Risks and risk management

The Group’s financing and management of financial risks is centralized within Kinnevik’s finance function and is conducted on the basis of a finance policy established by the Board of Directors. The Group has established a model for risk management, the aims of which are to identify, control and reduce risks. The identified risks and how they are managed are reported to the Kinnevik Board on a quarterly basis.

Kinnevik is exposed to financial risks mainly in respect of

– the equity risk, meaning the risk of changes in the value of the stock portfolio

– the interest rate risk resulting from changes in market interest rates

– the exchange rate risk comprising transaction exposure and translation exposure

– liquidity and refinancing risk, meaning the risk that the cost of financing opportunities will increase or that such opportunities will be limited when loans are re-negotiated, and that payment obligations cannot be met due to insufficient liquidity.

Equity risk

Kinnevik’s strategy is to participate actively in the companies in which the Group invests. Operations include management of a stock portfolio comprising considerable investments in a small number of listed companies. Accordingly, the portfolio is concentrated to a small number of companies, which makes the return dependent on how well these companies and their particular industries develop. By being an active owner, the return can be maximized and the risks controlled.

The Group’s assets, through ownership of shares in a number of companies conducting operations in more than 60 countries, are exposed to political risks. More than 50% of the market value of Kinnevik’s combined assets of approximately SEK 36 billion at 31 December 2008, were exposed to growth markets in Latin America, Africa, Russia and the Baltic countries.

The concentrated portfolio also results in a significant liquidity risk in the portfolio, in that it is difficult for Kinnevik during a limited time to make major changes in the portfolio’s composition without this affecting the share price.

Parts of the stock portfolio are used as collateral for Kinnevik’s loans from credit institutions. On 31 December 2008, 50% (16%) of the stock portfolio was used as collateral for the Group’s loans; also refer to Note 24.

The equity risk associated with Kinnevik’s portfolio may be illustrated by stating that a 1% change in the prices of all of the listed shareholdings at 31 December 2008 would have affected earnings and shareholders’ equity by SEK 245 million.

Kinnevik’s policy is to maintain short interest periods because the Company believes that this leads to lower interest expense over time. The Group has no borrowing subject to periods of fixed interest exceeding three months. On 31 December 2008, all of Kinnevik’s liabilities to credit institutions, SEK 8,963 million, was exposed to interest rate changes, of which SEK 8,418 million to changes in Stibor, SEK 328 million to changes in Euribor and SEK 217 million to changes in Libor USD. It would take three months for an increase in short-term interest rates to gain its full impact on Kinnevik’s interest expense. Accordingly, if the interest rate at 31 December 2008 had risen with 1% the average interest expense on an annualized basis would have risen by SEK 90 million. According to Kinnevik, an effect of any increase of the interest rate in the Company is managed efficiently, primarily via the operating cash flow from Korsnäs and secondarily via dividends from, leveraging or sale of listed shares.

The Group’s revenues and operating expenses arise mainly in SEK and EUR. The Group’s policy is to endeavour to match revenues and costs in the same currency. The net flow of the Group’s inflow and outflow in foreign currency amounted to a net inflow of approximately SEK 800 million (1,200) for the year, which consisted mainly of EUR. The Group’s policy is not to hedge this transaction exposure by using, for example, forward contracts. The reason for this approach is that the Group is dealing with a continuously even net inflow of foreign currency for which, over time, hedging measures would also be affected by exchange rate changes. A change in the EUR/SEK rate by SEK 0.10 would have affected consolidated profit in 2008 by approximately SEK 6 million.

Translation exposure arises when the earnings and shareholders’ equity of foreign subsidiaries are translated into SEK, and insofar as capital employed within the Group is financed in a currency other than the capital employed in the particular company.Kinnevik’s policy is to use external borrowing in various currencies to finance capital employed in the same currency. If this is not possible and significant temporary currency exposures exist, the Group’s finance policy permits the use of forward contracts. On 31 December 2008, there were no outstanding forward contracts. Translation exposure arising from the translation of the foreign subsidiaries’ earnings and shareholders’ equity is not hedged since the exposure is considered being of no material importance to Kinnevik. A change in the PLN/SEK rate by SEK 0.10 would have affected consolidated net assets by SEK 2 million on 31 December 2008. A change in the LVL/SEK rate by SEK 0.10 would have affected consolidated net assets by SEK 1 million on the same date. A change in the EUR/SEK rate or USD/SEK rate would have no material effect on the consolidated net assets.

In addition to the translation exposure existing in the operative subsidiaries, Kinnevik owns shares in listed companies that engage in foreign operations. Millicom, a company that reports in USD, is listed in the United States and conducts operations in Latin America, Asia and Africa, accounts for the principal exchange rate risk. On 31 December 2008, the book value of the holdings in Millicom was SEK 13,432 million.

Kinnevik’s liquidity risk is limited because listed shares account for a large part of the Company’s assets. On 31 December 2008, the Company also had cash and cash equivalents and committed but unutilized credit facilities amounting to SEK 2,031 million.

Kinnevik’s refinancing risk is limited by having loans from a number of different credit institutions maturing at different times as well as striving for refinancing all loans at least six months prior to maturity. On 31 December 2008, the available credit facility amounts from credit institutions totalled SEK 10,485 (11,357) million and the average remaining term to maturity was 2.2 (3.1) years. In February 2009 credit facilties totaling SEK 1,550 million maturing in 2009 have been prolonged for 3 years.