Financial risk management
The main objectives of the Group’s treasury operations are funding, optimising cost of capital and managing financing risks. Principles of risk managements are defined in the Group treasury policy, approved by the parent company Board of Directors. The policy includes guidelines for raising capital, investing cash surplus and managing finance risk. The Group treasury activities are centralised at the parent company treasury department which coordinates and monitors financing in the subsidiaries and reports to the Group management. The Group liquidity is centralised by using Group accounts and pooling systems. The parent company is responsible for investing the surplus liquidity as well as managing the Group’s external funding requirements. Any finance deficit in the subsidiaries will be financed through internal loans within the Group.
The main financial risks in the Group are liquidity, credit and interest rate risk. The objective of the Group financing risk management is to identify and measure the total risk position created by the Group financing operations and to carry out risk management measures to ensure that the total fi nancing risk will not exceed the Group risk-bearing capacity and objectives. The Group’s currency risk is not material since its operations are mainly carried out in Finland.
Liquidity risk refers to situations where the Group’s financial assets and extra funding opportunities fall short of the Group’s requirements or the cost of raising funding is higher than the market cost.Creating cash fl ow forecasts and determining any related uncertainties are the key measures to manage liquidity risk.
The Group has a large number of customers and the individual receivable amounts are small, and as such there are no major individual risks. New customers are subjected to credit check as part of the ordering process, and if any existing customers are found to have credit problems, unsecured new sales are not made. In 2018, the impairment loss of trade receivables totalled EUR 3.9 million (EUR 2.3 million).The maximum exposure to credit risk at the reporting date is the carrying value of financial assets. Customer with weaker solvency are required to pay the basic charges in advance as a deposit. Counterparty risk refers to a situation where the other party fails to meet its obligations under the fi nancing agreement. To restrict and monitor the counterparty risk, investments and derivative instruments are managed by counterparty, financial instrument and maturity limits. Counterparty risk mainly relates to the cash and cash equivalents of the company. DNA is not subject to any significant counterparty risk since cash and cash equivalents are distributed to several financial institutions with good credit ratings.
Interest rate risk
The Group’s interest rate risk primarily comprises interest rate sensitivity of financial items, referring to the direct effect of changes in the interest rate level on financial items, mainly borrowings, and historically also derivative instruments. DNA’s interest rate risk arises from borrowings that are issued at fl oating rates and expose DNA to cash fl ow interest rate risk. To manage its interest rate risk, the Group may use interest rate derivatives. At 31 December 2018, DNA did not hedge any of its borrowings (31.12.2017 hedged 0%). At the end of 2018, the Group had no interest rate derivatives (EUR 0 million).
Borrowings issued at fi xed rates, mainly the fi xed rate bonds, expose the Group to fair value interest rate risk. As at 31 December 2018, 76 per cent of DNA’s borrowings were fi xed rate (76 per cent).
If interest rates had been one percentage point higher, with all other variables held constant, the calculated post-tax result would have been EUR 0.6 million (EUR 0.4 million) lower and, with the corresponding decrease in interest rates, the calculated post-tax result would have been EUR 0.6 million (EUR 0.4 million) higher. The sensitivity analysis covers the Group’s variable-rate loans, cash and cash equivalents.
The sensitivity of the fair value of hedge accounting interest rate swaps to changes had zero effect on equity because the company had no active interest rate swaps at the end of 2017 and 2018.
The capital structure can be infl uenced for example through dividend distribution, repayment of capital and planning the cash outfl ows for investments. The Group management monitors the development of the capital structure for example on the basis of the gearing and equity ratios as well as the net debt to EBITDA ratio. The Group’s credit facility agreements include financial covenants requiring an equity ratio of at least 35 per cent and net debt to EBITDA ratio below 3.50:1. These conditions have been met during the financial periods. The equity ratio on the balance sheet date was 46.9 per cent (50.6 per cent) and net debt to EBITDA ratio was 1.33:1 (1.12:1).