Annual Report 1999 - Kemira

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
age to a change of about EUR 8 million in the
asset/liability porfolio. For 2000, the new limit is
EUR 15 million. By a decision of the Management
Board, the limits can be changed in accordance
with the market situation. As a consequence
of this policy, the Group’s average interest
rate level has in general been higher than
the market level of short-term interest rates
when low rates prevail and, on the other hand,
lower than the market level when high rates
prevail.
Counterparty risk
Counterparty risk is due to the fact that a contractual
party to a financing transaction is not necessarily
able to fulfil its obligations under the agreement.
Counterparty risks in treasury operations
are mainly connected with investing funds and
with the counterparty risks of derivative contracts.
The Group accepts as its counterparty only financial
institutions that have a good credit rating. At
present there are more than 20 approved counterparties.
A counterparty that has received a
credit rating under the A level or that is unrated
must have a separate approval. At present this
condition applies only to a few counterparties.
Before being accepted as a counterparty, the financial
institution must go through a special approval
process. In addition, Treasury Management
approves the new banking relationships of
subsidiaries. Counterparty risk is monitored on a
monthly basis by defining from the market values
of receivables the maximum risk associated with
each counterparty. For each financial institution,
there is an approved limit. Of these limits, the
maximum amount in use at the turn of the year
was 33 %. Short-term investments are made in
liquid instruments that have a low risk. Credit
risks in treasury operations did not result in credit
losses during the financial year.
Funding risk
The Group diversifies its funding risk by obtaining
financing from different sources in different
markets. The Group has bank loans,
pension loans, insurance company loans, a Medium
Term Note Programme as well as shortterm
domestic and foreign commercial paper
programmes. The objective is to balance the
maturity schedule of the bond and loan portfolio
and to maintain a sufficiently long maturity
for long-term loans. The Group’s solvency and
funding arrangements are safeguarded by maintaining
good liquidity and by means of revolving
credit facilities. The Group has a commercial
paper programme, providing for the raising
of a maximum of EUR 150 million as well as a
Euro Commercial Paper (ECP) programme,
within which a maximum of USD 200 million
can be raised. The ECP programme was used
to a very minor extent in 1999. The Group’s average
liquidity in 1999 was EUR 91 million. At
the end of 1999 the liquidity was EUR 88 million
as well as an unutilized revolving credit facility
of about EUR 260 million, or a total of
EUR 348 million. The management of liquidity
is being developed continually through more
effective use of the Group’s cash pool arrangements.
The introduction of the euro from the
beginning of 1999 and the euro cash pool that
is to be developed as a consequence of it will
facilitate the management of liquid funds considerably.
As plans now stand, a euro cash pool
will be started up stage by stage during 2000.
Documentation risk
The Group’s documentation risk of financing
agreement is managed by concentrating the
approval of financing agreements within
Group Treasury as well as by using standardized
agreement models.
Financial instruments 31.12.1999 31.12.1998
Nominal Fair Nominal Fair
value value value value
Currency instruments
Forward contracts 318.9 1.9 378.9 –4.2
Of which for hedging of future currency flows 47.7 3.2 125.2 –2.5
Currency options
Bought 5.8 0.1 38.7 0.9
Sold 11.6 –0.5 59.3 –0.9
Currency swaps 183.2 –9.9 198.9 –5.6
Interest rate instruments
Interest rate swaps 173.9 –3.6 120.5 –6.3
Forward rate agreements 290.0 – 321.2 0.1
Of which open – – 15.8 0.1
Bond futures 2.0 – – –
Of which open – – – –
Nominal values of the financial instruments do not necessarily correspond with the actual cash flows
between the counterparties and do not therefore give a fair view of the risk position of the Group.
Fair values are based on market valuation on the date of reporting for the instruments which are
publicly traded. Other instruments have been valued based on net present values of future cash
flows. A valuation model has been used to estimate the fair values of options.
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