In its operations, the TransAtlantic Group is exposed to various types of financial risks, such as changes in exchange rates and interest rates, as well as liquidity and credit risks.
The Group’s goal is to minimize such negative effects in the consolidated income statement and balance sheet.
Risk management is handled by the Group’s central finance department on
the basis of the finance policy established by the Board of Directors. The policy contains clear instructions on how various financial risks are to be handled.
Different types of derivative instruments are key elements in minimizing the financial risks. The policy also includes instructions for handling credit liquidity risks through financing and credit facilities.
The Group applies hedge accounting in accordance with the regulations included in IAS 39, the content of which is described in Note 1, Derivative instruments.
The Group has a policy that establishes how credit can be provided to customers and other business partners. Credits provided are often short-term in the form of receivables from the customer. Credit risk in cash and cash equivalents is managed by investing the liquidity with the major Swedish banks.
Liquidity risk is attributable to the event that the Group has an inadequate liquidity reserve. This can lead to difficulties in honoring current payment
liabilities in operating activities, planned investments and amortization. The Finance Department continuously prepares liquidity forecasts for the Group that are aimed at foreseeing the Group’s liquidity requirement for operating activities, taking into account future investment requirements and amortization.
Based on this work, a liquidity reserve is ensured by maintaining bank
balances/investments and obtained lines of credit. For information regarding the maturity structure of liabilities, see also note 25. Surplus liquidity is invested in accordance with the established finance policy.
Currency exposures for assets shall primarily be financed through financing being made in the same currency as the asset. Most of the vessels have such a hedge for 2009
In accordance with the finance policy, currency risks affecting cash flow must primarily be managed by balancing currency flows so that inward and outward flows offset one another. For anticipated imbalances, these positions shall be hedged at least 70% for the immediate six-month period, at 60% for the following six months, at 45% for Year 2 and 20% for Year 3. The Group is mainly exposed to USD, EUR and NOK. In 2009, in accordance with the policy, a number of hedge contracts were taken out in EUR on a continuous basis to reduce cash-flow risks during 2010. No hedging took place for other currencies since no significant imbalances exist, nor is there any uncertainty regarding time of payment.
On the reporting date, February 22, 2010, the Group had the following open currency forward contracts:
| Contract value in SEK M | Future rates (weighted average) | |||
| SEK 000s | 2009 | 2008 | 2009 | 2008 |
| Currency forward contracts, USD | — | 85 | — | — |
| Currency options, USD | 46 | 127 | — | — |
| Total, USD | 46 | 212 | 6.20 | 6.87 |
| Currency forward contracts, EUR | 31 | 37 | 10.28 | 10.32 |
| Currency forward contracts, NOK | 30 | — | 1.24 | — |
Exchange-rate derivatives mature between one month and twelve months from the closing date. If hedging had not occurred, the future earnings would be SEK 8 M if the closing-date rate had applied at the futures’ time of redemption.
The finance policy states that interest-rate risk must be hedged through financial instruments that limit exposure to raised interest rates. The Group’s policy is to hedge 25–50% of interest-bearing loans against changes in interest rates for a maximum period of one year, 25–50% for a period of one to three years and 25–50% for a period of more than three years.
The Group uses various kinds of interest-hedging instruments. At December 31, the Group held the following interest-rate terms:
Hedged underlying loan values for which the Group bears the interest-rate risk (Including interest-rate exposed lease commitments)
| SEK M | Variable rate of interest | One year or less | 1–3 years | 3 years or longer | Total |
| Interest-rate swap | — | 212 | 206 | 208 | 626 |
| Fixed-interest loan | — | — | 263 | 95 | 358 |
| Total interest-hedged | |||||
| loan values | — | 212 | 469 | 303 | 984 |
| Interest-rate exposed loans | 947 | — | — | — | 947 |
| Total interest-bearing | |||||
| loan values | 947 | 212 | 469 | 303 | 1,931 |
| % of total interest-bearing loan values | 49% | 11% | 24% | 16% | 100% |
Weighted average interest rate for interest-bearing loans amounted to:
| Group | Parent Company | ||
| 2009 | 2008 | 2009 | 2008 |
| 3.35 | 5.26 | 1.57 | — |
To minimize cost fluctuations for bunkers, the Group has principally signed
customer contracts that entail compensation for the Group in the event of changes in bunkers prices. Only a small proportion of the Group’s future bunkers
consumption will be exposed to price changes. At the closing date, the Group had no bunkers derivatives.
| Accounts receivable and cash and cash equivalents | Derivatives used for hedging purposes | Fiancial assets available for sale | Total | |||||
| Dec. 31, 2009 | Dec. 31, 2008 | Dec. 31, 2009 | Dec. 31, 2008 | Dec. 31, 2009 | Dec. 31, 2008 | Dec. 31, 2009 | Dec. 31, 2008 | |
| Assets in the balance sheet | ||||||||
| Financial assets available for sale 3) | — | — | — | — | 170 | 170 | 170 | 170 |
| Derivate instruments 1) | — | — | 7,856 | 988 | — | — | 7,856 | 988 |
| Accounts receivable and other receivables, excl. Interim receivables 3) | 256,788 | 316,055 | — | — | — | — | 256,788 | 316,055 |
| Cash and cash equivalents 2) | 327,400 | 573,734 | — | — | — | — | 327,400 | 573,734 |
| 584,188 | 889,789 | 7,856 | 988 | 170 | 170 | 592,214 | 890,947 | |
| Liabilities measured at fair value in profit and loss | Derivatives used for hedging purposes | Other financial liabilities | Total | |||||
| 2009-12-31 | 2008-12-31 | 2009-12-31 | 2008-12-31 | 2009-12-31 | 2008-12-31 | 2009-12-31 | 2008-12-31 | |
| Liabilities in the balance sheet | ||||||||
| Borrowing, excl. liabilities relating | ||||||||
| to financial leasing 2) | — | — | — | — | 1,164,939 | 972,653 | 1,164,939 | 972,653 |
| Liabilities for financial leasing 2) | — | — | — | — | 169,213 | 264,675 | 169,213 | 264,675 |
| Derivate instruments 1) | — | 31,668 | 15,453 | 30,551 | — | — | 15,453 | 62,219 |
| Accounts payable and other liabilities, excl. interim liabilities 3) | — | — | — | — | 453,442 | 482,489 | 453,442 | 482,489 |
| — | 31,668 | 15,453 | 30,551 | 1,787,594 | 1,719,817 | 1,803,047 | 1,782,036 | |
Fair values of derivative instruments on the closing date were allocated as follows:
| Group | ||||
| 2009 | 2008 | |||
| SEK 000s | Assets | Liabilities | Assets | Liabilities |
| Currency options | — | 8,372 | 988 | — |
| Currency forward agreements | 175 | — | — | –13,118 |
| Bunker forward agreements | — | — | — | –31,668 |
| Interest-rate SWAP | 7,681 | 7,081 | — | –17,433 |
| Total | 7,856 | 15,453 | 988 | –62,219 |
The Parent Company holds financial instruments corresponding to a negative fair value of SEK 8 M. This value has not been recognized in the Parent Company.