Annual Report 1998

42
industry companies in North America and Finland are major
exporters.
Group euro cash-pool structure
During the first quarter of 1999, a comprehensive cash-pool
structure will be introduced for Group euro-currency transactions.
This will reduce the number of international payments,
thus minimizing float periods and transaction costs. Cash
management will also be more efficient, since euro liquidity on
a day-to-day basis will be concentrated in a single account.
INTEREST-RATE RISKS
Interest-rate fluctuations have a direct impact on SCA’s consolidated
earnings due to changes in net interest, but there is
also an indirect effect as a result of the impact of interest levels
on the economy as a whole. SCA’s policy is to maintain a short
fixed interest term, since the company considers that this results
in lower borrowing costs and a more stable earnings trend
in the long run.
Management of the Group’s interest-rate exposure is a centralized
function. SCA Finans is responsible for identifying and
managing this exposure. During 1998, the average fixed-interest
term was approximately seven months. At year-end the
fixed-interest term was slightly less than six months.
REFINANCING RISKS AND LIQUIDITY
At 31 December 1998, gross debt amounted to SEK 25,806 M.
After deduction for liquid funds, interest-bearing receivables
and capital investment shares, net debt was SEK 21,370 M.
Liquidity risk is defined as the risk of being unable to meet
payment obligations as a result of inadequate liquidity or difficulties
in obtaining credit from external sources.
SCA applies a centralized approach to management of
Group financing. SCA Finans is responsible for external borrowing
and external investment.
The aim is that liquid funds and committed credit facilities
should amount to at least 10% of forecast annual sales for the
Redemption structure for
interest-bearing debt
Year SEK M
1999 6,629
2000 1,128
2001 3,987
2002 6,803
2003 6,580
2004– 679
Total 25,806
The average maturity period at year-end was 3 years.
Group, and that the average maturity for the Group’s gross
debt should be in excess of three years.
At year-end, the average maturity was three years. Liquid
funds and unutilized committed credit facilities amounted to
SEK 9,403 M at year-end, which corresponded to 15% of
Group sales in 1998.
During 1998, the existing SEK 4,000 M in committed credit
facilities was refinanced by means of a number of bilateral
transactions. In this connection, the total amount was increased
to SEK 6,000 M, and the average maturity period was
prolonged. The counterparties for these credit facilities are
eight international banks of high repute.
During the year, framework for SCA Finans’ Swedish commercial
paper program was increased from SEK 4,000 M to
SEK 8,000 M.
In order to reduce the costs of finance for working capital in
SCA’s Polish operations, a Polish commercial paper program
was arranged, with a framework totaling PLN 100 M (SEK
220 M).
A Swedish Medium Term Note (MTN) program was
established during 1998 in order to diversify the Group’s
medium and long-term credit facilities. The MTN program,
which has a framework total of SEK 2,000 M, permits issues
with maturities ranging from 1-15 years. During 1998,
medium-term notes totaling SEK 400 M were issued under
the MTN program.
SCA has a long-term rating of A3/A- and a short-term
rating of P2/A2 from Moody’s and Standard & Poor’s, and a
short-term Standard & Poor’s K1 rating in Sweden.
CREDIT RISKS
Financial risk management exposes SCA to credit risks. This
exposure arises from lending within the framework of liquidity
management, and from claims on banks through derivative instruments.
Special counterparty rules stipulate the maximum
credit risks allowed against various counterparties.
Credit exposure in derivative instruments is defined as the
market value plus an additional amount based on credit risk
factors which reflect the risk of increased exposure due to foreign
currency and interest-rate fluctuations.
SCA employs ISDA Master Agreement which permit net
calculation of receivables and liabilities in countries where this
is possible.
At 31 December 1998, credit exposure in derivative instruments
amounted to SEK 1,370 M.
RISK MANAGEMENT AND INSURANCE
SCA’s Risk Management function (RM) is responsible for financing
insurable risks in the Group. This is achieved by
means of Group-wide insurance programs and the use of SCA’s
own insurance companies, so-called captives. This approach
provides integration gains and optimization of deductibles, etc.
at Group level. In addition, the RM function endeavors to ensure
that risks are eliminated or reduced as a result of continuous
improvements in the level of loss prevention.