Principles of financing and financial risk management
TeliaSonera's financing and financial risks are managed under the control and supervision of the Board of Directors of TeliaSonera AB. Financial management is centralized within the Corporate Finance and Treasury (CFT) unit of TeliaSonera AB, which functions as TeliaSonera's internal bank and is responsible for the management of financing and financial risks.
CFT is responsible for Group-wide financial risk management including netting and pooling of capital requirements and payment flows. CFT also seeks to optimize the cost of financial risk management, which in certain cases may mean that e.g. an inter company transaction is not replicated with an identical transaction outside the Group or that derivative transactions are initiated in order to adjust e.g. the overall interest rate duration of the debt portfolio, e.g. through overlay-swaps, if deemed appropriate. This means that situations may arise in which certain derivative transactions with parties outside the Group do not fully satisfy the requirements for hedge accounting, and thus any shift in market value will affect the financial net.
Regarding foreign currency transaction exposure, CFT has a clearly defined deviation mandate which currently is capped at the equivalent of a nominal SEK +/-200 million, expressed as the long/short SEK counter-value amount that may be exposed to currency fluctuations. As of December 31, 2008, the deviation mandate was utilized by less than SEK 50 million.
SEK is the functional currency of TeliaSonera AB. Its borrowings are therefore normally denominated in, or swapped into, SEK unless linked to international operations or allocated as hedging of net investments abroad. TeliaSonera Finland Oyj's borrowings are denominated in EUR.
Capital management
TeliaSonera's capital structure and dividend policy is decided by the Board of Directors. TeliaSonera shall target a solid investment grade long-term credit rating (A- to BBB+) to secure the company's strategically important financial flexibility for investments in future growth, both organically and by acquisitions.
The ordinary dividend shall be at least 40 percent of net income attributable to shareholders of the parent company. In addition, excess capital shall be returned to shareholders, after the Board of Directors has taken into consideration the company's cash at hand, cash flow projections and investment plans in a medium term perspective, as well as capital market conditions.
TeliaSonera AB is not subject to any externally imposed capital requirements.
Credit risk management
TeliaSonera's exposure to credit risk arises from default of the counterpart, with a maximum exposure equal to the carrying amount of these instruments (detailed in the respective note), as follows.
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December 31, | ||
|---|---|---|---|
| SEK in millions | Note | 2008 | 2007 |
| Other non-current assets | 17 | 8,935 | 2,952 |
| Trade and other receivables | 19 | 20,287 | 18,345 |
| Interest-bearing receivables | 20 | 2,147 | 1,701 |
| Cash and cash equivalents | 20 | 11,826 | 7,802 |
| Total |
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43,195 | 30,800 |
TeliaSonera AB accepts only creditworthy counterparts when entering into financial transactions such as interest rate swaps, cross currency swaps and other transactions in derivatives. TeliaSonera AB requires each counterpart to have an approved rating and an International Swaps and Derivatives Association, Inc. (ISDA) agreement. The permitted exposure to each counterpart when entering into a financial transaction depends on the rating of that counterpart. As of December 31, 2008 and 2007, the aggregate exposure to counterparts in derivatives was SEK 4,475 million and SEK 532 million, respectively, calculated as a net claim on each counterpart.
The credit risk with respect to TeliaSonera's trade receivables is diversified geographically and among a large number of customers, private individuals as well as companies in various industries. Solvency information is required for credit sales to minimize the risk of bad debt losses and is based on group-internal information on payment behavior, if necessary supplemented by credit and business information from external sources. Bad debt expense in relation to consolidated net sales was approximately 0.4 percent in 2008 and 0.5 percent in 2007.
Surplus cash in TeliaSonera AB may only be invested in bank deposits, commercial papers issued by banks and/or in Swedish, Finnish, Norwegian or Danish government bonds and treasury bills. There are no limits for investments in government papers. For investments with banks, the rating should be at least A-1 (Standard & Poor's) or P-1 (Moody's) and the maturity is limited to 12 months. Furthermore, for maturities longer than 10 business days, the exposure per bank is limited to SEK 1,000 million.
Liquidity risk management
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities. TeliaSonera's policy is to have a strong liquidity position in terms of available cash and/or unutilized committed credit facilities. As of December 31, 2008, the surplus liquidity (short-term investments and cash and bank) amounted to SEK 12,858 million. TeliaSonera AB's surplus liquidity is typically deposited in banks or invested in short-term interest-bearing instruments with good credit ratings. At year-end, TeliaSonera AB had no such investments in interest-bearing securities with maturities exceeding 3 months. The average yield on bank deposits and short-term investments as per the balance sheet date was 3.4 percent in 2008 and 4.3 percent in 2007.
In addition to available cash, TeliaSonera has committed bank credit facilities and overdraft facilities, intended for short-term financing and back-up purposes, as follows.
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December 31, | |
|---|---|---|---|---|---|---|
| In millions of the respective currency |
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2008 | 2007 | |
| Group entity | Type | Characteristics | Final maturity | Currency | Limit | Limit |
| TeliaSonera AB | Revolving credit facility | Committed, syndicated | December 2011 | EUR | 1,000 | 1,000 |
| TeliaSonera AB | Revolving credit facility | Committed, bilateral | September 2010 | SEK | 2,000 | 2,000 |
| TeliaSonera AB | Revolving credit facility | Committed, bilateral | April 2013 | SEK | 1,400 | – |
| TeliaSonera AB and subsidiaries | Bank overdraft facilities | Committed, bilateral | – | SEK (various) | 1,204 | 1,163 |
As of December 31, 2008, SEK 1,407 million of the total facilities was utilized (no utilization as of year-end 2007). In total, the available unutilized amount under committed bank credit facilities and overdraft facilities was SEK 14,133 million and SEK 12,636 million as of December 31, 2008 and 2007, respectively.
As of December 31, 2008, contractual undiscounted cash flows for the Group's interest-bearing borrowings and non-interest-bearing currency derivatives represented the following expected maturities, including installments and estimated interest payments. Amounts in foreign currency have been converted into SEK using the exchange rate prevailing on the balance sheet day. Future interest payments, related to instruments with floating interest rates, have been estimated using forward rates. Where gross settlements are performed (cross currency interest rate swaps, currency swaps and forward exchange contracts), all amounts are reported on a gross basis. The balances due within 12 months equal their carrying values as the impact of discounting is insignificant. Corresponding information on non-interest-bearing liabilities are presented in Notes 25 “Other Long-term Liabilities” and 26 “Trade Payables and Other Current Liabilities.”
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Expected maturity SEK in millions |
2009 | 2010 | 2011 | 2012 | 2013 | Later years | Total |
|---|---|---|---|---|---|---|---|
| Utilized bank overdraft facilities | 7 | – | – | – | – | – | 7 |
| Open-market financing program borrowings | 4,592 | 8,949 | 6,129 | 8,433 | 7,646 | 25,990 | 61,739 |
| Other borrowings | 6,263 | 121 | 1,576 | 519 | 377 | – | 8,856 |
| Finance lease agreements | 34 | 24 | 14 | 6 | 4 | 7 | 89 |
| Cross currency interest rate swaps and interest rate swaps |
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| Payables | 1,508 | 3,625 | 2,442 | 6,156 | 4,470 | 8,794 | 26,995 |
| Receivables | -1,678 | -4,165 | -2,656 | -7,254 | -5,201 | -10,538 | -31,492 |
| Currency swaps and forward exchange contracts |
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| Payables | 36,528 | – | – | – | – | – | 36,528 |
| Receivables | -36,386 | – | – | – | – | – | -36,386 |
| Total, net | 10,868 | 8,554 | 7,505 | 7,860 | 7,296 | 24,253 | 66,336 |
Currency risk management
Currency risk is the risk that fluctuations in foreign exchange rates will adversely affect items in the Group's income statement, balance sheet and/or cash flows. Currency risk can be divided into transaction exposure and conversion exposure. Transaction exposure relates to net inflows or outflows of foreign currencies required by operations (exports and imports) and/or financing (interest and amortization). Conversion exposure relates to equity in foreign subsidiaries, associated companies or joint ventures which is denominated in foreign currencies as well as goodwill and fair value adjustments arising from acquisitions.
TeliaSonera's general policy is to hedge the majority of known operational transaction exposure up to 12 months into the future. This hedging is primarily initiated via forward exchange contracts and refers to invoiced cash flows. However, financial flows, such as loans and investments, are usually hedged until maturity, even if that is longer than 12 months. Financial flows longer than one year are hedged by normally using cross currency interest rate swaps, while shorter terms are hedged using currency swaps or forward exchange contracts. Currency options are also used from time to time. TeliaSonera does not normally hedge its conversion exposure.
As of December 31, 2008, TeliaSonera's portfolio of cross currency interest rate swap contracts represented the following currencies and expected maturities. Amounts indicated represent carrying values.
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Expected maturity SEK in millions |
2009 | 2010 | 2011 | 2012 | 2013 | Later years | Total |
|---|---|---|---|---|---|---|---|
| Cross currency interest rate swaps, received |
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| Buy EUR | – | 2,848 | – | 6,150 | 4,444 | 8,563 | 22,005 |
| Buy USD | – | – | 1,287 | – | – | 592 | 1,879 |
| Buy JPY |
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– | 262 | – | – | – | 262 |
| Total, received | – | 2,848 | 1,549 | 6,150 | 4,444 | 9,155 | 24,146 |
| Cross currency interest rate swaps, paid |
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| Total, paid | – | -2,348 | -1,302 | -5,248 | -3,762 | -7,813 | -20,473 |
| Net position | – | 500 | 247 | 902 | 682 | 1,342 | 3,673 |
As of December 31, 2008, the TeliaSonera Group's portfolio of currency swap contracts and forward exchange contracts hedging loans, investments, and operational transaction exposures represented the following currencies and expected maturities. Amounts indicated represent settlement values.
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Expected maturity SEK in millions |
2009 |
Later years |
Total |
|---|---|---|---|
| Sell USD | 1,418 | – | 1,418 |
| Sell EUR | 611 | – | 611 |
| Sell DKK | 210 | – | 210 |
| Sell NOK | 91 | – | 91 |
| Sell GBP | 56 | – | 56 |
| Sell other currencies | 98 | – | 98 |
| Sell total | 2,484 | – | 2,484 |
| Buy USD | -1,485 | – | -1,485 |
| Buy EUR | -563 | – | -563 |
| Buy DKK | -195 | – | -195 |
| Buy NOK | -93 | – | -93 |
| Buy GBP | -59 | – | -59 |
| Buy other currencies | -96 | – | -96 |
| Buy total | -2,491 | – | -2,491 |
| Net position | -7 | – | -7 |
TeliaSonera's conversion exposure was distributed as follows.
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December 31, | |||
|---|---|---|---|---|
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2008 | 2007 | ||
| Currency | Amount in SEK million | Percent | Amount in SEK million | Percent |
| EUR | 81,321 | 39.4 | 67,281 | 39.5 |
| of which hedged through borrowings | 6,149 | 3.0 | 4,045 | 2.4 |
| NOK | 32,142 | 15.6 | 32,555 | 19.1 |
| TRY | 26,704 | 12.9 | 20,258 | 11.9 |
| RUB | 16,946 | 8.2 | 9,456 | 5.6 |
| DKK | 15,700 | 7.6 | 12,178 | 7.2 |
| LTL | 8,098 | 3.9 | 8,317 | 4.9 |
| EEK | 5,438 | 2.6 | 4,963 | 2.9 |
| USD | 4,984 | 2.4 | 4,073 | 2.4 |
| LVL | 4,132 | 2.0 | 3,759 | 2.2 |
| NPR | 2,747 | 1.3 | – | – |
| KZT | 2,416 | 1.2 | 1,741 | 1.0 |
| UZS | 1,267 | 0.6 | 1,628 | 1.0 |
| AZN | 1,205 | 0.6 | 1,194 | 0.7 |
| TJS | 1,020 | 0.5 | 839 | 0.5 |
| GEL | 898 | 0.4 | 364 | 0.2 |
| GBP | 847 | 0.4 | 947 | 0.6 |
| Other currencies | 817 | 0.4 | 575 | 0.3 |
| Total | 206,682 | 100.0 | 170,128 | 100.0 |
Transaction exposure sensitivity
In most cases, TeliaSonera customers are billed in local currency. Receivables from and payables to other operators for international fixed-line traffic and roaming are normally settled net through clearing-houses. Hence, the operational need to net purchase foreign currency is primarily due to a deficit from such settlements and the limited import of equipment and supplies.
The negative impact on post-tax income would be approximately SEK 130 million on a full-year basis, should the Swedish krona weaken by 10 percentage points against all other transaction currencies, assuming an operational transaction exposure equivalent to that in 2008, and provided that no hedging measures were taken and not including any potential impact on post-tax income due to currency translation of other income statement items. Applying the same assumptions, the positive impact on post-tax income would be approximately SEK 120 million on a full-year basis, should the Euro, the Danish krone and the Baltic currencies weaken by 10 percentage points against the Swedish krona and all other transaction currencies.
Conversion exposure sensitivity
The positive impact on Group equity would be approximately SEK 20.1 billion if the Swedish krona weakened by 10 percentage points against all conversion exposure currencies, based on the exposure as of December 31, 2008 and including hedges but excluding any potential equity impact due to TeliaSonera's operational need to net purchase foreign currency or to currency translation of other income statement items. TeliaSonera's conversion exposure is expected to continue to grow due to ongoing expansion of the international business operations.
Interest rate risk management
The TeliaSonera Group's sources of funds are primarily shareholders' equity, cash flows from operating activities, and borrowing. The interest-bearing borrowing exposes the Group to interest rate risk. Interest rate risk is the risk that a change in interest rates will negatively affect the Group's net interest expense and/or cash-flows. TeliaSonera's financial policy provides guidelines for interest rates and the average maturity of borrowings. The Group aims at balancing the estimated running cost of borrowing and the risk of significant negative impact on earnings, should there be a sudden, major change in interest rates. The Group's policy is that the duration of interest of the debt portfolio should be from 6 months to 4 years.
If the loan portfolio structure deviates from the desired one, various forms of derivative instruments are used to adapt the structure in terms of duration and/or currency, including e.g. interest rate swaps and cross currency interest rate swaps.
As of December 31, 2008, the TeliaSonera Group's portfolio of interest rate swap contracts and cross currency interest rate swap contracts represented the following interest types and expected maturities. Amounts indicated represent carrying values.
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Expected maturity SEK in millions |
2009 | 2010 | 2011 | 2012 | 2013 | Later years | Total |
|---|---|---|---|---|---|---|---|
| Interest received |
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| Fixed interest rate | – | 1,740 | 1,767 | 5,692 | – | 10,325 | 19,524 |
| Floating interest rate | – | 1,780 | 668 | 6,150 | 5,082 | 11,655 | 25,335 |
| Total received | – | 3,520 | 2,435 | 11,842 | 5,082 | 21,980 | 44,859 |
| Interest paid |
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| Fixed interest rate | – | -2,387 | -1,269 | – | -729 | -2,789 | -7,174 |
| Floating interest rate | – | -671 | -904 | -10,839 | -3,762 | -17,916 | -34,092 |
| Total paid | – | -3,058 | -2,173 | -10,839 | -4,491 | -20,705 | -41,266 |
| Net position | – | 462 | 262 | 1,003 | 591 | 1,275 | 3,593 |
TeliaSonera AB has designated certain interest rate swaps as cash flow hedges to hedge against changes in the amount of future cash flows related to interest payments on existing liabilities. Hedge ineffectiveness related to outstanding cash flow hedges was immaterial and recognized in earnings during the year. Net changes in fair value recognized in shareholders' equity are separately reported in a hedging reserve (see section “Reserves” of Note 21 “Equity and Earnings per Share”). In 2008, no cash flow hedges were discontinued due to the original forecasted transactions not having occurred in the originally specified time period.
Interest rate risk sensitivity
As of December 31, 2008, TeliaSonera AB and TeliaSonera Finland Oyj had interest-bearing debt of SEK 59.3 billion with duration of interest of approximately 2.0 years, including derivatives. The volume of loans exposed to changes in interest rates over the next 12-month period was at the same date SEK 33.9 billion, assuming that existing loans maturing during the year are refinanced and after accounting for derivatives. The exact effect of a change in interest rates on the financial net stemming from this debt portfolio depends on the timing of maturity of the debt as well as reset dates for floating rate debt, and that the volume of loans may vary over time, thereby affecting the estimate. However, assuming that those loans were reset by January 1, 2009 at a one percentage point higher interest rate than the prevailing rate as per December 31, 2008, and remained at that new level during 12 months, the post-tax interest expense would increase by some SEK 250 million. Fair value of the loan portfolio would change by approximately SEK 1,100 million, should the level in market interest rates make a parallel shift of one percentage point, and assuming the same volume of loans and a similar duration on those loans as per year-end 2008.
Financing risk management
TeliaSonera's aggregate borrowings usually have a longer maturity than duration of interest (principal is fixed longer than interest rates). This allows the Group to obtain the desired interest rate risk without having to assume a high financing risk. The Group's policy is that the average maturity of borrowings should normally exceed 2 years. In order to reduce financing risk, the Group aims to spread loan maturity dates over a longer period.
TeliaSonera AB enjoys a strong credit rating with the rating agencies Moody's and Standard & Poor's. In 2008, Standard & Poor's confirmed its assigned credit rating on TeliaSonera AB at A- for long-term borrowings and A-2 for short-term borrowings, with a “Stable” outlook. Moody's credit rating on TeliaSonera AB remained unchanged at A-3 for long-term borrowings and P-2 for short-term borrowings, with a “Stable” outlook. These ratings represent a solid investment grade level and are thus expected to allow TeliaSonera continued good access to the financial markets.
TeliaSonera finances its operations chiefly by borrowing under its uncommitted open-market financing programs directly in Swedish and international money markets and capital markets. TeliaSonera also use some bank financing, which represented approximately 6 percent of the Group's total borrowing as of December 31, 2008. The open-market financing programs typically provide a cost-effective and flexible alternative to bank financing.
Pension obligation risk
As of December 31, 2008, the TeliaSonera Group had pension obligations which net present value amounted to SEK 22,814 million (see Note 23 “Provisions for Pensions and Employment Contracts”). To secure these obligations, the Group has pension funds, with plan assets of SEK 18,068 million based on market values as of December 31, 2008. The pension funds' assets are used as prime funding source for the pension obligations, and consisted of approximately 70 percent fixed income instruments and approximately 30 percent shares and other investments at year-end 2008. The expected average net return on the pension funds' plan assets is 4.7 percent annually. The portion of the pension obligations not covered by plan assets is recognized in the balance sheet, adjusted for unrecognized actuarial gains and losses, and unrecognized past service cost.
In 2008, accumulated actuarial losses increased from SEK 1,311 million to SEK 5,035 million. The actual net return on plan assets was a negative 8.5 percent (positive 3.1 percent in 2007), mainly due to falling prices on equity instruments. In addition, lower discount rates increased the present value of pension obligations.
As of December 31, 2008, the strategic asset allocation decided by the board of the Swedish pension fund, which represents approximately 85 percent of total plan assets, was 60 percent fixed income, 32 percent equities and 8 percent other investments. Other investments include primarily hedge funds and private equity. Out of the total strategic assets, 40 percent are domestic index (inflation) linked government bonds and 20 percent refers to other domestic fixed income assets with low credit risk. Out of the equity holdings, domestic equities represent 10 percentage points and global equities 22 percentage points. The actual allocation may fluctuate from the strategic allocation in a range of +/-10 percent between fixed income and equities. All assets in the Swedish pension fund are managed by appointed external managers with specialist mandates.
Pension obligation risk sensitivity
The approximate impact on the pension obligations is SEK 3.9 billion, should the weighted average discount rate decrease by one percentage point from the 4.2 percent which is currently used. Such an increase in the obligations, were interest rates to fall, should be partly offset by a positive impact from the fixed income assets in the pension funds. Based on the existing asset structure and the duration of the pension funds' fixed income portfolios (including index-linked bonds) as of December 31, 2008, and assuming that the value of the other assets in the pension funds were unchanged, a similar reduction in interest rates is estimated to increase the value of the pension funds assets by some SEK 1.0 billion.
Exogenous risk factors might from time to time lead to actuarial modifications increasing TeliaSonera's pension obligations. However, the impact on the obligations of such modifications cannot be quantified until realized.
Management of insurable risks
The insurance cover is governed by corporate guidelines and includes a common package of different property and liability insurance programs. The business units and other units being responsible for assessing the risks decide the extent of actual cover. Corporate Insurance at TeliaSonera AB manages the common Group insurance programs and uses a captive, TeliaSonera Försäkring AB, as a strategic tool in managing the insurance programs. The risks in the captive are in part reinsured in the international reinsurance market.