Sanoma’s treasury operations are managed centrally by the Group Treasury unit. Operating as a counterparty to the Group’s operational units, Group Treasury is responsible for managing external financing, liquidity and external hedging operations.
Centralised treasury operations aim to ensure financing on flexible and competitive terms, optimised liquidity management, cost-efficiency and efficient management of financial risks. Sanoma is exposed to interest rate, currency, liquidity and credit risks. Its risk management aims to hedge the Group against material risks. Sanoma Board of Directors has approved the unit’s guidelines in the Group Treasury Policy.
In the medium term, to ensure financial flexibility, Sanoma’s goal is to reach a capital structure where net debt/EBITDA ratio is below 2.5, and equity ratio 35% - 45%. This will ensure access to low-cost funding.
Financial risks can be mitigated with various financial instruments and derivatives whose use, effects and fair values are clearly verifiable. The Group used interest rate and currency swaps to hedge against financial risks during the year.
For more detailed information on financial risk management, please see note 29 of the Financial Statements.
Interest rate risks
The Group’s interest rate risk is mainly related to changes in the reference rates and loan margins of floating rate loans in the Group’s loan portfolio. The Group manages its exposure to interest rate risk by using a mix of fixed and floating rate loans. Interest rate derivatives can also be used to serve this purpose.
The majority of the Group cash flow from operations is denominated in euros. However, the Group is exposed to transaction risk resulting from cash flows related to revenue and expenditure in different currencies. Group companies are responsible for monitoring and hedging against transaction risk related to their business operations in accordance with the Group Treasury Policy. The majority of the transaction risk is related to the acquisition of programming rights denominated in US dollars. The Group has adopted forward contracts as a means of hedging against major transaction risks. Derivative instruments are used to hedge future cash flows; hence changes in their value will offset changes in the value of cash flows.
The Group is also exposed to translation risk resulting from converting the income statement and balance sheet items of foreign subsidiaries into euros. Business operations outside the euro area (countries in which the currency is not pegged to the euro) mainly consist of revenues in Polish zloty and Swedish krona. A significant change in exchange rates may have an effect on the value of the businesses in Poland and Sweden. The Group does currently not hedge against translation risk.
The reported nominal values of derivative instruments include gross nominal values from all active agreements. The outstanding nominal value is not necessarily a measure or indicator of market risks.
Sanoma has entered into netting agreements with all of its derivative instrument counterparties.
Liquidity risk relates to servicing debt, financing investments and retaining adequate working capital. Sanoma aims to minimise its liquidity risk by ensuring sufficient revenue financing, maintaining adequate committed credit limits, using several financing institutions and forms of financing, and spreading loan repayment programmes over a number of calendar years. The Group’s undrawn committed credit limits must be sufficient to cover its estimated funding requirements and loan repayments, and part of the outstanding commercial paper commitments. Liquidity risk is monitored daily, based on a two-week forecast, and longer-term based on calendar year. In addition, Sanoma Group Treasury Policy sets minimum requirements for cash reserves.
The Group’s financing agreements include customary covenants related to factors such as the use of pledges and morgages, disposals of assets and key financial ratios. In 2016, the Group fulfilled the requirements of all covenants.
Sanoma’s credit risks are related to its business operations. The Group’s diversified operations significantly mitigate credit risk concentration, and no individual customer or group of customers is material to the Group. The Group’s operational units are responsible for managing credit risks related to their businesses.
The Group Treasury Policy specifies that financing transactions are carried out with counterparties of good credit standing and divided between a sufficient number of counterparties in order to protect financial assets. The Group has spread its credit risks efficiently by dealing with several financing institutions.
Trade receivables and other receivables are presented in Notes 18 and 20.
Capital risk management
The Group’s medium-term goal is to reach a capital structure with an equity ratio between 35% and 45% and a net debt/EBITDA ratio below 2.5.
When calculating the net debt/EBITDA ratio, the following adjustments are made to the reported EBITDA: non-recurring items are removed, the effects of acquisitions are added and the effects of divestments are deducted, and the effects of the amortisation of programming and prepublication rights are deducted for the reporting period.
In 2016, the Group’s equity ratio was 41.0% (2015: 39.5%), net debt/ EBITDA ratio was 3.2 (2015: 5.1) and gearing 78.4% (2015: 77.8%).