The types of financial risks that the Industrivärden Group encounters in its business consist primarily of equities risk and – to a limited extent – other financial risks, such as interest rate risk and liquidity risk.
Industrivärden’s financing and management of financial risks are conducted in accordance with guidelines set by the Board of Directors.
Equities risk pertains mainly to share price risk, which is the entirely dominant risk in Industrivärden’s operations. By share price risk is meant the risk of a decline in value caused by changes in prices in the stock market. Industrivärden’s role as a long-term and active owner should reduce the relative equities risk in the portfolio companies and thus also in Industrivärden’s portfolio. A change in the price of all listed shareholdings in Industrivärden’s equities portfolio by one percentage point would have affected the market value of the equities portfolio on December 31, 2019, by +/– SEK 1.2 billion.
Interest-bearing net debt as per December 31, 2019
|Provision for pensions||68||111|
|Other interest-bearing liabilities||232||75|
|Total interest-bearing liabilities||4,255||7,564|
|Cash and cash equivalents||-56||-786|
Maturity structure for undiscounted, contracted interest-bearing liabilities and derivative instruments with negative market values as per December 31, 2019:
|Interest bearing liabilities 1)||1,935||1,250||1,000||-|
1) Excluding pension provisions of SEK 68 M (111).
Financing risk is the risk that financing of the operations’ capital need at any given time will be impeded or more costly.
Industrivärden’s interest-bearing net debt amounted to SEK 4,032 M (6,601) on December 31, 2019. Under a Medium-Term Note (MTN) program Industrivärden has the opportunity to issue bonds in Swedish kronor (SEK) or euros (EUR) up to a framework amount of SEK 8.0 billion, of which SEK 3.1 billion was utilized as per December 31, 2019.
In addition, within a commercial paper framework of SEK 3.0 billion, Industrivärden has utilized SEK 0.9 billion as per December 31, 2019. The average capital duration, excluding pension provisions, was 13 months (9). The table above shows the maturity structure of financial liabilities. In addition to raised loans of SEK 4.0 billion, the Group has contracted long-term loan promises of SEK 3 billion and short-term loan-promises in the form of an overdraft facility of SEK 500 M.
Industrivärden has a strong financial position, and its financing risk is considered to be very low. The credit rating agency Standard & Poor’s has assigned the Group a long-term rating of A+/Stable outlook and short-term ratings of A-1 and K-1. With these high ratings combined with an equity ratio of 96% (91%), Industrivärden has great financial flexibility.
Interest rate risk
Interest rate risk is the risk that the financing cost will vary due to changes in market interest rates. The financial instruments that are exposed to interest rate risk consist of loans with variable interest rates. Swap agreements may be used to adjust the length of fixed interest periods and capital durations. The interest rate swap agreement of SEK 750 M that was in effect at the start of 2019 has expired, and no new agreements were entered into. At year-end most of the Group’s loans carried variable interest rates.
The average capital duration as per December 31, 2019, was 2 months (4).
Based on net debt and the capital duration at year-end, a change in the market interest rate by 1 percentage point would have affected income after financial items in 2019 by approximately +/– SEK 25 M. Industrivärden has low gearing, also with limited interest rate risk.
Counterparty risk is the risk of a party in a transaction with a financial instrument not being able to meet its obligations and thereby causing loss to the other party.
Industrivärden’s internal rules and guidelines prescribe that approved counterparties have high credit ratings, which is why counterparty risk is considered to be low.
Operational risk is the risk of incurring a loss due to defects in internal routines and systems. Industrivärden’s risk management rests on a foundation of internally adopted guidelines and rules, and of policies adopted by the Board of Directors.
Against the background of the share price risk described above, the most important control process in Industrivärden’s business consists of the continuous monitoring of value exposure in the equities portfolio. Industrivärden’s internal control is therefore primarily focused on ensuring the reliability of valuations of outstanding equity and derivative positions and of the reporting of purchases and sales of shares and other securities.
According to the Swedish Companies Act, the Board is responsible for internal control. The instructions regulating the division of duties between the Board and the CEO lay out investment rules for equities and derivative instruments as well as a finance policy. Decision-making channels, authority and responsibility are defined by a set of investment rules and by a risk policy.
Industrivärden has a specially appointed investment committee consisting of members of the Executive Management and representatives from the investment and analysis organization. The Investment Committee makes decisions on investment matters on a regular basis within the framework of the CEO’s mandate and continuously monitors decisions made and whether they have been executed correctly. Minutes are recorded of Investment Committee meetings.
Other processes with a bearing on the financial reporting are regulated by Industrivärden’s Insider Policy and Information Policy. Industrivärden’s greatest risk consists of value exposure in the equities portfolio. The predominant risk in work processes pertains to potential errors in the accounting and reporting of equity transactions. Industrivärden continuously assesses the risks in the handling of equity transactions and affect the structure of internal risk control.
Control activities pertaining to the equities portfolio include, among other things, approval of all business transactions, follow-up to ensure that equity transactions are in accordance with decisions made, and checks to make sure that the value of purchases and sales of shares and of underlying shares in derivative transactions is within the scope of established exposure limits.