Financial risks

The Axfood Group is exposed to financial risks, which are described under the respective type of risk below. Axfood has a Group-wide finance policy that regulates the delegation of responsibility on financial matters between the Board, the CEO/CFO, the central finance department and other Group companies.

The Group’s external financial management is centralized in the central finance department of the Parent Company, Axfood AB. The Group’s finance department reports monthly to the CFO with a follow-up of the finance policy. The same report is also presented to the Board four times a year. This report also includes a follow-up of financing and liquidity risk, interest rate risk, currency exposure and credit risks.

(K) Financing and liquidity risks

Responsibility for the Group’s procurement in central financing matters rests with the finance department. The Group’s external financing from credit institutions (mainly banks) is conducted by the Parent Company, while subsidiaries finance their operations through the central Group account systems. To limit the risk and the potential financial loss associated with the Axfood Group’s inability to finance the Group’s operations at any given time, the Group has a refinancing risk reserve, which is broken down into a liquidity reserve and an operating reserve, in accordance with the finance policy. The refinancing risk reserve consists of the Group’s cash and cash equivalents along with unutilized, committed credit facilities and shall amount to a minimum of SEK 300 m (300). The refinancing risk reserve may be used during individual weeks in the event of short-term movements in liquidity. On 31 December 2017 the refinancing risk reserve amounted to SEK 1,102 m (1,550). Responsibility for monitoring and overseeing the refinancing risk reserve rests with the finance department.

The finance department works with moving 12-month liquidity forecasts covering all of the Group’s units. These forecasts are used to manage liquidity risk and are updated on a monthly basis. Granted credit lines are to have a minimum average remaining contract term of 12 months. Apart from granted, short-term overdraft facilities of SEK 200 m (200), the Group had no long-term granted credit facilities as per 31 December 2017 and 31 December 2016. The Axfood Group’s investment policy aims to ensure the Axfood Group’s ability to pay in the short and long term. In addition, the investment policy is designed to reduce the Group’s external borrowing as much as possible by coordinating the management of surplus liquidity within the Group and achieving the best possible balance of financial income and expense. Investments may only be made in highly liquid instruments with low credit risk, i.e., investments that can be converted to cash and cash equivalents at any given point in time. Approved instruments include account balances, deposits, and investments in short-term debt instruments with approved counterparties that have a K-1 rating. As per 31 December 2017 the Axfood Group had account holdings in Swedish banks with a K-1 rating, which are approved counterparties in the finance policy. The Axfood Group shall only cooperate with counterparties that are judged capable of meeting their obligations to the Group. The banks and financial institutions that the Group cooperates with shall have high creditworthiness in order to be able to support the Group long-term. Limits per counterparty are set yearly.

Axfood regularly monitors its capital structure on the basis primarily of the equity ratio. The target for the Group is to have an equity ratio of at least 25% at any given time and to distribute a minimum of 50% of profit after tax for the year to the shareholders.

(L) Interest rate risk

The Axfood Group’s interest rate risk associated with interestbearing assets is to be managed by investing cash and cash equivalents in such a way that maturity dates for investments with fixed rates of interest match the Axfood Group’s known outflows and/or amortization of principal. The goal is that no fixed-income investments shall be sold prior to maturity. As per 31 December 2017 the Axfood Group had no restricted fixed-income investments. Interest rate risk and cash flow risk in the Group’s debt portfolio shall be limited. The norm is to have terms of fixed interest that entail a risk-neutral position. This is achieved by maintaining short terms of fixed interest, which is defined as a remaining average term of fixed interest of 12 months. This interest risk norm applies only when the Group has a need for long-term borrowing. For commercial and administrative reasons, the finance department may also act within the framework of a limited deviation mandate. In terms of amount, this deviation mandate is set at SEK 2 m for a one percentage point parallel shift in the yield curve. As per 31 December 2017 the Axfood Group had no long-term borrowing from credit institutions, and in the same way as the preceding year, the deviation mandate was not exercised. At the end of the reporting period, there was no amount pertaining to interest-bearing liabilities excluding pension liabilities and finance leases that would affect earnings and shareholders’ equity in the event of a one percentage point change in the interest rate. The effect on interest income during the coming 12-month period of a one percentage point increase or decrease in interest rates on interest-bearing assets amounts to SEK +/–8.9 m (13.3). As per the end of the reporting period, a one percentage point change in interest rates would not entail any significant change in the fair value of financial assets.

(M) Currency risks

Transaction exposure in foreign currency arises in connection with the import of goods paid for in foreign currency. The Axfood Group’s finance policy prescribes that 100% of orders are to be hedged at the time the order is placed. In addition, currency flows that are judged to be of a permanent and continuous character shall be hedged to:

• 75% of the exposure within 3 months,
• 50% of the exposure within 6 months, and
• 25% of the exposure within 12 months.

Approved hedge instruments are spot contracts, forward exchange contracts and currency swap contracts. In 2017 hedges were taken out using these instruments. As per 31 December 2017 all outstanding currency forward contracts, with a nominal value of SEK 517 m (495 ), were restated to fair value. The Parent Company did not have any exchange rate exposure during the year.

The sensitivity analysis above shows a hypothetical impact on cash flow and profit before tax, and before taking currency hedges into account. Currency hedges are always taken out no later than at the time orders are placed, and the hedge rate is always coupled to the respective orders. Based on this value, the price in stores is then determined for the respective products.

(N) Credit risks

In the Axfood Group, credit risks and credit losses are mainly attributable to trade receivables, although some risks are coupled to a few minor guarantee commitments. The Group has drawn up a credit policy that stipulates how customer credits are to be handled. The credit policy stipulates, among other things, the conditions for credit assessment, credit monitoring, and for the handling of demands for payment and insolvency. The Group’s customers undergo a credit check, whereby information about the customers’ financial position is obtained from various credit reporting agencies. In addition, limits are set individually per customer, and security is obtained, such as bank guarantees and chattel mortgages. Through coordination of credit monitoring and its handling of security within the Group, Axfood ensures that its risk exposure and thus its credit losses are kept at a commercially acceptable level. Financial assets are reported in the statement of financial position after deducting provisions for possible credit losses. Added to these provisions are provisions for estimated losses on guarantee commitments made by Axfood. These pertain mainly to guarantees for collaborating stores, associated companies and joint ventures. Outstanding guarantee commitments amounted to SEK 2 m (2). There is no concentration of credit risks, neither through exposure to individual borrowers nor groups of borrowers whose financial situation is such that it can be expected to be affected in a similar manner by changes in the external environment. The Parent Company did not have any significant external credit risks at year-end.