Operational responsibility for the Group’s borrowing, liquidity management and financial risk exposure rests with the finance function, which is a central unit in the parent company.
Fabege’s financial policy, as adopted by the Board of Directors, specifies how financial risks should be managed and defines the limits for the activities of the company’s finance function. Fabege aims to limit its risk exposure and, as far as possible, control the exposure with regard to choice of investments, tenants and contract terms, financing terms and business partners.
Financing and liquidity risk
Financing and liquidity risk is defined as the borrowing requirement that can be covered in a tight market. The borrowing requirement can refer to refinancing of existing loans or new borrowing.
Fabege strives to ensure a balance between short-term and long-term borrowing, distributed among a number of different sources of funding. Fabege’s financial policy states that unused credit facilities must be available to ensure good liquidity. Agreements on committed long-term credit lines with defined terms and conditions and revolving credit facilities have been concluded with a number of major lenders. Fabege’s main credit providers are the Nordic commercial banks.
The Group’s borrowing is secured mainly by mortgages on properties. Since autumn 2004 the Group has been active in the Swedish commercial paper market. The company is aiming to become a significant player in this market. At 31 March Fabege had unused credit facilities of SEK 4.0bn excluding the commercial paper programme.
Interest risk refers to the risk that changes in interest rates will affect the Group’s borrowing expense. Interest expenses constitute the Group’s single largest expense item. Under its adopted financial policy, the company aims to fix interest rates based on forecast interest rates, cash flows and capital structure. Fabege employs financial instruments, primarily interest rate swaps, to limit interest risk and as a flexible means of adjusting the average fixed-rate term of its loan portfolio. The sensitivity analysis in the Directors’ Report shows how the Group’s short-term and long-term earnings are affected by a change in interest rates.
Interest-bearing liabilities at the end of the period totalled SEK 18,021m and the average interest rate was 3.96 per cent excluding and 4.08 per cent including commitment fees on the undrawn portion of committed credit facilities. The average fixed-rate period was 3.0 years, taking the effect of derivative instruments into account, while the average fixedrate period for variable-rate loans was 69 days.
The average maturity was 5.0 years. Average loan-to-value ratio per 31 March was 56 per cent. In compliance with the accounting rules contained in IAS 39, the derivatives portfolio has been measured at market value and the change in value is recognised in the profit and loss account. At 31 March 2013, the recognised nagative fair value of adjustment of the portfolio amounted to SEK 667m. The derivatives portfolio has been measured at the present value of future cash flows. The change in value is of an accounting nature and has no impact on the company’s cash flow.
Changes in market value occur as a result of changes in market interest rates. For all other financial assets and liabilities, unless otherwise stated in the Notes, the carrying amount is considered a good approximation of fair value.
Interest expenses linked to the liabilities are incurred over the course of the remaining maturities and cash flows from the derivatives are synchronised with the loan cash flows. Trade payables and other current liabilities mature within 365 days of the balance sheet date. Fabege’s obligations arising from these financial liabilities are largely met by rent payments from tenants, most of which are payable on a quarterly basis.
Credit risk is the risk of loss as a result of the failure of a counterparty to fulfil its obligations. The risk is limited by the requirement, contained in the company’s financial policy, that only creditworthy counterparties be accepted in financial transactions. Credit risk arising from financial counterparties is limited through netting/ISDA agreements and was deemed to be non-existent at the end of the quarter. As regards trade receivables, the policy states that customary credit assessments must be made before a new tenant is accepted.
The company also assesses creditworthiness in respect of any promissory note receivables arising from the sale of properties and businesses. The maximum credit exposure in respect of trade receivables and promissory note receivables is the carrying amount. Segments are reported from the point of view of management, divided into two segments: Property Management and Development Projects. Rental income and property expenses as well as realised and unrealised changes in value including tax are directly attributable to properties in each segment (direct income and expenses). In cases where a property changes character during the year earnings attributable to the property are allocated to either segment based on the period of time that the property belonged to the segment. Central administration and items in net financial expense have been allocated to the segments in a standardised manner based on each segment’s share of the total property value (indirect income and expenses). This applies also to tax that is not directly attributable to earnings from property management activities or sales. Assets and liabilities are stated as at the balance sheet date. Property assets are attributed directly to the respective segments in accordance with Parent company Responsibility for the Group’s external borrowing normally rests with the parent company. The company uses the funds raised to finance the subsidiaries on market terms.
Responsibility for the Group’s external borrowing normally rests with the parent company. The company uses the funds raised to finance the subsidiaries on market terms.