Financial risk management

Teleca’s operations are exposed to the following types of financial risk: interest rate, funding, liquidity, currency, credit and counterparty risk. The importance of managing these risks has increased following the rapid growth of Teleca’s international business. The group’s financial activities and financial risk management are largely centralized. Management of this type of risk is dealt with in the group’s financial policy, which is defined by the Board. The aim is to manage and control the group’s financial risks effectively.

Interest rate risk

Interest rate risk refers to the risk of a change in market rates having a negative effect on the group’s financial results. The duration of fixed interest rate periods of loans and financial investments is a key factor in determining how a permanent change in market rates affects the company’s earnings. The duration of the interest periods of Teleca’s assets and liabilities is mostly short-term and does not normally exceed 12 months.

Funding and liquidity risk

Funding and liquidity risk refers to the risk of costs increasing and funding potential becoming limited when loans are due for refinancing, and the risk of payment obligations not being fulfilled due to insufficient liquidity or difficulty in obtaining financing. Most of the group’s external funding takes the form of overdraft facilities arranged by the parent company. The existing overdraft facilities contain covenants which require the company to fulfill a number of financial key figures.

Currency risk

Currency risk refers to the risk of changes in foreign exchange rates having a negative effect on Teleca’s future cash flows and financial results. Currency exposure arises in connection with payments in foreign currencies (transaction exposure) and the translation of foreign subsidiaries’ balance sheets and income statements to SEK (translation exposure). During the year, Teleca’s earnings were affected by fluctuations in the USD, EUR and GBP.

Transaction risk

The main transactional risks pertain to the payment flow in the group’s international operations. International operations increased in 2007 and are significant. Transactional risks are limited to where Teleca’s subsidiaries predominantly invoice their customers in the local currency. As a result of these increasing foreign operations invoicing in another currency besides the local one has increased which has resulted in a rise in hedging of future payment flow during the year.

Translation exposure

Teleca’s financial results are also affected by group consolidation, when the subsidiaries’ results and net assets are translated to SEK. At the end of the financial year, the most significant translation exposure of net investments in foreign subsidiaries was related to GBP, EUR and RUB.

Derivate financial instruments

Teleca uses financial derivatives to hedge the Group’s currency exposure relating to future cash flows in foreign currency. All outstanding currency derivatives have a maturity of less than 12 months. The Group has a number of forward exchange contracts at 31 December 2007, with nominal amounts of EUR 0.1 million, GBP 0.1 million, SEK 0.9 million and USD 0.0 million. See also note 24.

Credit and counterparty risk

Credit and counterparty risk refers to the risk of Teleca’s counterparties financial (banks etc.) and commercial (customers) – being unable to meet their commitments in the form of interest payments, delivery of financial instruments or other payments. Teleca’s subsidiaries are responsible for the credit risk associated with trade receivables. Most of the group’s customers are large, blue chip companies for which credit risk is deemed to be low, as confirmed by the group’s historically low credit losses. Teleca’s policy is to obtain a credit rating whenever it starts doing business with a new customer. The group regularly evaluates its credit risk with regard to trade receivables. Counterparty risk is minimized by placement of the group’s cash & cash equivalents in Swedish banks, via the parent company. Maximum credit exposure corresponds to the carrying amount of Teleca’s financial assets.