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 statement of financial position.
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 commented upon 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 2010 a dividend of SEK 5.50 per share, which corresponds to 28% of this year's normalised net income. The total proposed dividend payment would amount to a maximum of SEK 365,779,321, 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 2009 and 2008. The Board of Directors will propose to the Annual General Meeting in 2010 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 "Loan facility" in this note.
           
Group (SEK million)       2009 2008
Interest-bearing loans and borrowings       -3,518 -4,653
Other interest-bearing liabilities       -45 -52
Cash and short term deposits       737 975
Long- and short-term interest-bearing assets       77 92
Net debt       -2,749 -3,637
           
Equity including minority interest       5,680 8,980
Net debt to equity ratio       48% 41%
Assets       14,651 19,232
Equity to assets       39% 47%
Capital employed, average       12,495 8,240
Operating income adjusted for one-off costs and the gain on sale of DTV Group       1,924 2,521
Return on Capital employed       15% 31%
           
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 cash requirements, and payment flows. The payment flows relate to Scandinavia and the Baltics. 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 non-revolving credit facility of SEK 3,000 million was granted in July 2009. The facility is available until 2 July 2012. In addition to the credit facilities, two overdraft facilities of SEK 50 million, in total SEK 100 million, are granted. As per 31 December 2009 SEK 3,500 (4,640) million of the credit facilities were utilised.
The loan agreements have covenants based on the ratios total consolidated EBITDA in relation to net debt and to net financial expenses.
The revolving credit facility of SEK 3,500 million can be paid out in optional currencies and the interest rate varies with Libor, Euribor or Stibor, depending on the currency utilised.
The Prima Group has a revolving credit facility of CZK 220 million, of which CZK 60 million is an overdraft facility. The facilities were unutilised on 31 December 2009 as well as 2008.
The Bulgarian company Nova has a credit facility of EUR 6 million, of which EUR 2.3 million were drawn at the balance sheet date, and provided a bank guarantee of EUR 0.8 million to an external supplier. EUR 2.9 million were therefore unutilised as per 31 December 2009. As per 31 December 2008 EUR 2.7 million were drawn, with a bank guarantee of EUR 1.7 million and EUR 1.6 million were unutilised.
Financial lease liabilities
The leasing liabilities refer to HD playout equipment. The equipment had a value of SEK 9 (11) million as per 31 December. Finance lease liabilities are payable as follows:
  2009   2008
Group (SEK million) Minimum lease payments Interest Principal   Minimum lease payments Interest Principal
Less than a year 4 1 3   5 1 4
Between one and five years 8 1 8   13 1 12
Total financial lease 13 1 11   18 2 16
               
Interest-bearing liabilities
Group (SEK million)           31 December 2009 31 December 2008
Non-current liabilities              
Non-current portion of bank loans           3,495 4,623
Other long-term liabilities           5 9
Finance lease liabilities           9 17
Total           3,509 4,649
               
Current liabilities              
Current portion of bank loans           23 30
Other short-term interest-bearing liabilities           27 21
Current portion of finance lease liabilities           4 5
Total           54 56
               
Maturity of long-term loans
Parent company (SEK million)           31 December 2009 31 December 2008
Amount due for settlement within 12 months           - -
Amount due for settlement within 13 to 59 months           3,462 4,623
Amount due for settlement after 60 months           - -
               
Terms and payback period, gross values        
  2009
Group (SEK million) Interest rate Fixed interest term Effective interest rate Total 12 months or less 1-2 years More than 2 years
Finance lease liabilities 6.3-7.2 12 months 6.3-7.2 13 4 9 -
Loan from bank 1.1-2.3 3 months 2.8-3.9 3,732 113 583 3,036
Forward agreements       70 70 - -
Other interest-bearing liabilities       32 27 5 -
Accounts payable       1,226 1,226 - -
        5,073 1,439 598 3,036
               
  2008
Group (SEK million) Interest rate Fixed interest term Effective interest rate Total 12 months or less 1-2 years More than 2 years
Finance lease liabilities 6.3-7.2 12 months 6.3-7.2 21 5 17 -
Loan from bank 3.4-6.1 1 - 9 months 5.7-7.1 4,891 135 3,089 1,666
Forward agreements           - -
Other interest-bearing liabilities       30 21 9 -
Accounts payable       1,563 1,563 - -
        6,505 1,724 3,114 1,666
               
The interest payments arising from the financial instruments were calculated using the last interest rates before or on 31 December. The liabilities were calculated to be repaid on the earliest possible time period.
Overdraft facilities
The amount granted for bank overdraft facilities in Sweden at 31 December 2009, equaled SEK 100.0 (100.0) million, of which SEK 100.0 (100.0) million was unutilised. The Prima Group is granted a bank overdraft facility of CZK 60 (60) million, of which CZK 60 (60) million was unutilised.
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 is limited partly through having loans with different maturity dates and with a number of financial institutions, partly by striving for refinancing all loans at least 12 months prior to maturity.
Market risk - interest rate
With an average fixed interest period of 2.5 months, a one percentage change in interest rates would have an impact on the Group's interest expense of approximately SEK 27 (23) million, calculated on the basis of long-term interest-bearing loans of SEK 3,500 (4,623) million as per 31 December 2009. 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.
Group policy is to have a balanced mix between variable and fixed interest rates. During 2009, the interest period was however short term. At year end it was 1 month. The Group does not currently use derivative financial instruments to hedge its interest risks.
Credit risk
Credit risk is defined as the exposure to losses in the event that one party to a financial instrument fails to fulfill their obligations. The Group's policy related to the credit risk in financial activities imply approving only well-established international financial institutions as counterparties.  Transactions are made within fixed limits and exposures are continuously monitored. The Group's exposure to credit risk amounts to SEK 2,261 (2,751) million as per 31 december 2009. The exposure are based on the carrying amount for the financiall assets, the major part comprising trade receivables and cash.
The credit risk with respect to the Group's trade receivables is diversified among a large number of customers, both private individuals and companies. The credit risks on certain markets have increased since the autumn in 2008 due to the financial crises. 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.
Foreign exchange risk
Foreign exchange risk is the risk that fluctuations in exchange rates will adversely affect the income statement, financial position 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, 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, hedges not included:
Currency (SEK million)           2009 2008
DKK           646 526
NOK           788 625
EUR           -557 -781
CHF           -49 -65
USD           -1,153 -1,013
               
The nominal value of the hedge contracts amount to USD 158 (139) million, CHF 12 (12) million, and GBP 3 (3) million at closing day.
Market risks – exchange risk              
A 5% change in USD/SEK would have a net currency flow affect on profit before tax of approximately SEK 50-65 (45-60) million, while the respective change in NOK would affect profit before tax by approximately SEK 35-45 (30-40) million.
The effect of a change in the rate by 5% on the outstanding positions in the hedge reserves in equity as per 31 December would have been approximately SEK 5 (3) million.
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 comprises the holding in CTC Media. MTG hedges part of the book value of the net investment in Nova Televizia 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, as the Bulgarian leva is pegged to euro. The euro loan was repaid at 31 December 2009. There are no other hedging positions for conversion exposure.
Net foreign assets including goodwill and other intangible assets arising from acquisitions are distributed as follows:
    2009   2008
Currency   SEK million %   SEK million %
BGN   4,028 43   7,908 57
USD   1,757 19   1,886 14
NOK   984 10   1,154 8
EUR   738 8   482 3
DKK   53 1   185 1
Other currencies   1,915 20   2,195 16
Total equivalent SEK value   9,475 100   13,810 100
             
A 5% change in USD/SEK would affect equity by approximately SEK 88 (94) million, while the respective change in the currencies in the Central European countries would affect equity by SEK 300 (506) million.
             
Financial instruments at fair value in the statement of financial position            
Financial instruments at fair value are classified in a three level hierarchy:
Level 1 - quoted prices in active markets for identical assets or liabilities are used to determine the fair value.
Level 2 - observable sources of data for the asset or liability, either directly or as prices or indirectly as derived from prices, are used to arrive at fair value.
Level 3 - unobservable input data which are not based on market data are used to arrive at the fair value.
Financial instruments available-for-sale, which comprise shares in listed companies are classifed as level 1, derivative instruments as forward foreign exchange contracts are classifed as level 2. There are no financial instruments at level 3.
Fair value of Financial instruments in the statement of financial position
    31 December 2009   31 December 2008
Group (SEK million)   Level 1 Level 2   Level 1 Level 2
Financial assets            
Derivatives            
Forward foreign exchange contracts   - -   - 122
             
Financial assets available-for-sale            
Shares in other companies   21 -   33 -
             
Financial liabilities            
Derivatives            
Forward foreign exchange contracts   - 70   - -
             
Other financial assets are reported in the statement of financial position 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. The company judges the book values and the fair values to correspond for these items.

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

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