Bond 2022, outstanding EUR 125.4 million
In September 2017, HKScan issued an unsecured bond of a EUR 135 million. After the conversions carried out in the context of the share issue in June 2019, the outstanding amount is EUR 125.4 million and it matures on 21 September 2022. It carries a fixed annual interest at the rate of 2.625 per cent and has an issue price of 100.00 per cent.
The proceeds from the bond offering were partially used for the partial repurchase of HKScan Corporation’s existing EUR 100 million 3.625 per cent fixed-rate notes. The remaining proceeds may be used for HKScan’s general corporate purposes.
Nordea Bank AB (publ) and OP Corporate Bank plc act as Joint Lead Managers for the issue of the bond.
Hybrid bond, outstanding EUR 25,9 million
In September 2018, HKScan Corporation issued a EUR 40 million hybrid bond. After the conversions carried out in the context of the share issue in June 2019, the outstanding amount is EUR 25.9 million. The coupon of the hybrid bond is 8.00 per cent per annum, but it will be subject to a coupon reset on each fifth anniversary of the issue date of the hybrid bond.
The hybrid bond does not have a specified maturity date but HKScan is entitled to redeem the hybrid bond for the first time on the fifth anniversary of the issue date, and subsequently, on each annual coupon interest payment date.
The hybrid bond issuance will strengthen HKScan's capital structure and financial position. The net proceeds of the issuance will be used for general corporate purposes.
Bond 2019, outstanding EUR 30 million as of 30 September 2019, repaid in November 2019
In November 2014, HKScan issued an unsecured bond of EUR 100 million. After the share buy-back in September 2017 and the conversions carried out in the context of the share issue in June 2019, the outstanding amount was EUR 30 million. The five-year bond matured on 21 November 2019. It carried a fixed annual interest of 3.625 per cent.
The proceeds from the bond offering were used for repayment in part of existing debt in order to lengthen the debt maturity profile and for the Group’s general corporate purposes.
Danske Bank acted as the lead manager for the transaction.
Interest-bearing debt (30 September 2019)
FINANCIAL RISK MANAGEMENT
The duty of Group Treasury in the HKScan Group is to ensure cost-effective funding and financial risk management for Group companies and to attend to relations with financiers. The treasury policy approved by the Board provides the principles for financial risk management in the Group. The policy is supplemented by separate guidelines and instructions, as well as approval practices.
Financial risks mean unfavourable movements taking place in the financial markets that may erode accrual of the company’s result or reduce cash flows. Financial risk management aims to use financial means to hedge the company’s intended earnings performance and equity, and to safeguard the Group’s liquidity in all circumstances and market conditions.
External funding of the Group’s operations and financial risk management is centralised to the Group Treasury operating under the Group Treasurer. Group Treasury identifies and assesses the risks and acquires the instruments required for hedging against the risks, in close co-operation with the operational units.
Risk management may employ various instruments, such as currency forwards and options, interest-rate or currency swaps, foreign currency loans and commodity derivatives. Derivatives are used for the sole purpose of hedging, not for speculation. Funding of the Group’s subsidiaries is managed mainly through the parent company. The subsidiaries may not accept new external funding, nor may they give guarantees or pledges without the permission of the Group Treasury in the parent company.
Foreign Exchange Risk
The Group’s domestic market consists of Finland, Sweden, Denmark and the Baltic countries. The company produces, sells and markets pork, beef, poultry and lamb products, processed meats and convenience foods to retail, food service, industry and export sectors. Meat products are mainly produced for domestic markets which reduces the overall currency risk in the Group.
Transaction risk arises when the Group companies engage in foreign currency denominated import and export both outside and within the Group. The aim of transaction risk management is to hedge the Group’s business against foreign exchange rate movements and allow the business units time to react and adapt to fluctuations in exchange rates. Foreign exchange risk exposures, which include sales, purchases (balance sheet items and committed cash flows), financing related contractual cash flows, and highly probable forecasted cash flows, are hedged through forward contracts made with the parent company. The business units report their balance sheet risk exposures, forecasted foreign currency sales and purchases and hedging levels to the Group Treasury on a regular basis.
According to Treasury Policy, subsidiaries must hedge balance sheet items in full amount and committed cash flows from 50 to 100 per cent. In addition, forecasted, highly probable cash flows are hedged at 0 - 50 per cent for up to 12 months into the future. Group Treasury can use currency forwards, options and swaps as hedging instruments. Treasury targets to hedge fully its significant foreign exchange risk exposures. Those include commercial exposures, external financing and internal financing which is given in the subsidiary’s home currency. All the forward contracts mature within one year. Hedge accounting is not applied currently. Nevertheless, all hedging instruments are done for hedging purposes.
Translation risk arises from the consolidation of equity into the basic currency in subsidiaries whose operational currency is not the euro. The largest foreign currency denominated equities of the Group companies are in Swedish krona and Danish krone. Fluctuations of exchange rates affect the amount of consolidated equity, and translation differences are generated in connection with the consolidation of equity in accounting. Group Treasury identifies and manages foreign exchange translation risks according to Treasury Policy. HKScan Group is not hedging translation risk currently.
Interest Rate Risk
The Group’s main exposure to interest rate risk arises through interest-bearing liabilities. The goal of interest rate risk management is to reduce the fluctuation of interest expenses in the income statement, minimize debt servicing costs and improve the predictability. The Group’s short-term money market investments expose it to cash flow interest rate risk, but the impact is not significant as these investments are targeted to keep in minimum. Group revenues and operative cash flows are mainly independent of fluctuations in market rates.
Interest rate risk is measured by the effect of interest rate movements on the total forecasted debt portfolio. The relevant measurement horizons are selected in accordance with the rolling business strategy planning and possible major investment programmes.
To manage interest rate risks, Group borrowings are spread across fixed and variable interest instruments. The company may borrow at fixed or variable interest rates and use interest rate derivatives to achieve a result that is in line with the Treasury policy. The goal of the policy is to keep the fixed interest term of the loans between 12 and 48 months. On the balance sheet date the fixed interest term was 25 months.
The Group monitors and analyses its interest rate risk position on a regular basis. The Group has determined sensitivity limits for interest rate movements. The sensitivity of net financial expenses on the balance sheet date to an increase/decrease of one per cent in interest rates, all other things being equal, was approximately EUR 1.7 (1.1) million before taxes over the next 12 months. The sensitivity analysis was prepared based on the amounts and maturities of interest-bearing liabilities and interest rate derivatives on the balance sheet date.
Financial counterparty risk refers to the risk that counterparty may fail to fulfill its contractual obligations. The risks are mostly related to investment activities and counterparty risks in derivative contracts. Banks that finance the Group are used as counterparties whenever possible, as well as a few other specified counterparties. Cash may be invested in bank deposits, certificates of deposit, municipal papers, and the commercial paper programmes of certain specified companies listed on the main list of the Nasdaq Helsinki, and to certain state-owned companies. Because of the limited extent of the investment activities, the resulting counterparty and price risks are not significant.
The Group is exposed to commodity risks that are related to the availability and price fluctuations of commodities. In addition to meat raw materials, physical electricity consumption is one of the most significant commodity risks in the Group companies. The subsidiaries can hedge against fluctuation in market prices for electricity and other commodities by procuring fixed-price products or through derivative contracts with the Group Treasury. The companies may use external parties to assist them in commodity risk management.
The Group uses electricity derivatives in Finland, Sweden, Denmark and Estonia to level out energy costs. The electricity price risk is evaluated for five-year periods. The value changes of derivatives hedging the price of electricity supplied during the period are included in the adjustment items of purchases. Hedge accounting is applied to contracts hedging future purchases.
The Group’s Treasury Policy and related guidelines specify the credit quality requirements and investment principles applied to customers and counterparties to investment transactions and derivative contracts. The Group Treasury is responsible for defining the principles for credit management within the Group and updating the Credit Policy as well as instructing the Group’s subsidiaries in credit management.
Credit risk results from a customer’s possible failure to fulfil its payment obligations. The Group’s trade receivables are spread among a wide customer base, the most important customers being central retail organisations in the various market areas. The creditworthiness, payment behaviour and credit limits of the clients are monitored systematically. As a main principle some type of securing is needed for all credit granted. The security can be credit insurance, a bank guarantee, or a security deposit. In addition, the Group is exposed to minor credit risk in remaining financing investments of primary production contract producers.
Liquidity and Refinancing Risk
The Group constantly assesses and monitors the amount of funding required for operations by means such as preparation and analysis of cash flow forecasts. The Group maintains adequate liquidity under all circumstances to cover its business and financing needs in the foreseeable future.
The availability of funding is ensured by spreading the maturity of the borrowing portfolio, financing sources and instruments. In general, cash and cash equivalents are targeted to be kept at a minimum. The Group also has revolving credit facilities with banks, bank borrowings, current accounts with overdraft facilities and the short-term EUR 200 million Finnish commercial paper programme. Liquidity risk is managed by retaining long-term liquidity reserves and by exceeding short-term liquidity requirements. The Group’s liquidity reserve includes cash and cash equivalents, money market investments and long-term unused committed credit facilities. Short-term liquidity requirements include the repayments of short- and long-term debt within the next 12 months, expected dividends as well as a specifically defined strategic liquidity requirement, which covers the operative funding needs.
The Group’s liquidity together with funding profile and maturity structure remained good in 2018. Undrawn committed credit facilities on 31 December 2018 stood at EUR 100.0 (100.0) million. In addition, the Group had other undrawn overdraft and other facilities of EUR 19.9 (20.1) million. The overdraft facility agreements are in force until further notice. At year end, the company’s EUR 200 million commercial paper programme had been drawn to the amount of EUR 35.5 (0.0) million. Similar to previous year, cash and cash equivalents were above the normal level amounting EUR 29.4 (50.9) million.
The average rate of interest for outstanding loans (including commitment fees) paid by the Group was 2.5 (3.0) per cent at the balance sheet date.
The company’s current loan agreements are subject to the net gearing ratio financial covenant. Outstanding unsecured bonds maturing in November 2019 and September 2022 have the net gearing ratio covenant level of 130%. Financiers are provided with quarterly reports on the observance of the financial loan covenant. If the Group is in breach of the covenant, the creditor may demand accelerated loan repayment. Management monitors the fulfillment of the loan covenant on a regular basis. The risks related to impairment of assets or breaching financial covenants under finance agreements will increase and have an effect on the financial position in case the Group i s not able to improve its financial performance and strengthen its balance sheet. Breaches of covenants could result in a default of an essential part of loans. With IFRS 16 introduction from 1 January 2019 onwards, assets and interest-bearing liabilities will grow by approximately EUR 45 million. With this increase the net gearing at year end 2018 would be approximately 102 per cent.
The purpose of capital management in the Group is to support business through an optimal capital structure by safeguarding a normal operating environment and enabling organic and structural growth. An optimal capital structure also generates lower costs of capital.
Capital structure is influenced by controlling the amount of working capital tied up in the business and through reported profit/loss, distribution of dividend and share issues. The Group may also decide on the disposal of assets to reduce liabilities.
The tools to monitor the development of the Group’s capital structure are the equity ratio and net gearing ratio. Equity ratio refers to the ratio of equity to total assets. Net gearing ratio is measured as net liabilities divided by equity. Net liabilities include interest-bearing liabilities less interest-bearing short term receivables and cash and cash equivalents.
On the balance sheet date the equity ratio is 35.1 per cent. The official financial target in respect of net gearing ratio is below 100 per cent. On the balance sheet date, the net gearing ratio was 88.6 per cent. With IFRS 16 introduction from 1 January 2019 onwards, assets and interest-bearing liabilities will grow by approximately EUR 45 million. With this increase the net gearing at year end 2018 would be approximately 102 per cent.