Annual report 2012

34. Financial risk management

The main risks arising from the Company’s operations include credit risk, long-term and short-term liquidity risk, and interest-rate risk. The Management Board reviews and adopts the risk management policy on an ongoing basis for each individual risk as summarised below.

Credit risk

The Company has a large number of customers. Receivables due from domestic customers account for 89% of total receivables, while the remainder relates to foreign customers, primarily operators from other countries.

In terms of the structure of total receivables, 47% of receivables relate to retail sales, while 53% relates to wholesale activities. 

The Company manages credit risk by lowering the possibility of outstanding liabilities. This is done by monitoring the credit ratings of business partners, by collateralising possible receivables, by monitoring traffic and informing customers about increased use. The Company defines the credit ratings of business users based on its rating model, which contributes to efficient credit risk management and serves as an additional indicator for increasing customer services during sales procedures.

In accordance with its adopted policy, the Company is engaged in debt recovery court proceedings. As the result of well-developed procedures for managing receivables and creating allowances, the Company assesses credit risk as manageable.

The Company's maximum exposure to credit risk is equal to the carrying amount of receivables. In terms of the structure of total exposure to credit risk, the highest exposure to individual customers accounts for 22%.

The Company is also exposed to certain credit risk in connection with loans to subsidiaries and guarantees, in particular those issued to subsidiaries. The Company mitigates the credit risk that arises from the default of the counterparties based on collateral in loan and warranty agreements, the amount of which must be at least equal to the amount of the loan given.

Long-term and short-term liquidity risk

Liquidity risk refers to a deficit in available assets or the ability to provide foreign sources of liquidity for settling liabilities upon their maturity.

The Company manages short-term liquidity risk by carefully managing and planning cash flows from operations (daily monitoring with a bi-monthly forecast), which facilitates the timely detection of possible deficits in liquid assets and decision on the appropriate measures. Short-term unused revolving loans and credit lines with domestic banks also provide a high rate of financial flexibility for bridging unexpected cash shortfalls.

Liquidity risk was assessed as low in 2012, primarily due to the scope of consequences that a risk could bring. Short-term and long-term unused revolving loans and credit lines, deposits with banks, investments in short-term securities and bank balances provided for financial flexibility and for the bridging of unexpected cash shortfalls, and for adequate cash flow balancing and thus resulted in lower short-term liquidity risk. As at 31 December 2012, the total liquidity reserve of the Company amounts to EUR 185.9 million.

The long-term liquidity risk is assessed as moderate as a result of foreseeable cash flows, an appropriate repayment schedule for long-term borrowings, anticipated measures in related to working capital management, an equity structure with a relatively stable proportion of equity, and as the result of long-term back-up credit lines raised.

The table below summarises the maturity profile of financial liabilities of Telekom Slovenije as at 31 December 2012 and 31 December 2011 based on the 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 7,363 27,738 92,104 0 127,205
Interest on loans received 0 0 399 1,084 854 0 2,337
Other financial liabilities 0 0 0 8,795 311,977 0 320,772
Interest on bills received 0 0 0 14,625 43,875 0 58,500
Trade payables and other current operating liabilities 44,766 14,921 100,776 3,755 12 0 164,230
Derivatives 0 0 186 559 373 0 1,118
Total 44,766 14,921 108,724 56,556 449,195 0 674,162
Loans and borrowings 0 0 7,764 27,738 115,336 11,849 162,687
Interest on loans received 0 0 808 2,525 5,098 72 8,503
Other financial liabilities 0 0 0 16,424 305,135 0 321,559
Interest on bills received 0 0 0 14,625 58,500 0 73,125
Trade payables and other current operating liabilities 36,268 6,641 88,026 4,288 12 265 135,500
Derivatives 0 0 124 386 746 0 1,256
Total 36,268 6,641 96,722 65,986 484,827 12,186 702,630

Interest-rate risk

Interest-rate risk derives from changes in interest rates that have a negative impact on interest-sensitive financial liabilities and may result in higher costs for related liabilities.

Liabilities from long-term loans with variable interest rates were exposed to interest-rate risk in 2012. Risk exposure is estimated as low as long-term loans accounted for 29.7% of interest-bearing financial liabilities in 2012. Interest rates are hedged using derivative financial instruments for 30.8% of these loans. The remaining portion of financial liabilities relate to bonds issued and to finance leases with fixed interest rates.

The Company uses derivative financial instruments exclusively for the purpose of risk hedging. Decisions on additional  collateral depend on the forecast of interest rate movements and market conditions. As at 31 December 2012, the average weighted interest rate for long-term borrowings was 89 basis points lower compared to the balance at 31 December 2011.

Derivatives used by Telekom Slovenije for interest rate hedging 

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

On the remeasurement of fair value of derivatives not designated as hedges, the Company recognised a loss in the amount of EUR 139 thousand as finance costs in 2012 (2011: EUR 127 thousand); refer to the table Net income and expenses as a result of changed fair value of investments in Note 9.

Interest-rate risk table

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

  Increase/decrease in basic interest rate Effect on profit or loss before tax (EUR thousand)
EUR +10 bp -127
EUR -10 bp 127
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 Company's currency risk arises in connection with cash flows denominated in foreign currencies. The exposure to currency risk is considered minimal, as Telekom Slovenije operates primarily in Europe and only a small share of transactions are conducted in foreign currencies, while the structure of inflows and outflows by individual currency is almost levelled out. Thus, the Company does not use any special instruments to hedge its exposure to such risks

Capital management

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

The Company monitors capital using a debt/equity ratio, which is net debt divided by total net debt plus total equity. The Company’s net debt includes interest-bearing borrowings and other financial liabilities less current investments and cash with short-term deposits.

EUR thousand  2012 2011
Interest-bearing borrowings and other financial liabilities 447,977 484,246
Less current investments and cash with short-term deposits -117,315 -87,862
Net debt 330,662 396,384
Net debt 831,638 827,721
Equity and net debt 1,162,300 1,224,105
Equity and net debt 28 % 32 %