Note 22 Financial instruments and financial risk management

           
Capital management          
The primary objective of the Group's capital management is to ensure financial stability, manage financial risks and secure the Group's short-term and long-term need of capital. The Group defines its capital as equity including minority interest as stated in the balance sheet.
The Group manages its capital structure and makes adjustments when necessary due to economic conditions in its environment. To maintain or adjust the capital structure, the Group may change the dividend payment to shareholders, buy-back shares or issue new shares. New strategic goals were presented during 2007, and are described in the Directors' report.
The Group monitors capital efficiency using different ratios, such as net debt, return on capital employed and equity to assets ratio.
The Board of Directors propose to the Annual General Meeting 2009 an ordinary dividend of SEK 5 per share, which corresponds to 11% of this year's net income. The total proposed dividend payment would amount to a maximum of SEK 329,451,875, based on the maximum potential number of outstanding ordinary shares as at the record date. The Group continues to maintain a strong financial position for its future development.
The Board of Directors was given a mandate to buy back shares at the Annual General Meeting in 2008 and 2007. The Board of Directors will propose to the Annual General Meeting in 2008 a new authorisation for a share buy-back.
There are no regulatory external capital requirements to be met by the parent company or any of the subsidiaries other than covenants described under the heading "e;Loan facility"e; in this note.
           
Group (SEK million)       2008 2007
Interest-bearing loans and borrowings       -4,653 -478
Short-term interest-bearing liabilities       -52 -37
Cash and short term deposits       975 521
Long- and short-term interest-bearing assets       92 64
Net debt/net cash       -3,637 69
           
Equity including minority interest       8,980 5,875
Net debt to equity ratio       41% N.A
Assets       19,232 10,958
Equity to assets       47% 54%
Capital employed, average       8,240 5,925
Operating income adjusted for the gain on sale of DTV 2008       2,521 2,027
Return on Capital employed       31% 34%
           
Financial policy
The Group’s financial risk management is centralised to the parent company to capitalise on economies of scale and synergy effects in the financial sector and to minimise operational risks. The parent company functions as the Group’s internal bank and is responsible for the management of financing and the financial risk policy. This includes netting and pooling of capital requirements, and payment flows in Scandinavia. The aim is to limit the Group’s financial risk, and ensure that the Group has appropriate and secure financing for its current needs.
The Group’s financial policy is reviewed and approved by the Board of Directors and constitutes a framework of guidelines and rules for financial risk management and financial activities in general. The policy is subject to a yearly review. The Group’s financial risks are continuously compiled and followed up to ensure compliance with the financial policy.
Liquidity in the Group is concentrated with the central financing function and in local cash pools. Surplus liquidity may be invested during a period of maximum six months. The financial policy involves a special counterparty regulation by which a maximum credit exposure for various counterparties to minimise the risk is stipulated.
Loan facility
A revolving multicurrency credit facility of SEK 3,500 million was granted in February 2006. The facility is unsecured and there are no required amortisations. The facility is available until February 2011. A new credit facility of SEK 3,000 million was granted in August 2008. Loans drawn under this facility is due 12 months after utilisation, with a possibility to prolong the credit by 6 months to 15 April 2010. In addition to the credit facilities, an overdraft facility of SEK 100 million is granted. As per 31 December, 2008 SEK 4,640 (400) million of the credit facilities were utilised. The loan agreements have covenants based on the ratio's total consolidated EBITDA in relation to total net debt and to net financial expenses.
The revolving credit facility of SEK 3.5 billion can be paid out in optional currencies and the interest rate varies with Libor, Euribor or Stibor, depending on the currency utilised as well as the financial covenance level.
The Prima Group has a revolving credit facility of CZK 290 million (SEK 119 million), of which CZK 60 million (SEK 25 million) is an overdraft facility. The facilities were unutilised on 31 December 2008. As per 31 December 2007, CZK 125 million (SEK 45 million) of the loan facility was utilised.
Diema in Balkan Media Group has a credit facility of EUR 6 million, of which EUR 2.7 (SEK 30) million were drawn at the balance sheet date, and provided a bank guarantee of EUR 1.7 million to an external supplier. EUR 1.6 million was therefore unutilised as per 31 December 2008.

 

Financial lease liabilities
The leasing liabilities refer to studio and HD playout equipment. The equipment had a value of SEK 11 (5) million as per 31 December. Finance lease liabilities are payable as follows:
  2008   2007
Group (SEK million) Minimum lease payments Interest Principal   Minimum lease payments Interest Principal
Less than a year 5 1 4   5 1 4
Between one and five years 13 1 12   11 1 10
Total financial lease 18 2 16   15 2 14
               
Interest-bearing liabilities
Group (SEK million)           31 December 2008 31 December 2007
Non-current liabilities              
Non-current portion of bank loans           4,623 -
Other long-term liabilities           9 35
Finance lease liabilities           17 2
Total           4,649 37
               
Current liabilities              
Current portion of bank loans           30 433
Other short-term interest-bearing liabilities           21 -
Current portion of finance lease liabilities           5 0
Total           56 433
               
Amount due for settlement within 12 months           56 433
Amount due for settlement after 12 months           4,649 37
               
Maturity of long-term loans
Parent company (SEK million)           31 December 2008 31 December 2007
Amount due for settlement within 12 months           - 400
Amount due for settlement after 60 months           - -
               
Overdraft facilities
The amount granted for bank overdraft facilities in Sweden at December 31, 2008, equaled SEK 100.0 (100.0) millon, of which SEK 100.0 (100.0) million was unutilised. The Prima Group is granted a bank overdraft facility of CZK 60 million, of which CZK 0 (0) million was utilised.
Interest rate and refinancing risk
MTG’s sources of funds are primarily shareholders’ equity, cash flows from operations and borrowing. The interest-bearing borrowing exposes the Group to interest rate risk. The refinancing risk and the maturities for the loans are described under Loan facility in this note. The Group does not use derivative financial instruments to hedge its interest rate risks.
Market risk - interest rate
With an average fixed interest period of six months, a one percentage change in interest rates would have an impact on the Group's interest expense of approximately SEK 23 million, calculated on the basis of long-term interest-bearing loans of SEK 4,623 million as per 31 December 2008. The calculation is based on the change in interest expense after the interest period and does not take the maturity of the loans or changes in currency rates into consideration.
Credit risk
The credit risk with respect to the Group's trade receivables is diversified among a large number of customers, both private individuals and companies. High credit ratings are required for all material credit sales and solvency information is obtained to reduce the risk of bad debt expense. See also note 14 Accounts receivable.
Insurable risks
The insurance cover is governed by corporate guidelines, and centrally negotiated insurance policies cover the majority of its subsidiaries. In certain cases, local insurance policies have been put in place. Each business unit is responsible for assessing and managing the insurable risks associated with its day-to-day operations.

 

Group              
  2008
Terms and payback period (SEK million) Interest rate Fixed interest term Effective interest rate Total 12 months or less 1-5 years More than five years
Finance lease liabilities 6.3-7.2 12 months 6.3-7.2 17 0 17 -
Loan from bank 3.43-6.12 1 - 9 months 5.68-7.14 4,654 30 4,624 -
Other interest-bearing liabilities       34 26 9 -
Accounts payable       1,563 1,563 - -
        6,268 1,619 4,649 -
               
  2007
Terms and payback period (SEK million) Interest rate Fixed interest term Effective interest rate Total 12 months or less 1-5 years More than five years
Finance lease liabilities 6.3% 12 months 6.3% 15 5 11 -
Loan from related parties 4.2% 3 months 4.2% 21 - 21 -
Loan from bank 4.0% 1 month 5.0% 433 433 - -
Other interest-bearing liabilities       45 40 6 -
Accounts payable       1,134 1,134 - -
        1,649 1,612 37 -
               
The loan from related parties in 2007 refers to GES Media Europe, the partner in the Prima Group.
Foreign exchange risk
Foreign exchange risk is the risk that fluctuations in exchange rates will adversely affect the income statement, balance sheet and/or cash flows. The risk can be divided into transaction exposure and conversion exposure.
Transaction exposure
Transaction exposure is the risk that arises from net inflow or outflow of a foreign currency required by operations and financing. Hedging positions are taken to protect the Group against the effects of transaction exposures in the contracted outflow for the main part of programme acquisitions in US dollars, euro (before 2008), British pounds and Swiss francs on a rolling twelve month basis. Other transaction exposure is not hedged.
The entities' net foreign exchange cash flow was distributed among the currencies as follows:
Currency (SEK million)           2008 2007
DKK           526 468
NOK           625 656
EUR           -781 -753
CHF           -65 -86
USD           -1,013 -910
               
The fair value of the hedge contracts amount to USD 139 (106) million, CHF 12 (10) million, GBP 3 (3) and EUR - (29) million at closing day.
               
Market risks – exchange risk              
The transactions in US dollars, euro, british pounds and Swiss francs comprise mainly program acquisitions. The cash flow is hedged through forward contracts, covering 12 months of the net outflow. The programme acquisitions are amortised according to expected revenue earnings. At year-end the forward contracts in US dollars had an average rate to SEK of 6.98. Swiss francs had an average rate to SEK of 5.87. A change in that rate by 10% would affect the outflow related to these currencies by SEK 104 million, regardless of any forward contracts.

 

Conversion exposure            
Conversion exposure is the risk that arises from equity in a foreign subsidiary or associated company that is denominated in a foreign currency. The USD amount comprise the holding in CTC Media. MTG hedges part of the book value of the net investment in Nova against fluctuation in currency rates, that is, the risk related to changes in currency rates between the Swedish krona and Bulgarian leva. In relation to the acquisition MTG raised a euro loan which is recognised as the hedging instrument.
Net foreign assets are distributed as follows:
    2008   2007
Currency   SEK million %   SEK million %
NOK   745 5   685 17
DKK   643 4   505 13
USD   1,886 13   1,108 28
EUR   9,837 67   220 6
Other currencies   1,484 10   1,438 36
Total equivalent SEK value   14,595 100   3,956 100
             
There are no other hedging positions for conversion exposure.
Financial instruments
Book value and fair value for interest-bearing financial instruments are shown below.
    31 December 2008   31 December 2007
Group (SEK million)   Book value Fair value   Book value Fair value
Financial assets available for sale   5 5   36 36
Other financial assets   2,660 2,660   1,909 1,909
Financial assets   2,665 2,665   1,945 1,945
Financial liabilities   -6,316 -6,316   -1,712 -1,712
Net assets   -3,651 -3,651   233 233
             
    31 December 2008   31 December 2007
Parent company (SEK million)   Book value Fair value   Book value Fair value
Financial assets available for sale   5 5   36 36
Other financial assets   12,665 12,665   10,651 10,651
Financial assets   12,671 12,671   10,687 10,687
Financial liabilities   -5,899 -5,899   -1,312 -1,312
Net assets   6,772 6,772   9,376 9,376
             
Other financial assets is reported in the balance sheet in cash and cash equivalents, interest-bearing long-term receivable, accounts receivables, and accounts receivables affiliated companies. Financial liabilities are reported in accounts payable, short-term interest-bearing liabilities and long-term interest-bearing liabilities.
             

Modern Times Group MTG AB Box 2094 SE-103 13 Stockholm Sweden Visiting: Skeppsbron 18 Tel: +46 8 562 000 50

Learn more about