The objective of risk management is to minimise the unfavourable impacts of changes in the financial markets on the company’s profits and cash flow. Sponda’s main financial risks are interest rate risk, risks concerning access to financing, credit risk and exchange rate risk. The Group’s treasury unit is responsible for managing financing risks.
Interest rate risk
Significant changes in market interest rates and margins may have a negative effect on Sponda’s financial result and contribute to slower growth in the property business.
Fixed-rate loans and interest rate derivatives are used to reduce the effect of changes in the market interest rates. Sponda’s has hedged against increases in interest rates by defining its hedge level as at least 60 per cent and at most 100 per cent. Due to its flexible operating model, Sponda has been able to keep its hedge level relatively high while simultaneously keeping its financial costs low. As a result, the interest rate risk did not materialise in 2013.
The average interest rate for Sponda’s liabilities declined to 3.2 per cent during the year 2013 from 3.4 per cent at the beginning of the year.
Risks related to the availability of financing
Sponda actively analyses and monitors the status of the financial markets and takes a proactive approach to restructuring its liabilities to ensure that it maintains adequate liquidity to finance its operations and repay loans as they mature.
Risks related to the availability of financing are mitigated by using credit agreements of varying lengths, a broad financing base, credit limits and by maintaining the company’s reputation as a reliable debtor.
Sponda has refinanced its loans in such a way that the next significant need for financing will arise in 2015.
According to Sponda’s assessment, the risk related to the availability of financing was reduced in 2013. Sponda was successful in managing the risk, as evidenced by the financial arrangements concluded during the year.
Money market investments, derivative contracts and rent and trade receivables may cause a credit risk for Sponda.
To avoid counterparty risks, Sponda uses only financially solid banks with a good credit rating as counterparties in its money market investments and derivative contracts.
Sponda carries out regular checks to monitor tenants’ solvency and changes therein. Most tenants submit a security deposit corresponding to three to six months’ rent at the start of their tenancy. The company has a diverse tenant base representing a wide variety of sectors.
Exchange rate risk
Sponda has international operations in Russia. Changes in the exchange rate between the Russian rouble and the euro and between the US dollar and the euro can affect Sponda’s financial position. Sponda is exposed to currency risk as balance sheet items for foreign subsidiaries and revenue and expenses from properties are translated into the business currency of the parent company, euros.
Sponda’s Russian companies receive their rents monthly in US dollars, in Russian roubles or in euros. The companies pay most of their expenses in Russian roubles. Sponda hedges foreign currency-denominated future net cash flows for a period of six months.