Financial risk

Castellum’s single greatest risk is not having access to financing. Conditions and rules in the credit market can change quickly, which impacts interest rate risk and financing costs as well as the opportunity to obtain and extend credits. Risks can be divided into funding risk, reporting and changes in values on derivatives.

RISK

 

MANAGEMENT

 

EXPOSURE

FINANCING

 

 

 

PRIORITY: FOCUS

 

DEVELOPMENT: 

23. Financing
Liquidity and funding risk: Financing is either not available or very disadvantageous at a given time. Lacking proper access to the capital market through a loss of an investment-grade rating.
Chosen capital structure: Castellum breaching the 50% loan-to-value ratio or similar covenant for 65% can impact market confidence in the company; and

  • A proportion greater than 65% could entail certain agreements falling due.
  • A proportion greater than 45% secured borrowing in relation to the Group’s total assets could mean certain bond financing will fall due for payment.

Interest rate risk: the risk of earnings or cash flow impact as a result of changing market rates. Castellum could breach the established mandate of an interest coverage ratio of not less than 200% or corresponding covenants of a minimum of 150%.

 

  • A financial policy that establishes risk mandates.
  • Liquidity reserves/unutilised credit facility.
  • Multiple sources of financing in various geographical markets (banks, capital markets including bonds and commercial paper).
  • Several lenders, moreover only counterparties with high credit ratings.
  • Continuous renegotiation of credit agreements.
  • Strong balance sheet.
  • An interest rate maturity structure spread across various tenors.
  • Reduced loan-to-value ratio.
  • Reduced share of secured assets.
  • Long-term credit agreements with fixed margins.
  • Revolving credits to obtain maximum flexibility.
  • Established calculation formulas.
  • Reconciliation between internal and external appraisals.
  • Compliance function to ensure independence.

 

Property ownership is a capital-intensive business that requires a well-functioning credit market. Access to financing is fundamental for Castellum and for continued growth. Insufficient liquidity reserves could result in Castellum missing out on business opportunities. All lenders are not equally strong financially, however, which means there are counterparty risks in the system.
Changes in capital structure might cause Castellum to breach the agreed key financial metrics of the loan conditions, which would lead to more expensive loans or to credit agreements maturing. Failure to ensure an appropriate capital structure could negatively impact capital market confidence in Castellum.
The market interest rate is impacted by central bank monetary policy, expectations for financial trends – both national and international – and unexpected events.
The pandemic has affected financing possibilities. Owing to the prevailing situation globally, there is a significant level of uncertainty on the finance market.

REPORTING

 

 

 

PRIORITY: FOCUS

 

DEVELOPMENT: 

24. Reporting
The risk that an official report, in the form of interim or annual reports, does not provide a true and fair view of Castellum’s operations, earnings and financial position.

 

  • A corporate culture based on high ethical ideals and orderliness.
  • Strict internal control processes with quality assurance at several stages.
  • Skilled and experienced staff.
  • Monitor trends in regulations in order to implement new changes in good time.
  • Compliance function that reports directly to the Board’s Audit and Finance Committee.
  • External audit, full-year and half-year.

 

A misleading report would give Castellum bad will and a poor reputation in the market. This could lead to uncertainty among investors, increased risk premium and ultimately to a negative exchange rate impact, creating economic losses for Castellum’s current owners.
Other effects include investors making incorrect investment decisions, regulators imposing sanctions and ultimately the Castellum share being delisted.

CHANGES IN VALUE

 

 

 

PRIORITY: MONITOR

 

DEVELOPMENT: 

25. Change in values – derivatives
Changes in value to Castellum’s interest rate derivatives or currency derivatives arise from changes in market interest rate or exchange rates.

 

  • Financial policy that establishes which derivative instruments may be utilised for interest rate fixing and currency risk.
  • Only marketable instruments in the market to be used, which is why listed prices can be obtained.
  • Established calculation formulas.
  • Reconciliation between internal and external appraisals.
  • Compliance function to ensure independence.

 

Changes in market interest rate and exchange rates impact the market value of the derivatives portfolio. Improper valuation of derivatives may provide an inaccurate picture of the Group’s financial position.

 

 

 

 

 

Reduced focus on risk area since previous year

 

 

 

 

Unchanged focus on risk area since previous year

 

 

 

 

Increased focus on risk area since previous year