Financial risk management and supplementary disclosures regarding financial instruments
Swisscom is exposed to various financial risks resulting from its operating and financial activities. The most significant financial risks arise from changes in foreign exchange rates, interest rates as well as creditworthiness and the ability of counterparties to meet their payment obligations. A further risk arises from the ability to ensure adequate liquidity. Swisscom’s financial risk management is conducted in accordance with established guidelines with the aim of limiting potential adverse effects on the financial situation of Swisscom. In particular, these guidelines contain risk limits for approved financial instruments and specify risk monitoring processes. Financial risk management, with the exception of the management of credit risks arising from business operations, is handled by the central Treasury Department. It identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The implemented risk management process also requires routine reports on the development of financial risks.
Market price risks
Foreign exchange risks
Swisscom is exposed to foreign exchange risks; these can impact the Group’s financial results and consolidated equity. Foreign exchange risks which have an impact on cash flows (transaction risks) are partially hedged by financial instruments and designated for hedge accounting. In addition, foreign exchange risks with an impact on equity (translation risks) are partially hedged through financial instruments and designated for hedge accounting. The aim of Swisscom’s foreign exchange risk management policy is to limit the volatility of planned cash flows. Forward currency contracts, currency options and currency swaps may be employed to hedge transaction risks. These hedging measures concern principally the USD and EUR. EUR-denominated financing is employed in order to hedge the translation risk of positions in EUR.
The following currency risks and hedging contracts for foreign currencies existed as of 31 December 2013:
In 2013, Swisscom contracted financial liabilities totalling EUR 800 million (CHF 980 million) which were designated for hedge accounting for net investments in foreign shareholdings.
The currency risks and hedging contracts for foreign currencies as of 31 December 2012 are to be analysed as follows:
The following sensitivity analysis shows the impact on the income statement should the EUR/CHF and USD/CHF exchange rates change in line with their implicit volatility over the next twelve months. This analysis assumes that all other variables, in particular the interest rate level, remain constant.
The volatility of the balance sheet positions and planned cash flows is partially offset by the volatility of the related hedging contracts.
Interest rate risks
Interest rate risks arise from fluctuations in interest rates which could have a negative impact on the financial position of Swisscom. Fluctuations in interest rates lead to changes in interest income and expense. Furthermore, they may impact the market value of certain financial assets, liabilities, and hedging instruments. Swisscom actively manages interest rate risks. The main aim thereof is to limit the volatility of planned cash flows. Swisscom employs interest rate swaps and options to hedge its interest rate risk.
The structure of interest-bearing financial instruments at nominal values is as follows:
The following sensitivity analysis shows the effects on the income statement and equity if CHF interest rates move by 100 base points. In computing sensitivity in equity, negative interest rates are excluded.
Credit risks from operating activities
Swisscom is exposed to credit risks arising from its operating activities. Swisscom has no significant concentrations of credit risk. The Group has policies in place to ensure that products and ser vices are only sold to creditworthy customers. Furthermore, outstanding receivables are continually monitored as part of its operating activities. Swisscom recognises credit risks through individual and general lump-sum allowances. In addition, the danger of risk concentrations is minimised by the large number of customers. Given that the financial assets as of the balance sheet date are neither impaired nor in default, there are no indications that the debtors will not be capable of meeting their payment obligations. Further information on financial assets is set out in Notes 17, 18 and 19.
Credit risks from financial transactions
Swisscom is exposed to the risk of counterparty default through the use of derivative financial instruments and financial investments. In business rules governing derivative financial instruments and financial investments, requirements to be met by counterparties are defined. Furthermore, individual limits by counterparty have been set. These limits and counterparty credit assessments are reviewed regularly. Swisscom signs netting agreements as issued by ISDA (International Swaps and Derivatives Association) with the respective counterparties in order to control the risk inherent in derivative transactions. The carrying amount of financial assets corresponds to the credit risk and is to be analysed as follows:
The carrying amounts of cash and cash equivalents and other financial assets and the related Standard & Poor’s ratings of the counterparties are to be summarised as follows:
Prudent liquidity management includes the holding of adequate reserves of cash and cash equivalents and marketable securities as well as the provision of adequate financing. Swisscom has processes and policies in place that guarantee sufficient liquidity in order to settle current and future obligations. Swisscom has an confirmed line of credit of CHF 100 million maturing in 2016 from banks and a further confirmed line of credit of CHF 2,000 million from banks maturing in 2018. As of 31 December 2013, these lines of credit had not been drawn down, as in the prior year.
The contractual maturities of financial liabilities including estimated interest payments as of 31 December 2013 are as follows:
The contractual maturities of financial liabilities including estimated interest payments as of 31 December 2012 are as follows:
Estimation of fair values
The carrying amounts of trade receivables and payables as well as other receivables and payables are a reasonable estimate of their fair value because of their short-term maturities. The carrying amounts of cash and cash equivalents and current loans receivable correspond to the fair values. The fair value of available-for-sale financial investments is based on quoted stock exchange prices or equates their purchase cost. The fair values of other non-current financial assets are computed on the basis of the maturing future payments, discounted at market interest rates. The fair value of non-publicly traded interest-bearing financial liabilities is estimated on the basis of the maturing future payments discounted at market interest rates. The fair value of publicly traded interest-bearing liabilities is based upon stock-exchange quotations as at the balance-sheet date. The fair value of finance lease obligations is estimated on the basis of the maturing future payments, discounted at market interest rates. The fair value of publicly traded derivative financial instruments as well as investments held for trading or for sale is based on quoted stock exchange prices as of the balance sheet date. Interest rate swaps and currency swaps are discounted at market interest rates. Foreign-currency forward contracts and foreign-currency swaps are valued by reference to foreign exchange forward rates as of the balance sheet date.
Fair value hierarchy
The fair value hierarchy encompasses the following three levels:
- Level 1: stock-exchange quoted prices in active markets for identical assets or liabilities;
- Level 2: other factors which are observable on markets for assets and liabilities,
- either directly or indirectly;
- Level 3: factors that are not based on observable market data.
Asset/liability valuation categories and fair value of financial instruments
The carrying values and fair values of financial assets and financial liabilities with their corresponding valuation categories are summarised in accordance with the following table. Not reflected therein is cash and cash equivalents, trade receivables and payables as well as miscellaneous receivables and payables whose carrying value corresponds to a reasonable estimation of their fair value.
The carrying values and fair values of financial assets and financial liabilities with their corresponding valuation categories are as of 31 December 2012 are as follows:
In addition, as of 31 December 2013, there were available-for-sale financial assets with a carrying value of CHF 21 million (prior year: CHF 20 million) which are valued at acquisition cost.
Level 3 financial instruments developed as follows in 2012 and 2013:
The level-3 assets consist of investments in various investment funds and individual companies. The fair value was arrived at using a valuation model. In 2012 and 2013, there were no reclassifi cations between the various levels.
Asset/liability valuation categories and results of financial instruments
The results for each asset/liability valuation category are to be analysed as follows:
In addition, in 2013, allowances for trade and other receivables amounting to CHF 83 million (prior year: CHF 70 million) were recorded under other operating expenses.
Derivative financial instruments
At 31 December 2012 and 2013, the following derivative financial instruments were recorded:
Fair Value Hedges
In 2007, for the purpose of hedging the foreign currency and interest rate risks of financing in EUR, cross-currency swaps for EUR 48 million were entered into which were designated as fair value hedges for hedge accounting. Of this amount, EUR 13 million matured in 2013. As of 31 December 2013, the instruments designated for hedge accounting had negative fair values of CHF 13 million (prior year: CHF 18 million).
Cash Flow Hedges
As of 31 December 2012, derivative financial instruments included cross-currency swaps which matured at the end of 2013. The cross-currency swaps were entered into in order to hedge foreign exchange risks with respect to USD-denominated bank loans. These hedging instruments were designated for hedge accounting purposes and had a negative fair value of CHF 23 million at 31 December 2012. The hedging reserve as part of consolidated equity as of 31 December 2012 included an amount of CHF 2 million.
Swisscom entered into interest rate swaps with final maturities in 2016 in order to hedge interest rate risks of CHF 350 million of the variable CHF-denominated interest-bearing private placements. These hedges were designated as cash flow hedges for hedge accounting purposes. As of 31 December 2013, these interest rate swaps were recorded with a negative fair value of CHF 12 million (prior year: CHF 17 million). CHF 13 million was recognised in the hedging reserve within consolidated equity for these hedging instruments (prior year: CHF 18 million). In 2009, interest rate swaps designated for hedge accounting for the premature hedging of the interest rate risk for the intended issuance of debenture loans totalling CHF 500 million were closed out. The effective share of CHF 24 million was left in the other reserves and is being released to interest expense over the hedged duration of debenture bonds issued in 2009. As of 31 December 2013, a negative amount of CHF 5 million (prior year: CHF 10 million) is recognised in the hedging reserve as part of consolidated equity.
As of 31 December 2013, derivative financial instruments include forward currency contracts of USD 188 million and EUR 172 million which serve to hedge future purchases of goods and services in the respective currencies. The hedges were designated for hedge accounting purposes. The hedges disclose a negative fair value of CHF 3 million (prior year: negative market value of CHF 3 million). A negative amount of CHF 4 million was recorded in the hedging reserve within consolidated equity for these designated hedging instruments (prior year: negative amount of CHF 3 million).
Other derivative financial instruments
In 2010 and in order to hedge currency and interest rate risks arising in connection with EUR-denominated financing, interest rate swaps were entered into covering EUR 350 million with a duration of up to five years. These hedges were not designated for hedge accounting. Already in 2007, interest rate swaps for EUR 228 million had been entered into in order to hedge currency and interest rate risks arising in connection with EUR-denominated financing and which had not been designated for hedge accounting. Of this amount, EUR 95 million matured in 2013.
Furthermore, derivative financial instruments as at 31 December 2013 include interest rate swaps covering CHF 200 million with maturities ending in 2040 with a positive market value of CHF 6 million (prior year: zero) and a negative market value of CHF 1 million (prior year: CHF 25 million) which were not designated for hedge accounting.
In addition, foreign currency forward contracts and currency swaps for EUR and USD which serve to hedge future transactions in connection with Swisscom’s operating activities and which were not designated for hedge accounting purposes are included in derivative financial instruments. In the prior year, derivative financial instruments also included options in connection with company acquisitions with a positive market value of CHF 23 million. In 2013, the related company was acquired and the market value of the option was recognised as part of the acquisition costs. See Note 5.
Cross-border lease agreements
Between 1996 until 2002, Swisscom entered into various cross-border lease agreements, under the terms of which parts of its fixed line and mobile phone networks were sold or leased on a long-term basis and leased back. Swisscom defeased a significant part of the lease obligations through the acquisition of investment-grade financial investments. The financial assets were irrevocably deposited with a trust. In accordance with Interpretation SIC 27 “Evaluating the Substance of Transactions involving the Legal Form of a Lease”, these financial assets and liabilities in the same amount are netted and not recorded in the balance sheet. As of 31 December 2013, the financial liabilities and assets, including accrued interest, which arose from cross-border lease agreements amounted to USD 63 million or CHF 56 million, which, in compliance with SIC 27, were not recognised in the balance sheet (prior year: USD 44 million or CHF40 million).
Netting of financial instruments
Swisscom enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. The ISDA agreements do not meet the criteria for offsetting in the statement of financial position. This is because Swisscom does not have any currently legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events such as a default or other credit events.
As per 31 December 31, 2013 the amount subject to such netting agreements was CHF 6 million. Considering the effect of these agreements the amount of derivative assets would reduce from CHF 6 million to 0, and the amount of derivative liabilities would reduce from CHF 127 million to CHF 121 million.
Charges for international roaming are settled over a clearing centre. Receivables and payables arising from roaming charges between the contracting parties are netted and settled on a net basis. Those receivables and payables for which Swisscom has a legal right of offset are netted in Swisscom’s consolidated financial statements.
Management of equity resources
Managed capital is defined as equity including non-controlling interests. Swisscom seeks to maintain a robust equity basis. This basis enables it to guarantee the continuing existence of the Company as a going concern and to offer investors an appropriate return in relation to the risks entered into. Furthermore, Swisscom maintains funds to enable investments to be made which will bring future benefits to customers as well as generate further returns for investors. The managed capital is monitored through the equity ratio which is the ratio of consolidated equity to total assets.
The following table illustrates the calculation of the equity ratio:
In its strategic targets, the Federal Council has ruled that Swisscom’s net indebtedness shall not exceed approximately 2.1 times the operating result before taxes, interest and depreciation and amortisation (EBITDA). Exceeding this limit temporarily is permitted. Swisscom’s internal target for the ratio of net indebtedness to EBITDA is 2.0. The target value may be temporarily exceeded. Financial leeway exists if the target is not reached.
The net-debt-to-EBITDA ratio is as follows:
Net debt consists of total financial liabilities less cash and cash equivalents, current financial assets as well as non-current fixed interest-bearing financial investments.