Financial risks
Efficient and systematic risk evaluation of financial risks as well as business risks is essential to Lagercrantz. Lagercrantz Group’s model for risk management does not involve avoidance of risk, but is rather aimed at identifying, managing and pricing these risks.
The Board of Directors of Lagercrantz is responsible for adopting the finance policy that sets guidelines, goals and limits for financial management within the Group. The finance policy governs the distribution of responsibility between the Board of Directors of Lagercrantz, Group management and the subsidiaries. Group management has the operative responsibility to secure the Group’s financing and to manage cash liquidity, financial assets and liabilities in an efficient manner.
Foreign exchange risk
Despite the fact that Lagercrantz has an international presence, its operations are local in nature as far as foreign exchange risk is concerned. Foreign exchange risk is the greatest financial risk to which Lagercrantz Group is exposed. It is defined as the risk for negative effect on profit caused by foreign exchange rate fluctuations. Foreign exchange rate fluctuations affect the Company’s profit, equity and competitive situation in different ways:
- The result is affected when sales and purchases are in different currencies (transaction exposure).
- The result is affected when assets and liabilities are in different currencies (translation exposure).
- The result is affected when profit of subsidiaries in different currencies is translated into Swedish kronor (translation exposure).
- Equity is affected when the subsidiaries’ net assets in different currencies are translated into Swedish kronor (translation exposure).
Transaction exposure
In an internationally active trading company such as Lagercrantz Group it is important to offer customers and suppliers opportunities to pay in their own currency. This means that the Group continually assumes currency risks, both in terms of trade receivable and trade payables in foreign currency.
Since the largest part of sales is in the Nordic Region, Lagercrantz Group has a surplus of foreign currency flows in that region. These flows are exposed to transaction risks. The Group’s purchases and sales in important foreign currencies amounted to MSEK 1,336 and MSEK 1,601, respectively, during the year.
Purchases/sales in important currencies
| Amounts in MSEK | Purchases | Sales |
|---|---|---|
| USD | 291 | 181 |
| EUR | 826 | 707 |
| GBP | 18 | 39 |
| DKK | 134 | 443 |
| NOK | 23 | 170 |
| JPY | 43 | 27 |
| PLN | 1 | 34 |
| Group total | 1,336 | 1,601 |
Cash and cash equivalents by currency
| Amounts in MSEK | 3/31/2009 | 3/31/2008 |
|---|---|---|
| SEK | 5 | 9 |
| USD | 6 | 11 |
| EUR | 27 | 32 |
| DKK | 3 | 8 |
| NOK | 9 | 8 |
| Other currencies | 10 | 11 |
| Group total | 60 | 79 |
According to the guidelines of Lagercrantz Group, its foreign exchange exposure should be reduced to a certain extent. Currency exposure that arises is eliminated to the greatest extent possible by currency clauses and invoicing in the same currency as that in which purchases are made. Forward cover of day-to-day exposure to foreign currency is used sparingly. The long-term benefit of forward foreign exchange cover is deemed to be small in combination with the growing complexity of reporting financial derivative instruments.
Translation exposure in the balance sheet
An individual subsidiary should normally have no translation risk in its own balance sheet. This means that a subsidiary’s receivables and liabilities in foreign currency should be balanced. Subsidiaries also normally do their borrowing in their own currency. In practice, this only comes into play when loans are raised in conjunction with the acquisition and in the case of loans between subsidiary and parent company. Equity in foreign Group companies is normally not hedged since investments in subsidiaries are considered to be of a long-term character. There may be exceptions, however. The translation exposure in consolidated equity can, during certain periods with sharp foreign currency rate fluctuations, be substantial. The largest exposures are in DKK, EUR and NOK. Currency hedges exist in the amount of MDKK 15 and MEUR 1, respectively. The agreed rate of exchange are DKK 1.47 and EUR 11.00. The effect of translation differences on equity is set forth in the summary of changes in shareholders’ equity.
Currency sensitivity
As a rule of thumb it can be said that a change of the euro exchange rate (including also the correlating currency exchange effect of the Danish krona that is tied to the euro) by plus or minus 5 percent is estimated to change Lagercrantz Group’s gross profit by plus or minus MSEK 10 on an annual basis, given the conditions that prevailed during the financial year. A change of the US dollar exchange rate by plus 5 percent would give a corresponding effect of minus MSEK 5.
Foreign exchange rate changes also have other effects on earnings, as a portion of the Groups costs are in foreign currency (predominantly EUR och DKK), and that actions are taken on a day-to-day basis to minimise the negative effects of foreign exchange rate fluctuations. This makes the ultimate effects on earnings difficult to predict and analyse. The rule of thumb should therefore be used with caution.
Interest risk
The Group’s financial policy states that borrowing and the term of fixed interest on borrowing should be up to the period during which a borrowing need is deemed to exist. The overarching policy is that up to 50 percent of the borrowing should be for a term of one to five years. A company’s exposure arises in two ways:
- The company may have invested in interest-bearing assets the value of which changes when there is an interest rate change.
- The cost of the company’s borrowing may change when the interest rate level changes.
Lagercrantz Group has no long-term surplus liquidity and does not normally invest funds in anything but short-term bank deposits/short-term money market instruments with a term of less than 90 days. As a consequence, there is no appreciable interest rate risk in the Group’s short-term investments. Changes in the interest rate level therefore primarily affect the Company’s borrowing cost. A change in the weighted average interest rate by 1 percent for the Group is expected to affect the interest expense before taxes by approximately MSEK 2 on an annual basis, given the conditions that prevailed during the financial year. An interest rate hedge has been acquired in an amount of MSEK 100. Interest on this amount will not exceed 4.55 percent over the next three years. The Group’s goal is to have a well balanced liquidity reserve available in the form of cash and cash equivalents and committed credit facilities.
Weighted average effective interest rates on loans
|
|
Group | Parent Company | ||
|---|---|---|---|---|
| Percent | 2008/09 | 2007/08 | 2008/09 | 2007/08 |
| Long-term liabilities to credit institutions | 5,97% | 4,09% | 5,99% | 4,04% |
| Short-term liabilities to credit institutions | 4,33% | 4,53% | 4,11% | 4,52% |
Credit risk
Lagercrantz Group’s credit risk with respect to trade receivables is highly diversified through a large number of projects and other business agreements of varying size and type, with a large number of customer categories in a multitude of geographic markets. The Company therefore has no significant concentration of credit risks. Financial credit and counterparty risk is identified, managed and reported in accordance with the framework defined in the Group’s finance policy, risk policy and rules of attestation. In connection with financing of projects and other business agreements Lagercrantz may in certain cases assume responsibility for bank guarantees, in the form Parent Company guarantees towards a third party, for the purpose of securing financing during a limited period of time. According to the finance policy, as few credit counterparties as possible shall be strived for and they should always be highly creditworthy.
No material losses of a financial character were sustained during the year.
Liquidity risk
Established relationships with the capital markets is a prerequisite for Lagercrantz Group’s prospects for securing a supply of capital on a long-term basis on terms and conditions in tune with conditions on the market. Given the credit facilities in place, there is good preparedness for temporary fluctuations in the Group’s liquidity needs.
Lagercrantz Group’s confirmed bank credit facilities consist of:
- Acquisition loan in the amount of MSEK 79.
- Committed credit facility in the amount of MSEK 250 in the Parent Company.
- Committed credit facilities in the amount of MSEK 64 in subsidiaries.
Capital risk
The Group’s goal with respect to its capital structure is in line with the purpose of securing the ability to continue operations, allowing it to continue generating a return to its shareholders and benefits for other stakeholders, and to maintain a capital structure that gives a low overall capital cost.
The risk inherent in the Group’s level of capital is judged in terms such as equity ratio and interest coverage ratio. The present levels of these metrics adequately fulfil the requirements imposed by providers of capital.
