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 stock market, meaning the risk of changes in the value of the major listed holdings.
– The interest rates, resulting from changes in underlying interest rates.
– The exchange rates, comprising transaction exposure and translation exposure.
– Liquidity and refinancing, meaning the risk that the cost of financing will increase or that opportunities will be limited when loans are re-negotiated, and that payment obligations cannot be met due to insufficient liquidity.
Stock market 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 65 billion at 31 December 2010, were exposed to growth markets in Latin America, Sub Saharan Africa, Russia and Eastern Europe.
The concentrated portfolio 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 2010, 10% (30%) of the stock portfolio was used as collateral for the Group’s loans; also refer to Note 26.
The stock market 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 2010 would have affected earnings and shareholders’ equity by SEK 515 m.
Interest rate risk
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 2010, all of Kinnevik’s liabilities to credit institutions, SEK 7,182 m, were exposed to interest rate changes, of which SEK 6,844 m to changes in Stibor and SEK 338 m to changes in Euribor. 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 2010 had risen with 1% the average interest expense on an annualized basis would have risen by SEK 72 m . According to Kinnevik, short-term negative effects from increases in the interest rate can be handled thanks to positive operating cash flow from Korsnäs, but is continuously measuring the risk to manage the potential impact a sharp increase in the interest rate might have on the business..
Foreign exchange rate risk
Transaction exposure
The Group’s revenues and operating expenses arise mainly in SEK and EUR . The Group’s policy is to endeavor 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 600 m (600) for the year, which consisted mainly of EUR. The Group’s policy is not to hedge this type of transaction exposure. 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. However, specific transactions where the foreign exchange rate risks are material may be hedged on a case by case basis. As per 31 December 2010, Kinnevik had no outstanding hedging contracts.
A change in the EUR/SEK rate by SEK +/-5% would have affected consolidated profit in 2010 by approximately SEK +/-30 m.
Translation exposure
Translation exposure arises when the earnings and shareholders’ equity of foreign subsidiaries are translated into SEK. This exposure also arises in situations when the capital employed and the financing of it is in different currencies. Kinnevik’s policy is to minimise the foreign exchange rate risk by raising external borrowing in various currencies to finance capital employed. If this is not possible and significant temporary exposures exist, the Group’s finance policy permits the use of forward contracts. On 31 December 2010, there were no outstanding forward contracts with this purpose. 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 5% would have affected consolidated net assets by SEK 9 m (9) on 31 December 2010. A change in the LVL/SEK rate by 5% would have affected consolidated net assets by SEK 7 m (7) 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, has its main listing in the United States and conducts operations in Latin America and Africa, accounts for the principal exchange rate risk. On 31 December 2010, the book value of the holdings in Millicom was SEK 24,309 m.
Liquidity and refinancing risk
Kinnevik’s liquidity risk is limited because listed shares account for a large part of the Company’s assets. On 31 December 2010, the Company also had cash and cash equivalents and committed but unutilized credit facilities amounting to SEK 4,923 m.
Kinnevik’s refinancing risk is limited by having loans from a number of different credit institutions with diversified maturities as well as by striving for refinancing of all credit facilities at least six months prior to maturity. On 31 December 2010, the available amount under the existing credit facilities totalled SEK 11,955 m (11,915) and the average remaining term was 3.2 (1.8) years.