inherent to financial instruments is the carrying value of the financial assets, which was EUR 17,278 (18,486) thousand at the reporting date. The financial assets are specified in note 25. The most significant separate item of credit risk is the trade receivables.


The credit quality of customers is regularly monitored by the finance department together with sales management, using data on payment history and reports from external sources. Credit rating checks are made on new customers before confirming an offer. The procedure for granting of credit for new customers or customers from countries with high risk rating requires always the acceptance of Group CFO. Tecnotree has not arranged financing for customers with third parties.


Tecnotree’s largest customers are much bigger businesses than the Group itself. The relationship between the Group and its major customers is one of interdependence, which poses a potential risk but also offers significant new business opportunities. The two largest customers accounted for 77 % of net sales in 2016 (2015: 80 %) and for 80 % of the trade receivables at the end of 2016 (2015: 86 %). Parent companies of these customers are large listed companies which credit ratings in February 2017 were A3 and Baa3 respectively according to Moody's rating. In addition, the customers of Tecnotree are mainly in developing markets, with consequenses such as currency transfer regulations and limitations, exchange rate fluctuations and other politic and financial challanges.


The credit quality of financial institutions is monitored by the finance department. The parent company’s counterparties are restricted to financial institutions with legal entities in Finland specified in the Group’s cash management policy. The subsidiary in India has its own finance function and their counterparties are also restricted in the Group’s cash management policy. The amount of cash reserves in other subsidiaries is minimized.


Analysis of trade receivables by age

EUR 1,000 2016 2015







Undue trade receivables 6,592 6,220
Trade receivables 1-90 days overdue 4,288 4,552
Trade receivables 91-360 days overdue 2,428 633
Trade receivables more than 360 days overdue 467 648
Total 13,775 12,053







Project deliveries result in large accounts receivable. Most of Tecnotree’s net sales comes from developing countries and some of these contain political and economic challenges. There is the risk of a considerable delay in the payment of invoices in these countries and that Tecnotree will have to record credit losses. The payment record of customers and the situation concerning trade receivables are actively monitored and credit rating checks are made on new customers before confirming an offer. During the period, new impairment losses of EUR 64 (1,052) thousand were recorded for over one year overdue trade receivables. The above analysis of trade receivables by age shows net trade receivables, thus after recognition of impairment losses.



Market risks


Currency risk


The financial risk to which the Group is exposed in its operations is mainly currency risk. Changes in exchange rates create risks especially in receivables and order backlog. Tecnotree Group’s reporting and presentation currency is Euro, but significant part of Group’s revenue is in US dollars. The Group’s open translation risk comes from the investments in six foreign subsidiaries, India (Rupees, INR), Brazil (Real, BRL), Argentina (Peso, ARS), Malaysia (Ringgit, MYR), The United Arab Emirates (Dirham, AED) and Nigeria (Naira, NGN).


Transaction risk


The Group’s open currency position comprises foreign currency denominated, sales related balance sheet items, cash and cash equivalents balance, currency denominated order backlog and binding currency denominated purchase and sales contracts.


In the policy for approval of sales contracts, it is required that only the Euros or the US dollar can be used as the sales currency. There shall not be any clauses tying the payments into any other currencies. Sales offices, when selling within their own country, use their own local currency. If any other currencies than Euro, US dollar or sales offices’ local currency are used in sales contracts, it requires a prior written approval from the group CFO.


In 2016, 17 per cent of external invoicing was in Euros, 64 per cent in US dollars, 5 per cent in Argentinian Pesos, 10 per cent in Nigerian Nairas, 1 per cent in Brazil Reals, and 3 per cent in other currencies. The Group is hedging the open US dollar currency position. The Group does not hedge the open ARS, NGN and BRL currency positions, partly because of local currency restrictions and high cost of hedging. Sales in BRL and purchases related to them form adequate operative hedging and therefore hedging instruments are not used. The open INR currency position is hedged when it is seen necessary. On the reporting date, the Group had no such INR hedges. The Group does not hedge the other currency positions, since they are not significant.


Currency risks can also arise on intra-group currency positions. The Indian subsidiary has intragroup receivables denominated in EUR, on which exchange rate losses amounting to EUR 1,043 thousand arose due to rate changes of Indian Rupies (2015: exchange rate losses of EUR 1,491 thousand). Also the intra-group liabilities denominated in BRL held by the parent company gave rise to exchange rate losses of EUR 904 thousand in 2016 (2015: exchange rate gains of EUR 1,451 thousand). Intra-group currency positions are not hedged.


All decisions about hedging are made in Group’s finance department, which assesses the hedging needs on a monthly basis. The hedging actions and hedging position are reported to the Audit Committee on a quarterly basis.

The Group is hedging the US dollar currency denominated cash flow position for a maximum period of 12 months for not more than 100 per cent of the net position. Hedging is carried into effect with foreign exchange forwards and options. On the reporting date, 0 per cent (0 %) of the open currency position was hedged. The general sentiment of the markets for the US dollar to strengthen against the Euro affected the decline in the hedging rate compared to last years.







US dollar denominated cash inflow is mainly converted into Euros. Some cash reserves are held in US dollar in order to manage forthcoming US dollar payments.


Sensitivity analysis for market risks












The functional currency of the parent company is Euro. Financial assets and liabilities nominated in foreign currency are presented in the table below. Figures are translated to Euros at the year-end exchange rate.





2016 2015 2016 2015
EUR 1,000 Note INR INR USD USD







Current assets
Trade and other receivables 17 4,532 30,236 7,193 11,077
Other receivables related to construction contracts 17

9,745 18,202
Cash and cash equivalents 18

2,098 2,892
Trade and other payables 23 -121 -208 -2,851 -1,123
Total current assets

4,411 30,028 16,184 31,049







Nominal value of currency derivatives 17, 23



Total current liabilities



16,184 31,049







In the sensitivity analysis below, the effect of weakening and strengthening of the INR and USD exchange rate against EUR is presented with all other factors remaining unchanged. The analysed change in the exchange rate represents a possible volatility of the currency during a 12-month period. Fluctuation in exchange rates has no direct effect on equity as the Group does not apply hedge accounting.


EUR 1,000 2016 2015







Change in percentage, INR -10% +10% -10% +10%
Effect on the result after taxes 280 -280 2,006 -2,006







Change in percentage, USD -10% +10% -10% +10%
Effect on the result after taxes -1,471 1,798 -2,823 3,450







Translation risk


Tecnotree India and its subsidiaries are consolidated into Tecnotree Group as from 6 May 2009, hence the Group is exposed to the risks incurred when the net investments denominated in INR are translated into Euro, the functional currency of the parent company. On the reporting date, the open translation risk for the Indian subgroup was EUR 21,948 (50,653) thousand. This net investment is not hedged, mainly because of local currency restrictions and high cost of hedging. The sensitivity for translation risk was analysed by determining the effects of 10 percent strengthening and weakening of the INR exchange rate against EUR, all other factors remaining unchanged.





2016 2015
EUR 1,000 INR INR INR INR







Change in percentage -10% +10% -10% +10%
Effect on the result after taxes 2,653 -3,242 -309 378
Effect on equity -1,995 2,439 -4,605 5,628







During 2016 Indian Rupie strenghtened 1 per cent compared to Euro, INR/EUR rate being 71.5935 at the end of 2016 and 72.0215 at the end of 2015. This gave rise to a negative translation difference in the Group's equity amounting to EUR 779 thousand.
The exposure for translation risk related to net investments in other foreign subsidiaries is not significant and is therefore neither hedged nor analysed for sensitivity. However, during 2015, Brazilian Real (BRL) and Argentinian Peso (ARS) changed exceptionally compared to Euro. The BRL/EUR rate strengthened 20 per cent being 3.4305 at the end of 2016 and 4.3117 at the end of 2015, which caused a positive translation difference of EUR 111 thousand in Group's equity. The ARS/EUR rate weakened 18 per cent being 16.6814 at the end of 2016 and 14.1367 at the end of 2015, which caused a negative translation difference EUR 84 thousand in Group's equity. On the reporting date, the open translation risk position for the Brazilian subsidiary was EUR -2,089 (2,961) thousand, for the Argentine subsidiary EUR 789 (1,218) thousand.







On the reporting date, the open translation risk position for the Malaysian subsidiary was EUR 133 (149) thousand, for the Nigeria subsidiary EUR -280 (30) thousand and correspondingly for the subsidiary in the United Arab Emirates EUR -403 (319) thousand. The change in translation difference in equity caused by fluctuations in exchange rates for these subsidiaries was EUR 6 (-18) thousand.


Interest rate risk


The Group’s interest rate risk management focuses on the optimal management of liquid funds in sense of profitability and safety and interest rate risk management of bank loans.


At the end of the financial year, the company had a payment program related long-term debt EUR 27.9 million (0.0), which consisted of interest-bearing EUR 23.5 million and EUR 4.4 million non-interest bearing liabilities to financial institutions.



Interest rate sensitivity was analysed by determining the effects of one percentage unit’s change in the interest rates on the Group’s interest-bearing financial instruments on an annual level. The analysis included all the significant interest-bearing financial instruments of the Group totalling EUR 25,114 (25,348) thousand debt. On the reporting date, an increase / a decrease of one percentage unit in the interest rates would have decreased / increased the net income after tax by EUR -117 / 117 (-174 / 174) thousand. Changes in interest rates would not have had a direct effect on equity. The effect of an increase and a decrease in the interest rates is presented with all other factors remaining unchanged.


Price risk


Tecnotree Group does not own any equity or other financial instruments with values tied to other market prices than interest or currency rates.