C26. Financial risk management

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 Group Treasury unit of TeliaSonera AB, which operates as TeliaSonera’s internal bank and is responsible for the management of financing, management of capital requirements and cash. Group Treasury is also responsible for TeliaSonera’s financial risk management, related to implementation of group policies and instructions, identification and monitoring of financial risks as well as implementation of hedging strategies thereof. The most noticeable risks under Group Treasury’s responsibility are credit risk, liquidity risk, currency risk, interest rate risk and (re-)financing risk. Group Treasury also seeks to manage the cost of financial risk management.

TeliaSonera finances its operations mainly by borrowing under its uncommitted open-market financing programs directly in Swedish and international money markets and capital markets. The communicated funding strategy themes have been to increase duration, to diversify funding sources and to keep a prudent liquidity position. Capital market funding is the primary source and bank funding is considered mainly as backup. This increases flexibility and ensures access to markets to enable attractive pricing. The open-market financing programs typically provide a cost-effective and flexible alternative to bank financing.

Former segment region Eurasia is classified as held for sale and discontinued opera-tions as of December 31, 2015 and therefore not included in the figures for 2015. The comparative year 2014 has not been restated. For further information, see Note C34 “Discontinued operations and assets classified as held for sale.”

Capital management

TeliaSonera’s capital structure and dividend policy is decided by the Board of Directors. The ambition is to distribute at least 80 percent of free cash flow based on continuing operations with an ambition to pay out a minimum of SEK 2 per share for the fiscal year 2016.

TeliaSonera AB retained its good credit ratings. In February 2016, Moody´s Investors Service confirmed its Prime-2 rating for short-term borrowings and announced that it had placed its A3 rating for long-term borrowings on review for downgrade. In March 2016, Standard & Poor’s Ratings Services confirmed its rating of A- for long-term borrowings and A-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 shall continue to target a solid investment grade long-term credit rating of A- to BBB+ and a leverage corresponding to Net debt/EBITDA of 2x plus/minus 0.5x to secure the company’s strategically important financial flexibility for investments in future growth, both organically and by acquisitions.

TeliaSonera AB is not subject to any externally imposed capital requirements.

Credit risk management

TeliaSonera’s exposure to credit risk arises from default of counterparties (including price risks as regards investments in equity instruments), with a maximum exposure equal to the carrying amount of these instruments (detailed in the respective notes), as follows.

SEK in millions

Note

Dec 31, 2015

Dec 31, 2014

Other non-current assets

C15

17,860

14,622

Trade and other receivables

C17

14,639

16,276

Interest-bearing receivables

C18

10,679

10,993

Cash and cash equivalents

C18

14,647

28,735

Total

 

57,825

70,626

When entering into financial transactions such as interest rate swaps, cross currency swaps and other transactions in derivatives, TeliaSonera accepts only creditworthy counterparties with a solid investment grade rating. TeliaSonera requires each counterparty to have an International Swaps and Derivatives Association, Inc. (ISDA) agreement. The permitted exposure of each counterparty when entering into a financial transaction depends on the rating of that counterparty.

The aggregated exposure in derivatives as of December 2015, is distributed by the counterparty long-term rating with Moody’s in the table below. In line with recommendations issued by the Basel Committee on Banking Supervision, exposures are calculated as the positive market value of the derivative contracts with each counterparty with an add-on amount intended to give a margin for a potential future exposure. Received collateral, regulated by the Credit Support Annex of the ISDA agreements, is deducted from the exposure.

SEK in millions

Dec 31, 2015

Dec 31, 2014

Counterparty rating Aa3

720

676

Counterparty rating Aa2

465

Counterparty rating A1

383

980

Counterparty rating A2

1,519

1,256

Counterparty rating A3

202

644

Counterparty rating Baa1

344

Counterparty rating Baa2

2

Counterparty rating Baa3

2

Total exposure of counterparties in derivatives

3,293

3,900

Surplus cash in TeliaSonera can be invested in bank deposits and securities issued by banks and corporates with at least a rating of A- (Standard & Poor’s) or A3 (Moody’s). In addition, cash can be invested in government bonds and treasury bills issued by the Swedish, German, Finnish, Norwegian or Danish government, Swedish municipals, investment funds and securitized assets with AAA/Aaa rating.

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 0.6 percent in 2015 and 0.8 percent in 2014.

Liquidity risk management

Liquidity risk is the risk that TeliaSonera will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

TeliaSonera has internal control processes and contingency plans for managing liquidity risk. The short-term and mid-term liquidity management takes into account the maturities of financial assets and financial liabilities and estimates of cash flows from operations.

A centralized daily cash pooling process in the Nordic countries enables TeliaSonera to manage liquidity surpluses and deficits according to the actual needs on group and subsidiary level.

TeliaSonera’s policy is to have a prudent liquidity position in terms of available cash and/or unutilized committed credit facilities.

SEK in millions

Dec 31, 2015

Dec 31, 2014

Surplus liquidity

   

Cash and bank

10,929

12,632

Cash equivalents1

3,718

16,103

Cash and cash equivalents (see also Note C18)

14,647

28,735

Short-term investments2 (see also Note C18)

5,216

3,144

Total

19,862

31,879

Long-term investments3 (see also Note C15)

8,841

4,671

Total surplus liquidity

28,703

36,550

Committed credit facilities

   

Revolving credit facilities (limit amount)

18,270

19,031

Bank overdraft and short-term credit facilities (limit amount)

2,063

1,924

Utilized credit facilities

-4,110

-648

Total unutilized committed credit facilities

16,223

20,307

Liquidity position

44,926

56,857

1 Bank deposits and securities which matures within three months of the date of acquisition.

2 Securities with maturities between 3 and 12 months. Convertible to cash within two days, i.e. excluding securities that for regulatory reasons are not convertible to cash within 2 days.

3 Securities with maturities exceeding 12 months. Convertible to cash within 2 days.

 

TeliaSonera’s committed bank credit facilities and overdraft facilities, intended for short-term financing and back-up purposes, were as follows.

SEK in millions

     

Dec 31, 2015

Dec 31, 2014

Group entity

Type

Characteristics

Final maturity

Currency

Limit

Limit

TeliaSonera AB

Revolving credit facility

Committed, syndicated

December 2017

EUR

9,135

9,515

TeliaSonera AB

Revolving credit facility

Committed

June 2017

EUR

9,135

9,516

TeliaSonera AB
and subsidiaries

Bank overdraft facility

Committed, bilateral

Extended yearly

(various)

2,063

1,924

As of December 31, 2015, contractual undiscounted cash flows for the group represented the following expected maturites. The amounts regarding the group’s interest-bearing borrowings and derivatives include installments and estimated interest payments. Amounts in foreign currency have been converted into SEK using the exchange rate prevailing as of the end of the reporting period. 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.

Expected maturity
SEK in millions

Note

Jan–Mar 2016

Apr–Jun 2016

Jul–Sep 2016

Oct–Dec 2016

2017

2018

2019

2020

Later years

Total

Utilized bank overdraft and short-term credit facilities

 

-119

-102

-274

-274

-769

Open-market financing program
borrowings

 

-3,250

-245

-1,896

-1,454

-10,802

-4,067

-11,543

-9,907

-71,836

-115,000

Other borrowings

 

-3,343

-70

-366

-366

-482

-231

-877

-5,735

Finance lease agreements

 

-2

-2

-2

-2

-7

-7

-7

-5

-15

-49

Cross currency interest rate swaps and interest rate swaps

                     

Payables

 

-4,082

-194

-258

-516

-8,516

-4,364

-5,335

-668

-21,763

-45,696

Receivables

 

5,798

107

165

589

9,827

4,933

5,373

725

22,397

49,914

Currency swaps and forward exchange contracts

                     

Payables

 

-31,378

-61

-328

-31,767

Receivables

 

31,617

57

327

1

32,002

Government bonds and treasury bills

C15

29

–-

29

Loans and receivables

C15

2,003

365

45

42

94

2,549

Financial guarantees

C22

287

287

Other long term liabilities

C23

-134

-48

-5

-5

-8

-200

Trade Payables and Other Current Liabilities

C24

-10,241

-410

-16

-314

-10,981

Credit and performance guarantees

C29

-15

-15

Total

 

-15,000

-916

-2,011

-1,411

-7,981

-3,828

-11,954

-10,323

-72,007

-125,431

Currency risk management

Currency risk is the risk that fluctuations in foreign exchange rates will adversely affect the group’s results, financial position and/or cash flows. Currency risk can be divided into operational transaction exposure and conversion exposure.

Transaction exposure relates to net inflows or outflows of foreign currencies required by operations and financing. TeliaSonera’s general policy is to hedge the majority of known operational transaction exposure up to 12 months into the future. Financial flows are usually hedged until maturity, even if that is longer than 12 months.

Regarding foreign currency transaction exposure, CFO has a clearly defined deviation mandate which is capped at the equivalent of a nominal SEK +/-500 million, expressed as the long/short SEK counter-value amount that may be exposed to currency fluctuations. Since SEK is the functional currency of TeliaSonera borrowings are normally denominated in, or swapped into SEK unless linked to international operations or allocated as hedging of net investments abroad.

Financial transaction exposure risk

As of December 31, 2015, contractual undiscounted financial cash flows split by currency, for the group’s interest-bearing borrowings, assets and derivatives represented the following expected maturities, including installments and estimated interest payments. Amounts in foreign currency have been converted to SEK using the exchange rate prevailing as of the end of the reporting period. Future interest payments, related to instruments with floating interest rates, have been estimated using forward rates.

SEK in millions

Jan–Mar 2016

Apr–Jun 2016

Jul–Sep 2016

Oct–Dec 2016

2017

2018

2019

2020

Later years

Total

DKK

lnterest bearing asset

 

lnterest bearing debt

 

Derivatives

-6,729

-6,729

 

Net

-6,729

-6,729

EUR

lnterest bearing asset

2,421

2,421

 

lnterest bearing debt

-2,856

-378

-338

-650

-9,627

-3,266

-7,657

-9,279

-55,842

-89,892

 

Derivatives

12,041

5

2

-77

8,699

975

4,509

-175

-10,222

15,757

 

Net

11,606

-373

-336

-727

-928

-2,291

-3,148

-9,454

-66,064

-71,714

GBP

lnterest bearing asset

 

lnterest bearing debt

-217

-217

-217

-217

-217

-9,715

-10,800

 

Derivatives

-31

217

217

217

217

217

9,715

10,769

 

Net

-31

-31

JPY

lnterest bearing asset

 

lnterest bearing debt

-7

-2

-7

-2

-331

-707

-6

-6

-1,261

-2,329

 

Derivatives

7

2

7

2

331

707

6

6

1,261

2,329

 

Net

NOK

lnterest bearing asset

 

lnterest bearing debt

-16

-63

-80

-80

-80

-80

-2,465

-2,864

 

Derivatives

-6,958

-36

-13

-796

-2,407

32

28

362

-9,788

 

Net

-6,958

-52

-76

-876

-2,487

-48

-52

-2,103

-12,652

USD

lnterest bearing asset

 

lnterest bearing debt

-3,343

-3,343

 

Derivatives

-1,620

-69

-328

-1

-2,018

 

Net

-4,963

-69

-328

-1

-5,361

SEK

lnterest bearing asset

2,815

2,272

1,486

41

2,159

1,564

3,866

1,239

15,442

 

lnterest bearing debt

-520

-21

-1,565

-522

-646

-170

-4,695

-839

-3,455

-12,433

 

Derivatives

5,395

-59

-36

272

-7,238

1,178

-4,725

-18

-486

-5,717

 

Net

7,690

2,192

-115

-209

-5,725

2,572

-5,554

382

-3,941

-2,708

Total, net

615

1,768

-520

-1,340

-7,529

-2,206

-8,750

-9,124

-72,109

-99,195

The cash flow pertains to foreign exchange rate hedging of receivables, payables and cash balances in foreign currencies. Foreign exchange rate risks are also mitigated through the group’s net investment in EUR and NOK, see section “Conversion exposure risk.”

Operational transaction exposure sensitivity

In most cases, TeliaSonera customers are billed in their respective 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. Main sources of transaction exposures are derived from the Nordic operations involving SEK, EUR, NOK and DKK.

Currency exposure
SEK in millions

Transaction
exposure from
operating net flows

Impact on net income if currency
rate appreciates against
all other currencies by 10 percent

SEK

160

-369

EUR

422

329

NOK

104

-36

DKK

131

-9

Other

13

13

Total

830

73

The sensitivity analysis is based on the assumption that the operational transaction exposure is equivalent to that in 2015, and provided that no hedging measures were taken.

Conversion exposure risk

Conversion exposure relates to net investments in foreign operations. CEO has a mandate to implement hedging up to a specific ratio limit. TeliaSonera’s net investments in foreign operations were distributed by currency as follows.

SEK in millions

2015

2014

Net
investments

Hedged through borrowings
or derivatives

Net

Net
investments

Hedged through borrowings
or derivatives

Net

AZN

5,060

5,060

DKK

608

-

608

2,463

2,463

EUR

75,719

-50,231

25,488

71,741

-51,248

20,493

GBP

137

137

251

251

GEL

1,146

1,146

KZT

2,927

2,927

LTL

5,202

5,202

MDL

165

165

NOK

13,797

-1,304

12,493

8,567

-410

8,157

NPR

6,705

6,705

RUB

4,459

4,459

5,812

5,812

TJS

449

449

TRY

16,693

16,693

23,991

23,991

USD

389

389

3,559

3,559

UZS

642

642

Other currencies

218

218

288

288

Total

112,021

-51,536

60,485

138,968

-51,658

87,310

Conversion exposure sensitivity

The positive impact on group equity would be approximately SEK 6.0 billion if the Swedish krona weakened by 10 percentage points against all conversion exposure currencies. The calculation is based on the exposure as of December 31, 2015, 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 net income related items.

Interest rate risk management

TeliaSonera’s sources of funds are primarily equity attributable to owners of the parent, cash flows from operating activities, and borrowings. The interest-bearing borrowing and financial investments expose 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.

Average interest rates, including relevant hedges, on TeliaSonera AB’s outstanding long-term and short-term borrowings as of the end of the reporting period was as follows.

Percent

Dec 31, 2015

Dec 31, 2014

Long-term borrowings

2.15

2.94

Short-term borrowings

1.62

0.87

Debt key figures on debt portfolio as of the end of the reporting period was as follows. Amounts indicated represent carrying values.

SEK in millions

Dec 31, 2015

Dec 31, 2014

Share (%)

Duration (years)

4.8

 

Average maturity (years)

8.4

 

Short-term borrowings

9,337

9

Long-term borrowings

91,646

91

Interest rate adjustment <1year

65,641

65

Interest rate adjustment >1year

35,342

35

TeliaSonera’s financial policy provides the framework for interest rates and the average maturity of borrowings and investments. 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 the debt portfolio should be between 3 to 7 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 interest rate swaps and cross currency interest rate swaps.

As of December 31, 2015, TeliaSonera’s rate reset periods of interest bearing assets, liabilities and derivatives represented the following interest types and expected maturities. Amounts indicated represent nominal values.

SEK in millions

Jan–Mar 2016

Apr–Jun 2016

Jul–Sep 2016

Oct–Dec 2016

2017

2018

2019

2020

Later years

Total

Fixed

                   

lnterest bearing asset

3,084

1,207

901

1,143

300

3,198

1,117

10,950

lnterest bearing debt

-3,798

-250

-6,851

-968

-6,168

-7,325

-56,384

-81,744

Derivatives

499

-450

1,383

6,545

9,588

5,074

6,853

22,139

51,631

Net

-215

757

2,034

837

8,920

2,104

645

-34,245

-19,163

Float

                   

lnterest bearing asset

6,431

169

6,600

lnterest bearing debt

-10,434

-966

-11,400

Derivatives

-42,521

-8,234

-50,755

Net

-46,524

-9,031

-55,555

Total, net

-46,739

-8,274

2,034

837

8,920

2,104

645

-34,245

-74,718

TeliaSonera 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 also including certain long-term borrowings hedging net investments, see Note C20 “Long-term and short-term borrowings.” Hedge ineffectiveness related to outstanding cash flow hedges was immaterial and recognized in net income. Net changes in fair value recognized in other comprehensive income are offset in a hedging reserve as a component of equity, see Note C11 “Other comprehensive income.” In 2015, 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, 2015, TeliaSonera had interest-bearing debt of SEK 100.9 billion, carrying value, with duration of interest of approximately 4.8 years, including derivatives. The volume of loans exposed to changes in interest rates over the next 12-month period was at the same date approximately SEK 65.6 billion, carrying value, 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, 2016, at a one percentage point higher interest rate than the prevailing rate as per December 31, 2015, and remained at that new level during 12 months, the post-tax interest expense would increase by some SEK 512 million.

Fair value of the loan portfolio would change by approximately SEK 5.2 billion, 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 2015.

Refinancing risk management

The group’s policy is that the average maturity of borrowings should exceed 4 years. In order to reduce refinancing risk, the group aims to spread loan maturity dates over a longer period. As of December 31, 2015, TeliaSonera borrowings had an average time to maturity of approximately 8.4 years.

Pension obligation risk and sensitivity

See Note C21 “Provisions for pensions and employment contracts” for details on the pension obligation risks and a sensitivity analysis.

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.

Master netting arrangements and similar agreements

TeliaSonera has entered into ISDA Master Agreements for its OTC derivative business, i.e. interest rate and currency derivatives, with all of its core banks. These ISDA Master Agreements allow the parties to do close-out nettings. For derivatives in the financial operations, CSAs (credit support annex) may be entered into as an annex to the respective master agreement, and are recognized as other current receivables/liabilities. Under the CSA, the parties agree to provide each other with eligible support, which is calculated based on a weekly exposure under the specific agreement. Funds transferred and interest accrued under a CSA agreement is not considered collateral.

If TeliaSonera has a commitment of a NCI option (put option over non-controlling interests) linked to a receivable from the same counterparty and the shares are held as collateral for the receivable, then the receivable and liability is recognized and offset in the statement of financial position. 

For information on discontinued operations, see Note C34 “Discontinued operations and assets classified as held for sale.” 

SEK in millions

Note

December 31, 2015

Gross amounts, financial assets

Gross amounts, financial liabilities

Net amounts of financial assets in the statement of financial position

Related financial 
liabilities that are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C15, C18

5,546

5,546

-2,192

-1,558

1,796

Currency swaps and forward
exchange contracts

C15, C17

351

351

-26

325

Other receivables

 

24

-8

16

– 

16

Total

 

5,921

-8

5,913

-2,218

-1,558

2,137

               
               

SEK in millions

Note

December 31, 2015

Gross amounts,
financial liabilities

Gross amounts,
financial assets

Net amounts of financial liabilities in the statement of financial position

Related financial
assets that are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C20

2,393

2,393

-2,192

201

Currency swaps and forward
exchange contracts

C23, C24

101

101

-26

75

Other liabilities

 

29

-8

20

20

Total

 

2,523

-8

2,514

-2,218

296

               
               

SEK in millions

Note

December 31, 2014

Gross amounts,
financial assets

Gross amounts,
financial liabilities

Net amounts of financial assets in the
statement of financial position

Related financial
liabilities that are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C15, C18

5,618

5,618

-1,716

-1,043

2,859

Currency swaps and forward
exchange contracts

C15, C17

152

152

-78

74

Receivables set off by NCI options

C22

2,257

-2,257

0

0

Other receivables

 

33

-14

19

19

Total

 

7,402

-1,613

5,789

-1,794

-1,043

2,952

               
               

SEK in millions

Note

December 31, 2014

Gross amounts,
financial liabilities

Gross amounts,
financial assets

Net amounts of financial liabilities in the statement of financial position

Related financial
assets that are not set off

CSA

Net
amount

Interest and cross currency
interest rate swaps

C20

2,191

2,191

-1,716

475

Currency swaps and forward
exchange contracts

C23, C24

417

417

-78

339

Other liabilities

 

177

-13

164

164

Total

 

2,875

-13

2,772

-1,794

978

© TeliaSonera 2015
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