Note 3 Financial risk management and financial instruments

Through its activities, the Atos Group is exposed to various types of financial risks, such as market, liquidity, and credit risks. The market risks primarily consist of interest rate and currency risks. The corporation’s Board of Directors is ultimately responsible for the risk exposure, risk management, and monitoring of the group’s financial risks, but this responsibility is primarily carried out by the Audit Committee. The framework that applies for risk exposure, risk management, and monitoring of the financial risks is implemented by the board in the form of a financial policy that is revised on an annual basis.  With this financial policy, the board has delegated responsibility for everyday risk management to the company’s CFO, who monitors compliance with applicable frameworks. rules, and the financial policy itself, through the company’s finance function. Ongoing market operations within the framework of the policy are carried out by the centralized treasury function. The board is able to pass resolutions for arbitrary departures from the established financial policy.

Market risks

Currency risks

Currency risk refers to the risk that either the fair market value or future cash flow fluctuates as a result of changes in exchange rates. Through its activities, Atos is exposed to various types of currency risks. The group’s exposure to currency risk stems from the group’s purchases and sales denominated in foreign currencies, so-called transaction exposure. These currency risks consist partly of risk from fluctuations in the value of financial instruments, accounts receivable, and accounts payable and partly of the currency risk of forecast and contractual incoming cash flow. Currency risks also appear as a result of the translation of the income statements and balance sheets of foreign subsidiaries into the group’s functional currency, the Swedish krona. These risks are referred to as translation exposure. The group is also exposed to currency risks with regard to the cash flow from loans and investments denominated in foreign currency, so-called financial exposure.

Transaction exposure

Transaction exposure involves the risk that net income is negatively affected by fluctuations in the exchange rates of cash flow denominated in foreign currencies. The group’s incoming cash flow is mainly in EUR, GBP, and USD, while its outgoing cash flow includes mainly these currencies as well as SEK, since the group has centralized manufacturing in Sweden and the subsidiaries are supplied with products for sale in the local currency by this unit. The manufacturing unit mainly accrues costs in SEK. In all other respects, subsidiaries’ costs and sales are substantially in the same currency. The group pays interest on the loans on a monthly basis and the payments are made in the main currencies EUR, GBP and USD. Pursuant to the group’s policy, this transaction exposure has not been hedged via the use of currency derivatives. The group is therefore affected by fluctuations in these exchange rates since the manufacturing structure results in a net transaction exposure.Transaction exposure within the group is managed via a multi-currency cash pool linked to a credit line in SEK. Within the group, an internal monthly payment schedule for subsidiaries is employed to ensure that foreign cash flow is monitored. The group then carries out purchase or sales transactions in applicable currencies on an ongoing basis to ensure that the monthly cash pool is in net SEK.

The table below shows the nominal net amounts of the significant cash flows that make up the transaction exposure. This exposure is indicated based on the group’s cash flow for the most significant currencies.The amounts are in SEK translated at the closing rate of December 31, 2017.

On the balance sheet date, the net book value of the group’s total monetary assets (+) and liabilities (-) used in the translation to SEK amounted to (the amounts are in SEK translated to the closing rate of December 31, 2017):

Translation exposure

Translation exposure involves the risk that the value of the group’s foreign currency-denominated net investments are negatively affected by exchange rate fluctuations. The group consolidates its net assets in SEK on the balance sheet date. This risk is referred to as the translation exposure and, pursuant to the group’s policy, so-called hedging of net investments is not employed.

The table below shows the translation exposure for net investments in foreign currencies (the amounts are in SEK translated at the closing rate of December 31, 2017).

Financial exposure

The group’s financial exposure mainly consists of foreign-currency denominated loans, where the distribution of loan structures is essentially adapted to the currency denominations of the sales. Interest payments are made on a monthly basis for foreign currency loans, which reduces the net exposure linked to the foreign currency transaction exposure. These amounts are included in the table above, which shows total net monetary assets and liabilities. Hedge accounting has not been used.

Under “Market risks sensitivity analysis” below, the effects of exchange rate changes relative to the Swedish krona is presented for the most significant foreign currencies.

Interest rate risks

Interest rate risk refers to the risk that either the fair market value or future cash flow fluctuates as a result of changes in prevailing market interest rates. The group is primarily exposed to interest rate risk through its debt financing. Since the loans have variable base interest rates, the group’s future financial expenses are affected by fluctuations in the prevailing market rates.  As of the balance sheet date, the corporation’s interest-bearing debt amounted to SEK 4,516,301k (4,237,959k) at an average interest rate of 5.85% (6.75%) before and 5.85% (6.75%) after the effect of derivatives. In order to lower the interest rate risk, the group employs swap agreements, where variable interest rates are swapped out with fixed interest rates. Pursuant to the financial policy, 50% of the interest rate risk (excl PIK loan) is hedged, which means that half of the debt yields are translated monthly and the other half yields year 2020, giving a 1.5-year average interest rate commitment. Hedge accounting is not used for these derivative instruments. The coupon payments are recognized in the net interest income/expense and the change in fair market value is accounted for in the income statement.

The table below shows the group’s financial liabilities divided into relevant maturity groupings based on their contractual maturities, including the effect of derivatives (the amounts are in SEK translated at the closing rate of December 31, 2017).

The effects of changes in the prevailing market interest rates are shown below under “Market risks sensitivity analysis”.

Market risks sensitivity analysis

The sensitivity analysis for currency risk shows the group’s sensitivity to an increase or decrease of 10% in the Swedish krona relative to the most significant currencies. The transaction exposure shows how the group’s net profit/loss after income taxes would be affected by a change in the exchange rate. This also includes outstanding foreign currency-denominated accounts receivable and accounts payable on the balance sheet date. The translation exposure shows how the group’s net profit/loss after income taxes and shareholder’s equity would be affected by a change in the exchange rate.

The sensitivity analysis for interest rate risk shows the group’s sensitivity to an increase or decrease of 100 points in the applicable prevailing market rates. The interest rate sensitivity is based on the effect a change in the prevailing market interest rate would have on net profit/loss after income taxes, both with respect to interest income and expense as well as unrealized changes in the fair market value of derivatives. The sensitivity analysis is based on an interest rate scenario that the company’s management feels is a reasonable assumption for the next 12 months, where all other factors, e.g. exchange rates, remain unchanged.

Liquidity and financing risks

Liquidity risk refers to the risk that the group has issues meeting its obligations with respect to its financial debts. Financing risk refers to the risk that the group is unable to raise adequate financing at a reasonable cost.

The group’s liquidity risk and liquidity planning is centrally managed. Liquidity needs for the upcoming year are reviewed at least annually in connection with budgeting. Liquidity planning is done monthly in connection with intra-group payments and transfers and also on an ongoing basis with a longer-term view based on the group’s financial developments and planned activities. Liquidity planning is done to ensure that the group’s liquidity risk is managed and no unnecessary costs arise from the financing of group activities.  The objective is for the group to manage its financial obligations under all reasonably plausible financial scenarios without considerable unforeseen expenses. The group’s policy of managing liquidity risks centrally results in any excess liquidity in the business being used to minimize outstanding loan amounts through the centralized cash pool structure.

The group’s overall financing is regulated by an agreement with a bank syndicate. The agreement does not contain any direct covenants, but does have restrictions on short-term loans in excess of a specified threshold amount. The interest rates are based on the group’s debt-to-equity ratio (net debt to EBITDA), which is currently at an acceptable level. In the credit agreement with the bank syndicate, there is an opportunity ta agree on additional credit facilities for financing future business acquisitions. The credit agreement has a remaining term of 4.5 – 7 years (5.5 – 8 years).

The group’s financial liabilities excluding derivatives amounted to SEK 4,516,301k (4,237,959k) as of the balance sheet date. The distribution of maturities of contractual payment obligations for the group’s financial liabilities excluding derivatives is presented in the tables below. The amounts in these tables are not discounted values and, if applicable, also contain interest payments, which means that these amounts cannot be reconciled against the amounts reported on the balance sheet. Interest payments are determined based on the applicable conditions on the balance sheet date. Amounts in foreign currencies are translated into Swedish kronor at the exchange rate in effect on the balance sheet date.

The group’s loan agreements include several special conditions that could result in payment due dates being significantly earlier than what appears in the tables.

As of the balance sheet date, the net fair market value of the swaps amounted to SEK 3,259k (4,489k), consisting of  assets due on July 31, 2020.

Credit and counterparty risk

Credit risk refers to the risk that the counterparty in a transaction causes the group to incur a loss by failing to perform its contractual obligations. The group’s exposure to credit risk is primarily attributable to accounts receivable. To limit this risk, credit reports are run for new sales as needed. The financial situations of existing customers are also monitored on an ongoing basis in order to identify any early warning signs. A large part of the group’s sales are made to public sector institutions, such as hospitals or government agencies in the various countries. The group’s largest customer (NHS, the health insurance authority in the UK) accounts for 12% (12%) of sales.

Otherwise, the accounts receivable are spread over a large number of customers with no single customer accounting for a significant portion of the total accounts receivable. Likewise, accounts receivable are not concentrated within a specific geographic area. The group thus considers the concentration risks to be limited.

The group’s maximum exposure to credit risk is estimated to correspond to the carrying amounts of all financial assets and appears in the table below.

For more information on the accounts receivable, refer to Note 21.

Classification of financial instruments

The reported values of financial assets and financial liabilities broken down by valuation category, pursuant to IAS 39, are shown in the table below.

Net gains/losses on financial assets and financial liabilities broken down by valuation category, pursuant to IAS 39, are shown in the table below.

Exchange rate effects above refer to loan receivables / accounts receivable and financial liabilities reported at accrued acquisition value.

Mark-to-market valuation of financial instruments

Financial assets and liabilities either valued at fair market value on the balance sheet or provided with information about their fair market value are classified into three different levels based on the information used to mark them to market.

Level 1 – Financial instruments marked to market based on observable (unadjusted) listed prices on an active market for equivalent assets and liabilities. A market is considered to be active if listed prices from an exchange, broker, industry group, pricing service, or supervisory authority are easily and regularly available and such prices represent actual and regularly occurring arms-length market transactions.

Level 2 – Financial instruments marked to market on the basis of valuation models based on other observable data for assets or liabilities aside from the listed prices included in Level 1, either directly (i.e., as price quotes) or indirectly (i.e., derived from price quotes).
Examples of observable data for Level 2 include:

• Listed prices for similar assets and liabilities
• Data that can form a basis for price assessment, e.g., market interest rates and yield curves

Level 3 – Financial instruments marked to market on the basis of valuation models, where essential inputs are based on non-observable data.

Financial assets and liabilities marked to market on the balance sheet consist of derivatives in the form of interest rate swaps. For other financial assets and liabilities, the reported amounts are estimated to be fair approximations of the fair market values since the maturities and/or mark-to-market interest rate adjustment periods are less than three months, whereby the discounted fair market value (FMV) based on prevailing market conditions is not estimated to have a significant effect.

Interest rate swaps are valued according to the procedure for Level 2. These are so-called OTC instruments and are valued using discounted cash flow (DCF) models based on contractual cash flow as well as interest and exchange rates determined on the basis of actual market listings on the balance sheet date.