Note 22 Financial Risk Management

Financing

Property is a long-term asset, requiring long-term financing allocated between equity and interest-bearing liabilities. From a security perspective, Castellum credits can be divided into the following categories:

  • Credits against collateral in the form of Castellum’s promissory note receivables in its subsidiaries, including pledged mortgages.
  • Secured credits directly to subsidiaries in the form of pledged mortgages. Credits directly to subsidiaries are supplemented in the majority of cases by the Parent Company’s guarantee.
  • Unsecured credits.
  • Issues of unsecured bonds.
  • Issues of unsecured commercial paper.

All types of credit agreements contain standard termination conditions, and in some cases renegotiation terms for changes in business and delisting. If the lender invokes the right to a renegotiation of this type and the parties cannot agree, the credit agreements have established settlement times for those credit agreements covered by such terms.

At the end of the year, utilised credits secured by pledged mortgages totalled MSEK 7,588 (7,249). In addition to mortgages, the majority of credit agreements include commitments regarding loan-to-value ratio and interest coverage ratio – financial covenants – involving a loan-to-value ratio not exceeding 65% and an interest coverage ratio of at least 150%. If the 55% loan-to-value ratio is breached, financing costs will become more expensive for some credit agreements. In all cases, the guarantee to lenders is issued with a comfortable margin in relation to Castellum’s capital structure objectives.

Financial policy

Castellum’s funding and management of financial risk are conducted in accordance with the financial policy adopted by the Board of Directors. Castellum is to have a low financial risk with a loan-to-value ratio not exceeding 50% over the long term and an interest coverage ratio of at least 200%. The financial operations in Castellum are to be carried out in such a way that the need for long- and short-term financing and liquidity is ensured. In addition, net interest expenses will be optimised at any time, taking the selected level of financial risk into account. The financial policy outlines overall authorisation and how financial risk should be reported and monitored. Financial risks are monitored and reported quarterly to the Board. As part of continuously improving and adapting financial risk management, the Board conducts an annual review of the financial policy.

The Parent Company holds an internal auditing function, separate from the Treasury function, which provides accounting and independent control of financial management and financial risks.

Risk management

Castellum carries out financial transactions based on estimates of the Group’s overall long-term financing needs, liquidity and chosen interest rate risk. Hence, financial risk management is carried out on portfolio level. Portfolio management of borrowing means that an intra-Group transaction (e.g. an internal loan) is not duplicated by an identical external transaction. Instead, loans are drawn under short- or long-term credit agreements based on the Group’s overall financing needs.

For cost-effective management of the interest rate risk, an assessment is made of the interest rate risk that occurs when a payment is made or a new loan is drawn with a short, fixed-interest term. Thereafter, interest rate derivative transactions are made in order to achieve the desired fixed interest term on the total amount of debts. Castellum’s internal bank works with a cash pool system of bank accounts for the Group’s liquidity flows.

Funding risk

Demands for long-term financing make Castellum look for long-term loan-to-maturity structure in credit agreements in order to limit funding risk. To reach maximum flexibility, bank loans are mainly revolving, i.e. the credits are usually traded within 1–3 months. Short-term revolving loans facilitate amortisation at every renewal occasion without any marginal breaking compensation or other compensation to lenders. The objective is to minimise interest-bearing liabilities, and cash is therefore used primarily to repay outstanding debts.

In order to secure Castellum’s need for liquidity and long-term financing, the company regularly renegotiates and – when required – enters into new credit agreements or forms of borrowing. At the end of the year, Castellum held credit agreements totalling MSEK 63,500 (60,604) of which MSEK 46,894 (49,433) were long-term and MSEK 16,606 (11,171) were short-term. Of the utilised borrowing facilities at the end of the year, MSEK 29,693 (30,233) was long-term and MSEK 15,866 (10,420) short-term.

After deduction of cash of MSEK 161 (173), net interest-bearing liabilities were MSEK 45,559 (40,653), of which MSEK 29,127 (27,512) were bonds outstanding and MSEK 8,844 (5,136) commercial paper outstanding (nominal MSEK 29,145 and MSEK 8,853 respectively).

During the year, bank credit facilities of approximately MSEK 1,620 were raised with new counterparties, approximately MSEK 7,400 were extended and approximately MSEK 4,000 were settled. As part of its Swedish MTN programme, Castellum also issued new bonds during the year with a nominal amount of MSEK 5,250 while bonds with a nominal value of MSEK 3,250 matured. At the end of the year, the framework amount for the Swedish MTN programme was raised to MSEK 25,000.

The average loan-to-maturity structure for utilised borrowing facilities including extension options at year end was 3.8 years (3.8), whereas the average credit price tenor at the same point in time was 3.0 years (3.2). Net debt to EBITDA at the end of the period was 11 (10).

Credit agreements/limits

 

Amount, MSEK

 

Utilised, MSEK

Long-term credit agreements in bank

 

22,729

 

5,528

Short-term credit agreements in bank

 

2,000

 

2,000

Liquidity

 

800

 

60

Total credit agreements

 

25,529

 

7,588

MTN programme (MSEK 25,000 facility)

 

19,300

 

19,300

EMTN programme (MEUR 2,000 facility)

 

9,827

 

9,827

Commercial paper (MSEK 10,000 facility)

 

8,844

 

8,844

Total

 

63,500

 

45,559

Debt maturity structure for credit agreements, presented in the table below, shows when in time the credit agreements fall due for renegotiation or repayment.

 

 

 

 

Utilised in

Credit agreement maturity structure

 

Agreements, MSEK

 

Bank

 

MTN/Comm. paper

 

Total

 

Share, %

0–1 year

 

16,606

 

2,071

 

13,795

 

15,866

 

35%

1–2 years

 

9,310

 

814

 

3,996

 

4,810

 

11%

2–3 years

 

16,799

 

880

 

7,619

 

8,499

 

19%

3–4 years

 

2,456

 

11

 

2,445

 

2,456

 

5%

4–5 years

 

8,204

 

11

 

3,793

 

3,804

 

8%

>5 years

 

10,125

 

3,801

 

6,323

 

10,124

 

22%

Total

 

63,500

 

7,588

 

37,971

 

45,559

 

100%

Interest rate risk

Changes in market interest rates and credit margins affect net financial items. How quickly, and by how much, largely depends on the chosen duration. To limit the immediate impact of changes in market interest rates, Castellum has chosen to work with both short- and long-term interest rate maturity structures. For the same reason, Castellum has chosen to enter credit agreements and issue commercial paper and MTNs/EMTNs with varying maturities. However, changes in both interest rates and credit margins will always have an impact on net financial items over time.

The interest coverage ratio is the financial measure that describes a company’s risk level and resilience to changes in net interest. Castellum has the objective of an interest coverage ratio of at least 200%. For 2020, the interest coverage ratio was 530% (502). The average interest rate duration at 31 December 2020 was 2.6 years (3.3). The average effective rate at 31 December was 1.69% (1.82) excluding unutilised credit agreements, and 1.82% (1.99) including unutilised credit agreements.

The cash-flow effect on income for the next twelve months at an interest rate change of +/– 1% amounts to MSEK –165/+118. In the interest rate maturity structure, interest rate derivatives are accounted for in the earliest time segment in which they can mature. Credit margins are distributed in the interval of the underlying loan.

Credit agreements

 

MSEK2)

 

Share, %

 

Average interest rate, %1)

 

Average fixed interest rate term

0–1 year

 

22,588

 

50%

 

1.62%

 

0.2

1–2 years

 

3,148

 

7%

 

0.92%

 

1.5

2–3 years

 

5,603

 

12%

 

2.47%

 

2.8

3–4 years

 

1,797

 

4%

 

1.06%

 

3.5

4–5 years

 

2,599

 

6%

 

1.31%

 

4.5

>5 years

 

9,824

 

21%

 

1.86%

 

7.8

Total

 

45,559

 

100%

 

1.69%

 

2.6

1.

Including fees for utilised credit agreements and exchange rate differences for MTNs.

2.

Calculated on the net volume of interest-bearing liabilities and derivatives.

Currency risk

Castellum owns properties in Denmark and Finland valued at MSEK 9,091 (7,247), which means that the Group is exposed to currency risk. Castellum is also exposed to currency risk through borrowing in euro. Currency risk in borrowing is fully hedged and hedge accounted through both cash flow hedging and hedging of fair value. The currency risk primarily occurs when income statements and balance sheets in foreign currency are translated into Swedish kronor. In cases where currency derivatives are used, Castellum applies hedge accounting for net investments in foreign operations. Normally, the transaction exposure in the Group is limited and will primarily be managed by matching income and costs.

The impact on financial position due to an appreciation of SEK by 10% in relation to DKK and EUR, respectively is MSEK –304.

Counterparty risk

Counterparty risk refers to the risk deemed to exist – at any given moment – that Castellum’s counterparties will not fulfil their contractual obligations. The model is indicated in the “Receivables” section under “Accounting policies.”

Castellum limits counterparty risk by requiring high credit ratings of counterparties. High ratings means that no rating agency indicates a rating that is below investment grade. Castellum’s counterparties are the major Nordic banks.

Future cash flow

Future cash flows attributable to liabilities are shown in the table below. The assumption is made that a maturing loan is replaced by a new loan during the term of maturity of the underlying credit agreement and at a Stibor interest rate as listed at year end.

Future cash-flow loans

Year

 

Loan, opening balance

 

Mature

 

Loan, closing balance

 

Interest costs, MSEK

2021

 

45,559

 

–15,866

 

29,693

 

–570

2022

 

29,693

 

–5,670

 

24,023

 

–454

2023

 

24,023

 

–7,639

 

16,384

 

–360

2024

 

16,384

 

–2,456

 

13,928

 

–212

2025

 

13,928

 

–3,804

 

10,124

 

–161

2026+

 

10,124

 

–10,124

 

0

 

–249

Total

 

 

 

–45,559

 

 

 

–2,006