Annual report 2012

35. Financial risk management

The main risks arising from the Group’s operations include credit risk, long-term and short-term liquidity risk, capital adequacy risk, and interest-rate risk. The management boards of Group companies review and adopt the risk management policies on an ongoing basis for each individual risk as summarised below. 

Credit risk

The Group has a large number of customers, both individuals and legal persons. At the Group level, receivables due from domestic customers account for 93% of total receivables. The Group introduced various procedures for managing receivables that include the collateralisation of receivables, the monitoring of subscribers’ traffic, and the collection of bad debts. As a result of well-developed procedures for managing receivables and creating allowances, credit risk is assessed as manageable. The Group's maximum exposure to receivables equals the carrying amount of these receivables. Receivables due from operators represent the highest exposure, of which the maximum exposure to individual customers accounts for 11% of the Group’s total exposure.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, deposits with banks, and available-for-sale financial assets, the Group's exposure to credit risk arises from default of counterparties, with maximum exposure equal to the carrying amount of these instruments. The Group pursues an appropriate policy of diversified financial assets based on which credit risk should be minimised. While deciding about the placement of liquid or cash assets, the economic as well as the risk aspect is taken into account, while the core objective lies in the optimum balancing of the liquidity position. Cooperation with individual financial institutions or short-term financial instruments is subject to the assessment of their stability, which is defined through the total assets of the financial institution and its operating results, the market situation and the liquidity of the instruments. 

Long-term and short-term liquidity risk

Liquidity is subject to effective cash management and investment dynamics. The Group manages liquidity risk by careful monitoring the liquidity of assets and liabilities and cash flows from operations. Short-term deficits are bridged using short-term borrowings from local banks and from Telekom Slovenije Group companies. Short-term surpluses are placed in bank deposits and securities. Also, a large portion of payments made by customers is reasonably predictable and stable.

The table below summarises the maturity profile of the financial liabilities of Telekom Slovenije as at 31 December 2012 and 31 December 2011 based on contractual undiscounted payments:

EUR thousand Past due On demand Less than 3 months 3 to 12 months 1 to 5 years More than 5 years Total
Loans and borrowings 0 0 7,364 27,920 92,132 402 127,818
Interest on loans received 0 0 399 1,084 854 0 2,337
Other financial liabilities 0 0 0 8,834 315,278 0 324,112
Interest on bills received 0 0 0 14,625 43,875 0 58,500
Interest on bills received 59,008 14,796 108,360 10,866 201 9 193,240
Derivatives 0 0 186 559 373 0 1,118
Total 59,008 14,796 116,309 63,888 452,713 411 707,125
Loans and borrowings 6 0 7,764 27,810 115,581 12,315 163,476
Interest on loans received 0 0 808 2,525 5,098 72 8,503
Other financial liabilities 0 0 0 16,508 308,484 0 324,992
Interest on bills received 0 0 0 14,625 58,500 0 73,125
Trade payables 39,957 6,558 98,676 10,501 12 274 155,978
Derivatives 0 0 124 386 747 0 1,257
Total 39,963 6,558 107,372 72,355 488,422 12,661 727,331

Interest-rate risk

Interest-rate risk is the risk of the negative impact of changes in market interest rates on the results of the Group's operations. The interest structure of items of assets and liabilities is not matched, since the amount of borrowings is much higher than the amount of interest-earning investments. The negative movement (increase) in the variable EURIBOR interest rate represents an exposure to interest-rate risk in respect of borrowings. Most long-term borrowings bear interest at a variable interest rate based on the 1-month, 3-month and 6-month EURIBOR.

The adopted financial risk management allows the Group to hedge against interest-rate risk by using interest-rate call options, interest-rate swaps and combinations of call and put options. The Group uses derivative financial instruments exclusively for the purpose of risk hedging. As at 31 December 2012, 31% of long-term loans were hedged against interest-rate risk.

The table below illustrates the Group's derivative instruments used for hedging interest-rate risk:

      EUR thousand
  Date of contract Maturity Nominal amount Fair value at 31 Dec 2012 Fair value at 31 Dec 2011
Fair value at 31 Dec 2011 24 June 2009 15 June 2014 39,214 -1,118 -1,257
Total     39,214 -1,118 -1,257

On the remeasurement of hedging instruments that are no longer designated as an accounting hedge, the Group recognised a gain in finance income in the amount of EUR 139 thousand (2011: expenses in the amount of EUR 110 thousand were recognised); refer to the table Net income/expenses from change in fair value of investments recognised in profit or loss in Note 10.

Interest-rate risk table

The following table illustrates the sensitivity of the Group’s profit before tax to a reasonably likely change in interest rates, with all other variables held constant (due to the impact of floating rates for borrowings by taking into account interest-rate risk hedges). Changes in interest rate have no impact on the equity of the Telekom Slovenije Group.

  Increase/decrease in basic interest rate Effect on profit or loss before tax (EUR thousand)
EUR +10 bp -128
EUR -10 bp 128
EUR +10 bp -163
EUR -10 bp  163

Non-interest bearing financial instruments are not included in the table above as they are not subject to interest-rate risk.

Currency risk

The Telekom Slovenije Group provides its services predominantly in Slovenia. Currency risk in ordinary activities arises in connection with foreign suppliers of services, merchandise and fixed assets. The majority of deliveries and borrowings from foreign entities are denominated in euro, which is also the functional currency of most Group companies. Therefore, exposure to currency risk is minimal.

Share of operations in individual currencies

Trade and other receivables, deferred costs and accrued revenue 89.16 % 9.72 % 0.73 % 0.35 % 0.03 % 100.00 %
Financial liabilities 99.89 % 0.00 % 0.11 % 0.00 % 0.00 % 100.00 %
Trade and other liabilities 90.58 % 7.95 % 1.12 % 0.34 % 0.01 % 100.00 %

Since currency risk is assessed as minimal, the Group does not use any special instruments to hedge its exposure to such risk.

Capital management

The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and capital ratios in order to support its business and maximise shareholder value.

Group companies monitor capital using a debt/equity ratio, which is net debt divided by total net debt plus total equity. Group companies’ net debt includes interest-bearing borrowings and other financial liabilities less current investments and cash with short-term deposits. The parent company balances the scope of borrowings made by Group companies and their related liquidity and solvency. The liquidity of Group companies is provided based on cash management, planned cash flows and short-term and long-term financing within the Group.

EUR thousand 2012 2011
Interest-bearing borrowings and other financial liabilities 451,930 488,468
Less current investments and cash with short-term deposits -105,881 -82,849
Net debt 346,049 405,619
Equity 814,601 815,275
Equity and net debt 1,160,650 1,220,894
Debt/equity ratio 30 % 33 %